Customers and Competition: Fundamentals of Market & Industry Analysis

13-August-2012
13-August-2012 10:37
in Market/Industry Analysis
by Colin Smith

Caught up in the excitement of your business idea, it’s easy to fall into the trap of believing that “if you build it, they will come”.  Kevin Costner’s “Field of Dreams” should be restricted viewing for all prospective entrepreneurs as it’s easy to forget that Ray Kinsella depended upon a rather large dose of the supernatural to make his baseball field a success.  At the turn of the century, when entrepreneurs and investors were busy creating what came to be called the dot-com bubble, many companies believed that if they built it, online customers would come.  The seemingly unlimited promise of the then nascent internet seemed to guarantee the success of their online business and companies and venture capitalists vied to establish first mover advantage in their online markets. 

The problem was that they all seemed to have a fatally flawed understanding of what they were getting themselves into.  The dot.com market or those individuals who would use the Internet for shopping, information, communication and other purposes was and is extremely attractive: it was fast growing and would soon include most segments of the population.  Unfortunately, many industries on the Web were and still are deeply unattractive, because numerous new competitors can easily enter, differentiation is difficult to establish, and competitive advantage is hard to sustain with competitors only a mouse-click away.  Unfortunately for the many dot-com entrepreneurs the recognition of this crucial distinction came too late. 

Without question, if these entrepreneurs and VC’s had spent a little time critically analysing the market, industry, and team elements relative to the opportunity, ensuring each is sufficiently attractive and that sustained competitive advantage was possible, many of these companies would never have got off the ground and huge sums of venture capitalist money saved.  Instead, these entrepreneurs could have chosen a different target market, one more receptive to your their offering or adapted their offering to make it better fit with what the market needed.
If this is important for VC backed dot-com companies, it’s doubly important for small business owners who are more often than not gambling their own money.

In order to properly answer those questions, the business owner is going to need to do some research.  The challenge is that often small business owners have no experience of the kind of research necessary to make a judgement about market or industry viability and the more they read in a bid to understand, the more confused they become.  At Continuous Business Planning, we specialise in helping small business owners make these decisions about business viability.  However, for those small business owners that are determined to DIY, here’s a basic outline for the fundamental considerations of market and industry analysis.


Is the market large enough to make the effort worthwhile?


Is there room in this market for me? (Meaning what is the number of customers in the Market, aggregate money spent by these customers and the number of units or usage occasions bought annually?)

Is the market growing or contracting?

What are the broad macro trends (Political, Economic, Social, Technological, Environmental & Legal) that may affect the opportunity in the future?

An analysis of the broad marketplace will not be sufficient to understand the viability of the opportunity.  Whilst the market may well be huge and attractive, only a tiny proportion of that market will realistically be addressable, as your product or service will not be equally attractive to every segment within the market.  Limited resources need to be focused on reaching those customers to whom you believe you can make the biggest difference, ideally to the point of being able to give names and addresses of first customers.  So, you would also need to ask:

Is there a particular segment of the market in which we can resolve genuine customer pain at a price they are willing and able to pay?

How large is this segment and is it growing?

Are the benefits of your offering different from and superior in some way to the currently available solutions?

Is it likely that entry into this segment will provide us with entry to other segments we would like to target in the future?

Is the Industry sufficiently attractive?

 

Sometimes, having a product or service that customers want to buy and an attractive market are not sufficent to build a business venture for the long term.  We also need to understand what Michael Porter called the Five Forces within your chosen industry.  We can do this by asking ourselves the following questions.

Is it easy or difficult for other companies to enter this industry?

Do suppliers in this industry have the power to dictate terms and conditions?

Do customers have the power to dictate terms and conditions?

Is it easy or difficult to substitute products and services to steal my  market?

Is competitive rivalry fierce or non-existent?

It was these industry forces that made the dot-com companies such poor investments because numerous new competitors can easily enter the industry, differentiation is difficult to establish, and competitive advantage is hard to sustain with competitors only a mouse-click away.


Can our team establish a sustainable competitive advantage with this proposition?

 

Warren Buffett, the legendary American investor and businessman, is attributed with the following business insight.

“When a management with a reputation for brilliance takes on a business with a reputation for bad economics, it’s the reputation of the business that remains intact”

It seems that the lesson from the Oracle of Omaha here is that even excellent execution of the finest strategy will not compensate for an opportunity founded on floundering markets or hyper competitive industries.  A hard lesson indeed for those of the "If you build it it, they will come" mentality, but a lesson best learnt from other rather than through bitter personal experience.

Today the bursting of the dot-com bubble seems a distant memory and it seems almost inconceivable that we could repeat the same mistakes again.  It’s often easy to be wise in retrospect.  Yet the insight provided in hindsight can sometimes be wasted on us.  A friend of mine from University lost almost everything investing in the Spanish buy to let market as the property bubble burst in spectacular fashion just a few short years ago.  This same friend had worked with me on the Dot-Com case studies as we were finishing our business studies degree and laughed at the greed and lack of foresight of the venture capitalists who lost millions when it all came crashing down for them in 2000.

If you are a self financed small business, can you really afford to make large, expensive mistakes that drain your personal resources and your confidence in yourself for future ventures?  Instead, please invest a little time in at least gaining a basic understanding of who your customers and competitors will be for your business venture.  If you don’t have the time or confidence to do the research yourself, call us.  The result of our market and industry assessment will be the recommendation of the report that the status of this business opportunity should either be green for “go”, amber for “proceed with caution” or “red” for stop.  You can seize this new opportunity with confidence or breathe a sigh of relief that you were prescient enough to pass up on an opportunity that could have been catastrophic for both you and your business.

 

 

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