3.1. Market & Competition

Introduction

The subject of this chapter are modules 4, 5 and 6 from the already known knowledge map for the business plan.

Module 4 - "Market & Competition" deals with the market structures and competitive conditions you need to investigate in order to successfully place your business in the market. You will learn about the criteria you should use to conduct your market research from the perspective of the business idea. You will probably need the most time to complete the module, as you will have to look at the real conditions in the relevant industry on site. You need to collect market data, company data, competition data and general information that has an impact on your business. Supply and demand meet in the market.  

When you have learned how the market works, you have learned a lot about the marketing of your competitors. In Module 5 - "Marketing & Sales" you will learn how to set up a marketing concept and which marketing instruments exist.  Based on this, you will learn to create a marketing mix for your start-up idea. In the advertising planning you have to determine the various possibilities of the marketing mix concretely for your company. A successful marketing plan has direct effects on the sales forecast.  

With module 6 - you will learn to set up a "sales planning & turnover forecast" for your company. This is only possible after you have gained knowledge about the market and your customers. You have to make a forecast about how many products or services customers will buy from you in a day, in a week, in a month, in a year and finally in three years. This is not about writing down wishful thinking numbers. You learn to make a realistic sales forecast.

3.1.1. Market research and market analysis

Anyone who wants to sell something must know the market. He must know about the nature and extent of the demand, about the attitudes and habits of the customers, about the ways and means of selling, about the competitors and about the causes of the constant changes in the market. Only customers give a company its raison d'être. They decide on the success in selling the products and services. A good knowledge of the market with an analysis of the customer potential and the competitors are among the success factors of the company.

When founding or taking over a company, market research seems indispensable. Constant market research is also necessary for the further development of a company. This means observing the market continuously and systematically. In market research, the market is continuously examined for its changes and developments.

For certain occasions, such as the preparation of a business plan, a market analysis is a sufficient instrument that focuses on a targeted one-time examination of the market at a certain point in time. The market analysis must collect the basic information that is necessary for the company to compete. The market analysis is an up-to-date examination of the market. The aim is to determine whether and to what extent the sale of a product and a service is possible.

If you want to describe the market, you can first conduct amarket reconnaissance. This can be done by talking to potential customers, suppliers, at trade fairs and exhibitions, by reading business reports, trade journals or by researching on the internet. It is about assessing the sales potential of one's own range of services.

Finally, the business plan is about making amarket forecast in which the medium-term market and sector development for the company are assessed and evaluated. For the business plan, this is three to five years.

It makes a crucial difference to a company's chances of success whether an industry is in growth or in a downturn. While demand tends to increase in growth phases, it decreases in recession. The sales forecast will be affected by this. A company is always in a certain competitive situation. When demand decreases, competitive pressure increases. It can turn into cut-throat competition. Another form of competition is to compete against a company with a dominant position or even a monopoly. In the best case, a company is the sole supplier, otherwise it may be one of many. Buying a company is also an option from a competitive point of view.

Market dynamics

Market movements can be distinguished. They have a direct impact on the assumptions made when planning sales in the business plan. The market movements are, metaphorically speaking, the "general weather situation", in which there are certainly different regional climates.  

1.       Business cycle fluctuations are movements in economic development that recur at regular and irregular intervals. They are like wave movements. They show typical changes in sales, price development, employment, investment propensity or capital procurement. They are a barometer for the climate in the economy. Every company is affected by them. A distinction can be made:

a.       Boom means the full utilisation of the production forces of an economy; it can also refer to individual sectors.

b.       Upswing means the increase in investment activity by companies, as a result of which general economic activity increases. With an upswing, economic growth increases noticeably.

c.        Downturn means the slowdown of sales in the economy or in branches. The seller's market changes to a buyer's market, a downward trend in growth can be seen. A severe downturn can lead to recession. Recession means the "significant" economic decline in sales and production. Finally, depression follows. Depression means the low point of economic activity, entire industries can come to a standstill. The economy and society enter a profound crisis.   

2.       The trend describes a direction of development. It is superficially known as a "fashion trend". The trend is a cycle in society, economy or technology that sets a new direction of march. The trend can be seen as tendential changes in the economy. A reversal of a certain development is also called a trend reversal. Then there is a fundamental change in previous perceptions, for example in buyer behaviour or political opinions. Megatrends are spoken of when they are profound and sustainable changes.

The trend has different triggers: e.g. through population development, which is demographically influenced; through district-related ageing, through migration, emigration and immigration; through revolutionary inventions, such as micro-technology; through state intervention in the health sector, through wars; through the globalisation of markets. Long- and medium-term developments are linked to the trend, which can also include economic leaps and breaks in production, sales, employment, transport or trade.

Trends are attempted to be ascertained within the framework of trend research. Dealing with trends is a special skill that companies can learn. The entrepreneurial possibilities of trends must be used. The effects can be positive or negative for the individual company.

3.       Periodic fluctuations (e.g. the season) recur at regular intervals and at certain times of the year or occasions. Thus, the seasonal weather (summer, winter) has just as much influence on purchasing behaviour as certain payment dates (Christmas bonus) or special occasions (start of school, trade fairs, regional markets). Such economic fluctuations can be included in the sales forecast as seasonal business.

4.       Random movements influence the course of the market irregularly and unpredictably. They can be triggered by "novelties" that affect the zeitgeist, sensibilities or fashion. This is according to the motto, what is "in" this summer, what is "out". Unusual weather conditions (storms, snow) or major events (demonstrations, events) can also have invigorating or disruptive influences on individual business.

The handling of economic fluctuations should be considered in the business plan if it is apparent that the sales forecast will be affected.

Market and customer potential

To be able to make a sales forecast for the range of services in the business plan, you need to check how large the market and customer potential is. These are relative parameters that need to be determined for each company.

