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Chapter 6
Market Analysis
Key Words
Market analysis—breaks the industry into segments and zeroes in on the specific
segment (or target market) that the firm will tackle
Chapter Overview
This chapter introduces the market analysis portion of the business plan. Be aware that
Chapter Summary
1.
promotion, and distribution.
The marketing analysis section of a business plan is distinctly different than the
marketing section. The market analysis section focuses on describing a firm’s
2.
The market analysis is an extremely important section of a business plan for two
reasons. First, it helps define the nature of the business and the remainder of the
plan. Second, it affirms that a company has a well-thought-out target market,
understands its customers, and can generate sales in the face of competition.
3.
Market segmentation is the process of dividing a market into distinct subsets (or
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4.
Once a firm segments its market, it selects a segment within the market to target.
The biggest mistake that people make when selecting a target market is to define
5.
leads you to your conclusions. If you are producing a product that is an enhanced
version of something that is already available, the numbers will be fairly easy to
get. Estimating the size of a target market for a market that doesn’t exist is
harder.
Estimating the size of a target market can be a tricky proposition. The first rule
of thumb is to not make frivolous predictions. The key is to explain the path that
6.
knows about the consumers in its target market, the more it can gear its products
or services to accommodate their needs.
It’s important to include a section in the market analysis that deals directly with
7.
A competitor analysis is a detailed analysis of a firm’s competition. It helps a
firm understand the positions of its major competitors and the opportunities that
are available to gain a competitive advantage in one or more areas.
8.
competitors.
9.
A competitive analysis grid is a tool for organizing and presenting the
information you collect about your competitors.
10.
There are four basic ways for a firm to estimate its initial sales: contacting trade
associations, finding comparable firms, finding sales estimates for comparable
firms in magazine and newspaper articles, and using the multiplication method.
Chapter Outline
I. Introduction
II. Market Segmentation and Target Market Selection
a. Market Segmentation
III. Buyer Behavior
IV. Competitor Analysis
a. Identification of Direct, Indirect, and Future Competitors
Chapter Notes
I. Introduction
• Market analysis breaks the industry into segments and zeroes in on the
specific segment (or target market) that the firm will tackle
their market too broadly or to try to target more than one segment
simultaneously. Start-ups are usually best served by zeroing in on a specific
target market.
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• The market analysis is an extremely important section of a business plan
for two reasons:
o The market analysis helps define the nature of the business and the
remainder of the plan
o It affirms that a company has a well-thought-out target market,
understands its customers, and can generate sales in the face of
competition
II. Market Segmentation and Target Market Selection
• A firm must answer the basic question, “Who are our customers, and how
will we appeal to them?”
• In some cases, a firm will have two markets, and you should describe the
characteristics of both markets
a. Market Segmentation
o Market segmentation is the process of dividing a market
into distinct subsets (or segments) that behave in the same
way or have similar needs
• Homogeneity of needs and wants within the
segment
• Heterogeneity of needs and wants among segments
• Differences within the segment are small compared
to differences across segments
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b. Selecting a Target Market
o After a firm segments its market, it selects a segment
within the market to target
c. Target Market Size and Trends
o Estimating the size of a target market can be tricky; in
many cases, you must literally invent a methodology for
making an estimate
as accurate as possible
o The best recourse, if you are stuck, is to talk with a
reference librarian to see if there are additional information
resources; editors of industry-specific trade journals and
directors of trade associations are also good sources of
information
III. Buyer Behavior
• It’s important to include a section that deals directly with the behavior of
the consumers in a firm’s target market
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• In many business-to-business start-ups, it’s important to discern
specifically who the “decision makers” are in the businesses you’ll be
trying to sell to
• The length of a customer’s buying process is often an important concern
IV. Competitor Analysis
• A competitor analysis is a detailed analysis of a firm’s competition
a. Identification of Direct, Indirect, and Future Competitors
o The first step in a competitor analysis is determining who
the competition is
o You should list a handful of competitors from each
category comprising your direct competitors, indirect
competitors, and future competitors:
• Direct competitors—businesses that offer a product
that is very similar to yours, targeting the same
customers that you are
o You should provide a short assessment of the scope and
intensity of your competition
o The next section focuses on your competitive analysis grid,
which compares your firm to your major competitors
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b. Competitive Analysis Grid
o A competitive analysis grid is a tool for organizing and
presenting the information you collect about your
competitors
• Show the key success factors for firms in your
target market on the vertical axis of the grid, and
then show your firm along with your four or five
V. Estimate of Annual Sales and Market Share
• The final section of the market analysis focuses on computing an estimate
of your firm’s initial annual sales and market share
• There are four basic ways for a new firm to estimate its initial sales:
o Contact the premier trade associations in your industry and ask if
they track sales numbers for businesses that are similar to the
business you plan to start
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Review Questions
1.
