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CHAPTER FOUR

Market/Submarket Analysis

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Strategic Analysis 1.External and Customer Analysis 2.Competitor Analysis 3.Market/Sub-Market Analysis 4.Environmental and Strategic Analysis

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• Market analysis builds on customer and competitor analyses to make strategic judgments about a market (and submarket) and its dynamics. • Should a firm invest or disinvest? • What should the level of commitment be?

• Primary objective #1 of a market analysis is to determine the attractiveness of a market (or submarket) to current and potential participants.

• Market attractiveness: the market’s profit potential as measured by the long-term return on investment achieved by its participants, will provide important input into the product-market investment decision.

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• Primary objective #2 of a market analysis is to understand the dynamics of the market. • This sheds light on what it would take to be a winner in the space. • The need is to identify:

• emerging submarkets • Key success factors • Trends • Threats • Opportunities • Strategic uncertainties

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• A key success factor is a required asset or competency • If a firm has a strategic weakness in a key success factor that isn’t

neutralized by a well-conceived strategy, its ability to compete will be limited.

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DIMENSIONS OF A MARKET/SUBMARKET ANALYSIS The nature and content of an analysis of a market and its submarkets will depend on the following dimensions:

• Emerging submarkets • Actual and potential market and submarket size • Market and submarket growth • Market and submarket profitability • Cost structure • Distribution systems • Trends and developments • Key success factors

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EMERGING SUBMARKETS • Are submarkets emerging defined by lower price points, the

emergence of niches, systems solutions, new applications, a customer trend, or new technology? How should the submarket be defined?

• The challenge is to detect and understand emerging submarkets, identify those that are attractive to the firm given its assets and competencies, and then adjust offerings and brand portfolios in order to increase their relevance to the chosen submarkets.

• The opportunity is to influence these emerging submarkets so that competitors become less relevant.

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EMERGING SUBMARKETS Knowing these characteristics can help detect and analyze emerging submarkets. They include offerings that:

• Provide a lower price point—discount airlines • Serve nonusers—Kodak Brownie camera • Serve niche markets—performance snowboards • Provide systems solutions—home theaters • Serve unmet needs—Lexus car buying experience • Respond to a customer trend—nutrient-dense energy drinks • Leverage a new technology—Gillette Fusion Razors.

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ACTUAL AND POTENTIAL MARKET OR SUBMARKET SIZE Important submarkets? • What are the size and growth characteristics of a market and

submarkets? • What submarkets are declining or will soon decline? • How fast? • What are the driving forces behind sales trends?

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ACTUAL AND POTENTIAL MARKET OR SUBMARKET SIZE A basic starting point for the analysis of a market or submarket is the total sales level. • Among the sources that can be helpful are

• Published financial analyses of the relevant firms, • Customers • Government data • Trade magazines and associations.

• The ultimate source is often a survey of product users in which the usage levels are projected to the population.

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ACTUAL AND POTENTIAL MARKET OR SUBMARKET SIZE It is often useful to consider the potential size.

• A new use • A new user group • More frequent usage

• All could dramatically change the size and prospects for the market or submarket.

Example: There is unrealized potential for the cereal market in Europe and among institutional customers in the United States. Europeans buy only about 25 percent as much cereal as their U.S. counterparts.

• Smaller niche segments should not be ignored

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MARKET AND SUBMARKET GROWTH After the size of the market and its important submarkets have been estimated, the focus turns to the growth rate.

• Growth means more sales and profits even without increasing market share.

• Declining sales can mean reduced sales and often increased price pressure as firms struggle to hold their shares of a diminishing pie.

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MARKET AND SUBMARKET GROWTH Identifying Driving Forces

The most important strategic uncertainty involves the prediction of market sales. A key strategic decision hinges on understanding the driving forces behind market dynamics.

Example: In the wine market, the relationship of wine to health and the future demand for premium reds might be driving forces. One second-level strategic uncertainty might then ask on what the demand for premium red will depend.

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MARKET AND SUBMARKET GROWTH Forecasting Growth

• Historical data can provide a useful perspective and help to separate hope from reality.

• Accurate forecasts for new packaged goods can be based on the timing of trial and repeat purchases.

• Durable goods forecasts can be based on projecting initial sales patterns.

• Data trends can be caused by random fluctuations or by short-term economic conditions, and the urge to extrapolate should be resisted.

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MARKET AND SUBMARKET GROWTH Submarket Growth

• Submarket growth is usually critical because it affects investment decisions and value propositions.

• That involves identifying and analyzing current and emerging submarkets.

