ENT Ch. 4

What are the two important reasons to study the industry in which your new business will operate?

1. It represents the business's external environment, and no business operates independent of its external environment. 2. You need to understand whether you can make a profit in the industry and if that profit will be significant enough to make the effort to start the business worthwhile.

Five Steps for an Ethnographic Approach for Entrepreneurs

1. Learn from Observation 2. Explain What Was Observed 3. Develop a Hypothesis 4. Test the Theory 5. Conclusions

Threat from Substitutes

A new venture must compete not only with products and services in its own industry but also with logical substitutes that other industries bring to the market

Ethnography

A way to explore the social culture of groups

What is some of the information that goes into the customer profile, whether that customer be a consumer or a business?

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

Industry vs. Market

An industry is defined by a product or service, whereas a market is defined by customers (those who pay for the benefits of the product or service)

Process for Gathering Market Data

Asses your Information Needs (Slide 24) Research Secondary Sources First (Slide 24) Measure the Target Market with Primary Research (Slide 25) Forecast Demand for the Product or Service (Slide 25)

Attractive vs. Unattractive Industries Based on the Five Forces

Attractive Industry: high barrier to entry, weak supplier and buyer bargaining power, few substitutes, not highly competitive Unattractive Industry: low barriers to entry, strong supplier and buyer bargaining power, many substitutes, intense competition

Data gathered during the market research process must ...

Be analyzed, synthesized, and result in some conclusions about market feasibility Raw data must be interpreted and turned into business intelligence With a complete picture of the market in hand, you will be in an excellent position to draw a conclusion regarding the market feasibility of your venture

Customers can describe their problems and what they need to be able to do, but they are typically not effective at describing solutions to their problems. How can you better design a solution to the customer's problem?

By asking questions that seek outcomes like "How do you want to use a communication device?" With this knowledge in hand, you are better prepared to gather demand data

How do entrepreneurs measure their return on investment (ROI)?

By dividing net profit by the cost of the investment and multiplying by 100 to get a percentage

How is a gross margin derived?

By diving gross profit by sales The resulting number indicated how much money is left to pay overhead and make a profit

An entrepreneurial venture's success is affected by the ability of what?

By the ability of new firms to enter the entrepreneur's market

Census Data (Gathering Secondary Customer Data)

Can be used to arrive at an estimate of how many target customers live within the geographic boundaries of the target market With any geographic area, those who meet the particular demographic requirements of the product or service can be segmented out

The Value Chain

Chain 1: Raw Materials/Supplies --> Manufacturer --> Wholesale Distributor --> Retailer --> Consumer/End user Chain 2: Raw Materials --> Manufacturer --> Agent or Manufacturer's Rep --> Retailer --> Consumer/End user

For smaller or newer industries that may get lost inside a much larger industry, what additional sources should you consider?

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

General Process for Collecting Primary Data

Collecting data based on the questions from Table 4.1, forming some hypotheses or educated guesses about the potential first customer, and then testing those hypotheses by conducting additional research with the customer

Value Chain

Consists of all of the companies that contribute to the development and distribution of products and services coming out of that industry

What is a useful way to look at various customer segments?

Construct a customer matrix that lays out the benefits, distribution channel, product/service, and potential competition for each of the identified customer segments

Target market research provides ... (Gathering Secondary Customer Data)

Critical data that is used to determine who the first customer is

Customer Segmentation

Critical to providing the right benefits to the right customer Unfortunately, many entrepreneurs define their customer segments too broadly and then wonder why they are only capturing a small portion of the segment

Three types of competitors for a product or service:

Direct Indirect or Substitute Emerging or Potential

Shakeout (Industry Life Cycle) (High)

Dominant firms emerge as weaker firms leave

Decline (Industry Life Cycle) (Middle-High)

Falling demand. Products being dropped.

Question

Focus on the Problem Avoid leading to a conclusion Avoid asking "will you buy?" or "How much will you pay?"

Hierarchy of People

Gatekeepers Influencers Deciders Purchasers Users

The Customer Discovery Hierarchy (Top to Bottom)

Gatekeepers, Influencers, Deciders, Purchasers, Users

Entrepreneurs need to distinguish between good competition and bad competition. What is the difference?

