You’re writing a business plan, so it’s a pretty safe bet that you’re launching a new business or preparing to take an established company to allnew heights.
By now, you’ve probably settled on a great business idea. And maybe (hopefully) you’ve crafted your mission and vision statements and set crystal-clear goals, objectives, targets, and timelines (also discussed in Chapter 3) to guide your way. But guess what: Even if your brainchild is the biggest thing since sticky notes, it isn’t enough to ensure success on its own. For one thing, you need to find customers. Plus, you need to establish a pretty compelling reason (or more than one reason) for those customers to choose your offering over competing alternatives that are available around the corner or over the Internet. In short, you need to take a long, careful look at your business environment before you leap into action.
Use this chapter as you conduct a straightforward analysis of your industry, including how you fit into it and the forces that will affect your success. Take an equally close look at your customers and prospective customers — whether they’re individual consumers or business clients. Finally, assess your competition, identifying exactly who and what you’re up against, what competitive challenges are on your horizon, and what you have to do to move the market in your direction.
Zooming In on Your Industry
Your business may be one-of-a-kind, with products and services that are in a class by themselves, but you’re also part of a larger industry: retail, telecommunications, entertainment, travel, publishing — or any of a hundred others.
Even if you run a nonprofit organization, you’re part of a contingent of worthy causes all seeking contributions from the same supporters. Regardless of your field, your strategy for success needs to begin with a clear sense of your industry and how you fit into it. Use this section as you figure out how you fit into your industry.
Seeing your industry’s big picture
Understanding the larger forces at work in your industry is a crucial part of business planning:
* What are the long-term trends in your business arena?
* Is your industry growing fast or treading water?
* Is entering the market difficult?
* How fast are technologies, regulations, or other fundamentals of your industry changing?
Answers to questions like these are key to creating a robust business plan. By compiling a good overview of your industry, you gain a better sense of how and where your venture fits in. Chances are, along the way, you’ll discover a few things you didn’t know — insights that will help you sidestep trouble and chart a better course.
Complete the Form 4-1 questionnaire to summarize what you already know about your industry and, even more important, what you still need to find out. What you don’t know can hurt your business, so instead of leaving questions in Form 4-1 unanswered, take the time to do some research and to uncover the facts. For example, if a few suppliers control most of your industry’s material costs, you can make sound decisions based on that knowledge — or you can overlook that fact and have it come back to haunt you later. After you complete the questionnaire, look over your answers and single out areas that are most apt to influence your future:
* How serious of a competitive threat do you face?
* Who really drives your industry: customers, distributors, or suppliers?
* Will you be able to ride the rising tide of an expanding industry, or will you have to find ways to succeed in spite of a general industry slowdown?
Diamonds are forever, but what about De Beers?
For most of the 20th century, De Beers wasn’t just a player in the diamond industry, but also the diamond industry’s dominant force. Using both ethical and underhanded practices — including the use of West African mercenaries — De Beers controlled the world’s diamond supply. The result: The company kept diamonds scarce and diamond prices high. By the mid-1980s, however, changes that De Beers had little control over threatened the company’s dominance. New diamond mines opened in Canada and Australia, conflicts in
Africa led to widespread diamond smuggling, and the collapse of the Soviet Union eroded the company’s influence over diamond producers in that area. In response, De Beers stockpiled billions of dollars worth of diamonds to keep supply down and prices up.
When that strategy wasn’t enough to protect profits, De Beers fundamentally changed the way it did business. It began selling off its stockpiled diamonds while increasing production from mines around the world. Instead of trying to control the world market, the company decided to focus its efforts on increasing demand for diamonds worldwide.
More changes still shadow the diamond industry horizon, including the emergence of highly competitive new retailers and the introduction of diamond synthetics that even people in the industry have a hard time distinguishing from the real thing.
Time will tell how these changes affect the company’s fortunes — or the price of a diamond ring. Meanwhile, this venerable old company continues to analyze its industry and adapt its business plan to fit the shifting environment. If the company is successful, De Beers, like diamonds, could be forever.
Any one of the forces, trends, or issues you identify just may be the one that holds the key to your success. Summarize the findings from your industry analysis and include your overview in the business environment section of your written business plan.
Paying the price of admission
Most business-planning efforts are designed to seize an opportunity — either by launching a business start-up or expanding an established company into new market arenas. In either case, inevitable competitive hurdles await. In any industry, obstacles — known as entry barriers — challenge new contenders. If the barriers are low, almost anyone can join the fray. When they walls are high, entry is harder and fewer competitors make the plunge. Consider the following examples:
* Suppose you’re thinking about starting a printing business. Right off the bat, one entry barrier is the capital cost associated with acquiring production equipment. To overcome the barrier, you may come up with creative ways to lease the equipment or figure out how to outsource a portion of your production until you get up to full speed.
