External Environmental Analysis for Small Enterprises - Example

Table of Contents Introduction 3 Economic environment 7 Technological factors 8 Legal factors 8 Environmental factors 9 Porter’s five forces analysis 9 SWOT Analysis 11 4Ps of Marketing 12 Product 12 Place 12 Price 13 Promotion 13 Strategic Choice 14 Products available 14 What we choose to choose and sell 14 Evaluation 14 Cost leadership strategy 15 Differentiation 15 Focus 15 Strategic implementation 16 Human Resources 16 IT 16 Marketing 16 Style of Ownership 16 The type of leadership 17 Financial analysis 17 Direct costs 17 Indirect costs 18 Selling price 18 Marginal costing income statement 18 Break-even point in units 20 Margin of Safety 21 References: 22 Report of Dream’s Cakes Company Introduction The purpose of this report is to make a study for the bank manager regarding the launch and spreading of my business that has to be within the area of London and in which cause the operation of community spirit and that supporting his immediate community is the focus main. And for this study to be fair my company will have to make analyses according to Environment Audit, Position Audit, Strategic Choice, Strategic Evaluation and Strategic Implementation. The Dreams cakes and the Community Spirit The Dream’s Cakes Company is located in Streatham Hill, London, and works with Community Spirit and the list of our best seller products are: Double Chocolate Dream, Strawberry and Banana Fiesta, White and Dark Chocolate Mousse, Ferrero Rocher Delight and Our Classic Cake. The United Nations is given the following definition which has been almost universally accepted: "Community development is a technique whereby the inhabitants of a country or region combine their efforts with those of the public authorities in order to improve the economic, social and Cultural diversity of their communities, to associate these collectivises with the life of the Nation and to enable them to contribute without reserve to the progress of the Country” Local or community development is the effort to improve the living conditions of those who inhabit a place, taking into account the specificity of that place. It distinguishes itself from the development of a population in general because it seeks the balanced and integrated development of a community, with the utmost respect for its own values ​​and seeking to take advantage of its historical wealth. In this context, local development, as a concerted action leading to an awareness of local potential, thus promoting wealth-generating and employment-oriented initiatives corresponding to an integrated local development plan, is, above all, concertation of strategies and methodologies of action that intend to change, for the better, the context and the level of life of the people of that community. Although there are differences due to their own cultural and organizational models, in all geographic areas there are agents promoting development, both institutional and individual, that stimulate and develop local development projects. The objectives of local development projects are usually to reinforce and enhance the human potential of a given region, to attract and retain young people and skilled employment, to improve the level and quality of employment, to improve the organization of the training market, to improve Levels of education and qualification of the resident population, in particular the young and active, to promote young people in the labour market and to retrain and retrain unemployed workers professionally. Development actors work closely with central government and other public and private development actors, playing important roles in planning and implementing plans and actions in key areas such as public and private investment, Employment, communications and cooperation, among others. It's not enough to just be a marketer and wait for customers to come and get some product. It is necessary, even more in the present day, to chase after new tools so that, with them, a differential can be achieved and, in this way, it will conquer even more customers and make the old, faithful customers. Sense of rescuing the community spirit of people and leaderships, relating the movements of the community in times past and the current moment, the achievements and the strength that the union can achieve in the search for results. The speaker comments that his presentation will not include unknown technical terms, because he wants it to be something to get closer to the community. The mission of our company is making the dream came true of our customers, bringing any type of cake according to customer’s request, as well as gluten, gluten-free and with the taste of your preference and also making the decoration for any event according to their wishes. Our company objectives are to satisfy our customers and never disappoint them, making them part of our family and treat them always with the highest consideration, respect and offer the best result that they deserve. The Dreams cakes works from