P3M3 Industry Attractiveness

If you already have a business, you have already made one of the biggest decisions which will affect your future profitability…

The choice of the industry and market you work in.

If you’ve picked wisely, then you have a great opportunity to make money.

But you may have picked a type of business where it is extremely difficult to make money and you face an uphill battle. The airline industry for example is notorious although that of course the world of big business.

Why Industry Attractiveness Is Important

  • You are already in the industry so why is understanding the forces of attractiveness important?
  • Industries are shaped over time
  • Opportunity to find a better niche and protect your business
  • Thinking about entering a new market
  • Your market may be ripe for attack by someone attracted by “easy pickings”

Once you’ve picked the type of business you own, you may wonder why you need to keep thinking about the attractiveness of your market. You’re committed so what difference can it make?

Well first, are you really committed if prospects turn bad? Industries are shaped over time by the customers and competitors together with the external PESTER forces. Sometimes it makes sense to “smell the roses” and get out first when your competitors still believe there are plenty of opportunities and will pay a good price for your business.

Second, even if the market becomes less attractive, different niches can survive untouched or even flourish. For example bookselling on the High Street may be tough with the Internet competitors like Amazon but it seems Amazon have hit a problem serving working families. The deliveries are attempted when they are out and then they have to go out of their way to collect the parcel when it would be much more convenient to pick up in a store in the city centre.

Third you may be thinking of entering a new market – that’s anything with different customers or competitors – so it might include you selling a new type of product, expanding out of your state or country or opening a new store in a different town.

Fourth, the market which gives you the base for a great business giving you good profits may be seen as a tempting morsel ripe for picking by an ambitious competitor.  Recognising that things are too good to last, can help you to create defensive strategies which reduce the possible profits of a new entrant.

I once did an extensive study into greeting card retailing in the Midlands of the UK. We were looking at town populations, the number, size and type of greeting card stores and their locations compared to major attractions and car parks. It was pretty clear where the opportunities lay.

It was interesting to go back to some of the towns years later and see new stores where we expected, sometimes opened by new people and sometimes a second store from an existing player who was prepared to close the opportunity as a defensive measure.

Describe Your Market And Industry

  • Exercise – stop and write down what you know and think about
  • Your market – the demand side – who customers are and what they want
  • Your industry – the supply side – who your competitors are and how they are different to you
  • How have things changed? Go back up to 10 years to now.
  • Do it now before you read on.

I’d like you to do an exercise right now to stop your mind playing tricks on you. It’s so easy to not notice changes but once you’ve got something in writing, you can refer back to it and spot how things have changed.

Write down what you know and believe about your market and industry.

I see market as the demand side of your business and therefore this is about your customers and potential customers.

  • Who are the big customers who buy most off you and your competitors? What do you think the relative size of each account is and who do they buy from?
  • What other types of customers buy? At the low end, there will be too many customers to name so try to find some way to group them – it may be by demographics e.g. size and ownership structure (small independents, independent chains, large single site independents, large multi site chains) or by some characteristic based on what they want to achieve. Where do you think the spending power is? Have a go at putting percentages to the types. Market research from trade journals will help.
  • What do customers want? What do you think are the main factors will drive their choice of what they buy.

If market refers to customers, then industry refers to your competitors.

Do a similar exercise.

  • Who are your main competitors by name and the smaller competitors by type.  Just listing down these can give you an insight into how you define your business. I call myself a small business coach but I focus on the benefits clients get – improved business performance – and see anyone who sells small business advice as a potential competitor. Interestingly I also see them as a potential collaborator but that’s a separate story.
  • Now look at the different business models and way your competitors deliver their service and benefits to customers. look at the advantages and disadvantages of each to the business and to the customers.
  • How are your competitors different and better to you? (A tough question but it can drive improvement provided you don’t copy to be the same.)
  • How are you different and better from your competitors in ways that matter to your customers and potential customers?

Four Ways To Change Your Business

The Ansoff Matrix helps businesses to look at how they will develop the business in the future.