• The terms market and customer potential are defined differently. For the business plan it is important to know what basic market opportunities a company has in its industry, sector or field. It is about the absorptive capacity of the market in terms of market capacity, taking into account the purchasing power of the customers.
• The market potential is a "quantity" to be defined

- in terms of the potential sales market of the products and services,
- in terms of the relevant market participants (customers) in the overall market.

• Customer potential defines the "size" of the target customers that are likely to be acquired from the market potential group. The customer potential is to be segmented from the market potential. It is to be examined which and how many customers have the characteristics of "target customers".   

Determining the market potential: If you want to start a "youth restaurant" in a neighbourhood, you should find out how many local residents and how many young people live within "x" kilometres of the restaurant. It would also be necessary to check how many young people still live outside or in certain catchment areas to the restaurant. The total number of potential young people can be defined as the market potential.

Determining the customer potential: Out of the total number of young people there are in the market, only a subset will feel attracted to the "youth restaurant". The restaurant will only actually address and reach a part of them with its offer. In the context of determining the customer potential, it is necessary to forecast how many young people are likely to visit the restaurant.

The verification of these assumptions can only take place in reality. In this respect, the quality of the sales forecast lies in the objectified assessment. The market potential as well as the customer potential have fluctuation ranges.  

Questions to determine the market and customer potential :

• What is the nature of the market in which the products and services are to be sold?
• What can be sold?

(Properties, advantages and disadvantages, durability, possible uses, presentation, fashion influences, price of the goods).

• Who shops?

(Buyer group according to gender, age, social origin, purchasing power, consumption and buying habits)

• How does the customer buy?

(past and future demand, initial, renewal and backlog demand, large or small quantities).

• When does the customer shop?

(Opening hours, season, sales quiet times, boom)

• Where does the customer buy?

(Sales area, transport routes and means, industry influences, European and international market)

• How does the customer buy?

(Direct sale, sale to dealers, sale to private or business customers, sale to public clients, sale via tender, sale via internet).

• How do legal regulations affect the market?

(Import, export and customs regulations, government reforms, occupational health and safety regulations, environmental protection regulations, permits, government subsidies and support programmes).

• What competitors are there in the market? What do they offer? What are they good at? Where do they have their weaknesses?

(Competitors in general and locally, size, quality, financial strength of the competition, type of services, unique selling propositions).

The market potential can be determined with the help of a market matrix for the respective products and services.

The sale of services usually takes place in market sectors, which can be branches (e.g. wood, furniture, consulting, gastronomy) or market segments (trade, crafts, industry). Rules of the game are formed in each market sector. These have something to do with the product and the service itself; for example, with the machines, with a craft, with retail or wholesale, with an intermediary or agency activity, with the service "personal care" or "health".

Sector data is a particularly important indicator for a company. It can be used to check whether the company's own results are above or below the industry average. Strengths and weaknesses can be worked out. Sector information is provided: Chambers of Industry and Commerce, Chambers of Crafts, District Chambers of Crafts, savings banks, credit unions and commercial banks, professional associations, employers' and entrepreneurs' associations, cooperatives, retail trade associations.

The typical characteristics in industries or economic sectors have a lot to do with the economic, social and cultural behaviour of people. Products and buyers shape each other. Certain products are bought by certain target groups. Certain target groups demand a certain service. There are big differences in who the products and services are sold to. National characteristics in Germany, Spain, the USA or in China also have a significant influence on the way goods are bought and sold.  

In the business plan, it is important to work out the special features of the market in order to be able to develop a targeted offer strategy for the respective market segments. Not all characteristics play the same role. The market criteria must be described with regard to the target customers who are to buy services.

3.1.2. Competitive analysis and self positioning

While the market analysis tries to capture the general conditions in which the company finds itself, the competitive analysis deals specifically with the competitors in the market.

The competitors are to be closely scrutinised. The competitors, their number, their range of services, their strengths and weaknesses, their immediate areas of attack should be recorded. The description in the business plan should give an idea of the competitive environment of the enterprise.  

When evaluating competitors, i.e. those who offer the same services, a company comparison (benchmarking) can be informative. In a comparison of service quality, sales, pricing, growth, market share, etc., one's own company should be classified. In this way, competitive advantages can be worked out.

When positioning the company in the market - in relation to the competition - the question is: Why should a customer buy "my" product, "my" service from "my" company? It must be determined what is better about one's own product or what promises greater benefits for the customer. Knowing this is of crucial importance for marketing communication. The comparison reveals how a "brand", a "product" or a "service" can be unmistakably anchored in the customer's consciousness.

The positioning of the service in the market needs to be skilful. In this context, the personal view of things is less important for market positioning than the view of the customers! The right positioning is crucial for market success. It does not happen automatically. It involves search movements and intensive discussion with the customers. It is a constant challenge for the entrepreneur, because the market and demand are constantly changing.

Synopsis of a simple competitive analysis

For a business plan it is helpful to draw up a simple synopsis of the competitors. This creates a classification. Define the criteria for your own company as well, because this is the only way to create a self-positioning that shows strengths and weaknesses.

In everyday business, information from competitors should be collected continuously and in a structured way. They provide information about market developments and what competitors intend to do. In markets where there is fierce cut-throat competition, close observation of competitors is indispensable.

Checklist for your business plan: Market & Competition

What is the nature of the market and competition?

1. Describe the market for your business idea.
2. Identify special characteristics and features of the market.
3. carry out an industry and competition analysis and describe the competitors. 
4. Define the market position of your business
5. Describe the market movements in the target market
Determine the market potential for your range of services. 7.
Describe your target groups and determine the customer potential. 8.
8. Create a customer matrix: determine the target customers and describe the products and services.
9. Position yourself in the competitive market.