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How to do a Market Anaysis for a Business Plan (Part 2)

By News Express on 14/11/2016

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Last week we ended the series with the explanation of the bottom up approach, this week therefore we shall be explaining the top down approach. The top down approach consist in starting with a global number and reducing it pro-rata. In our case we would start with the value of UK office furniture market which research estimates to be around £650m and then do a pro-rata on this number using the number of businesses in our delivery area x their number of employees/total number of people employed in the UK. Once again the number of employees would only be a rough proxy given all business don't have the same furniture requirements.

When coming up with an estimate yourself it is always a good practice to test both the bottom up and top down approaches and to compare the results. If the numbers are too far away then you probably missed something or used the wrong proxy.

Once you have estimated the market size you need to explain to your reader which segment(s) of the market you view as your target market.

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 my 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.

Market Need:

This section is very important as it is where you show your potential investor that you have an intimate knowledge of your market. You know why they buy.

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 the area then you don't know what the independent coffee shop's coffee is worth. 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. In the following sections of your business plan you are going to talk about your competition and their strengths, weaknesses and market positioning before reaching the Strategy section in which you'll explain your own market positioning. What you want to do is prepare the reader to embrace your positioning and invest in your company.

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, which is relevant for people on the move, another driver for coffee shop demand is the place itself as what coffee shops sell before most is a place for people to meet. You would then present your competition. And in the Strategy section explain that you will focus on locals looking for a place to meet rather than takeaway coffee and that your differentiating factor will be the authenticity and atmosphere of your local shop.

Competition:

The aim of this section is to give a fair view of who you are competing against. You need to explain your competitors' positioning and describe their strengths and weaknesses. You should write this part in parallel with the Competitive Edge part of the Strategy section.

The idea here is to analyse your competitors 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.

There are example in various environments and industries where you see all the actors on the market currently focused on the low medium range of the market leaving the space free for a high end focused new player.

This section is all about answering two questions from your investors:

what prevents someone from opening a shop in front of yours and take 50% of your business? having answered the previous question what makes you think you will be successful in trying to enter this market? (Start-up only).

As you would guess barriers to entry are great. Investors love them and there is one reason for this: it protects your business from new competition.

Here are a few examples of barriers to entry:

Investment – (project that require a substantial investment)

Technology – (sophisticated technology, a website is not one, knowing how to process uranium is)

Brand – (the huge marketing costs required to get to a certain level of recognition).

Regulation – (licences and concessions in particular).

Access to resources – (exclusivity with suppliers, proprietary resources).

Access to distribution channels – (exclusivity with distributors, proprietary network).

Location – (a shop on Marina or Broad Street Lagos).

The answer to the questions above will be highly dependent on your type of business, your management team and any relations it might have. Therefore it is hard for me to give any general tips about it.

Regulation:

If regulation is a barrier at entry in your sector then I would advise you to merge this section with the previous one. Otherwise this section should be just a tick the box exercise where you explain the main regulations applicable to your business and which steps you are going to take to remain compliant.

Now you know how to carry out a market analysis for a business plan. I hope you found this article useful. If so get in touch for indepth analysis and adoption to your particular enterprise and situation in our personalised intensive bespoke business coaching sessions, also for business advisory services and training – send me a message via WhatsApp or SMS.

•Lawrence Nwaodu is a small business expert and enterprise consultant, trained in the United Kingdom and the Netherlands, with an MBA in Entrepreneurship from The Management School, University of Liverpool, United Kingdom, and MSc in Finance and Financial Management Services from Rotterdam School of Management, Erasmus University Netherlands. Mr. Nwaodu is the Lead Consultant at IDEAS Exchange Consulting, Lagos. He can be reached via nwaodu.lawrence@hotmail.co.uk (07066375847).

Source News Express

Posted 14/11/2016 10:39:59 PM

 

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