  • Market penetration
  • Product development
  • Market development
  • Diversification

It is based on looking across existing and new products and existing and new markets.

Read: The Ansoff Matrix

If you decide to make any move outside of selling your existing products to your existing markets, then what you learn in this module is vital.

It could stop you making an expensive mistake which wastes a lot of time or it could give you the confidence that the idea you’ve been mulling over in your mind, really is stacked with potential.

Perfect Competition

  • Economists model
  • Equilibrium profit = cost of capital
  • Many buyers & sellers
  • No product or service differentiation
  • No entry or exit barriers
  • Free flow of information
  • No transactions costs
  • Real world – assumptions broken and provides opportunity for profit or loss.

Read: Perfect Competition

Michael Porter’s Five Forces Of Industry Attractiveness

Harvard Business School professor Michael Porter created one of the most famous models in business strategy with the Five Forces which explains why some industries of much more profitable than others.

The Five Forces are:

  • The threat of new entrants
  • The threat of substitutes
  • The bargaining power of customers
  • The bargaining power of suppliers
  • The rivalry amongst existing competitors

Please Read: The Five Forces It includes a video of Michael Porter explaining the five forces.

This is particularly important to use if you are thinking of moving into a new market.

If you want to dig deep into the individual forces

Buyer Power & Supplier Power

New Entrants

Substitutes

Industry Rivalry

5 Levels of Competition

It’s easy to think of competitors as the enemy who need to be beaten but competitors can be very useful.

If you are selling a new type of product or service, then you are able to share the costs of educating the market with your competitors. Any advertising they do helps to promote their brand but it also increases awareness of the problem and solution.

It’s also worth remembering that without competitors, you’ve got no way to look good in front of customers. The brain is used to comparing and contrasting.

There are five levels of competition

  • Collusion – almost certainly illegal where you are but remember, I’m not a lawyer
  • Co-opetition – competitors work together in alliance
  • Coexistence – each respects the others market positioning and territory
  • Competition
  • Conflict – price wars, service wars, marketing wars

The Life Cycle For Products, Markets and Needs

Innovation is a creative wave of destruction that replaces what was there before with something new and exciting.

For example in 1870, the only way to write was with a pen or pencil.

Then in 1873 the first commercial produced typewriter, the “Sholes & Glidden Type Writer,” was made by the gunmakers E. Remington & Sons.

Other companies started to produce typewriters and Remington introduced plenty of new models as improvements to the original idea.

Fifty years later the electric typewriter started to be produced and for many years was sold side by side with the manual typewriter.

The typewriter was killed by the word processor in the seventies and early eighties but then along came the personal computer with word processing software – first Wordstar, then Word Perfect and then Microsoft Word.

The underlying need – to create written communications that people can read has remained steady but the way that need is met changes as the technology creates better solutions.

The way the need is met changes and gives substance to a concept called the product life cycle.

The life cycle is useful for recognising that many markets go through periods of change which are a big opportunity or threat to a business in that market.

It may take many years – if ever – for a new product to move from the introduction stage into a period of rapid growth. For a company that’s ready and has the finances available, it is a great opportunity to become a leading brand.

But growth doesn’t continue for ever but for an industry used to growing at 20% per year, it is a major shock when the market matures to a steady ongoing rate.

And then a new innovation comes along – the equivalent of the word processor killing the typewriter – and a new product life cycle starts.

Read Product Life Cycle

Reasons For Decline – The Market Becomes Unattractive

If you see your market decline, any remedy depends on understanding the cause.

  • Life cycle decline – is this the right market?
  • Trade cycle decline – can we hang in for the recovery?
  • Competitive destruction – can competitors behave rationally?
  • Competitive decline – can we recover competitiveness (temporary or long term)?
  • Marketing/management decline – can the business be turned around?

The cure for an industry attractiveness problem depends on the cause.

If the problem goes back to the product life cycle or industry life cycle and you haven’t got replacement products lined up to kick start interest and demand, you need to be asking whether this is the right market for you.  Last man standing in an industry can be a profitable position but getting to it can be tough unless you can help ease others out of the market by taking on their commitments.

