Market and Industry Analysis


Entrepreneur Success Series

Resource Note # 7

In the ongoing Entrepreneurship Resources Series, we presented frameworks for business opportunity identification in the last edition of SATTVA. Having identified the opportunities, entrepreneurs need a systematic approach for assessing these opportunities. In this edition we present tools and techniques that can be used for analysing business opportunities.

1.         Evaluating Business Opportunities 

Professor Mullins of London Business School suggests that following three questions should be asked to evaluate a business opportunity: 

  • Are the market and the industry attractive?
  • Does the opportunity offer compelling customer benefits as well as a sustainable advantage over other solutions to the customer’s needs?
  • Can the team deliver the results they seek and promise to others?

The first two questions relate to market & industry attractiveness, which need to be viewed from both macro & micro perspectives. The third question related to team domain is especially relevant in case of an existing organisation which is exploring new business opportunities. This involves assessing ‘Strategic Fit’ between new business opportunity and an organisation’s broad strategic direction, its strategic assets, core competencies and value chain. Since our discussion is restricted to new entrepreneurial organisations, we focus our attention on Market & Industry Analysis. 

In Mullin’s framework markets are viewed as collection of buyers, and industry is looked at from the point of view of competing firms in a market. Macro view is broad, market-wide or industry-wide while micro refers to a specific segment of market & competitive advantage in industry. 

Exhibit 1: Seven – Domains Framework

(Source: Mullins, J. W. (2003), The New Business Road Test: What entrepreneurs and executives should do before writing a business plan,  New York: Prentice Hall – Financial Times, p.1)

2.         Market Domain

2.1       Market – Macro

(A) Market Size: Market size can be measured in many ways such as:

  • Number of customers in the market; 
  • The aggregate money spent by these customers on the relevant class of goods or services;
  • The number of units of relevant products or usage occasions. 

(B) Market Growth: One also needs to collect recent historical data to ascertain how fast the market has been growing together with any available forecasts about how fast it is likely to grow in the future. Assessment of broad macro-environmental trends can help understand whether things are likely to get better or worse in the future. Do the trends favour the opportunity, or will the new venture be swimming against a powerful tide?

2.1.1    Market Sizing

(a) Country – level / regional mapping

Market sizing can begin with search for country-level / regional economic, regulatory and demographic data. For instance, Exhibit 2 provides data on Arab markets

Exhibit 2: GDP Per Capita in Arab world

(Source: Mahajan, V. (May 2013). ‘Understanding the Arab Consumer.’ Harvard Business Review. p. 130)

While country analysis is useful as a first screen, local product-specific level market assessment gives more realistic size of market. For instance, Nestlé and Unilever, invested heavily in the ice cream market in Saudi Arabia, judging the market to be highly attractive by using established measures such as the proportion of youth in the population and the climate of the country. Yet, by 2001, both firms had exited the market, unable to reach profitability in the face of cultural barriers such low acceptance of ice cream as an eat-at-home dessert.  On the other hand a deeper understanding of a market can lead to new business ideas. For instance, as per tenets of Islam, Muslims are supposed to donate certain amount of their wealth every year in the form of Zakat. This has resulted into one of the largest philanthropic annuities in the Arab world. This creates opportunities for the global social sector.

At times specific market size data is available through secondary sources like the one shown in Exhibit3. This can be a good starting point, but ultimately a company is required to adopt a more customised approach as described below.

Exhibit 3: Global Economic Infrastructure Requirement

(Source: Woetzel, J; Garemo, N.; Mischke, J.; Hjerpe, M; and Palter, R. (June 2016). Bridging Global Infrastructure Gaps.McKinsey Global Institute. p.5) 

(b) Bottom Up approach

According to Professor Arnold a “bottom up” approach, especially in the context of international markets, consists of

(i)     Identification of key marketing model drivers (the most influential elements of the marketing program) 

(ii)    Understanding enabling conditions (the critical success factors for that model) that are necessary for the marketing model to operate effectively. 

(iii)   Estimation of costs

Arnold illustrates this approach, with the hypothetical case of two American MNCs considering entry into Vietnam:“Chemical Corporation (CC)” & “Sports Corporation (SC)”. CC is a specialty chemical company, focusing predominantly on industrial adhesives for use in a wide range of manufacturing applications. SC markets sportswear and sports-oriented fashion in the footwear and apparel categories. 

The key driver of CC’s marketing model is its sales force. The challenge is to convince their key prospective buyers of the value of using chemical fastenings (i.e., adhesives) rather than mechanical fastenings (e.g., nuts and bolts).This is a relatively technical selling challenge, and it requires a professional level of cost/benefit analysis by the customer as well as the salesperson. The enabling condition for CC is the presence of a number of sophisticated manufacturing client companies and the availability of an engineering-trained sales force.

