Strategy to Win Element 2 - Market Research

 

Introduction

This lesson will focus on the role of market research in improving your strategic approach. Many entrepreneurs often fall into the trap of thinking that they can find success by capturing a small portion of the market. However, this path overlooks the complex nature of business growth, especially in today's digital environment, and this line of thinking usually discourages investors.

 

Factors Determining Business Growth

Several factors contribute to business growth, including:

 

• The size of the addressable market

• The speed at which the market accepts your products

• The prevalence of product reviews on social media

• Competitive positioning

• How competitors respond to your actions

• Word-of-mouth sales

 

If increasing sales revenue were straightforward, the overall business failure rate would be significantly lower.

 

Long-Term Business Success

Over the years, Kirk discovered through his interactions with many business owners, both as a banker and as a business consultant, that sustainable success is hard-earned. It is not uncommon for businesses to take 15 to 20 years before substantial growth is realized. For some, it may even be their third or fourth business. The key to growing sales revenue lies in deeply understanding why customers choose your products over those of your competitors. 

 

Insights from "Competing Against Luck"

The book "Competing Against Luck" by Clayton Christensen offers valuable insight into understanding the customer’s "jobs to be done" and why customers choose your products. If business owners, managers, or entrepreneurs fail to grasp why their customers prefer their products over the competitors, the chances of successful business growth are slim. Real-world examples, like Kmart and Blockbuster, show companies that were once prosperous but faltered because they missed the opportunity to understand what their customers truly wanted.

 

Importance of Market Research

Conducting thorough market research to understand your customers and your position in the marketplace is important. While high sales projections may bolster confidence during presentations, unless projections are supported by comprehensive research, they lack credibility. The objective is to gain a thorough understanding of your market, competition, customers, business model, financials, and organizational capabilities. Armed with this knowledge, you can create a realistic strategic approach backed by well-thought-out research.

 

Defining the “Addressable Market”

The term “addressable market” does not refer to the total market but to the part of the market where your business can actively compete at any given time. Several factors, such as your product offering, geographic reach, price point, and business model, limit your ability to capture the entire market. Therefore, it is essential to clearly define your addressable market. It is helpful to clearly understand which part of the market will be most interested in your offerings and to not waste time in non-competitive markets.

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Market Research and Business Goals

Businesses often set goals and targets as part of their strategy. These targets should be achievable objectives that the executive team can confidently commit to. Hence, accuracy in market research is key.

 

Revenue projections can be cross-checked for reasonability by expressing them as a percentage share of the addressable market over a three-year period. If the strategic objective is not supported by the market size, the expectations may need to be renegotiated. It is crucial to understand early on whether your strategic or business plan supports an achievable strategic objective.

 

We have seen executive teams get excited about a product or service, only to discover that the market size would not support their overall strategic objective. It is better to identify the “Size of the Prize” before committing resources to it. 

 

Addressable Market Refinement

Further refinement of the addressable market will help improve your market projections. It requires experience with the market to understand which segments of the market are likely to buy and which segments are not likely to buy. For example, in the window business, certain parts of the country will almost only buy wood window frames, and other parts of the country almost only buy vinyl window frames. This was an expense lesson learned through many experiences. Such preferences exist in every market and limit the addressable market. It is usually too costly to try to change customer preferences. If the addressable market share does not match the needed outcomes, the company needs to consider different markets or market segments to achieve its strategic objective. 

 

The Importance of Competitive Research

Next, shift your focus to researching the competition. This exercise should involve examining competitors both within and adjacent to your market segment. Comparing yourself to competitors in terms of market share can offer valuable insights. You can use multiple resources to gather this information, from sales teams to educated guesses, and from internet searches to market research companies. This research will lay the groundwork for understanding your position in the market and planning your strategy accordingly.

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Researching the competition provides valuable insights into the current state of the market, its product offerings, pricing strategies, marketing tactics, and more. It helps you understand your competitors' strengths and weaknesses, enabling you to identify gaps in the market that your business could fill.

 

Resources for Competitive Analysis

You can conduct a competitive analysis through a variety of sources. Publicly listed competitors often provide detailed information in their annual reports, including their financial performance, strategic priorities, and key business risks. Trade publications and industry reports offer insights into current trends and market developments. Social media and online reviews can reveal how customers perceive your competitors, what they like and dislike about their products, and how their needs are being met or unmet.