If problems are caused by the trade cycle like the depression of 2009, then you need to decide whether you can hang on without changing or whether there are things you can do to make your business better and stronger.

The typical reaction to a performance problem is to see it as coming from external sources, to be temporary but controllable by doing more of what you normally do.

If that doesn’t work, the problem is usually seen as external, temporary and uncontrollable.

Unfortunately this is the perfect excuse to avoid taking responsible actions which need:

  • We must change – even if the problem started in the outside world, our internal response matters.
  • Even if it’s not permanent (and it might be), the problem may be long term
  • Everything in the business is controllable – we have a choice how we react and respond.

If the market looks strong if it wasn’t for your stupid competitors, then you need to ask yourself whether they are likely to change (grow up). Some industries handsomely reward those who get the biggest market share (see Strategic Environments Matrix) as brand names are established and costs are driven down by both volume and experience.

Many don’t.

Can you redefine your business away from the volume based mass market to a speciality niche where customers will value the extra things you bring?

Your alternative is trying to fight it out, toe to toe with your competitors and it will come down to who has the deepest pockets and most commitment. If you’re not prepared to fight it out until the bitter end, you’re better off avoiding the fight or coming out of it early.

If decline is caused by a loss of competitive advantage – either you’ve lost the edge you had or one or more competitors has found an advantage which makes them more appealing to customers or significantly lowers their costs, then your challenge is to respond. Go back to your customers and find out their main problems and frustrations and find the areas you can improve cost effectively.

The last area of decline is based on management and marketing issues. Senior managers may have left, new situations may be encountered. Whatever has happened, the ability of the managers to respond has reduced or the need for effective management has increased. A business may be fine without detailed financials and performance measures when it is doing well (although I wouldn’t recommend it) but if things are going badly, the management team quick, reliable information to identify and then fix problems.

What Business Are You In?

  • Perception is your reality
  • Implicit/explicit assumptions  filter everything  a company sees, thinks and does.
  • Levitt – Marketing Myopia – railroad & buggy whip manufacturer.
  • Product, Customer Need or Capabilities
  • No right or wrong – only what works.
  • Key – innovate by redefining.

As you go through the exercises looking at your business, you may find yourself questioning what business are you really in?

If I’d asked you upfront, it would have coloured your judgement throughout because your explicit assumptions (those you can tell me) and your implicit assumptions (those below conscious thought) filter everything you see, think and do.

You may have read about it before but there is a famous article by marketing expert Theodore Levitt in the Harvard Business Review called Marketing Myopia. he argued that the way companies define themselves can limit their ability to adapt to changing situations, citing as examples the railroad industry and buggy whip manufacturers.

Levitt was trying to get companies to go beyond thinking about the product as the basis for defining the business to tackling the underlying customer need. That would change Ford and Toyota from car manufacturers to sources of personal transportation. It’s a subtle difference now but if vehicles take to the air, it could be important.

I’d like you to go one step further than Theodore Levitt suggests and decide whether your business is:

  • Product based – are you sure this is a long term product?
  • Customer needs driven – you’ll sell what best fits the customer
  • Capability based – these may seem a bit far fetched but if you’re a biochemical firm then you may start with a drug to cure arthritis and then move on to something which will reduce the likelihood of cancer. Or if you are a metal presswork manufacturer, the product is irrelevant if you have the presses, the tools and the material. Or if your main skill is that you are a superb public speaker, you may start with customer service training and then move to personal motivation.

There’s no right or wrong way to define your business from a third party’s perspective. Each choice will move you in a particular direction and cut off other options. The important thing is that you find a definition which suits you and helps you to innovate.

You may have a preferred option – a natural choice – but why not try one of the other hats on for size. If you think of your business as a product business e.g. we sell wine and spirits – then what happens if you think of yourself as someone who brings pleasure and fun to your customers or someone who helps your customers to develop more sophisticated and discerning tastes which set them apart as special and knowledgeable.