Explain the purpose of the market analysis section of a business plan.
Answer: The market analysis is an extremely important section of a business
2.
Describe the difference between the market analysis section and the marketing
plan section of a business plan.
Answer: The marketing analysis section of a business plan is distinctly different
3.
Explain the process of market segmentation and why it’s important for a firm to
select a specific target market.
Answer: Market segmentation is the process of dividing a market into distinct
4.
Describe the requirements for successfully segmenting a market.
Answer: There are requirements for successful market segmentation:
• Homogeneity of needs and wants within the segment
5.
simultaneously.
What is the biggest mistake that people make when selecting a target market?
Answer: The biggest mistake that people make when selecting a target market is
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6.
Why is estimating the size of a target market referred to as a “tricky”
proposition?
Answer: The first rule of thumb is to not make frivolous predictions. The key is
7.
Describe why it’s important to include a section on “buyer behavior” in a
business plan?
Answer: It’s important to include a section in the market analysis that deals
8.
Explain the purpose of a competitor analysis.
Answer: A competitor analysis is a detailed analysis of a firm’s competition. It
9.
understand the strategies and behaviors of your competitors. This requires you to
engage in competitive intelligence. You can gather competitive intelligence by:
attending conferences and trade shows, reading industry-related trade
Explain why it’s important to collect competitive intelligence and some of the
techniques that are used to collect it.
Answer: To complete a meaningful competitive analysis grid, you must first
10.
Briefly describe the four separate ways of estimating the annual sales and market
share of a new business.
Answer: There are four basic ways for a new firm to estimate its initial sales:
(1) Contact the premier trade associations in your industry and ask if they track
Application Questions
1.
needs to focus on one segment and become an expert in serving that market
instead of spreading himself too thin and failing to differentiate his business
A friend of yours just completed a 42-page business plan for a solar power
company. The company will be asking for $4 million in venture capital funding
to ramp up production of a new type of solar panel they have developed. While
looking through the plan, you noticed that the company will be targeting three
segments of the solar energy market: commercial users, residential users, and
government buildings. When you asked your friend if he thought the company
might be spreading itself too thin, he replied by saying, “No. In fact, we thought
about targeting additional segments. We want to show the VCs that we have
broad markets for our product.” Do you think your friend’s target market
strategy is wise? Explain your answer.
Answer: The friend is making one of the big mistakes of entrepreneurs. He
2.
According to the chapter, one way that markets are segmented is on
psychographic variables. Explain what a psychographic variable is and provide
three examples of markets that might be segmented on one or more of these
variables.
Answers: Psychographic variables include criteria such as personality, lifestyle,
3.
Re–create Prime Adult Fitness’s estimate of the size of its target market
substituting the county that your college of university is located in for Seminole
County, Florida. How do your numbers compare with the numbers reported in
Prime Adult Fitness’s estimate?
4.
Put yourself in the place of an investor listening to Prime Adult Fitness present
the market analysis portion of their business plan. Think of three penetrating
questions that you would ask them about their market analysis.
5.
Expresso Fitness is producing an exercise bike that keeps its users engaged and
motivated by turning the bike into a sort of video game. Go to Expresso Fitness’s
website (http://www.expressofitness.com) and study the company. If you had
been the founder of Expresso Fitness, explain how you would have estimated the
company’s initial sales using the multiplication method.
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Additional Activities
1. What? So What?
Purpose: to demonstrate the difficulty of defining the nature of a business.
This activity pairs students to challenge each other in an effort to narrow their
explanations of the benefits of a product or service. Conduct this activity after
introducing the purposes of market analysis.
2. Competitor Matrix
Purpose: to practice identifying key success factors of competitors.
After lecturing on the competitive analysis grid, tell students it is time to apply what they
just learned. Although this activity can be conducted as an individual assignment, it is
probably most effective when done in groups.
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3. Trade Associations
Purpose: to determine the extent of information available from trade and professional
associations. This is a challenging task, as many associations will not provide sales or
income estimates to nonmembers.
4. Distant Competitors
Purpose: to determine the extent of information available from competitors. This is a
challenging task as students may encounter business owners who refuse to participate.
Fortunately, this happens far less often than students expect, as most business owners (if
approached tactfully) are happy to help others.
Ask students to share their results in class. Consider offering extra credit or a prize for the
student who demonstrated the most creative method of obtaining this information from a
distant competitor.
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