LAUNCHING NEW VENTURES – AN ENTREPRENEURIAL APPROACH, 7E Kathleen R. Allen – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Analyzing the Industry & Market Chapter 4 – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Chapter Objectives Explain the difference between an industry and a market. Discover effective ways to research and analyze an industry. Determine first customer and the characteristics of the market. Using ethnographic techniques for understanding customers. Gather competitive intelligence. – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.1 An Overview of Industry Analysis Two important reasons to study the industry in which a new venture will operate: ◦ It represents the external environment in which the business will be operating. ◦ Can the entrepreneur make a profit significant enough to make the effort worthwhile? Return On Investment (ROI) will be: Small if strong forces working against them in the industry Larger if more benign forces enable higher returns – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.1 An Overview of Industry Analysis Not easy to identify where an industry begins and ends Cultures may be different globally for the same industry Your business could cross more than one industry Must gather and synthesize an enormous amount of information – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.1 An Overview of Industry Analysis Data collected should answer: ◦ What does the industry look like? ◦ Is the industry growing? ◦ Where are the opportunities? ◦ What is the status of any new technology ◦ How much do industry companies spend on R&E? ◦ Who are the opinion leaders in the industry? ◦ Are there young, successful firms in the industry? ◦ What does the future look like? ◦ Are there any threats to the industry? ◦ What are the typical margins in the industry? – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.1a Gathering Secondary Sources Begin with Google, or other search engines, Wikipedia.com, journals, trade magazines, industry analysts, government publications and annual reports of public corporations. Industry analysts offer excellent overviews of most major industries, available at colleges & universities Use multiple sources to draw conclusions; no one source is complete, and you need a variety of perspectives. – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.1a Gathering Secondary Sources 1. Check the business press 2. Talk to trade associations. 3. Consult trade association journals. 4. Check organizations that list government and agency resources. 5. Look at blogs, wikis, websites, and social networking sites. – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.1b The Importance of Primary Industry Data Some sources to tap are: ◦ Industry observers and analysts ◦ Suppliers and Distributors ◦ Customers ◦ Employees of key firms in the industry ◦ Professionals from service organizations ◦ Trade shows – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.1c Understanding Industry Life Cycles Industries are constantly evolving: ◦ Emerging Industry ◦ Growth and Adaptation ◦ Differentiation and Competition ◦ Shakeout ◦ Maturity and Decline – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 4.1- Industry Life Cycle – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 4.2- Industry Trajectories – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.2 Analyzing an Industry The industry is the context in which an entrepreneur’s business will operate Every business operates within a value chain in that industry The value chain consists of all the companies that contribute to the development and distribution of products and services – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 4.3- The Value Chain – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 4.4- Porter’s Five Forces Framework – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.2a Porter’s Five Forces 1. Barriers to Entry ◦ Economies of Scale ◦ Brand Loyalty ◦ Capital Requirements ◦ Switching Costs for the Buyer ◦ Access to Distribution Channels ◦ Proprietary Factors – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.2a Porter’s Five Forces 2. Threat from Substitutes 3. Threat from Buyers’ Bargaining Power 4. Threat from Suppliers’ Bargaining Power 5. Competitive Rivalry among Existing Firms Using the Framework to Draw Conclusions ◦ Fast-growth industry may not be attractive ◦ A “sexy” industry will tend to attract more competition ◦ The need for industry complements must be considered – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 4.5- Attractive vs. Unattractive Industries, 5 Forces – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.3 Market Research for Customer Discovery Starting a new business might be as relatively simple as launching a website But securing customers to survive and make a profit is another matter entirely It is critically important that your first contact with customers be about understanding problems ◦ Don’t begin with a solution in mind; listen to your customers first – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.3 Market Research for Customer Discovery What are the potential markets for the product or service? Of these markets, which customers are most likely to purchase? How much do these customers typically buy, how do they buy, and how do they hear about the product or service? How can your new venture meet the needs of these customers? – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.3a Gathering Secondary Customer Data Target market research provides critical data used to determine who the first customer is ◦ This one has a significant problem that you can solve ◦ This customer may not be the biggest potential market, but an unserved niche that enables you to enter the market with no direct competition – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Table 4.1- A Process for Gathering Market Data – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.3b Customer Discovery Up Close The most important data that entrepreneurs can collect on potential customers are primary data, collected through direct observation or customer interviews The process for doing this involves collecting data based on the questions from Table 4.1, forming some hypotheses about the potential first customer, then testing them by conducting additional research with the customer – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 4.6- The Customer Discovery Hierarchy – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.3b Customer Discovery Up Close Ethnographical Techniques for Observing Customers ◦ 1. Learn from Observation ◦ 2. Explain what was observed ◦ 3. Develop a hypothesis ◦ 4. Test the Theory ◦ 5. Conclusions – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.3b Customer Discovery Up Close Structured Interviews Informal Focus Groups – The Group Interview Survey Techniques ◦ Keep the questionnaire short ◦ Don’t ask leading or biased questions ◦ Ask easy, simple questions first, progressing to more complex ones ◦ Ask demographic questions (age, sex, income, etc.) last – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 4.7- An Ethnographical Approach, Customer Discovery.. – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.3c Segmenting the Market with a Customer Matrix Customer segmentation is critical to providing the right benefits to the right customer But many entrepreneurs define their customer segments too broadly, then wonder why they are only capturing a small portion of the segment Constructing a customer matrix will help – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Table 4.2- Initial Customer Matrix for a Portable …Device – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.3c Segmenting the Market with a Customer Matrix The Customer Profile ◦ 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 Gathering Demand Data – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.3d Drawing Conclusions from Market Research Entrepreneurial decision making is more art than science Data gathered must be analyzed, synthesized, and result in some conclusions about market feasibility Organize the data into meaningful categories ◦ Customer profile ◦ Market demographics, etc. Threats and challenges can be identified – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.4 Gathering Competitive Intelligence One of the weakest portions of any feasibility analysis or business plan is the competitive analysis ◦ Entrepreneurs often underestimate or ignore the competition ◦ They will underestimate what it takes in resources and skills to establish a presence in the market To assess the competition, find ways to create new value that customers will pay for First, determine your target market – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.4a Identifying the Competition 3 types of competitors ◦ Direct ◦ Indirect or substitute ◦ Emerging or potential Continual innovation will give you a strong advantage ◦ What are the competitor’s core competencies? ◦ Do they have competency in the same area as you? ◦ Which are transferable to your business? – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 4.8- Good Competition vs. Bad Competition – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.4b Finding Information about Competitors Visit competitors’ websites or selling outlets Buy competitors’ products to understand differences in features and benefits and how they treat their customers Use internet search engines to read what customers are saying about the firm Find information on public companies through Hoover’s online ( the SEC ( and OneSource ( among others. – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4.4c Dealing with Competition The best way to stave off competition is to provide meaningful differentiation in your solutions to customer needs ◦ Best, identify new market space, a niche not currently being served Continue market research after launch; it should be an ongoing process over the life of the business Focus on developing relationships with key people in the supply chain, and key customers ◦ Business relationships take time to develop; once trust is in place, its difficult for a competitor to overcome it – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

New Venture Action Plan Identify the NAICS codes for the industry in which the new venture will operate Collect secondary data on the industry Conduct field research by interviewing suppliers, distributors, customers and others Define the target market, segment it, and identify the first customer for the product or service – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

New Venture Action Plan Gather primary data on the target market to generate a customer profile and evidence of demand Gather competitive intelligence and determine the impact on the new venture launch strategy – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.