Market, competition and alternatives

Adding missing elements to the Business Model Canvas

Although the Business Model Canvas is a very useful tool for business modelling, it misses some crucial elements on meso and macro level, absolutely essential for your business plan:
  • you need to know your market, size, growth, trends and attractiveness
  • you need to know more about your customers especially with regards to buying reasons and trends in preferences
  • you need to know your competitors, in fact you should create a business model canvas for each of your competitors
  • you should think about alternatives. Doing nothing is usually the most relevant alternative but there are others and innovation creates new alternatives. If you don't think about alternatives, your competitors will and they might put you out of business
  • you need to look at the macro environment (DESTEP) to find threats and opportunities for you business and understand trends in you industry so you can keep ahead of the flock
Below some models and analysing methods you can use to investigate the meso and macro environment, but you can also use your instincts as an entrepreneur to picture your surroundings.

Market Segmentation

In creating a customer analysis, we refer to the Abell model. Since the customer group is already described. Now the target group can de segmented. By dividing the target group into segments we can anticipate the needs of different sub groups. Segmentation can be based on several variables:
  • Geographic
  • Socio-Economic
  • Demographic
  • Behavioral:
    • Purchase(s)
    • Attitude (Mentality)
    • Friends, communities and networks
    • Innovator, early adaptor, etc
  • Use intensity
  • Brand loyalty
  • Etc

Competition

You need to know your competition. Not to follow them or to compete with them, but to distinguish yourself from them. Its no use to go into a head-on competition with a powerful market leader. Check for weaknesses in your competitors armor, look for disgruntled customers, dance around your competitors, float like a butterfly and sting like a bee (Mohammed Ali, before his legendary fight against George Foreman in 1974). You can use the Blue Ocean Strategy Canvas to compare yourself with your main competitors. For more traditional competitor analysis see below. Take a look at Abell, Blue Ocean, Customer Value and Pitch & Sales to figure out HOW you want to distinguish yourself from your competitors.

Competitor Analysis

The question 'who are actually my competitors' is not easy to answer. Broadly there are four levels of competition:
  • Need competition (competition between different needs of the customer)
  • Generic competition (competition between providers of different types of products in a single-sufficient)
  • Product form competition (competition between different technical manifestations of the same product)
  • Brands competition (competition between different brands that are each others substitutes)
Examples:
  • Needs competition: buying a new car >< creating a sustainable world
  • Generic competition: traveling by car >< traveling by bus
  • Product form competition: convertible car >< SUV
  • Brands competition: BMW >< Volkswagen
To respond to competition at any given level, organizations have several options. See Strategic Analysing Methods for the strategies formulated by Schüler and Jackson. Porter and Tracy & Wiersema formulate similar strategies under a different name.

Competitor array

One common and useful technique to investigate a market is to construct a competitor array. The steps include:
  • Define your industry - scope and nature of the industry
  • Determine who your competitors are
  • Determine who your customers are and what benefits they expect
  • Determine what the key success factors are in your industry
  • Rank the key success factors by giving each one a weighting - The sum of all the weightings must add up to one.
  • Rate each competitor on each of the key success factors
Multiply each cell in the matrix by the factor weighting. This can best be displayed on a two dimensional matrix - competitors along the top and key success factors down the side. An example of a competitor array follows:

Key Industry

Success Factors

Weighting

Competitor

#1 rating

Competitor

#1 weighted

Competitor

#2 rating

Competitor

#2 weighted

1 - Extensive distribution

.4

6

2.4

3

1.2

2 - Customer focus

.3

4

1.2

5

1.5

3 - Economies of scale

.2

3

.6

3

.6

4 - Product innovation

.1

7

.7

4

.4

Totals

1.0

20

4.9

15

3.7


In this example competitor #1 is rated higher than competitor #2 on product innovation ability (7 out of 10, compared to 4 out of 10) and distribution networks (6 out of 10), but competitor #2 is rated higher on customer focus (5 out of 10). Overall, competitor #1 is rated slightly higher than competitor #2 (20 out of 40 compared to 15 out of 40). When the success factors are weighted according to their importance, competitor #1 gets a far better rating (4.9 compared to 3.7).

