Business Assignment

Chapter

6 What Makes Your Business Special? 118 Know What You’re Up Against—Your Competition 119

More than a better mousetrap 121 types of Competition 121 Other factors affecting your ability to compete 122 Market share distribution 123 Barriers to entry 124

What Kinds of Strategic Positions Are There? 126 Customer perception factors 126 Internal operational advantages 127 proprietary products, technology, abilities, or relationships 128 Sales channels 128 First-mover advantage 128 Branding 129 Finding your niche 129 Defining your niche 130

Competitive Analysis 133 Risk 133

What kinds of risk? 133 Balancing risks and opportunities 136

Real-World Case Social Status: the rise and Fall of MySpace 138

Critical Thinking Exercise help Google Survive 140

Competitive Analysis, Strategic Positioning, and Risk Assessment

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What Makes Your Business Special? Is your business special? Distinct? Sure, you think it’s absolutely amazing, but can customers easily discern what makes you unique? How do you differ from competitors? Is it just price? Or the product mix you offer? The colors on your website? Are those differences really important? And can you sustain them over time?

To be successful in business, you have to know what makes your company distinct from all the other companies offering similar products or services. What makes customers want to buy from you? What are your unique com- petencies that, over time, give you an edge?

In short, what is your specific strategic position in the marketplace, and what is your sustainable competitive advantage?

You have to understand your competition if you’re going to be an effective competitor yourself. But you must also examine your own company and develop a strong sense of your strategic position—your strengths and weak- nesses in terms of your values, your core competencies, your management, your resources, and your assets. While it’s important to understand what (or whom) your business is up against and to understand your competitive

In this chapter, you’ll learn how to: n Define a specific strategic position in the marketplace

n Outline a clear and sustainable competitive advantage

n Evaluate the competition thoroughly and honestly

n Understand the importance of existing competition

n Distinguish between the various types of competitors

n Recognize the factors that can affect a competitive position

n Identify the dominant companies in a given market

n Analyze the barriers to entry in a specific market

n Recognize various competitive advantages and their pitfalls

n Define a niche market

n Evaluate the risks that a company faces

learning objectives

Reality check Today’s business reality is that customers have easy, convenient access to many of your competitors, some of whom may sell the same or similar products or services for lower prices. In this environment, you have to develop a distinct impetus for your customer to keep doing business with you.

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Barriers to entry Conditions that make it difficult or impossible for new competitors to enter the market. two examples of barri- ers to entry are patents and high start-up costs.

First-mover advantage the first company to gain a reasonable foothold in a new market. having a market to itself for even a brief period may enable a company to define the product, set stan- dards, establish key strategic partnerships, capture cus- tomer attention, or in other ways gain dominance.

Key differentiators Characteristics that differentiate one company from another. key differentiators motivate customers to buy from one company rather than either choosing another

company or not buying at all. key differentiators are price, quality, convenience, selection, and socially con- scious policies or products.

Niche a specialized, clearly identifiable group or market seg- ment that a company chooses to focus on and serve within a larger target market.

Strategic position a company’s distinct identity that separates it from the competition and helps it focus on its activities.

Switching costs Barriers for customers that make it difficult to switch from one product or service to another.

en.tre.pre.neur.ship key terms

environment, the competition is not likely to be the primary issue determin- ing your company’s long-term viability. Success for an entrepreneur depends much more on what you do than on what your competition does.

Nevertheless, one of the most important aspects of formulating your business concept is being aware of the alternatives available to your customers. In other words, how else can they acquire the products or service you offer? You also need to understand one very critical point: Whatever your key differentiator is—that is, whatever you do better than your competitor—it will have to evolve over time. Your competitors will not stand still; you can’t either. You must remain flexible and responsive, yet know what your core competencies are.

Many start-up companies are tightly focused on their competition. Although big businesses spend millions of dollars fighting over each percentage point of market share (just think of Coke vs. Pepsi, Ford vs. GM, and so on), this isn’t necessarily productive for new companies. Still, that does not mean that you can simply ignore the competition. You need to know who’s out there, what they offer, and what they charge. If you approach your competitive analysis as an opportunity to learn, you may find ways to enhance your own products or services—or at least to improve your marketing.

Know What You’re Up Against— Your Competition Famed baseball player Satchel Paige used to say, “Don’t look back; someone may be gaining on you.” But in business it is imperative to see who’s gaining on you. It is far better to know what you’re up against than to be surprised when your sales suddenly disappear to an unexpected competitor.

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Every business has competition. Those currently operating a company are all too aware of the many competitors for a customer’s dollar. But many people new to business—excited about their concept and motivated by a perceived opening in the market—tend to underestimate the actual extent of competition and fail to properly assess the impact of that competition on their business.

You may believe that your business idea is completely unique—that you’ve come up with a brand-new idea. And, it may be that you have come up with a fresh approach to meeting a need in the market. But remember this: One of the very worst statements you can make in thinking through your business or creating a business plan is, “We have no competition.”

If you believe you have no competition, that indicates that either 1) you haven’t fully examined the realities of your business and the competitive envi- ronment, or 2) your concept actually has no market.

