Market Analysis is the third section in a Formal Business Plan.
Below you can read, in detail, what the Market Analysis Section should include, depending on the purpose of your Business Plan and the target audience.
After learning more about the Market Analysis Section, you can read about the next Formal Business Plan Section, the Marketing Strategy formulation and Marketing Plan preparation Section.
Contact us for support in assessing your Business Planning needs, and for the Preparation and Implementation of the appropriate Business Plan for your enterprise.
The Market Analysis section should cover the following information:
This Section presents information that is part of the core of your Business Plan.
It should include a detailed analysis of what your business offers to the market, which problem your products/ services address, how you compare with the competition, the market size and the impact of your products/ services on the market.
This Section analyses and explains the competitive environment and highlights the competitive advantages of your business, providing sufficient documentation, using objectively reliable data.
Information presented may also include detailed analysis of the technologies employed, copyrights you own and other key factors in relation to your products and/ or services.
The significance of the Market Analysis section
Most existing entrepreneurs know your market, otherwise you would have been out of the market by now. Thus, if your Business Plan targets an internal audience, you do not have to prove that you know your market very well. However, even in this case, a different, fresh perspective of your market is a good idea, so it would be particularly useful for your Business Plan to include this Section.
In case you are a new entrepreneur who is just launching a new business or an experienced entrepreneur who is developing a Business Plan to secure funding for an existing business, then your Business Plan should definitely include a good market analysis. You must demonstrate that you understand your market and that you recognise market dynamics and incorporate them in your Strategy.
Parameters that should be analysed, within the context of the Market Analysis Section, in order to establish the characteristics of your market, to define competition and market positioning, and to determine business and industry level problems and prospects include
- Your industry/ market sector
- Key players in your industry
- Is your industry growing or shrinking, and where does growth come from?
- Market trends
- Your competitors and how you compare with them
- Your Procurement and Production facts
- Competitive environment
- PESTEL Analysis
- SWOT Analysis
- Any other parameters that may affect your particular industry
- Description of your Market
- Research, analysis and presentation of appropriate, reliable, data for your Market Size
- Market Segmentation Assessment, and Market Segmentation where applicable
- Potential Market definition
- Market Shares
- Macroeconomic environment
- Microeconomic environment
Readers of your Business Plan expect to see a thorough analysis of your industry, based on factors such as trends in the industry, industry growth, recent developments, common key success factors in the industry, concentration of large players in the industry, total players in the market and other similar parameters.
Define your industry/ sector
An industry or sector is a group of businesses that produce or sell similar products and/ or services. The easiest way to define your industry/ sector is to think about who your competitors are. For example, if you own a restaurant, other restaurants are your competition. So, your industry/ sector can be defined as the restaurant or catering services industry.
Information that should be analysed depends on the characteristics of your industry and the specific purpose of the Business Plan.
Market research is a good way to make sure that you have correctly identified who your customers are, so that you do not waste money on non-targeted advertising and promotion to the wrong people.
Content in relation to your industry / sector
Industry/ sector analysis should cover the following:
- Key players: Who are the main businesses in your industry? Who are the largest businesses in the industry and what are the main products and services they sell? What business models do they apply?
- Growth: Is your industry growing or shrinking? Both historical data and future projections should be included.
- Trends: You need to refer to trends in your industry and how they will affect your business. For example, in the restaurant industry, there has been a trend towards more "fast" restaurants. Another example is how the print media industry, such as books, newspapers, magazines, etc., has been affected by the evolution of technology-internet.
- Competitors: Should include information that answer questions, such as "Who are your main competitors in your industry?", "Are there enterprises that use similar strategies to yours?", "How do you differentiate?"
Comparison with Competition
This section should include a general comparison of the products/ services your business offers, as one of the different options available to a potential buyer.
Within the Market Analysis section, you need to compare, in detail, your strengths and weaknesses versus specific competitors. The Section should discuss how your product lines compare, based on the profile and needs of your customers, with respective competitive product lines.