Monday to Saturday from 7:00 a.m. to 7:00 p.m. and Saturdays from 8:00 a.m. to 6:00 p.m., and given the operation that my company has with the community spirit so every day 1 and a half hours before we close, we make a balance of the daily products that we still have and then we call the community centres of the area, so that they come to have the most community support is done at night distributing food to the most disadvantaged. We also help in the various charity events in the area such as children events, summer events, Easter events, Christmas events and many other events making special cakes and cupcakes at reduced prices and some free things, always with the help of our community (Timeout.com, 2017). The products that Dreams cake uses are bought in large areas such as Makro, wholesaler where we buy flour, cornflour, sugar, condensed milk, cake ferment, some cake decorations and others are homemade made in the company and we are also clients of Two farms that are Stepney City Farmer and Hackney City Farmer, which provide us with fruits, eggs, milk, butter, some cheeses, juices, and cream.   The products we use are fresh, organic and of excellent quality using the fair trade policy. The prices are affordable since the purchases are in great quantity. In the area where the Dream cake is located there is no bakery or store of the same kind as the same products, there are Tesco and Sainsbury but the products they have are very different from what I produce and so I do not feel competitive or competitiveness by any of these companies. Environmental Audit The PESTEL analysis aims to generate a list with generic factors that can cause impacts and forces on the business in question. Each letter in the name of this model represents a level of different factors that affect the company namely political factors, economic factors, social factors, technological factors, environmental factors and legal factors. These are explained below; Political factors The United Kingdom where Dream Cake business is to be located is a constitutional monarchy which has a parliamentary system. The country is a fairly stable country that has plenty of opportunities for operating within. East London is particularly peaceful. it is relatively fair and establishing a business is relatively easy. The government has put in place policies that support business and the country is considered among the best as far as the ease of doing business is concerned. However, since we intend to employ fair trade policies in sourcing the ingredients, we have instructed our suppliers to ensure that the ingredients observe the fair trade policy. Some of the ingredients like cocoa are thus sourced from such countries as Ghana which may be considered relatively unstable. Any instability in such countries may result in problems securing the ingredients which may make them expensive. On the other hand, we are yet to understand the effect that Brexit will have on the prices of our ingredients while the fair trade sugar which we intend to use in all our products has seen its prices continue to increase and this could have the effect of making our products more expensive that what we intend and this may minimize the number of people that our products will appeal to. Economic environment UK where the business will be located enjoys a strong economic performance with a high GDP and a diverse economy. East London also has a relatively high population and this will allow even a small business like ours to be profitable. The country enjoys a free market and has a diversified economy with most of the people being of the middle class. While this is good for our business, the slow recovery from the global economic crisis may not be good for our business. Furthermore, a high level of inflation and hard economic times may negatively affect the demand for our cakes as they may be viewed as luxury products. Social factors People have increasingly become more health conscious and hence foods like cakes that have high sugar content have become less popular and people now prefer that such products observe fair trade policies and be made from organic and healthy products. On the other hand, London is characterised by high standard of living and hence people demand high quality and would afford high prices provided that the product is of high quality. In addition, people in the locality where the business is located are kind and would be willing to support the charitable course we intend to be involved in by buying from us (Heather and Banham, 2010). As such, we aim at observing fair trade and organic sourcing of our products and observe high quality in the preparation of our cakes to ensure that they are both healthy and of high quality. Technological factors We appreciate the fact that the technology we employ will have a huge impact on the quality of our products and hence their reception in the market. Fortunately it is easy to access the latest cake making technology that we intend to use in London. In addition, we intend to employ technology in marketing while also establishing a website to popularise our business especially given that we will be opening two more branches in the near future. We also intend to invest in research and technology that will enable us to always come up with new and innovative products for our customers. Legal factors UK has a stable and reliable legal system. In addition, the laws and regulations regulating a cake business in the UK are not such prohibitive and are easy to follow and observe. There are also licensing requirements for the business that ought to be observed. However, these are easy to follow and hence there is no legal obstacle to our establishing the business. Environmental factors London’s environment is generally clean and well planned. Environmental conservation is well observed with 50% of the area covered in plants that make the air quality much good compared to other cities. As such, we also have the obligation to conserve the environment by engaging in environmental friendly activities especially given the increasing awareness on environmental conservation. This will include environmental friendly sourcing of our products as well as ensuring our activities do not destroy the environment and ensuring we observe all environmental regulations regarding our business. For instance, we will ensure environmental friendly packaging of our products to minimize environmental pollution while ensuring proper disposal of waste. Porter’s five forces analysis The following porter’s five forces analysis is aimed at heling the company come up with the best marketing strategy that will make it succeed in the market. Rivalry among competitors- Relatively high Although we intend to provide unique products while there are no other cake businesses in the place we are establishing the business, we still consider rivalry among competitors to be high. The industry is increasingly growing and costs of establishing our kind of business are not high while the business is attractive. As such, it is just a matter of time before we have numerous competitors. In London, there are many cake businesses that would compete with us. Thus, we intend to compete on price, quality, differentiation and key relationships with our customers (Turkay, 2011). As stated above, some of our potential competitors include Tesco and Sainsbury and though they produce products that are significantly different from ours, they have the financial muscles that they can use to start producing products similar to ours if they deem it fit. In addition, we have other smaller competitors including Maison Bertaux, Ms Cupcake, Crazy Baker, and Primrose Bakery among many others. As such, we intend to be continually innovative so as to always make our products hard to copy thus minimizing competition. Bargaining power of suppliers- Relatively low The suppliers do not have high negotiating power as they face high competition. As such, when we are unhappy with one supplier, we can easily switch to the other while ensuring low price and high quality benefits which we will pass to the consumer owing to low switching costs. Bargaining power of buyers- Relatively high The availability of many substitutes makes the buyers bargaining power to be relatively high. As such, they are able to command low prices and volume discounts as well as high quality. Threat of new entrants- medium The cake industry is on the rise and hence there is a medium threat of new entrants since the cost of entry is not high. However, their power is hindered by the low margins and the need for experience required in the industry. Furthermore, high customer loyalty means they may take time to acquire many customers. Threat of substitutes –High There are many direct and indirect substitutes to cakes and hence we have to compete on product quality, pricing and differentiation. Five forces matrix mix Force Opportunity Threat Weighted Score Rivalry among competitors 5 5 25 Bargaining power of suppliers 4 2 8 Bargaining power of buyers 2 3 6 Threat of new entrants 3 2 6 Threat of substitutes 4 4 16 Total 71 Position Audit SWOT Analysis Strengths: -Dream Cakes introduces new, different and healthy cake varieties and this will give us the benefit of product differentiation -Our bakery will be strategically positioned in an area with no competition and easily accessible from all parts of East London -We have hired experienced staff who will be essential in providing quality healthy products to our customers -Our place provides ambience of place and a feeling os being in one’s native place while enjoying our products providing pleasurable experiences that gives us advantage of our competitors Weaknesses -we are dealing with perishable products and we need a high demand to sell them as soon as possible to maximize profitability. Customers also prefer fresh cakes -we have only introduced three products and hence our limited menu may be viewed as weakness -We lack prior experience as we are a start-up and we may not know how to cope with competition from experienced