 

Identifying Threats and Opportunities

Understanding the competition is not just about identifying threats but also opportunities. If a competitor is unable to meet customer needs, or if there is a market segment they are not addressing, these are potential opportunities for your business. This also helps you anticipate potential competitive responses to your business strategies and prepare for them.

 

Inspiring Innovation and Understanding Market Dynamics

Moreover, researching competition can inspire innovation. By analyzing your competitors' products, you can find ways to improve your own offerings, whether by adding new features, improving quality, or offering better value for money.

 

Competitor analysis can also help you understand the key success factors in your industry, the barriers to entry, and the dynamics of the market. This knowledge is crucial in making informed strategic decisions about where to compete and how to win.

 

Setting Realistic Targets

Lastly, understanding your competitors and your position relative to them can assist in setting realistic targets for your business. A deep understanding of your competition and the overall market dynamics allows you to make informed projections about potential revenue and market share, leading to more accurate and achievable business plans and strategic objectives.

 

Gathering Market Data

Potential sources of market information include the Internet, market research companies, industry associations, industry conferences, bankers, and accountants. Additionally, creative methods like observation, conversations, and being receptive to observable market dynamics can yield valuable data. Online resources such as NAICS or SIC codes and data firms like Freedonia Group are other noteworthy sources of information.

 

Defining Winning and Understanding Demand Drivers

Winning in business may be defined in terms of return or earnings on sales or return on investment. Top quartile performance, represented by the upper 25 percent of companies within a market segment, serves as a basic benchmark for these returns. Size does not necessarily equate to better performance; a smaller company can outperform a much larger one in terms of these metrics. Higher margins can contribute significantly to a company's success and longevity, even in the face of larger competition. Smaller companies can gain great benefits from higher financial performance. Invest time into discovering the financial metrics of your industry and set targets for ensuring that you are performing in the top 25% of those industry metrics.

 

Netflix had a better understanding of the demand drivers of the video market than Blockbuster did. They understood among other things that customers did not like paying late fees and preferred not to leave their house to get a movie.

 

In a speech that Jeff Bezos gave at the 2016 Code Conference, where he talked about his approach to building Amazon.com. He said something very important about understanding the long-term demand drivers of his market. Here is his quote:

 

"I very frequently get the question: ‘What’s going to change in the next 10 years?’ And that is a very interesting question; it’s a very common one. I almost never get the question: ‘What’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two – because you can build a business strategy around the things that are stable in time. … [I]n our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want a vast selection. It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff I love Amazon; I just wish the prices were a little higher,’ [or] ‘I love Amazon; I just wish you’d deliver a little more slowly.’ Impossible. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.”

 

Just like Jeff Bezos knew which demand drivers were not going to change in 10 years, it is important for you to understand the demand drivers that will not change for your customers and to continue to innovate, improve, and invest in those demand drivers for long-lasting success and improved financial performance.

 

Final Thoughts

Understanding market dynamics, competition, and demand drivers is fundamental to the success and longevity of any company. In a world that now offers abundant knowledge, sources such as the internet, industry associations, and professional data companies offer invaluable insights. Additionally, bankers and accountants, who have unique access to financial data and market trends, can provide critical information.

 

In addition to acquiring data, it is vital to understand and interpret the information correctly. Creative and observational skills play a significant role in this process, allowing you to gain insights that are not immediately apparent in the data.

 

One of the key elements of strategic planning involves comparing a company's performance with that of the industry's top quartile performance. This comparison can reveal a company's relative position in the industry and inform strategic decisions to improve its competitive standing.

 

Significant business metrics include sales growth, net income as a percentage of sales, gross margin, and return on investment. These metrics serve as barometers of a company's success and competitiveness. It's important to remember that a company can still fail despite showing year-over-year improvements in some of these metrics if it does not keep up with or exceed its competition. K-mart is an example of a company that was forced out of the market because it did not keep up with its competitors.

 

Market research plays a pivotal role in understanding your competition, defining the addressable market, assessing the market size, and identifying top-quartile performance in the industry. Comprehensive market research enables you to devise effective strategies, ward off distractions, and maintain focus on proven approaches. The use of digital tools to capture market size, understand demand drivers, and analyze competition can further enhance this process, resulting in a strategy that inspires confidence and ensures success.