In other words, it is necessary to analyse the parameters of your Market Positioning, according to the profile and customer needs of the target market. Issues to be analysed include:
- Why do people buy from you instead of others operating in the same market?
- What do you offer, at what price, to whom, and how does your Marketing Mix compare with direct and indirect competition?
- Specific Benefits, Features and Market Segments, analysing elements you can utilise to positively differentiate from competition.
- Description of the important competitive features of your products and/ or services.
- Analysis/ comparison of whether you differentiate based on the characteristics of your core product/ service or based on the parameters of your augmented product/ service.
- This should include comparison of the products / services you sell in terms of features, price, quality, service etc.
Procurement and Production
You need to explain sourcing and procurement and your production costs. Organisations that manufacture and/ or assemble their products should clarify their cost structure explaining purchase, shipping, production costs and overheads. Distributors need to explain their discount policy and margins. Service providers should explain the costs they need to incur in order to meet their obligations arising from the provision of their services.
The Section needs to include an analysis of the standard costs and materials or services you need to buy as part of your production process, highlighting strengths and weaknesses.
Manufacturers, especially if the Business Plan is addressed to outside audiences such as bankers or investors, or if it aims to assess the value of the business, need to present sufficient information in relation to resource planning and the supply of important materials. In such cases it is useful to present credible documentation in the form of annexes. Such information could include contracts with major suppliers, standardised cost analysis, bills for the purchase of materials etc.
Additionally, the availability of alternative sources and your relationships with such providers may be discussed in cases where specific raw materials are critical for your manufacturing process.
Also, at this point, you can discuss your sourcing/ procurement strategy and whether or not you can improve your business performance by improving your sourcing/ procurement strategy.
The choice of supplies/ suppliers does not only concern manufacturing companies or organisations that heavily rely on third party products. For example, professional service providers such as accountants, doctors, lawyers, business consultants, etc., typically provide their services by employing professionals. In such cases, the wages of these professionals drive the cost of the services provided.
Other service providers are affected by completely different parameters, as a result of the nature of their operations. Travel agencies provide their services through a combination of knowledge, rights and infrastructure, including computer systems and databases. An Internet provider or a telephone company provides services involving the holding and maintenance of a communications infrastructure network. A restaurant is a service company whose cost includes a combination of wages (for kitchen and service), food costs and production costs (kitchen - food preparation).
Technology: How does it affect you?
Moreover, you need to explain how technology affects your business, the products you sell, the means you use to produce and or sell your products and services, and the needs of the customers you serve.
For example, the change could involve scanning technology or retail systems, or it could change the nature of the products or services you sell, such as mobile phones or DVDs that did not exist some years ago.
It is also important to take into account how the Internet affects you. For example, can a website change the way you conduct your business
Sometimes, technology can be vital for a business that provides services such as
- A business that offers meeting rooms for teleconferencing.
- An accounting firm that can achieve a competitive advantage by acquiring a proprietary specialised software or broadband network connection with their customers.
- A medical laboratory that may be totally dependent on certain expensive diagnosis technologies.
- A travel agency that may depend on its connection to an airline booking system.
Technology can be critical for a manufacturer:
- In terms of manufacturing or assembly technology, as in the case of computers.
- In terms of the technology incorporated in the manufacture of your products, and the extent to which it can be protected (e.g. patents).
In both cases, technology can provide a crucial competitive advantage. Especially in the case of a business Plan addressed to an external audience, you need to describe the technology involved and how the technology your business uses is protected through contracts, patents or other intellectual property rights.
In case technology constitutes potential threat for a business, the Business Plan should illustrate contingency plans. For example, the same travel agency dependent on a computerised reservation system may experience increasing competition from online booking systems available to consumers who prefer to buy directly.
PESTEL Analysis and SWOT Analysis
For a thorough analysis of your business environment you can include a PESTEL analysis. PESTEL analysis (which is an abbreviation for the words Political, Economic, Social, Technological, Environmental, and Legal) is a framework or tool used to analyse and monitor macro-environmental factors that affect a business.
