In laying the foundation of a competitive advantage businesses must be aware of the forces in the macro environment that shape competition within an industry. Figure 5.1 Model of Competitive Advantage Michael Porter identified five factors that comprise the industry environment to include - bargaining power of buyers, threat of substitute products or services, bargaining power of suppliers, rivalry among existing competitors, and threat of new competitors. Small businesses must properly assess these elements in order to determine the attractiveness and profitability of a target market. This must be systematic and built into the organization's regular processes. The entrepreneur must understand the difference between resources and capabilities.
Organizational resources are either tangible or intangible.
Organizational capabilities result from the successful integration of several organizational resources. A solid competitive foundation can only be established when an organization looks internally to ensure that the strengths and weaknesses of the organization have been properly matched with the opportunities and threats of the external environment. Therefore, using a SWOT Analysis strengths, weaknesses, opportunities, and threats, is an invaluable framework to determine how elements from the organization and the environment can come together and be leveraged to the advantage of the firm. If a SWOT analysis is properly done, an organization will identify and compare strategy options for building competitive advantage. The Internet is also being used by many firms, large and small, to create a competitive advantage.