Two additional columns can be added. In one column you can rate your own company on each of the key success factors (try to be objective and honest). In another column you can list benchmarks. They are the ideal standards of comparisons on each of the factors. They reflect the workings of a company using all the industry's best practices. (source wikipedia.com).

Adapted (HU) Market attractiveness matrix

This matrix combines parts of Porters five forces with parts of BCG and MABA, and should be used exclusively from a market perspective. The Matrix is very useful to describe markets for trade and service companies. MABA is preferred for manufacturing companies.

weight

opinion

Score 

(1-5)

final score

Market size

Market growth

Seasonal impact

Profit margin

Threat of new entrants

Bargaining power buyers

Bargaining power suppliers

Threat of substitutes

Competitive rivalry

Totaal

1 (100 %)

sum

(5 = attractive, 1 = unattractive and 3 = average)

Industry Attractiveness Analysis - Porter's five forces model

The Porter five forces model is used to analyze the industry. Porter's model provides insight into the structural profitability of an industry and the intensity of competition. The five forces that Porter sees, are:

  • Threat of new entrants

  • Threat of substitute products or services

  • Bargaining power of customers

  • Bargaining power of suppliers

  • Rivalry among existing organizations

The model also include two thresholds:

  • New Entry Thresholds

  • Exit Thresholds

Questions to assess the five forces:


Entrants:

  • Are there economies of scale in your market?
  • Is there a substantial capital required to enter your market?
  • Is there a reasonable chance that existing companies take actions against new entrants?
  • Can new entrants access existing distribution channels?
  • Do new entrants have access to existing or new technologies?
  • Are customers loyal to existing brands?
  • Can entrants access (government) subsidies and (venture) capital?
  • Are there significant barriers to switch supplier?

Customers:

  • Is there one or a few large customers (groups)?
  • Are consumers united?
  • Are the products or services very similar (poorly differentiated)?
  • Does quality plays a major role in the purchasing decisions of consumers?
  • Do customers have access information about their suppliers and their offerings (market transparency)?
  • Are there significant barriers to change supplier?

Suppliers:

  • Is the industry is dominated by a single supplier (or concentrated group of suppliers)?
  • Is the brand of the suppliers 'wanted' in your market?
  • Is it easy to change supplier?
  • Do suppliers provide an important contribution to the quality/finishing of products in your market?
  • Do the suppliers in your market face low margins?
  • Can you expect competition from the public sector?

Substitutes:

  • Is the functionality of the substitutes better/more extensive than the existing products/services ?
  • Do substitutes have better customer value than existing products ?
  • Is it easy for customers to switch to substitutes ?
  • Are substitutes profitable and do providers act aggressively ?

Rivalry:

  • Is the market growing or saturated?
  • Are the products/services in your market homogeneous in nature (undifferentiated)?
  • Are there many companies similar in size and competitive strength?
  • Are exit barriers high? (difficult to cease activities)?
  • Lack of strategic relationships (partnerships) between competitors?

DEPESTI:

The company must have a thorough knowledge of both direct environment, as the more indirect, social environment of his organization. In the macro environmental analysis, we use the DEPESTI-variables. Through the development of these variables we will get insight into the trends and developments in the area of the company. The seven variables are:

  • Demographic factors such as aging and number of households
  • Economic factors, such as purchasing power and inflation
  • Political-legal factors, such as tax laws and legislation
  • Environmental factors such as climate, environment and natural resources
  • Socio-cultural factors such as concern for the environment, values and regard for ownership
  • Technological factors, such as the emergence of new technologies and Internet
  • Infrastructural factors (for emerging markets): 
    • Government and governmental institution (like police and the justice system)
    • Harbours, roads and railways 
    • Power, telephone and internet
    • Water, food and sanitation
    • Health and education
    • Banking and insurance
ndw 2013