* If you’re planning a clothing shop that eventually will have to compete with chain stores, your entry barrier is the competitive advantage of large retailers whose pricing reflects a built-in economy of scale. Simply put, large retailers can buy merchandise at a lower cost because they buy so much of it at a time. To overcome the barrier, you probably need
to compete on attributes other than price: the quality of your fabrics, for example, or your special services or unique fashions.
* If you’re opening a hair salon in a town with a handful of successful beauty shops, your biggest entry barrier is customer loyalty to existing stylists. To prevail, you have to give customers a reason to change; for example, you can institute a bring-a-friend-for-free haircut or onsite daycare service.
Form 4-2 presents typical entry barriers that await new competitors in a variety of industries. Check the ones that apply to your industry and marketplace. Use the space at the end of the form to add barriers unique to your business situation.
On a scale of 1 to 10, with 1 being the most significant possible impediment to your success, rank the entry barriers that you expect to encounter. Look closely at the top three barriers on your list. These barriers represent the biggest hurdles you face in getting your business up and running. When you write your business plan, acknowledge these barriers and detail how you intend to overcome the obstacles they represent.
Defining Your Customers
When you get right down to it, customers are the key to business success. Without enough of them, you don’t have a business at all, so spend the time to understand precisely who your customers are, what makes them tick, and exactly what they want from your business. If you’re going to succeed — which is the point of all this planning — you need to know what attracts people to your business in the first place and what makes them come back to buy again and again.
Developing your customer profile
The more you know about your customers, the more you know about where to find others just like them, how to reach them with media or other marketing communications, and what kind of messages, offers, and incentives move them toward buying.
Three key terms apply:
* Geographics: This term describes where your customers and your potential customers — or prospects — reside. When you know this information, you can target your marketing efforts into specific regions, counties, states, countries, or zip codes.
Building entry barriers
If your company is entering a new (to you) industry or market area, expect to face some barriers as you seek to compete profitably with companies already up and running in your business. At the same time, think about building some barriers of your own in an effort to up the ante for potential competitors who want to follow you into your business arena or market area. Entry barriers come in a wide range of forms, including
* Patents: By protecting your idea and production process, you can block others from legally using your approach for a number of years. Visit the Web site of the U.S. Patent and Trademark office at www.uspto.gov for information.
* Cost and pricing advantages: Consider building a cash reserve to allow your business to cut prices or enhance promotions, if necessary, to force new competitors to operate at an unsustainable loss. Also, consider
committing volume businesses to key suppliers to establish relationships that result in preferential pricing, which lowers the costs to your business and prices to your customers.
* Marketing advantages: Especially if you’re the first in your market with a particular product or service, commit adequate marketing resources to quickly build market awareness, a strong brand, and loyal customers
(Chapter 7 focuses on the topic of marketing). The faster you establish your product or service as the preferred choice, the more expensive unseating you in the marketplace becomes for newcomers.
* Regulations and trade restrictions: Tariffs and quotas work as entry barriers to international and some domestic markets. If your industry is subject to trade restrictions, join industry associations, attend industry conferences, and follow industry news to keep up on the rules under which your business needs to operate. You should also participate in the protection of your markets from those who aren’t authorized to participate.
* Economic factors: The price of equipment, licensing, research and development, or other mandatory expenses involved in setting up shop deter other competitors from entering your arena. As you establish your business, think in preemptive terms, selecting equipment and processes around which you can build a distinct and impenetrable advantage.
* Demographics: This term describes who your prospects are in factual terms, including age, gender, race, education level, marital status, income level, and household size.
* Psychographics: This term describes lifestyle characteristics, including attitudes, beliefs, and opinions that affect customer-purchasing patterns.
* Behavioral: This term describes how customers buy, including such product usage rate tendencies, level of loyalty, purchase occasions, and whether customers buy for price or for performance, on impulse or after careful consideration, based of personal choice or on the recommendation of others, and other such behavioral patterns.
If yours is an existing business, create a best-take summary of your current customers. If you’re writing a plan for a new business, describe the person you believe is most apt to purchase your offering.
Conducting customer research
To paint a clear picture of your customer, undertake some research activities. Your efforts may involve highly customized efforts tailored specifically to your business clientele, or they may rely on available market analyses called secondary research, which you can apply to your business situation. The approaches and budgets vary widely. What never changes is the need to know exactly who’s apt to buy from your business, how to reach those people, and what to say when you have their attention.