Good competition: Companies that are doing what they do very badly; in other words, they aren't making customers happy (Poor performance, unhappy customers) Bad competition: Companies that are doing everything right; in other words, their customers are happy, they add value, and they're prosperous (Great performance, happy customers)

Secondary Sources of Information

Google Wikipedia Journals Trade magazines Industry analysts Government publications Annual reports of public corporations

Industry

Grouping of businesses that interact in a common environment as part of a value chain or distribution channel that delivers a particular good The context in which an entrepreneur's business will operate, and every business operates within a value chain in that industry

Shakeout

Growth rate decreases resulting in strong price competition Gross Domestic Product (GDP) actually increases May lead to temporary efficiency gains, but also eliminates the possibility of competition and therefore contribute to a social loss from decreased market competition The shakeout period moves the industry from many companies and high product costs, to a more stable and mature industry The part of the industry life cycle hen the opinion leaders establish themselves

Demonstrate

Help Customers Experience the Solution Test for usability, compatibility with existing solutions, difficulty, ease of realizing the benefits Use storyboards, videos, and prototypes

Michael Porter's Framework

His work has provided a way of effectively looking at the structure of an industry and a company's competitive strength and positioning relative to that industry and to the markets it serves. His basic premise is that sustaining high performance levels requires a well-thought-out strategy and implementation plan based on knowledge of the way the industry works and the attractiveness of markets. Porter asserts that there are five forces in any industry that affect the ultimate profit potential of a venture in terms of long-run return on investment.

Entrepreneurs experiment by forming what?

Hypotheses about problems and needs and the customers who have them, and then test those hypotheses with real customers to validate their thinking It is more frequent than not that first contact with customers will cause the entrepreneur to reformulate some hypotheses and test again This iterative process may go through several cycles before the entrepreneur is satisfied that the problem being solved is the right problem and that it's matched to the right customer

For a new company, the goals of market research are to:

Identify and profile the first customer Estimate potential demand from the customer Identify subsequent customer segments that can be tapped later on to grow the company

Demographic data (age, income, race, occupation, and education) help ...

Identify the likelihood that a person will choose to buy a product and also make it possible to segment the target market into subgroups that are different from one another

What does customer discovery involve?

Identifying and engaging with a hierarchy of people who have different roles to play in the process

Threat from Buyers' Bargaining Power

In industries where buyers (customers) have bargaining power, it is more difficult for a new entrant to gain a foothold and grow

Threat from Suppliers' Bargaining Power

In some industries, suppliers exert power through the threat of raising prices, limiting the quality or quantity of goods they supply, or changing the quality of products they supply to manufacturers and distributors A further threat from suppliers is that they will integrate forward; that is, they will purchase the outlets for their goods and services, thus controlling the prices at which their output is ultimately sold

Gross Margins

In the industry, they provide an indication of how much room there is to make mistakes Derived by dividing gross profit by sales The resulting number indicates how much money is left to pay overhead and make a profit

Industry Life Cycles

Industries do not remain static or stable over time; they are constantly evolving Like people, industries and their products move through a life cycle that includes birth, maturity, and ultimately decline The stages of the industry life cycle are identified by the different kinds of activities occurring at each stage

To access the timeliest information, what sources of primary field data on the industry should be gathered?

Industry observers and analysts Suppliers and distributors Customers Employees of key firms in the industry Professionals from service organizations Trade shows

Differentiation (Industry Life Cycle) (Middle-High)

Intense product differentiation

What does conducting a survey entail?

It entails designing a survey instrument, usually a questionnaire that provides detailed information

Why is it important to study the industry in which your business will operate?

It represents the business's external environment, and no business operates independent of its external environment You need to understand whether you can make a profit in the industry and if that profit will be significant enough to make the effort to start the business worthwhile

What are the few key points that should be remembered when designing a questionnaire?

Keep the questionnaire short, with lots of white space, so that the respondent is not intimidated by the task Be careful not to ask leading or biased questions Ask easy, simple questions first, progressing gradually to the more complex ones Ask demographic questions last, when respondent's attention may have faded

Growth (Industry Life Cycle) (Middle)

Many competitors. Healthy profits. Some acquisition of small companies.

Emerging (Industry Life Cycle) (Low)

Many new entrants. No dominant players.

Maturity (Industry Life Cycle) (High)

Market is becoming saturated. Prices and profits begin to fall.

How many sources should we used to draw conclusions?

Multiple. No one source is complete and it's important to get a variety of perspectives to look for patterns.

What are the ways to collect primary data on the target market?

Observation using ethnographical techniques Interviews Informal focus groups Online or in-person surveys

Informal Focus Groups -- The Group Interview

One efficient way to gain valuable information and feedback from customers and others is to conduct an informal focus group, in which a representative sample of potential customers is brought together for a presentation and discussion session led by a qualified facilitator

The market data you collect is ... (Gathering Secondary Customer Data)

Only as good as the research methods used to collect them

The Customer Profile

Out of the primary research will come a complete profile of the customer in great detail, that is, a description of the primary customer, be it a consumer or a business The profile is critically important to the eventual marketing strategy, because it provides information vital to everything from product/service design to distribution channels and the strategy to attract the customer

Deciders

People who make the final decisions about purchases, usually for a company and usually based on a budget

Influencers

People who want to affect the purchase decision and who approval is often required before a decision to purchase is made

What is the most important data that entrepreneurs can collect on potential customers?

