MODULE 4

ANALYZING MARKETS

AND COMPETITORS

Customers do not buy things, they buy solutions to problems. One person may buy a bicycle to solve a transportation problem. Another person may buy a bicycle to solve an exercise, or lack-of-exercise, problem. The purpose of business, therefore, is to help people solve problems.

Your enterprise will be just  one of many businesses competing for customers. To survive and prosper, you will have to look constantly for better ways to help people solve their problems. Maybe you will provide a new service, make a new product, or design a new and more convenient package for an old product. Whatever you do, you will need customers, preferably many of them. Without customers who want your product or service and are willing and able to pay your price, there is no need to be in business.

To help customers solve their problems, you will have to learn about the customers and the markets of which they are a part. Because other businesses will probably be trying to do the same thing, you will also have to find out as much as you can about the other businesses. In this module, you will learn methods of analyzing your markets and your competitors.

OBJECTIVES:

After studying this module, the student should be able to:

1.      Describe the process of market segmentation.

2.      Explain sales forecasting.

3.      Identify the characteristics of a good location.

4.      Evaluate the competition.

ANALYZING MARKETS

The word market is sometimes confusing because it seems to have so many meanings. IN newspaper headlines you may have read “Investors put more money into the stock market,” “Job market tight in many cities,” or “Commercial real estate market improves.” Television newscasters often mention the new car market or the international market. We buy groceries in a supermarket and food from the wet market. These are  just a few of the markets you hear everyday.

The Market for an Enterprise

Before you decide to start a new enterprise, you will have to identify your market. In this sense, market refers to the groups of people, businesses, or organizations seeking the types of products ore services you sell. Customers must also be both willing and able to pay the price you charge; otherwise, they would not be a part of your market.

Persons or households that buy products and services for personal or family use are called consumers. They buy products from a wide variety of sources, including retail stores, mail-order companies, and door-to-door salespeople. Consumers also buy services from such business ventures as auto repair shops, restaurants, cable television companies, and photography studios.

Business users are companies or institutions that buy products and services to use in running their businesses, to resell, to produce other products or to provide services. Schools buy desks, floor wax, and paper. Sporting good stores buy basketballs, athletic shoes, and tennis rackets to resell to customers. Wholesale grocers buy from producers to resell to supermarkets, Furniture manufacturers buy wood and upholstery fabric to make tables, chairs, and sofas. These are examples of the many purchases businesses users make each day.

Market Segments

Some entrepreneurs start out trying to meet the needs of every possible customer. In other words, they try to be “all things to all people.” They scatter their efforts and energy. In the end, they do not serve anyone very well. A better way is to concentrate your efforts on market segments. Market segments are groups of people with similar needs and characteristics. Think of the market as a pie and a market segment as a slice of that pie.

Market Segmentation

Dividing the market for a product or service into segments is market segmentation. Each segment consists of customers who are alike in many ways. The particular group to whom you wish to sell your products or services is your target market.

Large corporations offering different products often have several target markets. Car manufacturers, for instance, produce several models. Each model is usually designed to meet the needs and preferences of people in a particular target market. However, when starting a new business, the best advice is to select just one target market. When, and if, you are successful in serving that one group, you can start thinking about other target markets.

Learn as much as possible about your target market. You can do this by asking yourself these questions:

1.      Will my customers be consumers or business users?

2.      If they are consumers, how old are they? How much money do they earn? Where do they live? Are they in cities, suburbs, or rural areas? Are they more likely to men or women?

3.      If they are businesses users, are they extractive, manufacturing, wholesaling, retailing, or service ventures?

4.      What needs will the product or service satisfy for customers?

5.      How many potential customers are in the area where I will open my business?

6.      Where do these potential customers now buy the products or services I want them to buy from me?

7.      What price are the customers wiling to pay?

8.      What can I do for customers that competitors are not doing for them?

Develop a mental picture of customers in your target market. Then try to put yourself in their place an see your enterprise as they see it. Do this when you start your business and do it every day you are in business. Never stop studying your market because it will continually change. Neighborhoods change, customers’ needs and buying habits change, and new products replace old products.

Sales Forecasts

Forecasting sales is essential for every business enterprise, regardless of its size or the field of activity. The forecast is the basis of sound planning. Without it, you will not know how much merchandise or raw material to buy, how many employees to hire, or how much money you will need.

What Is a Sales Forecast? A sales forecast is an estimate of sales, in pesos or units, for a specific time period. The forecast may be for a specific item or service, or for the enterprise’s total sales volume. One year is the most widely used time period. However, some entrepreneurs prepare sales forecasts for periods of three or six months.

Forecasts of less than a year are often desirable when sales fluctuate widely from month to month. Sellers of seasonal products or services often find that it is not practical to look ahead a full year. Some product examples are summer and rainy day clothing, Christmas decorations, and home appliances such as room air conditioners.

Review sales forecasts frequently and revise them as necessary. New competitors, or price changes by existing competitors, can make your estimates obsolete. Therefore, many business persons review their annual sales forecasts monthly. In this way, they can respond quickly to changes that affect the enterprise.