Compiling a firsthand analysis of your customer
Large companies spend huge budgets conducting customized market research. Fortunately, simpler and cheaper ways to obtain a picture of your customers are available. Consider the following ideas:
* Stop, look, and listen. You can discover plenty simply by observing customers. If you’re in the retail business, watch where customers go inside your store and what products they linger over the longest. When you go to an industry trade show, watch which booths and exhibits attract the biggest crowds. Conduct informal surveys, asking prospects about their reactions to various products, services, and features.
* Create a dialogue. If you’re thinking about improving a product or developing a service, invite your best customers to become part of the creative process. Ask what they like and don’t like about existing offerings. What would they change? What features would they add? Response cards also offer a good way to obtain customer input. If you have a Web site, consider an online version. Offer a small incentive for customers to participate — a gift, membership in your company’s VIP club, and a future discount are options.
* Go virtual. If your customers are far-flung, consider a virtual focus group by arranging for selected customers to meet in an online chat room to discuss a particular aspect of your product or service. As in a traditional focus group, offer participants a little something in return for their time and ideas.
The closer you get to knowing your customers, the more success you’ll experience in your marketplace.
Casting a wider net
Supplement your customer and prospect knowledge with secondary research:
* Contact your industry association and the major media groups that serve your industry to obtain their analyses of the consumers in your market arena. Study the findings to discover more about the profile of the people who buy products like the ones you’re offering.
* Cruise the Internet, where you can find a vast database of customer responses to everything from the latest bestseller to the most sophisticated digital equipment on the market. Publishers and authors cantrack which books are selling well hour by hour. Winemakers can follow which vintages customers are snapping up. Consultants can research the hottest business topics. Digital gadget makers can survey customer reaction to cutting-edge technology as they design the next generation of electronic toys.
To find sites relevant to your business, conduct Web searches for products like the ones you offer. In the search results, you may find sites where customers like yours weigh in on what they think. When you find such a site, visit it regularly. You’re bound to get an earful — or eyeful — of useful information.
* The reference area of your public or university library most likely has copies of the SRDS Lifestyle Market Analyst and the CACI Sourcebook of ZIP Code Demographics, which can help you locate geographic areas with concentrations of residents who match your customer profile. This information can be invaluable as you pinpoint
regions for business expansion.
Getting research assistance
If your research involves questionnaires, focus groups, or phone or in-person interviews, consider bringing in specialists to help you maintain objectivity and convey professionalism throughout the process. Contact research firms, marketing firms, and public-relations companies for help. Another good resource is your Small Business Development Center. To find a nearby center, visit the Small Business Association Web site at www.sba.gov/sbdc and click on the Your Nearest SBDC button.
Sharpening your customer focus
Remember the old saying that knowledge is power? Well, when planning and directing your company’s business activities, customer knowledge equals business power. And close is nowhere near good enough. Consider the case of a new business specializing in online sales of lingerie. When the owners wrote their first-take customer profile, it read like this:
We’re going after Internet shoppers with a sense of style, adventure, and playfulness but who are a bit reluctant to shop for intimate apparel at a brick-and-mortar store. Our customers are women who buy our products for themselves or for significant others.
Not long after writing this profile, the owners realized that this snapshot left out some crucial aspects. How is the customer likely to find the Web site in the first place? Why would she choose to buy here rather than somewhere else? What motivates her to buy — price, quality, or special features? Is she likely to be a repeat buyer? What convinces her to come back and shop again? As the owners expanded their customer profile, here’s what they added:
Most of our customers are 18 to 35 years old and are single or recently married. They live in urban areas, especially on the East and West Coasts. They’re Internet savvy, and they tend to be affluent and sophisticated. They discover our site primarily through ads placed in women’s magazines and on selected Web sites. When making buying decisions, they
value quality — determined by the unique designs and fine materials used in our products — more than price. The bottom line: Our products make our customers feel beautiful. By delivering on this promise, we can develop a loyal clientele of repeat buyers.
See the difference? The expanded description includes demographic characteristics — where customers live, their ages, and lifestyle information — as well as psychographic information about what drives their buying decisions. Based on the expanded customer description, the business owners were able to hone a sharp marketing strategy. First, they realized that their customers viewed lingerie purchases as a means to an end — to looking and feeling beautiful and sensual. Knowing this information helped the owners create attention-getting ads that converted to Web-site traffic and online sales. Second, their customer snapshot revealed that the company’s success relied on loyal buyers who kept coming back on their own — and referring their friends, as well. This trend sparked the decision to add an online weekly health and beauty magazine featuring columns by cosmetologists, beforeand-after stories, and an interactive Q&A discussion area.