You can see this with any seemingly “new” invention, no matter how innova- tive it seemed at the time. Take the photocopier, for example. When the first one was introduced, no competition existed from other makers of photo- copiers, of course. But competition still came from many sources, including suppliers of carbon paper and mimeograph machines. There was a demon- strated demand for making copies of documents. If no competition truly existed at the time the photocopier was invented—if people weren’t dupli- cating documents by some means—it would have meant that no market for photocopiers existed.

Honestly evaluating your competition will help you better understand your own product or service and give investors a reassuring sense of your compa- ny’s strengths. It enables you to know how best to distinguish your company in the customer’s eyes, and it points to opportunities in the market.

Learn from your competition. The basic concept of competition is respon- siveness to customers. Watching your competitors can help you understand what customers want.

As you begin your competitive assessment, keep in mind that you need to evaluate only those competitors aiming for the same target market. If you own a fine French restaurant in midtown Manhattan, you don’t have to include the McDonald’s next door in your competitive evaluation: You’re not aiming for the same customer at the same time. By contrast, if you plan on opening an online store for sporting equipment, you have to look far afield at any retail stores and franchises, both in your area and nationally, as well as at mail order dealers and other Internet stores from around the world, since that’s where your potential customers now shop.

Comparing competitors’ pricing When assessing your competition, you’ll certainly want to know what they charge. After all, setting prices is one of the most difficult aspects of starting a new business. This is especially true in service industries, where prices can vary greatly from one provider to another. For more on pricing, see pages 221–223.

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When conducting a competitive analysis, identify the following:

n Who your major competitors are

n On what basis you compete

n How you compare

n Potential future competitors

n Barriers to entry for new competitors

More than a better mousetrap It’s tempting to want to judge your competition solely on the basis of whether your product or service is better than theirs. If you have invented a clearly superior widget, it’s comforting to imagine that widget customers will natu- rally buy your product instead of the competitors’ and the money will roll in.

Unfortunately, many other factors determine your success in comparison to other widget manufacturers. Perhaps their brand name is already well- known. Perhaps their widgets cost much less. Perhaps their distribution sys- tem makes it easier for them to get placement in stores. Perhaps they have a bigger marketing budget. Maybe customers just like the color of your com- petitors’ packages better. Or maybe they are comfortable with what they’re using now and don’t feel a need to change.

The objective features of your product or service may be a relatively small part of the competitive picture. In fact, all the components of customer pref- erence, including price, service, and location, are only part of the competitive analysis. You’ll need to examine many other factors, not the least of which is the strength of your competitors’ companies. In the long run, companies with significant financial resources, highly motivated or creative personnel, and other operational assets will prove to be tough, enduring competition.

Types of competition Competition comes in many forms, including:

n Direct competitors. These companies offer the same or similar product or service mix, try to reach the same target market, and typically have close relationships to their customers. They’re the ones you first think of when you hear the word “competition”—and who keep you up at night. Most markets have enough business to go around, but you’d better know what your direct competition is doing.

n Large competitors. The Walmarts, Home Depots, and Lawyers ‘R’ Us— national companies or franchises with huge marketing budgets. Don’t just dismiss these as being inferior because they’re big. A lot of them have adopted customer service practices that used to be the hallmark of small businesses. These are very real competitors to you, particularly if you plan to compete on price.

Truth or fiction? “If a man can write a better book, preach a better sermon, or make a better mousetrap, than his neigh- bor, though he build his house in the woods, the world will make a beaten path to his door.” – Ralph Waldo Emerson

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Sources of competition Competition comes in many forms, including: n Direct competitors n Large competitors n Online competition n Indirect competition n Future competition

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n Online competition. If yours is a brick-and-mortar operation selling physical goods, you’ll almost certainly face stiff competition from Internet sellers. They most likely offer lower prices, may be able to charge few or no taxes, and perhaps even provide free or highly discounted shipping. Don’t be surprised if customers use you as a “showroom” and then shop online. Competing effectively is a challenge, requiring you to provide a unique product mix, high customer service that engenders loyalty, and an experience that brings customers in.

n Indirect competition. It’s important to understand that you can face a great deal of indirect competition—that is, rather than having another company compete head to head against your product or service, you compete against other types of products or services that your customers might spend their funds on rather than yours. For example, if you run a lakeside resort for family vacations, your competition would include not only the resort on the other side of the lake, but also Disney cruises, mountain cabins for rent, and vacation packages to Hawaii.

n Future competition. You must make a few reasonable predictions of what the competition will look like in the future. New competitors enter markets all the time, and sometimes current competitors drop out. So don’t take comfort in the fact that other companies have overlooked a particular product or service. Once you show you can succeed, someone will want to take a piece of that market from you. Who are your new competitors likely to be? How long will you have the field to yourself before other competitors jump in?

In most situations, though, when assessing the competition, you’ll concen- trate your energy on looking at what your direct competitors are doing— who they are, what their competitive strengths and weaknesses are, and how much they charge.

You can identify these direct competitors by looking at directories (online directories, trade association directories, even the Yellow Pages) and adver- tisements. You can also ask suppliers and distributors to name the major competition in your area. See if your competitors are exhibiting at trade shows. And you can survey potential customers, asking them to name your competition. Indeed, identifying whom your customers are considering as an alternative to you is one of the best types of market research you can do.