Example: While the overall beer category is flat, a deeper look shows that imports are declining, and craft beers are showing significant growth.

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MARKET AND SUBMARKET GROWTH Detecting Maturity and Decline

• Transitions are important indicators of the health and nature of the market. • The growth phase of the product life cycle changes to a flat

maturity phase and when the maturity phase changes into a decline phase.

• Historical sales and profit patterns of a market can help to identify the onset of maturity or decline, but the following often are more sensitive indicators:

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MARKET AND SUBMARKET GROWTH Price pressure • Caused by overcapacity and the lack of product differentiation. • When growth slows, previously developed capacity becomes

excessive. • Product evolution often results in most competitors matching

product improvements which make it difficult to maintain meaningful differentiation.

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MARKET AND SUBMARKET GROWTH

Buyer sophistication and knowledge • Buyers tend to become more familiar and knowledgeable as a

product matures, and thus they become less willing to pay a premium price to obtain the security of an established name.

• Example – Computer buyers over the years have gained confidence in their ability to select computers—as a result, the value of big names has receded.

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MARKET AND SUBMARKET GROWTH

Substitute products or technologies: Sales of fresh pre-portioned ingredients with recipes delivered to customers’ homes (e.g., Blue Apron) may portend a decline in frozen and packaged store-bought meals. Saturation: When the number of potential first-time buyers declines, market sales should mature or decline. No growth sources: The market is fully penetrated and there are no visible sources of growth from new uses or users. Customer disinterest: The interest of customers in applications, new product announcements, and so on falls off.

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MARKET AND SUBMARKET PROFITABILITY ANALYSIS Economists have studied why some industries or markets are profitable and others are not. If the average profit level is low, the task of succeeding financially will be much more difficult than if the average profitability were high. Michael Porter identifies five factors that influence profitability:

1. The intensity of competition among existing competitors 2. The existence of potential competitors who will enter if profits are high 3. Substitute products that will attract customers if prices become high 4. The bargaining power of customers 5. The bargaining power of suppliers

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Porter’s Competitive

Forces model

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MARKET AND SUBMARKET PROFITABILITY ANALYSIS Existing Competitors

The intensity of competition from existing competitors depends on several factors, including:

• The number of competitors, their size, and their commitment • Whether their product offerings and strategies are similar • The existence of high fixed costs • The size of exit barriers

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MARKET AND SUBMARKET PROFITABILITY ANALYSIS Potential Competitors

• Companies that are currently not competing in the industry but have the potential to do so.

Potential competitors

• Reductions in unit costs attributed to a larger output.

Economies of scale

• Preference of consumers for the products of established companies.

Brand loyalty

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MARKET AND SUBMARKET PROFITABILITY ANALYSIS Potential Competitors

• Enjoyed by incumbents in an industry and that new entrants cannot expect to match.

Absolute cost advantage

• Costs that consumers must bear to switch from the products offered by one established company to the products offered by a new entrant.

Switching costs

• Falling entry barriers due to government regulation results in significant new entry, increase in the intensity of industry competition, and lower industry profit rates.

Government regulations

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MARKET AND SUBMARKET PROFITABILITY ANALYSIS Potential Competitors

Various barriers to entry include required capital investment (the infrastructure in cable television and telecommunication) and economies of scale (Becton Dickinson’s 80 percent market share in the blood collection category means that R&D investments are spread over a large number of units making it difficult for competitors to enter). Likewise, barriers to entry can include distribution channels (Frito-Lay and Texas Instruments have access to customers that is not easily duplicated) and product differentiation (Apple and Harley-Davidson have highly differentiated products that protect them from new entrants).

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MARKET AND SUBMARKET PROFITABILITY ANALYSIS Substitute Products & Complementors

• Substitute products – Those of different businesses that satisfy similar customer needs

 Examples Butter v margarine, Eyeglasses v contact lenses.

− Limits prices that companies in an industry can charge. Complementors – Companies that sell products that add value to the other products (Intel).

− Strong complementors provide a increased opportunity for creating value.

− Weak complementors slow industry growth and limit profitability – coffee and milk

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MARKET AND SUBMARKET PROFITABILITY ANALYSIS Customer Power

• Buyers’ power to bargain down prices or raise costs by demanding better quality and service.

• Power includes:

− buyers can choose sellers and purchase in large quantities.

− supplier industry is dependent on buyers for a major portion of sales.

− with low switching costs and ability to purchase input from several companies at once, buyers can pit companies against each other.

− buyers can threaten to enter the industry and produce the product.