Use everything you know about your clientele to create your customer snapshot, to condense it down to two or three plain-English sentences that describe the person most likely to buy from your business. Make the description of your customers part of your business plan. Doing so keeps your business and its marketing efforts focused and effective.
Describing your ideal customer
Every customer is important to your business, but the truth is that some are
simply more important than others, and a precious few are absolutely essential.
The difference between good and great customers is huge. If you’re already in
business, you know firsthand that some customers are more profitable, more
pleasant, more apt to buy frequently, and more likely to spread good words
about your business than others. And those customers are the ones you want
to amass.
Separating the good from the best — and the best from the worst
Your best customers
* Ask you to do things you do well
* Appreciate what you do and willingly pay the price that you ask
* Make reasonable requests that lead to improvement and expansion of your skills and services
* Inspire your business to move in new and profitable directions Great customers are the ones who you want to go overboard for. Heap on the special services, pile on the appreciation, and do what you can to keep them loyal to your business. You’ll be doubly rewarded with repeat purchases and invaluable word of mouth.
Good customers are the ones who appreciate your offerings, buy your products, and pay your bills on time and with courtesy. But they can be transitory — here today, and gone tomorrow. And what often lures them away is a better offer. They may never become loyal patrons of your business because they value special deals more than they value long-term business relationships. Your worst customers are prospects who are simply mismatched to your offerings. They’re excessively negative, unreasonably demanding, and maybe even abusive to your staff and your business systems. Watch for these indicators to flag customers you’re better off not having in your clientele:
* They consume considerable time and attention yet buy very little.
* They demand unreasonable concessions on pricing, service, or product alternations, and, if you consented, they would harm your business.
* They demoralize your staff.
* They refuse to pay your fair price for your offering or refuse to comply with your billing and service standards.
* They act dissatisfied no matter what you do for them.
Defining perfection
Indulge in a little fantasy. Conjure up an image of your ideal customer, whether that customer is an individual buyer or a business client (discussed later in this chapter). Imagine the sort of person who eagerly buys your products or services, raves about you to friends and colleagues, and returns to purchase from your business on a regular basis.
Segmenting your customers into buyer groups
By lumping similar customers together, companies can target their offerings to select groups of people who all respond in similar ways. Consider the example of a new residential golf community selling homes and golf-club memberships primarily to affluent middle-age buyers. After gathering customer data, the developers found that buyers from the nearby market area wanted to upgrade their housing by buying homes with better views and amenities than they enjoyed at their previous addresses. On the other hand, buyers from out-of-area urban markets were more interested in the feeling of escape that the new community offered with its rural surroundings and wide range of nearby outdoor recreation activities.
Studying further, the developers discovered that even buyers from out-of-area urban markets broke into two segments. One segment lived fewer than six hours by car from the new community and wanted second homes to enjoy on
long weekends and vacations. The segment that lived more than six hours away shopped for a dream retirement home or for a new residence from which to telecommute or to run a home-based business.
Armed with this information, the developers created direct-mail campaigns to appeal to the unique desires of prospects in each geographic market. Analyze how your customers break into market segments. Use Form 4-8 to uncover which groups of buyers seek which kinds of products and how their interests vary from other customer groups. Include your market segmentation information in the business environment section of your written business plan.
Doing business with business customers
B2B is shorthand for the great contingent of businesses that sell to other businesses rather than to individual consumers.
Business and individual customers have plenty in common. They share concerns about price, quality, convenience, service, reliability, and expertise. All those aspects add up to value in their minds. But you can also expect some important distinctions in how business customers buy:
* Sales or promotional blitzes don’t sway them.
* They rarely buy on impulse.
* The buying patterns of their customers and what’s happening in their industries affect their buying behavior.
* Their buying decisions often rely on approval from managers, owners, financial consultants, or others.
For success selling to business customers, you really need to organize. Create a profile for each business client and major prospect, and then circle the characteristics that the companies have in common. Use these common traits to create an ideal business customer snapshot — two or three paragraphs describing the kind of business customers you want to target.
If you have a business-to-business company, include a detailed description of the kind of business customers you intend to serve in your business plan.
Sizing Up Your Competition
Unless you’re very clever — and extremely lucky —your business isn’t the only one on the horizon with a great idea and a serious plan to win over eager customers in your particular market.
Except for government agencies and communist states, everyone has competition.