Assessing A Move Into A New Market

  • New to you or new to the world
  • Market size & growth, PESTER, Five Forces, Life Cycle
  • Risk assessment
    • Demand risk – will customers want what you sell now and in the future?
    • Competitive risk – can you survive competition?
    • Capability risk – can you deliver on your promises?

These techniques are particularly powerful when you are assessing starting a new business or moving your business into a new market.

A little research and analysis can stop you making mistakes which prove to be very expensive in the long run. It won’t guarantee your success but it will increase your probably of success.

It will make it easier to create a winning proposition because you understand what is going with the environment and how that is likely to change, your customers and the changes they are facing and your competitors.

First, are you going into a new market to you but where the market demand is proven and there are established competitors?

Or are you an inventor entrepreneur who has created something new to the world?

With an existing market, your analysis can be much more formal since you have some history to look back to and you can see your competitors models of business and even talk to their customers to find out what they like and don’t like about the product or service. PESTER, the Product Life Cycle and the Five Forces will help you to see what is happening and the likely pressure points.

With a new to the world market, you are literally forging new ground and any projections are inevitably more speculative. You can do your PESTER analysis focusing on your customers and yourself.

The product life cycle shows that introduction periods for new products can be long and frustrating as people are slow to adapt to new innovations. You’ll need to use educational marketing to explain the problem, the solution in terms of benefits and how it works with testimonials from those users who love to be at the cutting edge.

A technique I use to look at new ventures is to look across the three big risks:

  • Market Demand Risk – is there a genuine problem which customers will pay to solve? If so, is the potential market large and how much is it worth to take the problem away? If you watch an entrepreneurs program like the BBC’s Dragons Den, you’ll see crackpot schemes where significant demand only exists in the inventors head.
  • Competitive Risk – if demand exists, can the business grow market share when new competitors move in? Two types of competitors are likely to emerge – other small entrepreneurial firms who have also seen the same problem and been inspired to find a solution and bigger firms who lack the creative spark but see the opportunity and have the financial, marketing and operational muscles to dominate the market. The bigger the opportunity, the more it will attract other established businesses who can move sideways from existing businesses. This is why intellectual property rights based on patents is so important – it protects your business or means that you are paid a royalty when others take up the idea.
  • Capability Risk – can you deliver on your promises? Spotting a new market with real potential and protecting yourself from competition is great but you’re still not at the stage of having a profitable business. You need to have the marketing and operational skills and capabilities needed and the finance to back it up. Having a working prototype which took your £265 and three weeks to make is one thing. Producing (or having produced for you) 10,000 a day for less than £5 each and then selling and distributing them is another. The product life cycle shows what happens – slow growth while the idea gets established and then explosive growth when it takes off. What is doesn’t do is make any predictions on time periods so balancing low costs and low break even points during the slow stage with the flexibility and speed of response for the growth stage is a huge challenge and why many inventors sell out their ideas to big corporations who already have the infrastructure and connections.

Things To Do

We’ve covered a lot in this module and I’m sure that it has got you thinking about your existing business or business opportunity in different ways.

  • Capture your initial thoughts on market and industry
  • Try the Five Forces model – minus 10 plus 5
  • Stage of life cycle – close to turning point? How will you know?
  • Are you clear on how you define your business – do alternatives give you better options?

Collect your thoughts in a SWOT analysis – that’s Strengths, Weaknesses, Opportunities & Threats.

Often it’s just one or two pages split into four sections but it provides an excellent reminder of the big issues which will shape your business strategy through:

  • Changes in your personal and business vision – sometimes you will realise that what you want and what you can do are different. You need to be pragmatic about this although challenge yourself to find ways to make your vision come true.
  • Your goals and priorities – the strategic analysis may have highlighted an opportunity of threat which means you have to act right now if you are going to position your business for maximum advantage.

Once you’ve identified opportunities and threats, the reticular activating system in your brain will be more alert to seeing evidence around you. This is why, when you buy a new car, you start noticing more lookalikes.

I recommend you go one step further and let Google do your competitive intelligence work for you by taking advantage of Google Alerts to send you emails automatically when relevant things appear on the Internet about your industry.

Read: Google Alerts

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