MARKET ANALYSIS AND DEALING WITH UNCERTAINTY

A market analysis is a quantitative and qualitative assessment of a market. It

looks into the size of the market both in volume and in value, the various
customer segments and buying patterns, the competition, and the economic
environment in terms of barriers to entry and regulation.

STEPS IN MARKET ANALYSIS

Step 1: Demographics and Segmentation-
When assessing the size of the market, your approach will depend on the type
of business you are selling to investors. If your business plan is for a small shop
or a restaurant then you need to take a local approach and try to assess the
market around your shop. If you are writing a business plan for a restaurant
chain then you need to assess the market a national level.
Depending on your market you might also want to slice it into different
segments. This is especially relevant if you or your competitors focus only on
certain segments.
Who are the potential customers?
The definition of a potential customer will depend on your type of business.
For example, if you are opening a small shop selling office furniture then your
market will be all the companies within your delivery range. As in the example
above it is likely that most companies would have only one person in charge of
purchasing furniture hence you wouldn't take the size of these businesses in
consideration when assessing the number of potential customers. You would
however factor it when assessing the value of the market.

Market value:
Estimating the market value is often more difficult than assessing the number
of potential customers. The first thing to do is to see if the figure is publicly
available as either published by a consultancy firm or by a state body. It is very
likely that you will find at least a number on a national level. If not, then you
can either buy some market research or try to conduct a research yourself.

Step 2: Target Market-

The target market is the type of customers you target within the market. For
example, if you are selling jewellery you can either be a generalist or decide to
focus on the high end or the lower end of the market. This section is relevant
when your market has clear segments with different drivers of demand. In the
above example of jewels, value for money would be one of the drivers of the
lower end market whereas exclusivity and prestige would drive the high end.
Now it is time to focus on the more qualitative side of the market analysis by
looking at what drives the demand, i.e., what motivates our potential
customers to purchase our product.

Step 3: Market Need-

Here you need to get into the details of the drivers of demand for your product
or services. One way to look at what a driver is, is to look at takeaway coffee.
One of the drivers for coffee is consistency. The coffee one buys in a chain is
not necessarily better than the one from the independent coffee shop next
door. But if you are not from that particular area then you don't know what
the independent coffee shop's coffee tastes like. Whereas you know that the
coffee from the chain will taste just like in every other shop of this chain.
Hence most people on the move buy coffee from chains rather than
independent coffee shops.
From a tactical point of view, this section is also where you need to place your
competitive edge without mentioning it explicitly. To do so you need to
highlight in this section some of the drivers that your competition has not been
focussing on.
A quick example for an independent coffee shop surrounded by coffee chains
would be to say that on top of consistency, another driver for your coffee shop
is the place itself as what coffee shops sell before anything else is a place for
people to meet up. You would then present your competition. And you will
explain that the focus is on locals looking for a place to meet rather than a
simple takeaway coffee and that your differentiating factor is the atmosphere
and ambiance of your local shop.

Step 4: Competition-
The aim of this section is to give a fair view of who you are competing against.
You need to know your competitors' positioning and describe their strengths
and weaknesses.
The idea here is to analyse your competitor’s angle to the market in order to
find a weakness that your company will be able to use in its own market
positioning. One way to carry the analysis is to benchmark your competitor
against each of the key drivers of demand for your market (price, quality, add-
on services, etc.) and present the results in a table.

When you are analysing the competition, you should take a look at the
following areas:
Direct competition: These are companies that are offering very similar
products and services. Your potential customers are probably currently buying
from these companies.
Indirect competitors: Think of indirect competition as alternative solutions to
the problem you are solving. This is particularly useful and important for
companies that are inventing brand new products or services. For example, the
first online task management software wasn’t competing with other online
task managers—it was competing with paper planners, sticky notes, and other
analogue to-do lists.
How you’re different: You don’t want to be the same as the competition.
Make sure to discuss how your company, product, or service is different than
what the competition is offering. For a common business type, such as hair
salons, your differentiation might be location, hours, types of services,
ambiance, or price.
Barriers to entry: Carefully describe what protections you have in place to
prevent new companies from competing with you. Maybe you have a great
location, or perhaps you have patents that help protect your business.

Step 5: Pricing and forecast-

The final step in a market analysis is to figure out your pricing and create a
sales forecast to better understand what portion of the market you think you
can get.
First, think about your pricing. Of course, you should ensure that your price is
more than what it costs you to make and deliver your product or service. But,
beyond that, think about the message that your price sends to consumers.
Customers usually link high prices to quality. But, if you are pricing on the
higher end of the spectrum, you need to make sure the rest of your marketing
is also signalling that you are delivering a high-quality product or service. From
what your business looks like to its logo and customer service experience, high-
prices should come with a high-quality experience during the entire sales
process.
On the other end of the spectrum, maybe you’re competing as a low-priced
alternative to other products or businesses. If that’s the case, make sure your
marketing and other messaging are also delivering that same, a unified
message.
Once you have an idea of your pricing, think about how much you expect to
sell. Your industry research will come into play here as you think about how
much of the overall market you expect to capture. For example, if you’re
opening a new type of grocery store, you’ll want to know how much people
spend on groceries in your area. Your forecast should reflect a realistic portion
of that total spend. It’s probably not realistic to gain 50 percent of the market
within your first year.

Conclusion:
Creating a good market analysis is a very worthwhile exercise. It will help you
uncover your blind spots and prepare you to compete with other businesses.
More importantly, it will help you understand your customers so you can
deliver the best possible service to them.