How Is a Sales Forecast Prepared? The first step in forecasting sales is to estimate the market potential for your products and services. The term market potential refers to the total sales of all similar businesses in your area. In other words, market potential is the total of your sales and those of your competitors.

To determine market potential, be prepared to go to several sources for information. Start by visiting the local chamber of commerce and the library. Also, contact the trade association of your line of business. Virtually every industry has such an association; ask those who are already in business for the address. The information from these sources is usually in the form of nationwide averages. That is, the information may not refer specifically to your local area. Nevertheless, the information is useful because it can give you the background for further study of your market.

Next, you should seek the help of a banker or an accountant. These individuals are familiar with the sales and finances for a wide range of business ventures. For this reason, they can help you to estimate the potential for your market.

Other potential sources of information are those businesses that sell to a business venture similar to yours. Examples are manufacturers, wholesalers, and suppliers who conduct business regularly in the community. Finally, locate an entrepreneur in your line of business but not in your community. Because you will not be competitors, this person may be willing to share information about the market potential.

After you have estimated the market potential, you should estimate your share of the market. This will be your sales forecast. The estimate is important because it is the basis for almost all other decisions you will make.

Suppose, for example, that you are starting a printing business. You want to specialize in business cards, letterheads, envelopes, and business forms. You find that P10,000,000 is spent on this kind of printing each year in your community. This is the market potential.

There are four printing shops, but when you open yours, there will be five competing businesses. To compute average market share, divide market potential by the number of competing business. Using the numbers from the example, the computation would be as follows:

The average market share is P2,000,000. You should not assume that you will reach this level of sales your first year. You are new and the other businesses are established. However, you should try to estimate how much of that P2,000,000 you can get. You can do this by observing your competitors to find answers to these questions:

1.      What are their successful sales points?

2.      What are their weaknesses?

3.      What can you provide that they do not provide?

4.      How much business can you actually take away from competitors?

Avoid the tendency to overestimate these figures, however.

Based on these answers, you may estimate that your sales will be P1,400,000 for the first year. The estimate is not as high as average market share, but you are just getting established. Review your initial estimate no later than three months after opening. At that time, you may have to adjust the estimate either upward or downward.

For example, because of superior products or services, you may be taking more business away from competitors than originally planned; or the total market potential may have increased because there are new customers in the area. These factors would cal for an increase in your sales forecast. On the other hand, you may have to decrease the forecast if for instance a new competitor appeared, or not all your equipment was installed on time.

Location

Location is the place where you have your main base of operation. Wherever you locate, make sure the community needs the business you want to start. Deciding on the location for a new enterprise involves three steps. You must (1) choose a community or city, (2) choose an area within the community or city, and (3) choose a specific site in the area.

Choose a Community or City. Certain communities are more desirable than others as locations for new business ventures. In choosing a community, you should consider (1) personal factors, (2) population, (3) level of employment, (4) competition, and (5) legal considerations.

Personal Factors.   One of the advantages of being an entrepreneur is that you can choose where you will work. You are free to pick a place where it would be pleasant to work and probably live. Factors that make a community pleasant often make it a good place for conducting business. Look at the general appearance of the town. Are most homes neat, and are streets and parks well maintained? What about public transportation and public utilities (such as water, electricity, and sewage)? Do these services meet local needs? Determine the quality of schools as well as police and fire protection. In short, find out if residents take pride in their community.

Population. A community’s population is an important factor in location. Are there enough customers for your products or services? Is the population growing or declining? Given the choices, you will probably want to locate in a fast-growing city. Construction of new homes, apartments, and shopping facilities is an indication of growth.

Level of Employment. Spending for some goods and services is low in cities where many persons are unemployed. Places with unemployment problems tend to be poor locations for businesses intending to sell to local consumers. The same cities, however, could be good locations for other businesses. One example is the entrepreneurs who will hire many employees for a manufacturing company. Or if you intend to put up an employment agency, such a place will be a good location for your endeavor. Local conditions, however, would not affect a product sold in other cities.

Competition.  Overcrowding occurs in many fields of business activity. Therefore, you should be concerned with the nature and amount of local competition. Determine the number, size, and quality of competitors. Then decide if there is likely to be room for your new enterprise.

Legal Considerations. Some cities and provinces try to attract new businesses by offering tax advantages. Others have unusually high taxes or restrict certain businesses. Taxes and restrictions mean higher costs of operating a business. You should, therefore, inquire about these items when considering a location. Also, check on zoning ordinances that limit your selection of sites in the town.

Choose An Area Within the Community or City. After choosing a city in which to locate, the next step is to choose an area within the city. Your goal will be to find an area that is suited to your type of enterprise.

The location decision is more important for some types of business than for others. For instance, a variety store should be conveniently located for shoppers. If it is hard to find, customers will not make the effort to shop there. On the other hand, a plumbing service’s location is of minor importance. Why? Because the service is performed in the home, and customers do not have to go to the place of business.

Your location decision will depend on whether your enterprise is manufacturing, wholesaling, retailing, or services. Extractive business ventures are usually locked into a fixed location where products are found in nature.