Other factors affecting your ability to compete In addition to your competitors, many other factors can affect your competi- tive position.

n First-mover advantage. In new industries or new market segments, the first company to gain a reasonable foothold in the market can often leverage being early into a significant competitive advantage. Having a market to oneself for even a brief period may enable a company to define the product, set standards, establish key strategic partnerships, capture

Better isn’t necessarily best Keys on early typewriters were arranged to prevent the manual keys from sticking, slowing down typing. Although many later keyboards improved on this arrangement, typists were already comfortable with the “QWERTY” keyboard, and it remains the stan- dard to this day.

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customer attention, or in other ways gain dominance. This rush to market, however, does not guarantee success, and many industries have instances of early market leaders being overtaken by later-stage competitors.

n Installed user base and switching costs. One big challenge in introducing a new product or service—especially one involved with technology or electronics—is assessing whether that product is compatible with existing products or what the switching costs will be for customers who “switch” from their current product or service to yours. If a sizable portion of the market currently uses a product or service that performs a similar function to yours but is incompatible with your new product or service, customers may resist the cost and inconvenience of making the transition, even if your offering appears superior.

For example, switching from videocassettes to DVDs took consumers a long time because it involved replacing a pricey machine as well as personal libraries of movies, while switching from DVDs to streaming video took far less time because many consumers already had cable boxes or DVRs that could accommodate the technology. With business customers, the time, energy, and disruption it takes to deploy new technology often keeps companies from moving to improved technology, even if it is cost effective.

n The Web. Using the Internet substantially lowers barriers to entry in many industries, and in some cases it allows competitors to operate at very narrow profit margins or increase their operating efficiency significantly. The Internet also arms customers with considerably more purchase information, sometimes even wholesale prices. Companies that previously may have been able to compete effectively in a particular geographic area likely now face worldwide competition.

n Inertia. Sometimes your biggest competition comes from consumers’ simple lack of motivation to change their ways, try a new product, or investigate a new service. In such cases, you may have to devise unique marketing plans to light a fire under them.

Market share distribution Some competitors are more important than others, due entirely to the fact that they command a large percentage of the sales. Although these companies may not necessarily provide the best product or best service at the best price, they nevertheless represent a crucial component in evaluating your competi- tive position.

Companies that generate a significant portion of all sales to the target market must be carefully considered, because they:

n Generally define the standard features of the product or service

n Substantially influence customers’ perception of the product or service

n Usually devote considerable resources to maintaining their market share

Other factors affecting your ability to compete n First-mover advantage n Installed user base and

switching costs n The Web n Inertia

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Take time to understand the companies that dominate the market, if only to better distinguish yourself from them. Of course, if your company is for- tunate enough to control a major share of the market, then you gain the advantage of defining the product or service in the marketplace; you are the proverbial “800-pound gorilla.” Even so, you can’t be complacent but must plan on committing the resources necessary to preserve or expand your share.

Barriers to entry In an entrepreneurial company, you might have a new or vastly improved idea to bring to market. That’s great, but what keeps new competitors from coming in after you’ve established a customer base for your new product? In other words, what are the barriers to entry?

Obstacles that stand in the way of a company’s entering a given market are called barriers to entry. These barriers apply to your entering a market, as well. What stands in your way of entering a market? Costs, technology, lack of distribution channels? Every company can gain a sense of how best to prepare for future competition by examining the barriers to entry. These include:

n Investment. How much money will it take to get on par with competitors? For some industries, the investment required is substantial: Think about what it would take to start up a new, low-cost airline, for example.

n Government regulations. In regulated markets like energy and tele- communications, the government can make it difficult to jump-start a new business. Requirements for licenses and permits may raise the investment needed to enter a market. If you want to drive a taxicab in New York, for example, you must purchase a hard-to-acquire “medallion” due to local restrictions on the number of taxis allowed on the streets.

n Aggressive prices. Sometimes companies with a major share of a market will sell at a loss—or even give products and services away free—to make it difficult for smaller, younger firms to enter the market. Although illegal in many cases, this can be difficult to prove.

n Intellectual property (IP). In some industries, the right to use certain patented devices or processes may keep smaller firms from entering the market—either because they lack the funds to purchase rights to use the patents, or because patent holders refuse to license those rights.

n Economy of scale. Larger firms can frequently manufacture products or provide services at a lower cost than smaller businesses can, making it difficult to compete in a market with entrenched competition.

n Customer loyalty. Customers who are extremely reluctant to switch from the company that currently serves them present a common barrier to entry.

n Market saturation. Entering a market with a large number of players already in place reduces the possibility of gaining a meaningful foothold.

Consider the playing field It’s generally easier and less expensive to enter a market with many diverse competitors than one dominated by a few major players.

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Build-Your-Business Worksheet

Barriers to Entry Choose one of the following businesses:

— Work clothes manufacturer

— socially responsible specialty foods manufacturer

— software company that produces office automation software

— Financial services company

— Publishing company

With this company in mind, fill in the table below. Indicate how strong the barriers to entry are and, in the final column, how much time it will take new competition to overcome each barrier.