and big providers such as Nestle foods -Due to rising health concerns, people may shun our products although they are organic and healthy Weaknesses -Expanding our product line in future by establishing new outlets/branches as well as new products -The cake industry is rapidly growing while demand for the healthy products we are providing is on the rise -we have opportunity to harness technology and our charitable aims in bringing in more and more customers Threats -Threat of new entrants when we become successful -Price wars from other producers - Threat of the many substitutes that exist 4Ps of Marketing Product Dream Cakes business will offer a variety of cakes including Double Chocolate Dream, Strawberry and Banana Fiesta, White and Dark Chocolate Mousse, Ferrero Rocher Delight and Our Classic Cake as indicated above. The cakes will come in a number of flavours, frostings, sizes, styles, decorations and toppings at our bakery (Lexa and Berlin). We intend to offer numerous options with an aim of satisfying common health and diet need of our customers in order to enhance our competitiveness. Our products will be available for everyone whether or not they have health conditions. They will be gluten free, naturally sweetened and organic and will have low fat content. This will be aimed at attracting more customers to our premises. To enhance competitiveness, we will continually innovate to develop more varieties. Place Initially, we will have a single bakery located in Streatham Hill, London although we have the objective of continually growing. As profitability increases, we will open more bakeries with a target of opening two more branches in London in the next two years before gradually expanding to other areas. We will sell both to retail and wholesale customers. In order to enhance popularity and hence sales, we will also have online presence by developing a website on which customers can place orders and the orders are delivered to their places of choice within East London. Those far from us will have their orders delivered through appropriate means (Milhart, 2015). This will serve to increase the amount of sales while helping us determine where to open our next two stores outside East London based on where most orders will come from. Price Dream cakes aims at offering superior quality products at affordable prices. The selling price will include a portion of the operating expenses and variable costs such as labour and raw materials used in making the products. In addition, the selling price must factor in our target profit. The variable costs will include the varying amounts of desserts that will go into cake preparation. To start with, Dream Cakes are going to be sold at low reasonable prices as listed below but as we continue gaining the market share, the price will be adjusted accordingly. The following are the prices at which we aim at offering our products at; Type of cake Projected selling price Double Chocolate Dream £2.90 per slide White and Dark Chocolate Mousse £2.30 per portion Ferrero Rocher Delight £2.50 per slide Promotion We do not intend to use a lot of money in advertising our products given that our main aim is to be charitable. Furthermore, we hope that the high quality of our products will lead to the products gaining a large market share rapidly. As such, our promotion strategy will be limited to; i) Our internet presence though our website and twitter and Facebook pages ii) Creatively designed banners at different sports in East London iii) We will run a few adverts in local radios and TVs just before and after the product launch iv) Word of mouth as we believe that our customers will play a great role in marketing us by ‘Telling it to others’. Strategic Choice Products available There are many types of cakes available in the market ranging from big cakes such as wedding cakes and small cakes that could be used as snacks. Biscuits also form part of the substitutes to our products. What we choose to choose and sell Despite the many competing products, we have chosen to make and sell the three types of cakes described above. They include Double Chocolate Dream, White and Dark Chocolate Mousse and Ferrero Rocher Delight (FitzGerald, 1981). These have been chosen since they are not expensive to make, they are organic and healthy and are hence likely to find a lot of demand in the market. Evaluation All the products will use the same basic ingredients to make although their concentrations may differ. The main differences will be in the additives which will differentiate the products on the basis of taste, colour and texture. The following table gives the variable costs that will be incurred in making each cake. Type of cake Projected selling price Double Chocolate Dream £0.70 per slide White and Dark Chocolate Mousse £0.40 per portion Ferrero Rocher Delight £0.60 per slide Cost leadership strategy Our cost leadership strategy is based on sourcing and using cheap low materials in making our products, we will also aim at keeping the cost of