Vietnam in the late 1990s looked an attractive market for CC because of two critical factors. First, the enabling conditions were present at an acceptable level. The sophisticated manufacturing clients that it seeks are largely multinational firms rather than local Vietnamese concerns that used Vietnam as a manufacturing base. Moreover, there was a pool of recently trained American engineering graduates who could be recruited as sales personnel. The second critical factor is the low cost-to-serve. Adhesives are not bulky products, and they can affordably be exported from existing production locations in Asia.

Sports Corporation, on the other hand, operates an entirely different model. Its products are aspirational, requiring not only good product quality, but also brand association with high-achievement and high-fashion world. For such a model to work effectively, the target market must have a well-developed sports industry, including intensive sports media, and it must also offer opportunities for event sponsorship. In addition, Sports will require a retail sector well developed enough to allow it to control distribution and merchandising, an important factor in maintaining the premium image of image-oriented brands. Whereas there is latent demand for CC’s products in Vietnam, SC faces a market in which neither latent demand nor enabling conditions are present.

Arnold offers following guidelines related to data collection in a new market:

Exhibit 4: Use of Parallel Markets for Forecasting

(Source: Arnold, D. J. (2003). The Mirage of Global Markets: How Globalizing Companies Can Succeed as Markets Localize.  New York: Financial Times/ Prentice Hall. p.45) 

Process of forecasting total market demand is discussed in the following section. 

2.1.1.1 Demand Forecasting

Following four steps are suggested for forecasting total market demand

(i)        Define the market

Understanding product substitution is a key to defining market. For instance, demand for industrial paper tubes may be affected by uses of metal & plastic tubes. Talking to industrial customers, speaking to experts, reviewing technological literature, quantification of economic value of alternative products to different customers are some of the ways to understand substitution possibilities. 

(ii)       Divide total demand into its main components

While dividing the demand into component segments try to make each category small and homogenous enough so that the demand drivers will apply consistently across its various elements. 

Granular analysis of market demand can sometimes reveal aspects which otherwise remain hidden. For example, low penetration level of videogames in an emerging market country may lead to a belief that lot of scope exists for market expansion. But breaking the market on the basis of income & number of children per family may reveal that the penetration level is very high in middle class families, leaving hardly any scope for rapid growth.

(iii)      Forecast the segment wise demand drivers & project likely change therein

Demand may be affected by both the macroeconomic as well industry level factors. Wherever historical data is available, statistical techniques like regression analysis can be used to understand amount of change caused in the demand by one unit change in a demand driver. For instance, a marketer of equipment required for oil & metal exploration may be interested in understanding drivers of commodity resource exploration and development. A Commodities Market Outlook Report  brought out by World Bank lists following drivers.

Exhibit 5: Rig Counts in Africa & Latin America

(Source: World Bank (April 2016). Commodity Markets Outlook.p. 15)

(iv)      Conduct sensitivity analysis

After completing demand forecasting it helps to ask a question: “what things could cause the forecast to change dramatically?” Sensitivity of demand to change in state of demand drivers can help in better evaluation of opportunities. 

2.2       Market – Micro

Analysis of market at micro level helps understand who are likely to be the first customers (early adopters), why they would benefit, and how entry into this segment might create options for growth into other market segments. For instance, Nike started by making shoes for long distance runners and subsequently entered the athletic footwear market. The micro-level market assessment involves asking four key questions relevant to such a segment:

  • Is there a target market segment in which we can offer the customer clear and compelling benefits at a price they are willing to pay? 
  • Are these benefits, in the customers’ minds, different from and superior in some way – better, faster, cheaper or whatever – to what is currently offered by other solutions?
  • How large is this segment, and how fast is it growing? 
  • Is it likely that our entry into this segment will provide us entry to other segments we may wish to target in the future?

A combination of primary data (talking to or surveying prospective customers) and secondary data (data collected previously and available in public domain), to determine segment size and growth rate can help in answering these questions.

2.2.1    Market Segment Attractiveness Analysis

In any market there exist subsets of customers with very different patterns of behaviour, underlying needs, and drivers of behaviour. Segmentation is the process of grouping customers based on their similarities.

(A)      Bases of segmentation for Industrial / Organisational / Business Markets

(i)     Customer Location (Geographic):Country, Region, State, etc.