Primary data, in particular, data collected through direct observation or customer interviews

Personal interviews are more costly and time-consuming than surveys, but what are the advantages? (Structured Interviews)

Provide more opportunity for clarification and discussion Interviewer has an opportunity to observe nonverbal communication and hence assess the veracity of what the interviewee is saying The response rate is high Interviews permit open-ended questions that can lead to more in-depth information Provide an opportunity for the entrepreneur to network and develop valuable contacts in the industry

Observe

Record, Explain, Hypothesize, Test, Conclude Look for confusion, skipped steps, frustration, too much effort, and work around Focus on understanding the problem

Listen

Remain Objective Develop a list of key questions Rank them Be prepared to scrap them if the customer take you in a new direction

Indirect or Substitute Competitors

Serve the same customer needs but with different resources as in substitute products, services, or distribution channels

Key questions that should be answered as you move from a broad group of potential customers (the market) to segmenting that market so that you can better understand customer needs and discover your first customer:

Slide 22

Exploring an industry will involve gathering and synthesizing an enormous amount of information. The data collected should answer the following key questions:

Slide 5

What methods must be employed to ensure that useful and correct conclusions can be drawn from the data collected? (Gathering Secondary Customer Data)

Sound Research Methods

What key features does ethnography have?

Studying customers in their everyday environment Collecting data from a variety of sources, the most important and insightful of which are from observation and informal discussion Analyzing using descriptions and explanations

What is one of the weakest portions of any feasibility analysis or business plan?

The competitive analysis

What happens in the beginning stages of customer discovery?

The customer definition you use to conduct your secondary research will be fairly loose and may even change substantially once you get into the field with real customers

Primary Market

The customers that have the most need for what you're offering

Given the lead time from data gathering to print, secondary research rarely yields ...

The most current information available

First Customer (Gathering Secondary Customer Data)

The one who has a significant problem you can solve They may not be the biggest potential market, but rather be an unserved niche that enables you to enter the market with no direct competition for a time

Users

The ultimate beneficiaries of the purchase

Why do entrepreneurs frequently underestimate or completely ignore the competition?

Their information is incomplete because competitors don't reveal their most proprietary strategies and tactics They tend to underestimate what it takes in the way of resources and skills to establish a presence in the market They don't identify all the roadblocks along the way They don't know what they don't know!

Barriers to Entry

These barriers to entry are high and discourage competitors from entering: - Economies of scale - Brand loyalty - Capital Requirements - Switching costs for the buyer - Access to distribution channels - Proprietary factors - Government regulations

Direct Competitors

Those businesses that serve the same customer needs with the same types of resources

Gatekeepers

Those individuals or companies that hold the key to reaching particular customers; they control the flow of information

Emerging or Potential Competitors

Those that are not currently serving the same customer needs but have the resources to quickly move into that space and compete

Purchasers

Those who have the actual authority to buy

Porter's Five Forces Framework

Threat to New Entrants of Barriers to Entry Buyer Bargaining Power Threat of Substitutes Supplier Bargaining Power All these are apart of the fifth force: Rivalry

Competitive Rivalry Among Existing Firms

To position themselves in a competitive market, firms often resort to price wars and advertising skirmishes, however, most new ventures can't compete on price and can't afford costly advertising battles to build an image To compete in a market that is highly competitive, new ventures must identify a niche that serves an unmet need for customers and that will enable them to enter quietly and gain a foothold

True or False: An analysis of the industry in which the business will operate is critical to determining whether a new venture can be successful.

True

True or False: Identification of the primary market and the first customer is one of the most important tasks that needs to be undertaken during the feasibility analysis for a new business.

True

True or False: It's generally wise to begin any research by looking at secondary sources of information to gather background data

True

True or False: Sometimes the most threatening aspect of a competitor is not readily visible in the typical facts that are reported, and frequently competitors come from outside your industry and market

True

Suggestions on Where to Look for Competitor Information

Visit competitor's websites or the outlets where their products are sold Buy competitors' products to understand the differences in features and benefits and to learn about how they treat their customers Use Internet search engines to read what customers are saying about the company Find information on public companies through the websites of Hoover's Online, the SEC, and the One Source to serve as benchmarks for the industry.

To make certain that a potential threat is not missed, what should you determine?

What the competitor has to do to be successful in its own core business Whether the competitor has a competency in the same area as your business Which of the competitor's core competencies are transferable to your business

Businesses and Value Change

Where a company is located in the value chain normally reflects the entrepreneur's capabilities and risk-taking propensity Once the business is located on the value chain, it is easier to recognize who pays whom (who is the customer) and to determine costs and pricing

Survey Techniques

Whether online, in-person, or by phone, they require drawing a representative sample from the population of customers in which you are interested In general, to avoid bias, a sample should be random to have as little control over the selection of respondents as possible