Within the context of the PESTEL Analysis, the following parameters are analysed:
- Political: Includes assessment of State/ European regulations and laws on whether they can affect the business environment and the commercial markets. The main issues addressed in this aspect include political stability, tax guidelines, trade regulations, security regulations and employment legislation.
- Economic environment: In this context, financial issues that are expected to have an impact on the enterprise are examined. Parameters evaluated include inflation, interest rates, economic growth, unemployment rates and related policies, and the business/ economic cycle followed by the country.
- Social environment: Within this subsection, a business can analyse socio-economic market factors through elements such as demographic characteristics, cultural limitations, attitudes/ lifestyles and education. Based on these factors, a business can understand how consumer needs are being shaped and what drives the market.
- Technology: As discussed in detail in the Technology section, above, it is assessed, inter alia, how technology can affect, positively or negatively, the introduction of a product or service in the market. It also assesses how technology can affect existing business activities. Additionally, technological developments, the life cycle of technologies, the role of the Internet and government spending on technological research and development are being assessed.
- Environment: Includes an assessment of how the business is affected by weather and climate changes, legislation on pollution and recycling, Waste management, and the use of green or environmentally friendly products and practices.
- Legal Environment: It involves assessing how the enterprise is affected by legislation such as Discrimination Laws, Health and Safety Laws, Consumer Protection Laws and Copyright Laws.
The results of the PESTEL analysis are utilised for the identification of threats and weaknesses outlined in a SWOT analysis. Also, they can be utilised in conjunction with the “Porter's Five Forces” tool in order to create a clear perception of a situation and related internal and external influencing factors.
The SWOT Analysis is concerned with analysing the following parameters in relation to the enterprise:
- Strengths (Internal factor, Positive effect)
- Weaknesses (Internal factor, Negative effect)
- Opportunities (External factor, Positive Influence)
- Threats (External Factor, Negative Influence)
Below you can refer to some examples of Strengths, Weaknesses, Opportunities and Threats. Note that the list is not exhaustive. Also, note that with the proper handling and effort, you can turn a threat into an opportunity and a weakness into strength.
Strengths (Internal factor, Positive effect)
- Where do we excel/ what do we do better?
- What intellectual property do we own (patents or copyrights), which can help us achieve our goals?
- What specific skills that can contribute to our goals does our current workforce have?
- Which existing networks and alliances can we utilise?
- What is our bargaining power with suppliers and intermediaries across our supply chain?
- "Special" products and services that are not available on the market.
- Healthy financial situation (cash flow, increasing turnover and profitability, etc.)
- Sound financial management.
- Strong credit rating and good relationship with your bank.
- Good reputation and brand name.
- Leader in a selected market segment
- Knowledge and expertise in the field
- Good location
- Competitive advantage
- Something the business offers, and which no one else offers
Weaknesses (Internal factor, Negative effect)
- Answers to the questions, such as: "What are the fields in which we do NOT do well?", "In which fields are we lagging against competition?", "What should we avoid?"
- Is our intellectual property outdated?
- Limited management and organisation capabilities
- Existing workforce training gaps.
- Non-specialised and untrained staff.
- Are we in a weak financial position?
- Poor financial management.
- Insufficient working capital.
- Inability to collect customers’ debts.
- Which networks and alliances do we need to utilise but do not have?
- Lack of adoption of marketing practices
- Operational Problems (e.g. production, distribution, promotion, pricing, etc.)
Opportunities (External factor, Positive Influence)
- Which changes in the external environment can we exploit?
- Which of the weaknesses of our competitors can we use to our advantage?
- Which new technology can we gain access to?
- Which new markets can we create?
- Market "gaps" that your business can exploit.
- Consumer need for new products and services.
- Shift in consumer preferences.
- The development of new distribution channels (e.g. via the Internet).