labour and other associated costs to their minimum thus ensuring that we are able to produce our products at prices that are lower than what our competitors would offer while ensuring high quality (Kraus and Schwarz, 2008,). Thus, our products will be at least 10 percent cheaper than those of our competitors. Differentiation Our cakes will be differentiated on the basis of quality. Since we only aim at using premium ingredients and also develop special recipes not used by our competitors, our cakes will be of superior quality. Something customers cannot get elsewhere. We will be known as the choice supplier of gluten free cakes or the healthier cake providers. In addition, we will offer added services such as customized cake orders and delivery services as described above. Focus Our cakes will be targeted at the mothers. This is because mothers in most cases make the diet decisions for the entire family. Thus if we target them, they will be able to promote our cakes to the rest of the family members meaning that our market share can only increase as children and fathers come to adopt the cakes as their premium gluten free and healthier choice for cakes. Strategic implementation Human Resources This kind of business calls for a lot of managerial and marketing skills. Fortunately, the directors of the company have enough prior experience. As such, we do not intend to hire any staff to start with apart from the driver and the chief chef (Teena, 2014). The rest of the operations including management and marketing will be undertaken by the directors until the company is stable and more outlets have been established. IT One of our directors who is also our marketing director is an IT Guru and will be responsible for the IT department also. He will be responsible for designing adverts and also for our online presence. Marketing Initially, marketing will involve a few adverts on the local radios and TVs. However, this will eventually shift to the word of mouth, banners and the internet through the social media and our adverts. Mark Kegan who is our marketing and IT director will be responsible for this. He will also eventually be responsible for the recruitment of sales and marketing staff in conjunction with our HR manager Raymond Jeremy when the need arises. Style of Ownership Dream Cakes is a private limited company owned by four individuals who are also its directors. The owners/directors include; i) Joel Bull- He is our designate chair of the board and he brings with him a lot of managerial experience and has been chair of the board for many companies including Nestle Foods. ii) Jared Jackson- He is the designate CEO and he brings with him a lot of experience in managing food based companies having been the managing director for Maison Bertaux and Ms Cupcake companies for many years (Pedro and Barry, 2017). iii) Mark Kegan- He is a marketing and IT guru and will be responsible for the management of the two departments iv) Raymond Jeremy- He holds a master’s degree in business administration and has been a HR manager for a number of companies. He will be responsible for the company’s HR issues. The type of leadership The type of leadership to be employed is T&S which is a type of democratic leadership where by the leader tells, sells, consults and joins. Financial analysis Direct costs The following are the direct costs that will be incurred in producing the three different products stated above. The costs have a direct relationship with each unit of cake produced. i) Direct materials- These will include such materials as flour, corn flour, sugar, condensed milk, fruits, eggs, milk, butter, cheeses and juices. ii) Direct labour- This will include the cost of labour directly associated with production of a certain type of cakes Indirect costs These are costs that cannot be assigned to a single unit of production but are assigned to the entire production. They include; i) Indirect materials- These will include cake decorations and cooking spray which can be directly linked to a single unit of production. ii) Indirect labour –this includes such costs as maintenance, cleaning, labelling and; iii) Overheads such as electricity, insurance and depreciation among others. Selling price We aim at employing cost plus pricing in pricing our products. In this regard, we will add a mark-up percentage to the total of direct material cost, direct labour cost and overhead costs in order to arrive at the cost of the product. In this regard, the mark-up will be set at 40 percent which is reasonable for the industry. Marginal costing income statement The following marginal costing income statement is based on the below forecasted production and sales of different types of products together with their associated costs. Type of cake Units Direct materials Direct labour Variable factory overheads Variable selling & Distribution expenses Indirect materials Double Chocolate Dream 70,000 £0.70 per slide 0.3 0.07 0.2 0.05 White and Dark Chocolate Mousse 100,000 £0.40 per portion 0.2 0.1 0.2 0.05 Ferrero