Even after very careful analysis of the market, there are chances that you
might face situations of uncertainty. In situations like these a suitable strategy
should be developed that can deal with uncertainty in the best possible
manner leaving the chances of failure. Let us now understand the concept of
uncertainty.
The uncertainty that remains after the best possible analysis has been
undertaken is what we call residual uncertainty—for example, the outcome of
an ongoing regulatory debate or the performance attributes of a technology
still in development. But quite a bit can often be known despite this. In
practice, we have found that the residual uncertainty facing most strategic-
decision makers falls into one of four broad levels.
 FOUR LEVELS OF UNCERTAINTY:

Level one: A clear enough future

The residual uncertainty is irrelevant to making strategic decisions at level one,
so managers can develop a single forecast that is a sufficient for their
strategies. To help generate this usefully precise prediction of the future,
managers can use the standard strategy tool kit: market research, analyses of
competitors' costs and capacity, value chain analysis, Michael Porter's five-
forces framework, and so on.

STRATEGY- In predictable business environments, most companies are

adapters. Analysis is designed to predict an industry's future landscape, and
strategy involves making positioning choices about where and how to
compete. The best level one adapters create value through innovations in their
products or services or through improvements in their business systems,
without fundamentally changing the industry.
It is also possible to be a shaper in level one situations, but that is risky and
rare, since level one shapers, hoping fundamentally to alter long-standing
industry structures and conduct, increase the amount of residual uncertainty
for themselves and their competitors in otherwise predictable markets.
Level two: Alternative futures
The future can be described as one of a few discrete scenarios at level two.
Analysis can't identify which outcome will actually come to pass, though it may
help establish probabilities. Most important, some, if not all, elements of the
strategy would change if the outcome were predictable.

Many businesses facing major regulatory or legislative change confront level

two uncertainty. Consider US long-distance telephone providers in late 1995,
as they began developing strategies for entering local telephone markets.
Legislation that would fundamentally deregulate the industry was pending in
Congress, and the broad form that new regulations would take was fairly clear
to most industry observers. But whether the legislation was going to pass and
how quickly it would be implemented if it did were still uncertain. No amount
of analysis would allow the long-distance carriers to predict those outcomes,
and the correct course of action—for example, the timing of investments in
network infrastructure—depended on which one materialized.

STRATEGY- In level two, a shaping strategy is designed to increase the

probability that a favoured industry scenario will unfold.
Shapers in such cases might commit their companies to pre-empting
competition by building new capacity far in advance of an upturn in demand,
or they might consolidate the industry through mergers and acquisitions. But
even the best shapers must be prepared to adapt.
The best companies supplement their shaping bets with options that allow
them to change course quickly if necessary because trigger variables are often
fairly simple to monitor in level two.

Level three: A range of futures-

A range of potential futures can be identified at level three. A limited number
of key variables define that range, but the actual outcome may lie anywhere
within it. There are no natural discrete scenarios. As in level two, some, and
possibly all, elements of the strategy would change if the outcome were
predictable. Companies in emerging industries or entering new geographic
markets often face level three uncertainty.
The analysis in level three is similar to that in level two: a set of scenarios
describing alternative future outcomes must be identified, and analysis should
focus on the trigger events indicating that the market is moving toward one or
another scenario. Developing a meaningful set of scenarios, however, is less
straightforward in level three. Scenarios that describe the extreme points in
the range of possible outcomes are often relatively easy to develop but rarely
provide much concrete guidance for current strategic decisions. Since there
are no other natural discrete scenarios in level three, deciding which possible
outcomes should be fully developed into alternative scenarios is a real art. But
there are a few general rules. First, develop only a limited number of
alternative scenarios—the complexity of juggling more than four or five tends
to hinder decision making. Second, avoid developing redundant scenarios that
have no unique implications for strategic decision making. Third, develop a set
of scenarios that collectively account for the probable range of future
outcomes and not necessarily the entire possible range. Establishing the range
of scenarios should allow managers to decide how robust their strategies are,
to identify likely winners and losers, and to determine, at least roughly, the risk
of following status quo strategies.

STRATEGY- Shaping takes a different form in level three. If at level two shapers
are trying to promote a discrete outcome, at level three they are simply trying
to move the market in a general direction because they can identify only a
range of possible outcomes.
No amount of solid market research could precisely forecast consumer
demand for services that didn't even exist yet. However, incremental
investments in new attempts or trials could provide useful information and
would put the company in a privileged position to expand the business in the
future should that prove attractive.

Level four: True ambiguity-

A number of dimensions of uncertainty interact to create an environment that
is virtually impossible to predict at level four. In contrast to level three
situations, it is impossible to identify a range of potential outcomes, let alone
scenarios within a range. It might not even be possible to identify, much less
predict, all the relevant variables that will define the future.
Level four situations are quite rare, and they tend to migrate toward one of the
others over time. Nevertheless, they do exist. Consider a telecommunications
company deciding where and how to compete in the emerging consumer
multimedia market. The company will confront a number of uncertainties
concerning technology, demand, and relations between hardware and content
providers. All of these uncertainties may interact in ways so unpredictable that
no plausible range of scenarios can be identified.

SRTATEGY- Paradoxically, though level four situations involve the greatest

uncertainty, they may offer higher returns and lower risks for companies
seeking to shape the market than situations in levels two or three. Recall that
level four situations are transitional by nature, often emerging after major
technological, macroeconomic, or legislative shocks. Since no player
necessarily knows the best strategy in these environments, the shaper's role is
to provide a vision of an industry structure and standards that will coordinate
the strategies of other players and drive the market toward a more stable and
favourable outcome.