Extent of Effectiveness Factor How Long EffectiveType of Barrier to Entry High Medium Low None

Patents

High Start-up Costs

Substantial Expertise Required

Engineering, Manufacturing Problems

Lack of Suppliers or Distributors

Restrictive Licensing, Regulation

Market Saturation

Trademarks

Aggressive Competitor Pricing

Economy of Scale

Customer Loyalty

Other:

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Few barriers to entry last very long, particularly in newer industries. Even patents don’t provide nearly as much protection as is generally assumed. Thus, you need to realistically project the period of time by which new competitors will breach those barriers. If your company’s competitive position depends on new technology, new manufacturing techniques, or access to new markets, outlining the barriers to entry is essential. This will be one of the first areas judged by potential funding sources.

What Kinds of Strategic Positions Are There? What makes a company different? Is it the nature of its products or services? The quality or cost? The geographic area or type of customers served? Perhaps the company has proprietary products that customers can’t find elsewhere.

Each of the competitive advantages outlined in this chapter offers opportu- nities but also poses pitfalls. And they may be related: If you’re positioning your company on the basis of low price, you’ll also need operational efficien- cies to reduce costs or else you won’t be able to survive against competitors with higher profit margins. Keep in mind that your competition will also use many of these same strategies.

Customer perception factors This is the “better, faster, cheaper” approach, based on how customers dis- tinguish your company and its products and services from the competition. Some key customer perception factors are:

n Features. Specific inherent attributes of the product or service itself.

n Price. This factor includes costs other than the actual purchase price, such as installation or additional equipment required.

n Quality. Inherent merit of the product or service at the time it’s provided.

n Durability and maintenance. Quality of the product or service over time; ease of maintenance and service.

n Image, style, or perceived value. Added values derived from design features, attractive packaging or presentation, and other intangibles.

n Customer relationships. Established customer base and customer loyalty; relationships of sales personnel to customers.

n Societal impact. Perception of the company, product, or service relative to issues such as environment, civic involvement, and the like.

n Convenience. Ease with which customers can obtain the product or service. This can include the product’s ease of use or the business’s geography, operating hours, credit policies, and so on.

A Strategic Position Also Defines What You Don’t Do As important as helping you deter- mine what to do, a well-defined strategic position is a boon in help- ing you decide what not to do. This saves you a lot of time and money, and also makes you more confident of your business decisions, some of which may not be understood by others.

For example, say you sell gifts. You had been selling to consumers, so local customers were important. But you decide to switch to selling upscale corporate gifts. You stop advertising in the neighborhood and participating in daily deal sites. When your lease expires, you move to a less-convenient location that can’t be seen from the street and receives little foot traffic. All this may seem foolish to an out- sider. But since you have decided to serve the corporate market, your location matters less.

Your carefully defined strategic position helped you understand what activities were of lower pri- ority. You aren’t trying to be all things to all people.

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Concentrating on customer perception factors is the most typical method of attempting to differentiate yourself from the competition. They seem to provide the simplest, most straightforward way to compete. Surprisingly, they may also be the most difficult to achieve and maintain. For instance, competing on the basis of price is often perilous. While it’s easy—in the short run—to attract customers on the basis of low price, highly price-sensitive customers are the most fickle, quickly tempted away by the next company offering a lower price. Once you appear to be attracting a significant portion of the market, well-funded established competitors can lower prices (even if they have to take a loss) to compete temporarily until you’re no longer able to sustain your losses.

Other perception factors may be harder to “prove” to the market. You may have to spend a lot of money on marketing and advertising to get customers to realize that you offer additional features, more convenience, or higher quality. Once you do, however, you may be able to build a loyal and committed customer base that appreciates the differences between you and your competition.

Internal operational advantages Another strategy is to gain significant competitive advantages through insti- tuting better internal procedures or operations, giving you substantial ben- efits—such as higher profit margins—over the competition. Because these advantages are often not seen directly by customers, their significance is often unrealized. Yet many companies have succeeded not by clever market strategies but by running their business better than the competition. For instance, See’s Candies’ inventory management system results in very fresh candy at its stores, with minimal waste; this results in better-tasting candy and higher profit margins.

Internal operational factors that increase competitiveness include:

n Financial resources. Ability of the company to withstand financial setbacks, and to fund product development and improvements.

n Marketing program and budget. Amount and effectiveness of advertising and other promotional activities.

n Economies of scale. Ability to reduce per-unit costs due to large volume.

n Operational efficiencies. Production or delivery methods that reduce costs and time.

n Product line breadth. Ability to increase revenues by selling related products; ability for customers to purchase needed items from a single provider.

n Strategic partnerships. Relationships with other companies for purposes of development, promotion, or add-on sales.

n Company morale and personnel. Motivation, commitment, and pro- ductivity of the employees.

Strategic Position Is More than Advertising Don’t be confused: A true strate- gic position is not the same as an advertising campaign or slogan. Advertising and marketing are means to achieving your strategic position—they help you create the image consistent with your position and get your message to potential customers. Defining a strategic position is about creating a meaningful place for yourself—a position—in the market.