(ii)    Customer type (Firmographics):Industry type/ sector, Company size

(iii)   Operating Variables:Type of Technology, Specific Applications, Volume of Usage, Size of Order

(iv)   Purchasing Approaches:Purchasing Organisation – Centralised / Decentralised, Purchasing Criteria, Purchase policies & procedures 

(B)       Bases of segmentation for Consumer Markets

(i)     Geographic:Country, State, City, Urban / Rural, Class of city / town

(ii)    Demographic:Age, Gender, Education, Occupation, Income, Family Lifecycle Stage, Religion, Caste, Community

(iii)   Psychographic:Lifestyle, Personality, Social Class

(iv)   Behavioural:Needs / Benefits sought, Occasions of Usage, Quantity of Usage, Buyer Readiness Stage, Attitude

After having identified an attractive business opportunity, a company needs to identify different market segments which may find its value prepositions attractive and finally target a few of these. 

2.2.2    Additional Considerations in Analysis of International Markets

Professor Ghemawat has developed a CAGE framework to measure distance between two countries along four basic dimensions. These dimensions are described with an example of a Japanese company like Toyota operating in China.

Cultural Distance:China and Japan both countries are collectivist societies, which mean successful partnership is achieved through group effort. That is why Toyota could successfully transplant Toyota Production System (TPS) in China. 

Administrative or Political Distance:Japanese companies need to be very sensitive in every action it takes in China because of the historical issues between both countries.

Geographic Distance:Toyota chose to establish plants and clusters on the eastern coast of China, thus decreasing the distance and transportation costs. In addition, the presence of just one-hour time difference, China’s improved communication and transportation infrastructures and the presence of big ports, especially in Tianjin and Guangzhou, makes the geographic distance relatively insignificant for Toyota.  

Economic Distance:The economic distance between Japan and China is quite high. However, the rapid development and the high growth rates of the Chinese economy fuelled growth in consumers’ income levels.

3.         Industry Domain

In the process of new business opportunity evaluation, while market analysis focuses primarily on revenue side of the equation, industry analysis shades greater light on cost & capital side. For instance, with growing popularity of computers & other electronic devices all over the world, market for microprocessors looks very attractive. Does this make microprocessors an attractive business opportunity for a new company? The microprocessor industry has strong entry barriers. Intel, through its ‘Intel Inside’ campaign built brand equity creating an entry barrier for new players in microprocessors industry.

3.1       Industry – Macro

According to noted management guru Michael Porter competitive analysis of an industry should go beyond ‘direct competition’ and should involve other four major forces listed below. 

Exhibit 6 : The Five Forces Model

(Source: Porter, M. E. (January 2008). ‘The Five Competitive Forces That Shape Strategy.’, Harvard Business Review. p. 80)

According to Porter these five forces constitute industry structure and are powerful determinants of the overall profitability of an industry. Exhibit 7shows profitability of select US industries. The purpose of industry analysis is not just to declare an industry as attractive or unattractive but to understand the underpinnings of competition and root causes of profitability. The five competitive forces are described below. 

3.1.1    Threat of New Entrants

New entrants to an industry bring new production capacity & desire to gain market share putting pressure on prices, costs and investment necessary to compete. Threat of new entrants depends on the height of entry barriers. Some of the entry barriers are

(i)     Supply side economies of scale. This refers to decline in unit cost as the absolute volume per period increases: Ex. Scale economies in microprocessor industry gives a cost advantage to Intel over new players. 

(ii)    Demand side benefits of scale. These benefits, also called network effect, arise where a new buyer’s willingness to buy from a company increases with the number of existing customers of that company. Ex. Value of e-bay’s electronic auctions in the eyes of new customers depends on network of it’s existing trading partners.

(iii)   Customer’s Switching Cost: How easy it is for customers to switch? Ex. ERP software, where customer switching cost is very high. 

(iv)   Capital requirement: Investment required not only in manufacturing (Ex. Aircraft industry) & marketing (ex. Parle decided to sell off its soft drink brands like Thumbs Up after re-entry of Coca-Cola in India) but also in funding initial losses, maintaining inventory, extending credit to customers etc.

(v)    Incumbency advantage independent of size. Cost or quality advantage arising out of proprietary technology, being first in a geography, brand awareness, etc. 

(vi)   Unequal access to distribution channels. For instance, low cost airlines had to develop new online booking model as the existing channel of travel agents used to favour full service airlines. 

(vii)  Government  Policy regulating number of players or their production capacities.