Manufacturing. Manufacturers usually need access to low-cost forms of transportation. For example, trucking companies should be nearby. This makes it convenient for receiving raw materials and shipping finished products. Access to utilities, such as electricity, water, and sewers, is also important.

Wholesaling. Like manufacturers, wholesalers should have access to various transportation facilities. They should also be located in the middle of the market they serve. The wholesalers will then be conveniently located for quick shipments to all customers.

Retailing. Retail store locations are largely determined by the type of merchandise carried. For example, clothing stores are commonly located near department stores. As another example, home furnishings stores and furniture stores are located near each other. Preferred locations for other retailers are on the main traffic thoroughfares. Examples are supermarkets and drugstores.

If you go into retailing, locate in an area where customers are most likely to shop for the kinds of goods you sell.

Services. Personal services and repair services have many of the location requirements of retail stores. Dry cleaners, travel agencies, and car repair shops must be located where customers can come conveniently. Likewise, business services, such as equipment rental firms and accounting firms, usually locate in the business districts nearest their customers.

Choose A Specific Site. Choosing a specific site is more critical for retail and service businesses. Therefore, te following discussion on site choice applies primarily to those fields of business activity.

You may find very few specific sites that are vacant. This could mean that you will have to take whatever site is available. Before you make a final decision, you should answer these questions:

1.      Is parking space adequate for the enterprise?

2.      Is the building, as well as those nearby, attractive and well maintained?

3.      Can cars enter and leave the parking lot with ease?

4.      Is there an ample flow of traffic on nearby streets?

5.      Is the rent or building cost high or low in relation to the area?

6.      Are there any restrictions on the use of the property?

You should use an evaluation sheet when assessing different sites. The following are some of the factors that may appear on an evaluation sheet. Start with this evaluation sheet, then eliminate factors or add new factors to meet your needs.

STUDYING THE COMPETITION

Practically all business ventures in the country face competition. Competition is the effort of two or more businesses to win the same group of people as customers. Individual firms involved are called competitors. A new enterprise will survive only if it offers some competitive advantages. Examples are better service, superior products, lower price, or shorter delivery time. Customers buy from a particular enterprise for these and other advantages. It is important, therefore, to include a study of competition in your business plan. This study should include the number of competitors as well as their strengths and weaknesses.

Number of Similar Businesses

Who are your competitors? How many are there? You should be aware that not all competitors are located in your community. For example, if you open a gift shop, you may be competing with companies selling gifts by mail order; or you may have local competitors whose businesses are not exactly like yours. As an example, the gift department tin a department store could be a major competitor. When planning your enterprise, you must identify the competition.

You should also determine if the local area already has too many businesses like the one you plan to open. A relationship exists between the number of people in a community and the number of businesses of various kinds.

Strengths and Weaknesses of Competitors

Once you have identified your competitors, you should determine the strengths and weaknesses of each. Visit each competitor’s place of business. Observe the competitor’s operation and the way customers are treated.

After each visit, make notes of your observations. Then summarize the information when you have completed the series of visits. Even though a comparison of competitors can be helpful, the information can become outdated. Competitors may make changes in their businesses. One may lower its prices while another increase the number of services it offers to customers. New competitors may open their doors, while others close theirs forever.

What will other businesses do when you start your business and begin competing against them? You should expect other businesses to react. Be prepared to take action. Plan ahead by writing scenarios. A scenario is an outline of a chain of events that an individual believes could possibly occur in the future. Collect all the information you can to prepare informed opinions. Ask experts for their opinions. Then write scenarios about your competition.

Because it is an attempt to describe the future, a single scenario will not be 100 percent accurate, nor is it expected to be. Write at least two scenarios: one for the worst case and one for the probable case. In a worst-case scenario, try to imagine a situation as bad as t could get. A worst-case scenario might be as follows: Competing convenience stores open up on each of the other three corners. The products they sell are very much like yours; their prices lower than yours. The new businesses advertise more than you do. The events described in the scenario may not occur. Nevertheless, you should think about what you would do if you actually had competitors across the street.

A probable-case scenario describes what is more likely to occur. Let’s continue with the convenience store example to determine a probable-case scenario: Competing businesses open up in the area, but the closest one is at least half a kilometer from your location. One of the stores that starts out with lower prices gradually increases prices and now charges what you charge. You lose some customers to competitors, but you gain other customers by promoting your store and providing good customer service.

Questions to Answer:

Part I.

Match the following terms with the statements that best define the terms. Write the letter of your choice in the space provided.

Part II.

Kindly answer the following questions.

1.       What is the difference between consumers and businesses users?

2.       One of your friends asks, “Shouldn’t a business try to be all things to all people?” What is your answer?

3.       List eight questions you can ask to learn as much as possible about your target market.

4.       Why is a sales forecast important to a new enterprise?

5.       Describe the steps in the sales forecasting process.

6.       List the five factors you should consider when selecting the community or city in which to locate a new enterprise.

7.       What two items should be included in a study of competition?

8.       What is a scenario? How can a scenario be used to analyze competitors?