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Proprietary products, technology, abilities, or relationships Another way to gain a competitive advantage is to develop or secure exclusive assets that will be difficult or impossible for competitors to replicate. For manufacturing and technology companies, these may be patents, processes, or copyrights. For others, proprietary assets might include distribution agree- ments, licenses, strategic partnerships, even hiring certain employees with exceptional talents. The key to deploying this strategy effectively is that you have to identify those aspects of your business where proprietary assets make a real difference, and then you must secure those assets in such a way that your competitors can’t easily replicate or circumvent them.

Sales channels In some instances, you may be able to differentiate your company by the manner in which you reach and sell to customers. For instance, some com- puter companies, such as Dell, distinguished themselves early on by selling directly to consumers rather than through retail computer outlets. Later, the Internet opened up the opportunity for many other companies to circum- vent existing sales channels and sell directly to customers. But using differ- ent sales channels as a key strategy doesn’t necessarily require a high-tech approach: Tupperware has long used house parties instead of retail outlets to compete against Rubbermaid.

First-mover advantage “No one’s ever done anything like this before.” Many entrepreneurs believe their key competitive advantage is that they’ve developed a new concept— product, service, technology, or online business—before anyone else. They recognize that there’s a big advantage in being first; the fear of others beating them to market keeps many entrepreneurs working around the clock.

If you can get your company, product, service, or website established before the competition, you gain what’s called the first-mover advantage. Being first potentially enables you to capture so many customers that it becomes difficult for a significant portion of the market (in technology terms, the “installed user base”) to change.

Being first to a market brings many advantages, including the ability to:

n Capture significant market share before competitors enter the market

n Secure key strategic partners, leaving fewer opportunities for later competitors

n Attract outstanding employees and management

n Capture media attention

n Lock in financing sources, such as venture capitalists

Competitive advantages Tactics you can use to distinguish yourself from your competitors include: n Market share n Customer perception factors n Internal operational advan-

tages n Proprietary products, technol-

ogy, abilities, or relationships n Sales channels n First-mover advantage n Branding n Market segment or niche

Six first-movers n COCA-COLA: first cola company n EBAY: first online auction n FORD: first implementer of the

assembly line for mass produc- ing cars

n GILLETTE: first safety razor n KLEEnEx: first disposable facial

tissue n SOnY: first portable music

device, the Walkman

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Going after a “first-mover advantage” carries its own risks as well as rewards. In most businesses, there are few truly effective barriers to entry. Will you end up merely serving as the research-and-development arm of copycat com- panies? There’s also the quite real risk that if you’re doing something truly new, the market (and financing sources) may not be ready for you. In fact, many second- or third-to-market companies benefit from avoiding the costs of educating the market, conducting extensive research and development, and hiring highly creative people.

If gaining the first-mover advantage is part of your key business strategy, ask yourself, “How defensible is this position? What will I need to make it defensible?” Remember, patents, copyrights, and other proprietary informa- tion only go so far. Can you develop strategic alliances or lock in customers, distributors, and financing sources to make it difficult for future competitors to take you on?

With a first-mover strategy, there’s also the risk of doing something fast but not well, allowing your inevitable competition to honestly tout itself as a much- improved version. So continually work on improving your products, services, marketing, and operations. Look for ways to leverage being first into being best.

Branding One increasingly important strategy that many companies pursue is inten- tionally trying to build a brand. If you can become a brand name, customers will develop such a strong relationship with your company that others have difficulty competing.

There are, obviously, many advantages to being a brand name, but it’s not easy to achieve. First, it’s usually expensive. You must spend a great deal of money on marketing and advertising just to get your name well known. And, though it seems like some brand names develop overnight, especially with online businesses, building a brand is hard to achieve quickly.

Building a truly strong brand is more than merely a matter of securing name recognition. A real brand gives customers trust in your products and services because, over time, you’re consistent in quality, price, service, or convenience. This doesn’t mean you have to promise the highest quality or the lowest price. It just means being consistent, so the customer can depend on what they’ll get from your brand.

If your goal is to build a brand name, you have to look at those factors that you’re able to offer and deliver to your customers consistently and repeatedly, making certain you put sufficient company resources into supporting those factors.

Finding your niche It’s often far easier for a company to get and retain a competitive edge by focusing on a specific market segment—or niche—rather than trying to win every customer imaginable. A niche, or niche market, however, isn’t necessar-

Does McDonald’s serve the best burger? A brand represents consistency. To be a reliable brand, McDonald’s doesn’t have to promise gourmet food. Rather, its brand depends on giving customers the same experi- ence, the same type and quality of food, and the same cleanliness, at every McDonald’s.

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ily a small market. Rather, choosing a niche means finding something that immediately distinguishes you from your competitors by focusing on some- thing that makes you distinct.

Say you want to turn your knack for design into a fashion business. Telling yourself that everyone needs clothes isn’t going to help you design products that stand out in the marketplace. You could choose to target clothes for young women, but that’s an incredibly crowded field. On the other hand, choosing to design and sell clothes for a specific niche—let’s say plus-size women or, even more specifically, focusing on business attire for plus-size women—allows you to easily differentiate yourself in a smaller but still viable marketplace.

An important thing to note about a niche is that it must be based on objec- tive factors. When asked what makes their business unique, most entrepre- neurs will say something like, “We give exceptional customer service,” or “We do the best job.” Those are subjective criteria. Trying to distinguish yourself based on subjective factors is tough—it takes a long time for customers to recognize that you’re actually better than the competition.