Exhibit 7: Average Return on Invested Capital 1992-2006

(Source: Ibid. p. 83)

3.1.2    Bargaining Power of Suppliers

Suppliers, including labour suppliers, create pressure by raising price or reducing quality & service. Bargaining power is high if:

(i)     Suppliers are few in number. Ex. Aircraft manufacturers

(ii)    Suppliers sell their output to many customers. Ex. Petroleum industry

(iii)   Supplier’s product is an important input to buyer or if it cannot be stored. Ex. Raw material for food processing industry

(iv)   Supplier’s products are unique & there is high switching cost. Ex. Software/ Operating Systems

(v)    Substitutes are not easily available. Ex. Electricity

(vi)   Suppliers can go for forward integration. Ex Intel getting into PC business.

3.1.3    Bargaining Power of Buyers

Buyers can create pressure in the form of demand for lower price or better quality & service. Bargaining power of buyers is high if:

(i)     Buyers are concentrated or if buyers purchase large volume: Ex. Organised retailers negotiate lower prices from manufacturers of FMCG

(ii)    Buyers operate on low profit margins: Ex. Vendors of Tata Nano car

(iii)   The purchased product is not very important to the quality of final product of buyer: Ex. Packaging material for industrial equipment

(iv)   Alternative sources of supply exist when the product is undifferentiated. 

(v)    Switching costs are low. Ex. Office supplies to a manufacturing company.

(vi)   Buyers can go for backward integration. Ex Picture tubes being manufactured by TV manufacturers 

3.1.4    Threat of Substitutes

Of all the five forces, this one is most neglected by strategists. But in reality substitutes create price ceiling in an industry and also set consumer expectations about performance standards. Substitutes are products or services which appear to be different but meet same customer needs. Ex. Growing popularity of Video Conferencing is a threat to Airlines industry as it reduces requirement to fly for business meetings. The threat of a substitute is high if:

(i)     It offers an attractive price – performance trade off to the customers.

(ii)    If buyer’s cost of switching to substitutes is low.

3.1.5    Rivalry among existing competitors

The rivalry in an industry is affected by the intensity as well as the basis of competition. 

(i)     Number of competitors: Larger the number, lesser the possibility of competitive retaliation since shifting of market share may be in small quantum. 

(ii)    Diversity of competition: Competitors with different backgrounds (ex. Docomo & Uninor, changed the rules of cell phone tariffs in India.) may cause change in rules of the game. 

(iii)   Market growth rate: Slow market growth leads to market share wars & price pressure.

(iv)   Amount of fixed cost: High fixed cost creates pressure for capacity utilization.  

(v)    Nature of capacity increase: If capacity addition needs to be done at large scale, it leads to price wars to increase capacity utilization 

(vi)   Product characteristics: If a product or service is considered to be undifferentiated or commodity, it creates price pressures.

(vii)  Exit barriers can be specialised assets, fixed cost related to exit (labour settlement), strategic interrelationships, emotional barriers, government restrictions. High exit barriers lead to excess capacity & price pressures.

3.1.6    How to use Five Forces Framework

  • Define the relevant industry in terms of product &competitive scope. 
  • Assess the underlying drivers of each force.
  • Evaluate existing rivalry in the industry by looking at number and strengths & weaknesses of each competitor. 
  • Once, you are inside, how strong do you feel will be the entry barriers for new entrants? Once, you are inside, how easy will it be for you exit, should you decide so in future?
  • What are substitutes? What advantages do they have over industry’s products? What pressure do they create on market share & prices? Assign a score to this component.
  • Identify the buyers & buyer groups. Look at their number, volume of purchase, importance of your product to them, & their profitability.
  • Identify suppliers & supplier groups. Evaluate bargaining power of suppliers by looking at their number, importance of their product to you, & their dependence on the business with which you are associated. 
  • A score, say out of 10, may be assigned to each dimension on the basis of evaluation.
  • Finally, one the two approaches can be adopted. Set a minimum acceptable score for each component below which the industry will not be considered attractive. In such an approach,  all forces can be classified into ‘critical’ and ‘desirable’ categories. Alternatively, a weight  may be assigned to each of the five forces in terms of impact on industry’s profitability and a composite score can be calculated.  In this manner an industry’s attractiveness may be considered as high, medium or low.

3.2       Industry – Micro

Micro level industry analysisinvolves understanding competition at different levels and assessing company’s competitive advantage. 

3.2.1    Analysis of Competition 

Competition exists at four different levels: 

(i)     Generic competitionincludes all those products and services which satisfy the same customer needs. Various product categories satisfying a particular need are competitors at this level. For example, Airlines, Railways & Taxis all satisfy the need of transportation.

(ii)    Product categorylevel competition includes all those products and services which have similar features. But these features may differ in perceived value. All product forms within a product category are competitors at the product category level . Example: Low cost & full service airlines are two service categories within airlines industry.

(iii)   Product formlevel competition includes all those products and services which typically pursue the same market segments and their features offer similar values. All brands within a product form are competitors at the product form level. Example: Spice Jet, IndiGo, Go Air are different brands in low cost airlines category.

