Steps to Growth Capital Self-Study GuideStep 3

3.5 Analyse the Business Environment

As with the analysis of your company's internal strengths and weaknesses, analysing the business environment will help you build a solid plan for growth and provide you with information that investors will want to know. You and the investor will need to identify all opportunities for growth and profitability, and any threats that jeopardize the well-being of your business.

There are four major dimensions to the business environment, each presenting its own threats and opportunities:

• economic environment
  
• industry characteristics
  
• market dynamics
  
• competitive climate

Economic Environment

General economic conditions will affect your company's performance, and that, in turn, affects the valuation of your business. Investors will want to know how you anticipate key economic trends will affect your industry, markets and corporate results. The typical issues that you might explore are:

• growth rate of the gross national product;
  
• rate of inflation;
  
• level of capital investments;
  
• state of financial markets (cost of capital); and
  
• exchange rates (strength of the Canadian dollar).

Industry Characteristics

Investors want to be knowledgeable about the industries they invest in. To assess the potential of an investment, they'll want to know about industry trends.

• Is this industry profitable? Is it growing? How fast?
  — If it is growing, will it pull in new entrants? How many and what will be the impact on the industry?
  
• What are the barriers to new entrants?
  — Does this industry require big investments, specialized technologies or expertise?
  
• Is this industry competing against other industries (substitute products)?
  — What are they? Are they real threats? How do consumers regard these substitute products?
  
• Is a large volume of production required to be cost competitive in this industry (economies of scale)?
  — What is the optimal cost structure or operating leverage (fixed versus variable costs)?
• What is the relationship between supply and demand?
  — Will surpluses push prices and profit margins down? Will shortages pull them up?
  
• To what extent is the industry regulated?
  — What impact does this have on industry growth and profitability?

Market Dynamics

If you understand the market you compete in and the factors that affect your company's ability to sell products or services, you'll know your growth potential. Investors will want proof of your capacity for sustained growth. To build an effective plan and to convince investors, you'll need to be able to answer these questions:

• Can you define the markets in which your company competes?
  
• What are these different markets? How big are they?
  
• How will you attract and keep these markets?
  
• What percent of the market do you have now and what percent will you have if you pursue your growth plans?
  
• What is the market's growth potential?
  
• What is the market segmentation of your customer base (e.g. purchasing habits and preferences)?

Competitive Climate

Risk capital investors will want to learn about your competitive advantage over others. They need to know your company's current competitive position, your staying power and your ability to outperform and acquire competitors. Investors will ask the following:

• How many competitors do you have? How do they compare in size, market share and strategy?
  
• Why do your customers buy from you and not from your competitors?
  
• Can you list your key competitors in each market you compete in?
  
• Can you demonstrate how your company differentiates itself from your competitors?
  
• What are your key areas of competitive advantage?
  
• Is your price competitive? How did you arrive at your price structure?
  
• Are new competitors entering the market? Who are they? Where are they from?
  
• How do you get your products and services to your end users?
  
• How will your operations be better than those of your competitors?
  

Third-Party Sources

Using third-party sources will make your analysis more convincing and will validate your industry information. So be sure to gather and include in your investment proposal:

• reports prepared by independent parties (business associations, government studies, etc.); and
• information from industry surveys.

Economic environment information can be obtained from:

• forecasts provided by chartered banks and the Conference Board of Canada; and
  
• forecasts and economic assumptions contained in federal and provincial/territorial government annual budgets.

Information on industry characteristics can be found in:

• corporate and industry association Web sites;
  
• corporate annual reports;
  
• specific industry surveys and studies;
  
• industry association information; and
  
• research reports prepared by brokerage firms.
  

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