But a niche based on objective criteria is immediately understandable—“We create an online accounting application for midsize law firms” or “We man- ufacture furniture for family-style restaurants”—and clearly sets you apart from your competitors.

Carving out a niche for a new or smaller business gives you an immediate head start. While you trade having a larger total market from which to attract customers, you can more easily (and often more inexpensively) gain visibility and credibility with a more-focused market.

Defining your niche After you’ve generated a number of ideas for niche markets, how do you choose the right one for you? First, you’ll have to do some research. Judge a potential niche by the following four factors:

n Sizable: Your market segment should be big enough to provide you with plenty of customers but not so huge that it will attract too many competitors and be too expensive to reach.

n Reachable: How can you let your target market know you exist? Where will you advertise? Look for publications, media outlets, organizations, or events that reach your specific market so you’re assured that you can let them know you exist.

n Self-defining: Your potential market should have—or feel they have— special needs. After all, that’s why they want a specialist!

n Sustainable: Select a niche that can support your business over the long haul, one in which you won’t quickly deplete the supply of customers. Avoid specialties highly affected by changes in the economy.

Carving out a niche: n Sets you apart from the mass of

competitors n Gives you a clear focus for your

marketing and advertising efforts

n Earns you additional credibility when you’re trying to make a sale

n Makes you more memorable and helps you get referrals

n Enables you to charge higher prices than non-specialists

You can choose a niche based on one of two things: your target customer, or your type of product/ service. In other words: who your customers are, or what you do and how you do it.



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CuStOMER-BASED NIChES: WhO YOuR CuStOMERS ARE

NichE Who Your customErs ArE

BENEfits coNsidErAtioNs ExAmplEs

industry or Busi- ness type

a particular industry or type of business

One of the easiest ways to specialize; familiarity in an industry attracts and reassures potential clients

May require a broader geographic market in order to find enough cus- tomers

Website design for hospitals; public relations for plastic surgeons; janitorial service for banks

demographic Group

Customers defined by age, gender, eth- nic group, religion, sexual orientation, income level, etc.

relatively easy to identify marketing vehicles serving the group

Often helps to belong to the group; group may dislike being singled out; must accept cus- tomers outside the group

Children’s furni- ture manufacturer; computer training for seniors; travel operator of group tours for gays

Geographic Area Customers in a par- ticular geographic area

easy way to special- ize; can be highly successful in remote, underserved loca- tions

May not provide enough of a com- petitive advantage

a regional airline; a bank serving a local community; a real estate firm special- izing in a particular city

other specialty any group of people that has a common characteristic

Works best if the tar- geted group has a unique need, served best by a specialist

Group must be large enough to create a demand

Footwear for travel- ers; frozen entrees for vegetarians; gear for parents of twins and triplets

PRODuCt- OR SERvICE-BASED NIChES: WhAt YOu DO

NichE WhAt You do BENEfits coNsidErAtioNs ExAmplEs

unique Knowledge provide special- ized expertise for a particular field or product

For some fields, expertise can be developed on-the- job

Likely to need spe- cialized training, expertise, or under- standing

Clinical trials data processing; environ- mental impact con- sulting firm; math textbook publisher

style or product mix

perform work in a distinctive manner or place; create a unique product or product mix

Clear differentiator from competition

Often hard to find distinguishing differ- ence; relatively easy for competitors to enter

Organic-only fast- food chain; on-call auto-glass replace- ment service; fee-only financial planning

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Build-Your-Business Worksheet

Niche market ideas Use this worksheet to brainstorm possible niche markets to pursue.

Type of Niche Potential Niche Idea

industry/Business

demographic Group

Geographic Area

other specialty

unique knowledge

style or Product Mix

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Competitive Analysis Now that you’ve begun to examine the competition, and you’ve thought about some of the strategic advantages you would like to exploit or develop, fill out the two competitive analysis worksheets on pages 134–135. These worksheets will help you evaluate your competitive position in terms of both customer preference and internal operational strengths.

The worksheets enable you to assign greater or lesser importance to each competitive factor, depending on the significance of those particular aspects. To complete each worksheet, give each factor listed a maximum possible number of points, ranging from 1 to 10, with 1 being least important to your overall target market and 10 being the most important. Place the maximum number for each factor in the maximum points column.

For instance, on the first worksheet, “Competitive Analysis: Customer Per- ception Factors,” let’s say your target market is extremely price sensitive but willing to travel a long way to get a bargain. The purchase price factor might be given a maximum of 10 points and the location factor a maximum of 2.

Keep in mind that you can also allot negative numbers. If, for example, your target market is interested only in items perceived as luxuries, having too low a price may be a liability. If your market is particularly socially conscious, the fact that your competitor conducts tests on animals may be a negative for the social image factor in their evaluation, giving you a competitive edge.

In your analyses, look both at specific competitors—particular companies you compete against—and at the overall type of competition. Once you have finished numbering the factors for your company and competitors, you’ll see how this weighting system gives you a better picture of the actual strength of your competitors, as opposed to your own.

Risk Every business involves risk. Only the most naive and inexperienced entre- preneurs believe their business “just can’t fail.” Use this section to sit down and think through the various risks facing your new endeavor.

