Thursday, September 25, 2014

Why the Market Analysis Section of Your Business Plan is the Most Important Element of Your Plan

image This article was written by John Rau, SCORE Orange County Business Mentor

Most business plan templates suggest the following topics to be addressed in your business plan: executive summary, company overview, description of the products and/or services that you intend to provide, a detailed market and industry analysis (including a competitive assessment), a marketing plan, your plan for business operation, your organization and staffing plan including qualifications of key personnel, your financial projections, and planned exit strategy. I contend that the key element of your business plan is your market analysis. If there is no solid market case for your business idea, then you don’t have a business idea worth pursuing and, as a result, don’t need to prepare a business plan! This is where you should start. Don’t worry about the other sections of your business plan until you have completed this analysis.

I have seen many business plans where the market analysis section has a discussion that states that “the market for the widgets that this start-up company plans to address is on the order of $100 billion per year” without any indication as to what portion of the widget market this business is trying to address! In other words, where is your niche and how big is it? You can be assured that, if indeed the market for widgets that you plan to produce is this large, there are already many companies already fighting over this market. In their best selling book entitled Blue Ocean Strategy published by the Harvard Business School Press in 2005, W. Chan Kim and Renee Mauborgne define the business universe as consisting of two distinct kinds of space referred to as red and blue oceans. According to them, “red oceans” represent all the industries in existence today. As they point out in their book, “in red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are well understood. Here, companies try to outperform their rivals in order to grab a greater share of the existing demand. As the space gets more and more crowded, prospects for profits and growth are reduced. Products turn into commodities, and increasing competition turns the water bloody”.

On the other hand, according to Kim and Mauborgne, “Blue oceans denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid.” When you’re in the blue ocean, you are in potentially uncharted territory. Your market “niche” may not necessarily be totally understood and/or well defined. You’re not sure who the potential competitors may be and how these entities might react to the introduction of your new business idea. It is, however, a great opportunity for “first to market entry”.

When preparing the market and industry analysis section of your business plan, you need to determine where you are with your business idea—specifically which ocean you are trying to navigate as this will shape your marketing strategy as well as your overall marketing plan to be discussed elsewhere in your business plan. If you believe you’re in the blue ocean when in reality you’re in the red ocean, then you’re in for a real surprise! That’s why market research is so critical in your business planning and development process. You need to know the “color of the water” you are trying to navigate and what you need to do in order to be successful as there is a different set of challenges in each ocean.

So how do you determine where you are? Here are some basic steps you should follow to assist you in making this determination:

Step 1: Define what you believe to be the market area that you are addressing in your business pursuit. Types of information you will need to present include the following:

  • Facts about your industry such as how it’s organized and sales trends, products and services involved, growth history, etc.
  • Total size of the market you are addressing within this industry sector—in particular, specifically define the market niche you are addressing
    • If it’s a niche currently ignored by competitors or ill-served by competitors, then you may be in the Blue Ocean.
  • Description of your target market or focus area along with an assessment of the growth history and current demand.
  • Description of any barriers to entry in your target market and, if there are any, how do these apply to you and what steps do you need to take to overcome these.
  • Description of your potential customers such as consumers, businesses or both
    • For consumer customers, provide demographics such as age, gender, location, income level, social class/occupation, education, etc.
    • For business customers, demographics would include industry or segment of an industry, location, size of firm, demand for products and/or services you plan to provide, etc.

Step 2: Define the competition in your market area. You should never assume that you have no competition for your product or service just because you were unable to identify any direct competitors as there will always be companies that have the capability to move into your market area if they see a significant market for themselves. Here you need to present the following types of information:

  • Describe the competitive environment in your industry and market area in terms of the names of such companies, a description of what they provide that makes them competitive, annual sales and pricing information, estimates of their market share, etc.
    • If your target market area is dominated by a few companies that control a major share of the market, then you’re in the Red Ocean and should not consider competing directly with them.
  • An assessment of the nature of the competition in terms of do these companies compete with you across the board, just for certain products, certain customers or in certain locations.
  • A comparative assessment of your business idea (product and/or service) as it relates to your competitors—specifically what is different and/or better about what you are offering, that is, your potential discriminators.
    • You need to provide the reasons as to why customers who may already be buying/using your competitors’ products or services might switch to yours.

Step 3: Based on what you learned in Steps 1 and 2, conduct an assessment of where you fit in the “big picture”. According to Stephen Lawrence and Frank Moyes at the Deming Center for Entrepreneurship at the University of Colorado at Boulder (see Writing a Successful Business Plan, 2004), your Market and Industry Analysis section of your business plan should conclude with a summary of what the opportunity is and why it is attractive. Remember that this is a key section of your business plan because here is where you must make the case that there is an attractive opportunity for your venture. They suggest that you address the following key points in your summary:

  • What is the size of the opportunity? How rapidly is it growing? What trends support the opportunity?
  • What is the compelling need? What problem(s) are you solving?
  • What evidence do you have that proves there is a market?
  • Who is the target market?
  • What is unique about your product or service? What are the benefits?
  • What is your competitive advantage?

Remember, it’s not enough to say “there is a big market for your product or service”. You need to back it up with facts!