- Technological progress (new materials, new production methods, smart systems, etc.)
- New ways consumers find and buy products (e.g. Amazon, e-shop, eBay, etc.)
- New ways young people employee for networking (e.g. blogs, Facebook, etc.)
- New infrastructures created (e.g. Areas designated for Small Industry, etc.)
- Subsidies from National and European development programmes.
Threats (External Factor, Negative Influence)
- A Global Economic Crisis
- Reduction in consumption
- Increased competition
- Entry of many new businesses into the market
- Reduction in consumer purchasing power
- Excessive dependence on a single vendor
- Price increase by Suppliers
- Changes in legislation (e.g. increase in taxation, additional permits, etc.)
- Social changes that could impose potential threats.
- International political-economic changes (e.g. terrorism, oil price increase, etc.)
- Increase in inflation and interest rates.
- What our competitors can do to hurt us.
Description of your Market
A market is a group of potential customers. Markets can be defined based on geographic parameters, demographics (such as age or gender), or psychographic features (such as hobbies and interests). Markets can also be defined as any combination of the above parameters.
In the case of Institutional markets, demographic factors may include the Type of the Business Clients Industry), the Region, the Size of the Business Clients, Quality Preferences, Technology and Value, or other product/ industry related attributes.
Your business may only target a single market segment, or it can target various market segments. For example, a company that manufactures sport shoes can target both middle-aged hikers and young athletes. Below, you can read more about Market Segmentation and segment selection decision.
Researching and analysing appropriate numerical data to determine the Size of your Market
Currently, there is usually a lot of market related information available. Thus, market analysis is usually more about collecting, classifying, digesting and understanding what is important, and developing the right market perspective.
The goal of this Section of the Business Plan is not just to collect and present a lot of figures in relation to your aggregate market, your target market, selected market segments, etc. The data you need to research, gather, analyse and present should be incorporated into your Marketing Strategy and your Tactics.
We often meet people struggling to find information that matches their biases in relation to what they think they need, rather than utilising already available appropriate information. You need to develop a plan/ “map” of the information you will need, in order to collect suitable data that will guide your decisions and improve your business.
For example, if you are trying to classify enterprises, in a particular industry, based on annual turnover, you may discover that it is impossible. If you use the number of employees per enterprise, as the basis of grouping, instead of annual turnover, you will discover that it will be much easier to find the required data. Bear in mind that classifying enterprises into size classes based on the number of employees is just as useful as categorising them based on total revenue.
The sensible, practical, approach requires the use of appropriate, already available information that can provide the necessary insight for making important business decisions.
For example, both the Statistical Service of the Republic of Cyprus and the European Statistical Service (Eurostat) provide useful, reliable data in relation to the Cyprus and the European (including Cyprus) markets. For example:
- If you need to group enterprises in terms of their size, you can utilise readily available employee figures
- If there is a need to classify enterprises based on their size by utilising number of employees, existing/ available classifications can be used. It makes no sense to decide you should use classification groups of 1 to 18 employees and 19-25 employees when the existing/ available classification is different.
- During your search for market information it will become apparent that classifications already exist. Flexibility is needed in order to use existing classifications in a way that the required insight is provided.
Market Segmentation Assessment
The concept of Market Segmentation, which involves segmenting a market into parts, is one of the most powerful concepts of Marketing. For example, a traditional demographic segmentation of the market, i.e. age and gender, is useful for a company selling clothes.
Family status, that is, whether someone is married, divorced or unmarried, in conjunction with sex, is another example of segmentation basis. If the market Segment is large enough to be profitable and the positioning of your products/ services adequately fit the characteristics of the target market, you could focus only on married females in a specific age group.
Another example of segmentation basis is the income of a population, often called an economic segment. This segmentation basis is useful for many businesses, such as retailers, car dealers, restaurants, travel agencies, and luxury goods vendors. Such businesses, as part of their Strategy formulation and Marketing Tactics preparation, can utilise economic segmentation, combined with some additional variables.