This task might seem daunting. So why shake your enthusiasm? Because risk assessment helps you prepare for and prevent threats to your success. If, for instance, you identify a major risk as the possibility that a well-funded com- petitor will enter the market, you’ll want to take steps to quickly secure key customer contracts or line up significant funding yourself.

What kinds of risk? It’s not just a matter of high risk or low risk. It’s also what kinds of risk. Some risks are more tolerable or more important. The key types of risk companies face include:

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Build-Your-Business Worksheet

competitive Analysis, customer perception factors Following the directions on page 133, allocate points for each of the factors listed below for both your company and your competitors.

Factor Maximum

Points (1–10)

Your Company

Competitor _________

Competitor _________

Competitor _________

Competitor _________

Product/Service Features

Purchase Price

Indirect/Peripheral Costs

Quality

Durability/Maintenance

Image/Style/Design

Perceived Value

Brand Recognition

Customer Relationships

Location

Delivery Time

Convenience of Use

Credit Policies

Customer Service

Social Consciousness

Other:

Other:

Total Points Comments:

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Build-Your-Business Worksheet

competitive Analysis, internal operational factors Following the directions on page 133, allocate points for each of the factors listed below for both your company and your competitors.

Factor Maximum

Points (1–10)

Your Company

Competitor _________

Competitor _________

Competitor _________

Competitor _________

Financial Resources

Marketing Budget/Program

Technological Competence

Access to Distribution

Access to Suppliers

Economies of Scale

Operational Efficiencies Sales Structure/ Competence

Product Line Breadth

Strategic Partnerships

Company Morale/Personnel

Certification/Regulation

Patents/Trademarks

Ability to Innovate

Other:

Other:

Other:

Total Points Comments:

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n Market risk. The risk that the market won’t respond to your products or services, because either there is no real market need or the market isn’t yet ready. Market risks are very difficult to overcome.

n Competitive risk. The risk that the competitive situation will change dramatically, and new competitors will enter the market or established competitors will reposition their products or services to more effectively take you on. You should carefully think through how other competitors might respond to your entering the market and not assume that the competitive environment will remain the same.

n technology risk. The risk that the technology or product design and engineering won’t work, or won’t work as well as you envision. This may be critically important to your company’s success, or it may be irrelevant, depending on the nature of your company, its products or services, its customers, and the like. If your business faces substantial technology risks, what’s your ability to quickly and effectively improve the technology?

n Product risk. The risk that the product won’t materialize, won’t be finished in time, or won’t work as promised. This is similar to the above, only with non-technology products or services.

n Execution risk. The risk that you won’t be able to effectively manage the rollout and growth of the company because management isn’t sufficiently capable, the time allowed isn’t adequate, operations aren’t in place, and other reasons. You should be able to demonstrate specific steps you’re taking to reduce or eliminate such risks.

n Capitalization risk. The risk that you’ve badly underestimated costs or overestimated income, and you will run out of money. The best way to avoid these risks is to budget realistically and acquire enough funding so you don’t run through your cash reserves prematurely. Look for investors who have the ability and inclination to offer additional funds as your company progresses.

n Global risk. The risk that, when doing business internationally, you may encounter unanticipated situations that will interrupt or stop your ability to do business, reach your market, or receive supplies.

Balancing risks and opportunities Once you’ve outlined your risks, you may feel overwhelmed. But while there are many risks, there are many rewards—otherwise, why would you bother to start an endeavor?

A typical method to illustrate the balance between risks and opportunities is to develop a “SWOT” chart, delineating your company’s strengths, weak- nesses, opportunities, and threats (thus, “SWOT”). This is a good exercise for quickly sizing up your company’s position. Complete the “SWOT” grid on page 137. Be sure to include both internal and external factors, as well as current and potential ones.

Types of risk The key types of risks companies face are: n Market risk n Competitive risk n Technology risk n Product risk n Execution risk n Capitalization risk n Global risk

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Build-Your-Business Worksheet

sWot: strengths/Weaknesses/opportunities/threats In each appropriate box below, list your company’s strengths or weaknesses, and the opportunities or threats facing it.

Strengths Weaknesses

Opportunities Threats

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r E A l - W o r l d c A s E

challenge Staying competitive when

you’re the leader in a rapidly changing market

solution Stay the course, keep current

customers happy, and hope for the best

social status: the rise and fall of myspace how does a company that has established clear market dominance keep ahead in a rapidly changing field? When your current customers and business model depend on one model, how do you respond as competitors introduce new business models? It’s one of the toughest questions facing entrepreneurial companies, and sometimes even the biggest, most well-funded aren’t immune from the challenge.

the rise and fall of the MySpace empire took only six years to play out. Ultimately, the same business strategy that drove it to the top of the social net- working world led directly to its failure.

prior to MySpace, the first social networking site to really prove the power of harnessing individuals’ own social circles was Friendster. Launched in 2002, Friendster was based primarily in asia and was backed by some of the leading venture capital firms in the world. It quickly became a powerhouse, and Google offered to buy it for $30 million in 2003. Friendster turned the offer down.

