Understanding the market

1. CHAPTER 3 Understanding the market

2. Learning Objectives • Explain the difference between an industry and a market. • Discover effective ways to research and analyze an industry. • Determine first customer and the characteristics of the market. • Understand anthropological techniques for understanding customers. • Gather competitive intelligence.

3. Definitions • Industry: a grouping of businesses that interact in a common environment as part of the value chain or distribution channel • Market: a grouping of customers that an entrepreneur targets • First customer: represents that segment of the marketplace that needs the product or service most

4. An Overview of Industry Analysis • Data collected should answer the following key questions: • What does the industry look like? • Is the industry growing? • Where are the opportunities? • What is the status of any new technology? • How much do industry companies spend on research and development? • Who are the opinion leaders in the industry? • Are there young, successful firms in the industry? • What does the future look like? • Are there any threats to the industry? • What are the typical margins in the industry?

5. Gathering Secondary Sources of Industry Information • Common broad industries are easier to research using online and library resources. • Tips for researching smaller industries: • Check the business press • Talk to trade associations • Consult trade association journals • Check organizations that list government and agency resources • Look at blogs, wikis, websites, and social networking sites

6. Primary Industry Data • Secondary industry data needs to be validated by talking with people in the industry (primary data): • Industry observers • Suppliers and distributors • Customers • Employees of key firms in the industry • Professionals from service organizations • Trade shows

7. Understanding Industry Life Cycles • Industries and products move through a life cycle that includes: • Birth • Growth and adaptation • Differentiation and competition • Shakeout • Maturity and decline

8. Figure 5.1 Industry Life Cycles

9. Figure 5.2 Industry Trajectories

10. Porter’s Five Forces Model • Barriers to entry: • Economies of scale • Brand loyalty • Capital requirements • Switching costs for the buyer • Access to distribution channels • Proprietary factors • Government regulations

11. Porter’s Five Forces Model (cont’d) • Threats from substitute products: • Products/services which accomplish the same function in a different way or at a different price • Threats from buyers’ bargaining power: • The more large buyers understand the nature of the industry and the more products are standardized, the greater the likelihood that these buyers will have significant bargaining power.

12. Porter’s Five Forces Model (cont’d) • Threats from suppliers’ bargaining power: • If the number of these suppliers is few relative to the size of the industry or the industry is not the primary customer of the suppliers, the suppliers’ potential power to raise prices or change the product quality of goods/services supplied to manufactures and distributors is greater. • Competitive rivalry among existing firms: • In general, a highly competitive industry will drive down profits and ultimately the rate of return on investment.

13. Figure 5.4 PEST Analysis

14. Characterizing the Target Market • Key questions to answer: • What are the potential markets for the product or service? • Of these potential markets, which customers are most likely to purchase the product or service at market introduction? • How much do these customers typically buy, how do they buy , and how do they hear about the product or service? • How often do they buy? What is their buying pattern? • How can the new venture meet these customers’ needs?

15. Characterizing the Target Market (cont’d) • Goals in market research: • Identify and profile the first customer • Estimate potential demand from that customer • Identify subsequent customer segments and needs to grow the company

16. Targeting the First Customer • Steps in market research: • Assess your information needs • Research secondary sources first • Measure the target market with primary research • Forecast demand for the product or service

17. Exploring the Market with Primary Data • Primary research techniques: • Anthropological techniques • Structured interviews • Informal focus groups (group interviews) • Survey techniques • Online • In-person • Phone

18. Table 5.4 (in part) Customer Matrix • Segment the market with a customer matrix to determine primary or first customer.

19. Primary Customer Profile • Profile information is critically important to the eventual marketing strategy. • Profile information should include: • Age • Income level • Education • Buying habits – when, where, how much • Where customer finds products/services • How customer would like to purchase

20. Gathering Competitive Intelligence • Identify the competition • Three types of competitors for a product or service: • Direct • Indirect or substitute • Emerging or potential

21. Gathering Competitive Intelligence (cont’d) • Find information about competitors • Visit competitors’ websites or outlets where product is sold • Buy competitors’ products • Use internet search engines to read what customers are saying • Find information on public companies to serve as benchmarks for the industry • Deal with competition