Rocher Delight 80,000 £0.60 per slide 0.25 0.06 0.2 0.05 Dream Cakes Company Limited Marginal costing statement For the Period Ending 30th June 2018 Item Double Chocolate Dream White and Dark Chocolate Mousse Ferrero Rocher Delight Total Sales £203,000 £230,000 £200,000 £633,000 Direct materials £49,000 £40,000 £48,000 £137,000 Direct labour £21,000 £20,000 £20,000 £61,000 Indirect materials £3,500 £5,000 £4,000 £12,500 Variable factory overheads £4,900 £10,000 £4,800 £19,700 Variable selling and distribution costs £14,000 £20,000 £16,000 £50,000 Total variable costs £92,400 £95,000 £92,800 £280,200 Less closing stock(15%) £13,860 £14,250 £13,920 £42,030 Contribution £110,600 £135,000 107,200 £352,800 Less: Fixed factory overheads £16,800 £24,000 19,200 60,000 Fixed selling and distribution expenses £13,200 £13,200 £13,200 £39,600 Profit before tax £80,600 £97,800 £74,800 £253,200 Tax expense (30%) £24,180 £29,340 £22,440 £75,960 Profit after tax £56,420 £68,460 £52,360 £177,240 The projected income statement has been prepared on the assumption that the company will be able to make the projected sales. In addition, it is assumed that the fixed company overheads will be allocated on the basis of the units produced while fixed selling and distribution expenses will be shared equally among the three projects (Samuelson and Honig, 2017). A corporate tax rate of 30% assumption has been made. During the second year, we hope to open a second outlet while a third outlet will be opened during the third year. The cost structure is expected to remain the same with exception of direct materials cost that is expected to increase by 10% during the second year However, all costs are expected to increase 15% during the third year. On the other hand, the selling price is expected to remain constant during the second year but will increase by 10% during the third year. Consequently, the cost structure during the second and third year will be as follows; Item Year 1 Year 2 Year 3 Sales £633,000 £1,166,000 £1,928,300 Direct materials £137,000 £278,300 £485,400 Direct labour £61,000 £112,500 £196,500 Indirect materials £12,500 £36,100 £40,020 Variable factory overheads £19,700 £23,000 £63,270 Variable selling and distribution costs £50,000 £92,000 158,700 Total variable costs £280,200 £541,900 943,890 Less closing stock £42,030 £81,500 141,600 Contribution £352,800 £624,100 £984,410 Less: Fixed factory overheads 60,000 £110,525 £190,600 Fixed selling and distribution expenses £39,600 £73,000 £120,735 Profit before tax £253,200 £440,575 £673,075 Tax expense £75,960 £132,200 £201,925 Profit after tax £177,240 £308,375 £471,150 Break-even point in units Break-even point in units = Fixed costs/ (Sales price per unit-Variable cost per unit) Type of cake Selling Price Variable cost Fixed cost BEP in Units Double Chocolate Dream £2.90 £1.32 £30,000 18,988 White and Dark Chocolate Mousse 2.30 £0.95 £37,200 27,556 Ferrero Rocher Delight £2.50 £1.16 £32,400 24,180 In order to break even, we would need to sell 19,988 units of Double Chocolate Dream, 27,556 units of White and Dark Chocolate mousse and 24,180 Ferrero Rocher Delight. Margin of Safety Margin of Safety = Budgeted sales units- Break even sales in units Type of cake Budgeted sales units Break-even point in units Margin of safety Double Chocolate Dream 70,000 18,988 51,012 White and Dark Chocolate Mousse 100,000 27,556 72,444 Ferrero Rocher Delight 80,000 24,180 55,820 References: Timeout.com, 2017, The best cakes in London, Retrieved on 22nd May 2017, from; https://www.timeout.com/london/restaurants/the-best-cakes-in-london Heather, C&, Banham, C2010, External environmental analysis for small and medium enterprises (SMEs), Journal of Business & Economists Research, vol. 8, no. 10, pp. 19- 27. Turkay, O2011, Strategic analysis of the external environment and the importance of the information, Social and Behavioural Sciences, vol. 24, pp. 1060-1069. Lexa, J&, Berlin, J2006, Strategic marketing, Social and Behavioural Science, vol. 3, no. 4, pp. 274-277. Milhart, C2015, Impact of integrated marketing communication on consumer behaviours: Effects on consumer decision making process, International Journal of Marketing Studies, vol. 4, no. 2, pp. 121. FitzGerald, J1981, The three levels of strategic choice, Journal of Business strategy, vol. 1, no.4, pp. 52-58. Kraus, S& Schwarz, J2008, Strategic business planning and success in small firms, International Journal of Entrepreneurship and Innovation management, vol. 8, no. 4, pp. 10-18. Teena, B2014, SHRM: Alignment of HR function with business strategy, Strategic HR Review, vol. 13, no. 4, pp. 23-30. Pedro, K&, Barry, B2017, The role of finance in the strategic-planning and decision making process, Retrieved on 22nd May 2017, from; https://gbr.pepperdine.edu/2010/08/the-role-of-finance-in-the-strategic-planning-and- decision-making-process/ Samuelson, M&, Honig, B2017, Business Strategy, Retrieved on 22nd May 2017, from; http://entreprenorskapsforum.se/wp-content/uploads/2013/03/WP_05.pdf Read More