(iv)   Budget / Wallet level competitionincludes all those products and services which compete for the share of customer’s money. 

Definition of competitive scope helps in measuring market potential. It can be done at the level of a product form (i.e., low cost airlines/motorbikes) or a product category (i.e., airlines/two wheelers) or a generic need (i.e., travel/personal transport). Thisalso provides a systematic framework for benchmarking of value proposition and value chain. As regards specific major competitors, following questions need to be answered.

  • What is their past & current performance?
  • What are their objectives & strategy (past & current)?
  • What are they likely to do in future?
  • How do we compare with respect to the competitors in terms of Strategic Assets, Core Competencies & Value Chain? 
  • Whom can we attack?

3.2.1.1Information Sources on Competitors

(i)   Secondary data

  • Government Agencies (Ex. Telecom Regulatory Authority of India)
  • Trade Associations (Ex. Society of Indian Automobile Manufacturers)
  • Syndicated Research (Ex. AC Nielson Consumer Panel Data) 
  • Annual Reports of Companies & their other literature
  • Press & Electronic Media

(ii)   Primary data can be obtained from

  • Your Sales Force
  • Customers
  • Channel Partners
  • Common Suppliers
  • Common Bankers

3.2.1.2 Competitive Advantage

Anew venture is not likely to grow over the long term if the initial advantage it brings to its customers cannot be sustained in the face of subsequent competitors’ entry or if its business model lacks economic viability. In order to assessing the sustainability of competitive advantage it becomes necessary to determine whether certain factors are present that would enhance the ability of the venture to sustain any advantage that it might have at the outset. These factors are:  

  • The presence of proprietary elements like patents, trade secrets etc.
  • The likely presence of superior organizational processes, capabilities or resources that others would have difficulty duplicating or imitating.
  • The presence of an economically viable business model – one that won’t quickly run out of cash. This factor, in turn, involves a careful look at some more detailed issues:
  • revenue, in relation to the capital investment required;
  • customer acquisition time & cost, customer retention costs;
  • gross margins;
  • operating cash cycle characteristics.

Following four questions need to be asked about company’s strategic assets, core competencies and activities in the value chain. 

(i)     Is it Valuable? An asset, a competency or an activity becomes valuable if it helps the company either in differentiating itself or having lower cost of operations & marketing. 

Ex. Sony’s miniaturization skills is a valuable competence which could be extended to Video Games, Digital Cameras, Computers, Audio etc.

(ii)    Is it Rare? A particular valuable resource or capability that is unique to a firm.

Ex. South West Airlines has created a highly motivated workforce.  Even a pilot doesn’t mind helping passengers in baggage loading.

(iii)   Is it Inimitable? Valuable & rare resources that cannot be easily acquired by competitors or can be acquired but at substantial cost.

Ex. National Aluminium Co. Ltd (NALCO) of India has captive coal mines, a valuable & rare resource which is very difficult for competitors to imitate. 

(iv)   Is the company Organizedfor its  usage? To fully utilize a valuable, rare & inimitable resource, organisations need to have proper structure, systems, policies & processes in place. 

If a company’s resources & capabilities pass above four tests, there is a likelihood of it gaining a sustainable competitive advantage over its competitors. This VRIO framework can be used to identify sustainable competitive advantage.  

References

Arnold, D. J. (2003).The Mirage of Global Markets: How Globalizing Companies Can Succeed as Markets Localize.  New York: Financial Times/ Prentice Hall.

Barnett, F. W. (July – August 1988). ‘Four Steps to Forecast Total Demand.’Harvard Business Review.

Ghemawat, P. (September 2001). ‘Distance Still Matters : The Hard Reality of Global Expansion.’ Harvard Business Review.

Lehman, D. L., and R.S. Winer. (2005).Product Management.New Delhi: Tata McGraw Hill, 4thedition.

Mahajan, V. (May 2013). ‘Understanding the Arab Consumer.’ Harvard Business Review.

Mullins, J. W. (2003).The New Business Road Test: What entrepreneurs and executives should do before writing a business plan.New York: Prentice Hall – Financial Times.

Porter, M. E. (1980).Competitive Strategy. New York: The Free Press.

Porter, M. E. (January 2008). ‘The Five Competitive Forces That Shape Strategy.’Harvard Business Review. 

Woetzel, J; Garemo, N.; Mischke, J.; Hjerpe, M; and Palter, R.  (June 2016). Bridging Global Infrastructure Gaps.McKinsey Global Institute.

World Bank (April 2016). Commodity Markets Outlook.

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