Some creative segmentation systems are based on psychographic elements, including personality profiles, values, opinions, attitudes, interests, and lifestyles. For example, knowing that someone is driving a particular type of car can help to predict other seemingly unrelated preferences.
The following parameters should be assessed as part of the Market Segmentation decision-making process.
- What is the size of the market?
- Is the market large enough to allow for profitable segments?
- Which are the characteristics of the market: Economic characteristics, demographic characteristics, psychographic characteristics, geographic characteristics, trends and behaviours?
- Is the market homogeneous enough for you to serve, better than the competition, with a common Marketing Mix?
In order to decide to segment the market, it should be large enough to be profitable to serve the segments that will be created.
Also, it is important to segment the market in cases where the market is not sufficiently homogeneous and therefore you need to modify the Marketing Mix in order to serve it better than competition does.
Of course, each Segment should be large enough to be profitable, or you can select to target those Segment(s) that will be profitable to serve better than the competition.
Potential Market Definition
Market Analysis involves potential customers, not actual. So, your Business Plan needs to include an analysis of potential customers. Thus, as a first step, it is necessary to calculate how many potential customers exist. The type of your business determines how you will calculate the number of potential customers.
For example, a shoe retailer needs to know the number and profile of people living in a specific geographic area, and a graphic design firm should know about the population and sectors of local businesses.
TAM, SAM, and SOM and why they are important
In order to determine the potential customers of a business, it is necessary to clarify the differences between the total market (Total Available Market or Total Addressable Market “TAM”), your Serviceable Available Market “SAM” and market share (Serviceable Obtainable Market "SOM") or the number of customers who will actually buy your products / services.
- TAM (“Total Available Market or Total Addressable Market ”): The total available or total market you are addressing (everyone you want to reach with your product/ service),
- For example, for a movie theatre, "TAM" is probably the total population over the age of two and under 85 or 90 years of age. It is a large and practically useless number.
- SAM (“Segmented Addressable Market or Served Available Market”): Your segmented available market or your accessible market (the portion of your total available market “TAM” that you will target).
- For example, for the same movie theatre, "SAM" can be considered to be the number of movie tickets sold for a congruent period of time in the specific geographical area in which the theatre is located.
- SOM (“Share of the Market”/ “Serviceable Obtainable Market”): Your market share (the subset of your "SAM" that you will realistically capture, especially in the early years of your business and/ or the introduction of a new product/ service).
- For example, the "SOM" for the same movie theatre can be calculated by dividing the number of tickets sold by the particular theatre in a given time period, with all the tickets sold by all movie theatres throughout the geographical area, for the same time period.
The above definitions can help you to better understand and assess the dynamics and characteristics of your market. In practice, once you assess the characteristics and dynamics of your market, the best practice is to recognise your current market share in relation to your aggregate potential market and to plan the Strategy and Tactics you will need to implement in order for your Total Available Market to become your Potential Market.
For the completion of the Market Analysis Section, it is important to include a summary that outlines the results of the Analysis, at Macroeconomic and Microeconomic levels. By analysing the results of the Section at Macroeconomic and Microeconomic levels, existing and expected problems and prospects of the sector will emerge, which in combination with the characteristics of the Microeconomic Environment will highlight the problems and the prospects for the enterprise. Problems can be addressed through appropriate actions and in the same way the prospects can be enhanced.
This way, the Market Analysis Section is linked to the Investment Analysis Section, since any Investment should in any case aim to address the problems and enhance the prospects of the enterprise.
Once you've learned about the content of the Market Analysis Section, you can study the content of the next Formal Business Plan Section, the Marketing Strategy formulation and Marketing Plan preparation Section.
Also, by clicking on the relevant link, below, you can read in detail about each of the remaining Sections of a Formal Business Plan:
Contact us for support in assessing your Business Planning needs, and for the Preparation and Implementation of the appropriate Business Plan for your enterprise.