Even if your business idea launches a brand-new industry, you can expect a throng of new competitors to quickly emerge, each fighting tooth and nail to grab their slices of the market pie. Your success depends largely on how well you understand your competitors and how successful you are at distinguishing yourself from all the alternatives that exist in the minds of your potential customers. Competitors challenge you to run your business better by forcing you to distinguish yourself from the crowd. Competition isn’t necessarily a bad thing — as long as you know exactly who and what you’re up against. Identify your five biggest competitors — those businesses that are most likely to take business away from you if you’re not careful. Can’t come up with five?
Using cloak-and-dagger methods
If your plan is to open a gift shop on Main Street, scoping out your competition isn’t difficult. Browse through neighboring shops that cater to the same kinds of customers you hope to attract, and inquire around — by talking to your banker, other retailers, business leaders, clerks at City Hall, and others — to see what businesses are planning to open in the near future. You can then uncover stealth competitors (see the following section), including online competitors who want to take a bite out of your market. You’re ready to roll!
For many businesses, however, finding out what you need to know about the competition is a bit more complicated. You have to work harder to find out the following information:
* What products or services they offer
* Who their customers are
* What their strengths are
* Where their weaknesses are
Corporate strategists call this information-gathering effort competitive intelligence, or CI. Fortunately, the Internet provides a great starting point. Start at your competitors’ Web sites. They can provide a goldmine of information, from product specifications to client lists. Many company sites include pressrelease archives, which often contain useful information about future strategies and plans.
Another resource is right down the street at your public library. Consult the Readers’ Guide to Periodical Literature to find magazine articles about a given industry or company. You can also ask for a LEXUS/NEXUS search (the library may charge you a few bucks) to find articles that appear in newspaper business sections.
Identifying your stealth competitors
You can usually spot direct competitors pretty easily. They look a lot like you, offer similar products or services, and go after the same markets. But you have to watch out for less-obvious competitors — known as stealth competitors — who can catch you off guard, winning competitive battles before you even realize they’re around. Your stealth competitors go after the same customers you do, but in different, sometimes unexpected, ways. Suppose you’re starting a yoga studio. Your direct competitors are other yoga centers within, say, a 20-mile radius. But under-the-radar threats also lurk. Local fitness centers, spas, the YMCA, and the Parks and Recreation Department may also offer yoga classes. Plus, a slew of yoga videos or DVDs are available to rent or buy. And the stealth competition doesn’t stop there. Think about it: Why do people sign up for yoga classes in the first place? To relax, to become more fit and flexible, and to help ease joint pains. So any place that caters to those needs — gyms that offer water aerobics classes, for example, or meditation centers — vies for your customer, too. Imagine yourself in your customers’ shoes, and consider every possible alternative — near or far — to the solution your business offers. Traditionally, local businesses catering to local customers competed with other local businesses. But those days are gone. Here are a few examples:
* The corner bookstore that used to compete with the bookstore around the corner now goes head-to-head with the behemoth online booksellers.
* The local travel agent, once an indispensable resource for trip planners, now competes with online sites that allow travelers to book hotels, flights, car rentals — even ski equipment — on their own. Suddenly, travel agencies are lonely places, except for the forward-thinking agents who read their competitive tea leaves and focused their efforts on particular market segments and services, such as group sales or high-end, customized tour packages.
When unmasking stealth competitors, don’t limit your thinking to Internet offerings. Here’s an example of a business blindsided by the impact of a research breakthrough: Makers of flea collars and flea shampoos are slowly fading away because of once-a-month wonder drugs that wipe out fleas. Scary, huh? For these reasons, you need to take extra time to come up with a list of as many potential stealth competitors as you can.
Staying a step ahead
Keep in front of your competitors by anticipating and countering their next moves. Predicting the future isn’t easy; you have to think through your competitors’ options so you’re better prepared to defend your position. Aim to emulate a chess master who routinely thinks five or six moves ahead. Most likely, your competitors’ next moves will build on their relative capabilities — areas in which they feel they have advantages over their competition. A competitor whose strength is in Research and Development may be planning to develop and introduce a new product; a competitor strong in marketing and sales may have plans to undertake a market expansion; and a competitor whose strong suit is customer loyalty may plan to grow its business by adding customers, resulting in increased market penetration or market share.
More often than not, companies compete in the following ways:
* Lower prices
* Better service
* Highly targeted customer focus
* Unique and attention-getting products or services
Now describe each competitor’s strongest suit or key capability — along with the strategic move you think each competitor is most likely to make in the next year or so. No one can hold you to your predictions, but by taking the time to think through the possibilities, you can fine-tune your business plan and prepare yourself for the competitive battles ahead.
Add a general description of your competitive environment, including the strengths, capabilities, and likely moves of major competing businesses, to your business plan. This information influences all your other business planning.