Meanwhile, MySpace quickly began challenging Friendster. Still a relatively early entrant in the new social networking market space, by 2004 it overtook Friendster, and by 2005 MySpace was considered the world’s top social net- work program. News Corporation acquired MySpace for $580 million that year,1 expecting it to generate more than $1 billion in annual revenue.2

at first, things looked good for MySpace. at the time of its acquisition, MySpace was the fifth-ranked Web domain in terms of page views (putting it in the league of Web giants yahoo!, Google, and aOL),3 it had five times the traf- fic of Facebook,4 and by 2006 it outranked Google as the most visited website in the United States and had acquired its 100 millionth member.5 that year, MySpace inked a $900 million advertising deal with Google. It was the social network, valued at an astonishing $12 billion in its heyday.6 the prospects seemed limitless.

MySpace was so powerful that Friendster, based in kuala Lumpur, increas- ingly focused its growth in asia, pulling back on its presence in the United States.

yet MySpace wasn’t watching the competitive and strategic landscape care- fully. Because MySpace was easily open to all—anyone could join, and there were few privacy controls—it faced criticism on a number of fronts, including

1. “News Corporation to Acquire Intermix Media, Inc.” News Corporation. July 18, 2005. 2. “Special Report: How News Corp got lost in MySpace,” by Adegoke Yinka. Reuters.com. April 7,

2011. 3. “News Corporation to Acquire Intermix Media, Inc.” 4. “The Network Effect: Facebook, LinkedIn, Twitter & Tumblr Reach New Heights in May,” by

Andrew Lipsman. The ComScore Blog. June 15, 2011. 5. “MySpace Signs 100 Millionth Member,” by Mark Sweeney. The Guardian. Aug. 9, 2006. 6. “MySpace loses 10 million users in a month,” by Emma Barnett. Telegraph.co.uk. March 24, 2011.

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questions 1. Was it reasonable for Facebook

to initially ignore a segment of its market when MySpace was so big and Facebook so small?

2. Friendster turned down a $30 million acquisition offer, and MySpace accepted one for $580 million. Both decisions are considered to have hampered their ability to compete with Facebook. Should they have taken the money? When and how do you know it’s time to sell?

3. MySpace later became known as the social networking site for music and entertainment connections. Do you think it can build a highly profitable business around this niche?

online privacy, child safety, censorship, and website performance. MySpace’s inability to build an effective spam filter made it seem seedy, driving away members and advertisers.7

Meanwhile, the strength of upstart Facebook was growing. Face- book’s initial model allowed only those who were connected to a col- lege or university to join. at first, these were only Ivy League universi- ties, giving the social media site an air of exclusivity. Later, members had to have a “.edu” email address, enabling Facebook to capture the highly valuable college market.

By 2009, Facebook had surpassed MySpace’s traffic. Meanwhile, MySpace was locked into an advertising revenue deal with Google that limited its flexibility and ability to innovate and compete.8

rather than attempt to address all the technological and cultural Web issues plaguing the MySpace platform, News Corp. chose to focus on generat- ing revenues by increasing its identity as an entertainment-centric Web desti- nation and by forging even closer relationships with the recorded music and movie industries. after all, News Corp. owned many media properties. On a site that already was lagging behind the social aspect of the overall social network, this decision to move away from connecting people with people in favor of connecting people with media proved disastrous. at a time when Facebook and twitter were experiencing meteoric increases in membership, MySpace’s membership numbers as well as its traffic dwindled.

Despite numerous rounds of management shakeups between 2008 and 2010, none of the would-be executive saviors of MySpace managed to turn the company around. By the end of 2010, MySpace had no defensible competi- tive advantage. It had long ago defined its niche as a place for music fans and bands to connect, and had decided to stick with this core competency despite evidence that the social media universe was quickly evolving in another direc- tion altogether. It also ignored complaints from its members that the technol- ogy was falling behind, and that the features and user interface were substan- dard to the newer social networks appearing almost monthly. MySpace man- agement ran the company without adapting sufficiently, or smartly enough, to these two particular challenges.

In 2011, MySpace was sold to Specific Media and Justin timberlake,9 where it may be in better hands. although just a shadow of its former self, it remains one of the top 160 most-visited websites in the world,10 which gives its new owners a foundation to rethink and perhaps reinvent this once-giant social net- working and technology innovator. n

7. Ibid. 8. “Special Report: How News Corp got lost in MySpace,” by Adegoke Yinka. Reuters.com. 9. “News Corp. Sells Myspace for a Song,” by Jessica Vascallero et al. The Wall Street Journal. June 30,

2011. 10. Alexa. Jan. 29, 2012. www.alexa.com.

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hElp GooGlE survivE Goal: To learn to think strategically when you’re the mar- ket leader.

What to do: Even market leaders face challenges, and must look over their shoulders at what might be threatening them.

In this exercise, consider the market risks and chal- lenges that Google currently faces. Then build a strategy for staying ahead of the pack.

1. Either alone or in a group, choose one area in which Google currently operates, such as search, social networking, online video, email, or online applications. (There are many more.)

2. Identify the key competitors Google currently faces in the area that you’ve chosen.

3. Make a list of the competitive challenges Google now faces. Make a list of what challenges might emerge in that area.

4. Make a list of the potential opportunities Google has in that area to improve its competitive posi- tion.

ExERCISE: c r i t i c a l t h i n k i n g

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