Chapter 4: Analyzing the Industry & Market

Chapter 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.
 Using ethnographic techniques for understanding customers.
 Gather competitive intelligence.

4.1 An Overview of Industry Analysis

‫ ﬦ‬Two important reasons to study the industry in which a new venture will operate:
 It represents the external environment in which the business will be operating.
 Can the entrepreneur make a profit significant enough to make the effort worthwhile?
‫ ﬦ‬Return On Investment (ROI) will be:
 Small if strong forces working against them in the industry
 Larger if more benign forces enable higher returns

4.1 An Overview of Industry Analysis

 Not easy to identify where an industry begins and ends
 Cultures may be different globally for the same industry
 Your business could cross more than one industry
 Must gather and synthesize an enormous amount of information

4.1 An Overview of Industry Analysis

Data collected should answer:
o What does the industry look like?
o Is the industry growing?
o Where are the opportunities?
o What is the status of any new technology?
o How much do industry companies spend on R&E?
o Who are the opinion leaders in the industry?
o Are there young, successful firms in the industry?
o What does the future look like?
o Are there any threats to the industry?
o What are the typical margins in the industry?

4.1a Gathering Secondary Sources

 Begin with Google, or other search engines, Wikipedia.com, journals, trade magazines, industry analysts,
government publications and annual reports of public corporations.
 Industry analysts offer excellent overviews of most major industries, available at colleges & universities
 Use multiple sources to draw conclusions; no one source is complete, and you need a variety of
perspectives.

4.1a Gathering Secondary Sources

1. Check the business press
2. Talk to trade associations.
3. Consult trade association journals.
4. Check organizations that list government and agency resources.
5. Look at blogs, wikis, websites, and social networking sites.
4.1b The Importance of Primary Industry Data
Some sources to tap are:
  Industry observers and analysts
 Suppliers and Distributors
 Customers
 Employees of key firms in the industry
 Professionals from service organizations
 Trade shows

4.1c Understanding Industry Life Cycles

Industries are constantly evolving:
 Emerging Industry
 Growth and Adaptation
 Differentiation and Competition
 Shakeout
 Maturity and Decline

Figure 4.1- Industry Life Cycle

Figure 4.2- Industry Trajectories

model to describe how industries change by Anita M. McGahan (Professor of Management, Boston)

Two Types of Threats of Obsolescence:

۵ A threat to the industry's core activities (the recurring activities companies perform to attract and retain
suppliers and buyers that have historically generated profits for the industry are threatened)
 ۵ A threat to the industry’s core assets (the durable resources, including intangibles such as knowledge
and brand capital, that have historically made the organization efficient at performing core activities, are
failing to generate value)

1. Radical (when core assets and core activities are both threatened with obsolescence > perform a
balancing act - aggressively pursuing profits in the near term while avoiding investments that could later
prevent you from ramping down your commitments, PLUS: > assess how quickly your core assets are
depreciating and determine the segments in which you can protect your competitive position from those
in which your position will erode quickly))
2. Progressive (when neither core assets nor core activities are jeopardized > develop a system of
interrelated activities that are defensible because of their compounding effects on profits, not because they
are hard to understand or replicate; be the biggest)
3. Creative (when core assets are under threat but core activities are stable > assess how quickly your core
assets are depreciating and determine the segments in which you can protect your competitive position
from those in which your position will erode quickly)
4. Intermediating (when core activities are threatened while core assets retain their capacity to create value
> perform a balancing act - aggressively pursuing profits in the near term while avoiding investments that
could later prevent you from ramping down your commitments)

4.2 Analyzing an Industry

 The industry is the context in which an entrepreneur’s business will operate
 Every business operates within a value chain in that industry
 The value chain consists of all the companies that contribute to the development and distribution of
products and services
Value chain - is a high-level model developed by Michael Porter used to describe the process by which
businesses receive raw materials, add value to the raw materials through various processes to create a finished
product, and then sell that end product to customers.

Figure 4.3- The Value Chain

Figure 4.4- Porter’s Five Forces Framework

4.2a Porter’s Five Forces
1. Barriers to Entry
҉ Economies of Scale
҉ Brand Loyalty
҉ Capital Requirements
҉ Switching Costs for the Buyer
҉ Access to Distribution Channels
҉ Proprietary Factors
2. Threat from Substitutes
3. Threat from Buyers’ Bargaining Power
4. Threat from Suppliers’ Bargaining Power
5. Competitive Rivalry among Existing Firms

o Using the Framework to Draw Conclusions

 Fast-growth industry may not be attractive
 A “sexy” industry will tend to attract more competition
 The need for industry complements must be considered

Figure 4.5- Attractive vs. Unattractive Industries, 5 Forces

4.3 Market Research for Customer Discovery

 Starting a new business might be as relatively simple as launching a website
 But securing customers to survive and make a profit is another matter entirely
 It is critically important that your first contact with customers be about understanding problems
 Don’t begin with a solution in mind; listen to your customers first

 What are the potential markets for the product or service?