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MARKET AND SUBMARKET PROFITABILITY ANALYSIS Supplier Power

• Suppliers’ power to raise input prices or industry costs through various means.

• Power includes:

− product has few substitutes and is vital to the buyer.

− supplier is not dependent on one particular industry for their sales.

− companies would incur high switching costs if they moved to a different supplier.

− supplier can threaten to enter a customers’ industry.

− companies cannot enter their suppliers’ industry to lower prices.

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COST STRUCTURE An understanding of the cost structure of a market can provide insights into present and future key success factors.

1. conduct an analysis of the value chain which shows the steps in the production and delivery of an offering that add value.

2. Advantages in lower value-added stages will simply have less leverage.

Example: In the metal can business, transportation costs are relatively high, and a competitor that can locate plants near customers will have a significant cost advantage.

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DISTRIBUTION SYSTEMS An analysis of distribution systems should include these types of questions:

1. What are the alternative distribution channels? 2. What are the trends? 3. What channels are growing in importance? 4. What new channels have emerged or are likely to emerge? 5. Who has the power in the channel, and how is that likely to shift?

Sometimes the creation of a new channel of distribution can lead to a sustainable competitive advantage.

Example: Amazon has radically changed many categories and has recently decided to disrupt the furniture category.

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DISTRIBUTION SYSTEMS An analysis of likely or emerging changes within distribution channels can be important in understanding a market and its key success factors.

The increased sale of wine in supermarkets made it much more important for winemakers to focus on packaging and advertising.

The consolidation of department stores meant that clothing brands had fewer retailers through which to sell their products

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MARKET TRENDS Often one of the most useful elements of external analysis comes from addressing the question, what are the market trends?

The question has two important attributes: it focuses on change and it tends to identify what is important.

Strategically useful insights almost always result. A discussion of market trends can serve as a useful summary of customer, competitor, and market analyses. It is thus helpful to identify trends near the end of market analysis.

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MARKET TRENDS

• As the soft drink market stagnated in the United States, sales of noncarbonated beverages grew sharply, and sales of herb and vitamin-fortified beverages exploded. Not surprisingly, the major soft drink companies sought to obtain a position in these trendy categories.

• Reports that dark chocolate is heart-healthy has increased sales in the confectionary market and spawned new products involving dipped fruits and nuts. Chocolate makers scrambled to redo their lines and create novel and value-creating new products.

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MARKET TRENDS Trends versus Fads It is crucial to distinguish between: Trends: a general direction in which something is developing or changing – will drive growth and reward those who develop differentiated strategies. Fads: interest that is very popular for a short period of time – will only last long enough to attract investment

Example: Schwinn, the classic name in bicycles, proclaimed mountain biking a fad in 1985 with disastrous results to its market position and, ultimately, its corporate health.

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MARKET TRENDS Trends versus Fads 1. What is driving it? A trend will have a solid foundation with legs. Trends are

more likely to be driven by demographics (rather than pop culture), values (rather than fashion), lifestyle (rather than a fashionable crowd), or technology (rather than media).

2. How accessible is it in the mainstream? Will it be constrained to a niche market for the foreseeable future? Will it require a major change in ingrained habits? Is the required investment in time or resources a barrier (perhaps because the product is priced too high or too hard to use)?

3. Is it broadly based? Does it find expression across categories or industries? Eastern influences, for example, apparent in health care, food, fitness, and design—are a sign of a broader trend.

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KEY SUCCESS FACTORS Key Success Factors (KSFs): assets and competencies that provide the basis for competing successfully. T • Strategic necessities do not necessarily provide an advantage, because others

have them, but their absence will create a substantial weakness. The firm needs to achieve a point of parity with respect to strategic necessities.

• strategic strengths,are the firm’s assets or competencies that are superior to those of competitors and provide a base of advantage. The set of assets and competencies developed in competitor analysis provides a base from which key success factors can be identified. The points to consider are which are the most critical assets and competencies now and, more important, which will be most critical in the future.

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RISKS IN HIGH-GROWTH MARKETS The conventional wisdom that the strategist should seek out growth areas often overlooks a substantial set of associated risks. As shown in Figure 4.5, there are risks that:

The number and commitment of competitors may be greater than the market can support.

A competitor may enter with a superior product or low-cost advantage. Key success factors might change and the organization may be unable to adapt. Technology might change. The market growth may fail to meet expectations. Price instability may result from overcapacity or from retailers’ practice of pricing

hot products low to attract customers. Resources might be inadequate to maintain a high growth rate. Adequate distribution may not be available.