“The environment is everything that isn’t me.”
― Albert Einstein
Remember the time you walked into an exam without ever having opened the textbook? The first thought that probably came to your mind was that you should have done your homework, right? When you’re starting a new business, there’s a lot more at stake than just a passing or failing grade, so you’re going to want to show that you’ve done your research and care enough about your own success to have scoped out the lay of the land.
You’re also going to have to use this section to demonstrate that the industry’s market size is worth going after, who you main competitors will be if you decide to pursue it, and how you’ll be able to carve out a niche for yourself and give them a run for their money.
Let’s start with getting an idea of just how big the opportunity is and why it’s worth going after. This means figuring out how many customers you’re going after and what are the revenue possibilities? This is a convincing first step to lure in whoever is reading your business plan to become intrigued and dig further into your findings. But, you might get stuck on figuring this one out, so here are some general categories to point you in the right direction:
Free resources on the web
Financial Services Firms
Online Data Providers
Industry Forces and Trends
Now you’ll need to outline what’s happening in the industry from a number of wide angles that would help the reader of your business plan get the gist of whether on the whole if its a good or bad place to be. A great general-purpose tool for doing just that is something called the PEST Analysis. Here’s what it stands for and what you should consider:
P - Political factors
What role the government plays in your industry?
E - Economic factors
What is the state of economy on both a local and national level?
S - Social factors
What the relevant changes in matters like lifestyle trends, demographics, consumer attitudes, buying patterns and opinions?
T - Technological factors
What is the impact of changing technological trends on your industry?
Another handy tool to have in your arsenal when conducting industry research is the almighty Porter’s 5 Forces Analysis. Don’t worry if you’ve never attended a business strategy class in your life, it’s actually quite straightforward. Here are how they break down:
Porter's 5 Forces Analysis
1. Threat of New Entrants
How difficult (or easy) is for someone to enter your specific vertical? If it’s very easy then most likely the space will be crowded with competitors fighting for margins. Conversely, if it’s very difficult, that that in itself can become a competitive advantage.
2. Threat of Substitute Products (or Services)
How likely is it that another product or service could decrease demand or displace you and potentially the entire industry all together?
3. Bargaining Power of Customers
When it comes to pricing and terms, how much power does your customer have? Are they organized enough to exercise their purchase power or is their so much competition that they have their pick resulting in pricing wars amongst providers?
4. Bargaining Power of Suppliers
This refers to how dependant you are on a given supplier to operate your business. If it’s difficult or near impossible for you to switch, that means they have the upper hand, whereas, if the switching costs are low, you can negotiate better terms for yourself.
5. Competitive Rivalry of Market
Factoring in the first four forces, you can arrive at a good understanding of the playing field and whether it’s in your favour you enter it, how long you’ll be able to last, through what means you’ll carve a space for yourself, and what you’re up against.
Once you’ve given your reader a good idea of the important trends and paradigm shifts in the industry, you’re going to have to start dropping names and point out your major competitors. This means factoring in not just your direct competition (those with similar offerings) but the indirect competition as well, meaning the 800 pound gorillas lurking in the jungle (or the Amazon and Googles of the world).
To help both you and reader get a good grasp on how formidable those competitors might be, you’ll want to mention things like their annual profits, market share, and distinct competitive advantage. It’s much easier to find information on public companies than private companies, but it’s always a good idea to do as much background research as possible. You’ll also want to use something called a SWOT Analysis when discussing these competitors to make sure you’ve covered the right amount of ground. Here’s what it stands for:
S - Strengths
What do they have going for them? Is it their technology, brand, people, or lean value chain?
W - Weakness
What do they not have going for them? Are they missing experienced management, have unreliable customer service, or just plain old poor customer retention?
O - Opportunities
What are they positioned to take advantage of? Are their environmental trends or changes they are likely to benefit from?
T - Threats
What’s keeping them up at night? Or what should they be worried about?
Lastly, before we move onto “how” you’re going to get your product or service in other people’s hands, we need to discuss what makes your offering distinct from everything else in the marketplace. These variables are often referred to as your “value propositions,” “unique selling points” or “competitive strategy.” First, we’ll start by once again taking a page from our friend Michael Porter’s playbook and refer to his Generic Competitive Strategy, which states three routes for standing out from the competition.
Generic Competitive Strategy
1. Cost Leadership
This refers to having the capacity to scale operations in order to offer lower prices than the majority of the players in an effort to maximize profits.
This is where your product or service offers something distinct than those of the current cost leaders in your industry and banks on standing out based on the “newness” factor.
This is where you focus on a very specific or “niche” target market and focus on building traction with a smaller audience first before moving on to the bigger fish.
We’re also big fans of a book you should be reading called “Business Model Generation” by Alexander Osterwalder and Yves Pigneur who list some very handy ways that your offering can stand out from the crowd. Based on the list in their book, here are a few particular ones you can compete on:
Newness - Satisfying a previously undiscovered need or want with no similar offering
Performance - You’ve built something that is incrementally faster or better than what exists in the marketplace
Customization - You tailor your offerings to each individual customer or customer segment
Design - Your offering is markedly better designed or stands out from the others
Price - You offer the same thing as everyone else at a lower price
Cost reduction - You help your customers save money
Risk reduction - You help reduce the risk your customers take when purchasing what you have to offer
Accessibility - You’ve tapped into a previously underserved or never served market
Convenience - You’ve made something that’s much easier to use than whatever else is in the marketplace