 Of these markets, which customers are most likely to purchase?
 How much do these customers typically buy, how do they buy, and how do they hear about the product or
service?
  How can your new venture meet the needs of these customers?

4.3a Gathering Secondary Customer Data

 Target market research provides critical data used to determine who the first customer is
- This one has a significant problem that you can solve
- This customer may not be the biggest potential market, but an unserved niche that enables you to
enter the market with no direct competition

Table 4.1- A Process for Gathering Market Data

4.3b Customer Discovery Up Close

д The most important data that entrepreneurs can collect on potential customers are primary data, collected
through direct observation or customer interviews
д The process for doing this involves collecting data based on the questions from Table 4.1, forming some
hypotheses about the potential first customer, then testing them by conducting additional research with
the customer

Figure 4.6- The Customer Discovery Hierarchy

4.3b Customer Discovery Up Close

 Ethnographical Techniques for Observing Customers

1. Learn from Observation
2. Explain what was observed
3. Develop a hypothesis
4. Test the Theory
5. Conclusions

 Structured Interviews
 Informal Focus Groups – The Group Interview
 Survey Techniques
 Keep the questionnaire short
 Don’t ask leading or biased questions
 Ask easy, simple questions first, progressing to more complex ones
 Ask demographic questions (age, sex, income, etc.) last

Figure 4.7- An Ethnographical Approach, Customer Discovery..

4.3c Segmenting the Market with a Customer Matrix

- Customer segmentation is critical to providing the right benefits to the right customer
- But many entrepreneurs define their customer segments too broadly, then wonder why they are only
capturing a small portion of the segment
- Constructing a customer matrix will help
Table 4.2- Initial Customer Matrix for a Portable …Device
4.3c Segmenting the Market with a Customer Matrix
 The Customer Profile
 Age
 Income level
 Education
 Buying habits – when, where, how much
 Where these customers typically find these types of products and services
 How they would like to purchase these products and services
 Gathering Demand Data

4.3d Drawing Conclusions from Market Research

 Entrepreneurial decision making is more art than science
 Data gathered must be analyzed, synthesized, and result in some conclusions about market feasibility
 Organize the data into meaningful categories
- Customer profile
- Market demographics, etc.
 Threats and challenges can be identified

4.4 Gathering Competitive Intelligence

۵ One of the weakest portions of any feasibility analysis or business plan is the competitive analysis
 Entrepreneurs often underestimate or ignore the competition
 They will underestimate what it takes in resources and skills to establish a presence in the market
۵ To assess the competition, find ways to create new value that customers will pay for
۵ First, determine your target market

4.4a Identifying the Competition

3 types of competitors
 Direct
 Indirect or substitute
 Emerging or potential
Continual innovation will give you a strong advantage
 What are the competitor’s core competencies?
 Do they have competency in the same area as you?
  Which are transferable to your business?

Figure 4.8- Good Competition vs. Bad Competition

4.4b Finding Information about Competitors

Visit competitors’ websites or selling outlets
Buy competitors’ products to understand differences in features and benefits and how they treat their
customers
Use internet search engines to read what customers are saying about the firm
Find information on public companies through Hoover’s online (www.hoovers.com), the SEC
(www.sec.gov), and OneSource (www.onesource.com), among others.

4.4c Dealing with Competition

 The best way to stave off competition is to provide meaningful differentiation in your solutions to
customer needs
o Best, identify new market space, a niche not currently being served
 Continue market research after launch; it should be an ongoing process over the life of the business
 Focus on developing relationships with key people in the supply chain, and key customers
o Business relationships take time to develop; once trust is in place, its difficult for a competitor to
overcome it

New Venture Action Plan

҉ Identify the NAICS codes for the industry in which the new venture will operate
҉ Collect secondary data on the industry
҉ Conduct field research by interviewing suppliers, distributors, customers and others
҉ Define the target market, segment it, and identify the first customer for the product or service
҉ Gather primary data on the target market to generate a customer profile and evidence of demand
҉ Gather competitive intelligence and determine the impact on the new venture launch strategy