How competitive will the company be in the new market?
2. The Classic Connection Ltd specialize in supplying and fitting the appropriate tyres to vintage and classic cars. These vehicles
are owned as investments. However, although a few of them are squirreled away in museums never to see the light of day many of these cars are driven during rallies and other social events for the sheer enjoyment of doing so. So their tyres wear out. The Classic Connection has acquired most of the moulds in which tyres for these cars are made. Most of the owners of these classic and vintage vehicles are very wealthy, owning such cars is an indulgence for them. Thus, exploiting the law of supply and demand, (see Chapter 1) Classic Connection can almost charge what they like. This company is thus very profitable.
What are the barriers to entry, (old and new markets)?
Barriers to entry discourage new companies from entering a market.
The relevance of this depends on whether the company in question is an incumbent or a potential new entrant. If an incumbent, then whatever barriers exist are seen as lessening the chances of having to face unwanted competition. Like the walls of a mediaeval town, they protect the market from the invader. For a potential new entrant, these
‘walls’ have to be scaled, and to do so, even if possible, may be too costly.
Some examples of barriers to market entry are market structure, tech- nology, marketing spend by the incumbents, legislation etc.
Market structureis an indicator of competitive intensity. It is to do with the ratio of the numbers of incumbent companies to the volume/value of business they do. A market is said to be highly structured when 20%
or less of the companies in a market account for 80% or more, of the value of the business in that market. If this is the case, there are some big muscular and rich competitors with whom the invader may have to fight.
An unstructured or fragmented market is one where the above ratios are reversed, i.e. it takes more than 20% of the companies in a market to do 80% of its business. The more unstructured a market the less intense the competition, in the sense that rather than having to face one big adversary there will be many small ones, but few if any of them will have the resources to put the new entrant out of the market. Also, the incumbents will probably be under fire themselves; they may not have the time or inclination to attack. The chances are that current incum- bents may not even notice the extra competitor or two, so one more in the market is not going to make much difference to them.
Technologycan be an entry barrier to a market, especially if this market is highly specialized and advanced. The rate of advance is an important factor. Any new entrant will need to discover ways to gain this techno- logical expertise, and the faster the better. This will require either a great deal of money either to catch up with the market leaders or to buy a company which is already at the ‘state of the art’. If the market is highly structured the chances of being able to acquire such a portal into the market are very slim indeed, the big players will want to buy them first.
Marketing spend– incumbent companies can create barriers against new entrants by spending so much on advertising to establish their brands, that any company wishing to compete will have to match this spend in the long-run, but in the short-term, will have to spend a great deal more just to become noticed and established before they can hope to sell anything. A good example of this is the market for home laundry detergents. There are only two major suppliers of branded products, Unilever and Proctor and Gamble, and they spend so much on promo- tion that any other company in the business can only market via the chain store’s ‘own label’ detergent. This is because most potential new entrants cannot afford to match the spending of the big two, and unless they do, they will not be heard over the noise of the promotion already in the market.
The law of the land – apart from monopolies established via patents, or via government fiat, the law can impose such restrictions on a market that the cost of compliance can cause a barrier. An example of this is the financial services industry; even Richard Branson had to partner an incumbent in the form of Norwich Union in order to establish Virgin Direct.
Activity No. 4
Although useful to all businesses the following exercise is essential for those readers who previously classed their companies products no better than the competition (i.e. situated them within columns ‘=’ or ‘–’ in Activity 3, Chapter 2).
‘Gap in the market’
Refer to the customer needs considered in Activity 3, Chapter 2:
1. Select a specific set of one or two special customer needs that are mission critical to the customers who have them (i.e. these needs are important to a subset of the customers in the market), and that the benefits from your competitors’ offerings do not adequately satisfy:
Then:
i) spell out what they are
ii) classify each as to whether they are objective or subjective needs.
THE NEEDS OBJECTIVE/SUBJECTIVE
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Now, for the ‘market in the gap’. (Here you will most probably need to do some research, read Chapter 7 to find out how.) 2. Specify which particular characteristics describe these customers,
and from these select those which also differentiate them from other customers in the market. This differentiation/discrimina- tion is critical – you are trying to segregate your customers from the ‘herd’ – if you can’t do that, you can’t address your mix to them specifically.
i) Spell out what these are.
ii) Classify them as to observable or non-observable.
THE NEEDS OBJECTIVE/SUBJECTIVE
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3. Enumerate how many of these customers there are in the market.
4. Put a value on them in total.
A simple way to do this is to:
a) estimate what the average value per customer purchase would be, then multiply this by:
– the number of times each would purchase per year, then – the average number of years a company could expect to keep these customers if they were looked after well, and finally by:
– the numbers of customers in the segment.
State the product of the above £__________ millions/thousands.
5. Is this value worth the investment in time and effort?(i.e.
either as straight profit or as a stepping stone to others in a cherry picking strategy, OR as a block to stop your competition getting a toehold in your market etc).
If still no, then go back to item No.1. and start again. If yes to any of the above, proceed to discover:
How best can you communicate?
6. Research:
– What media do they consume? For example, not just read, but also believe, internalize and act upon.
– Are there databases, mailing (or other types of) lists avail- able to buy or hire?
– How many browse the Internet? How frequently?
State these, and if you can do so with confidence (it’s your money) you have defined a segment/niche, or cherry.
NOTE:In some cases in business to business markets it is often possible to go through the whole exercise with only one major customer – this will be a so called Key Account. However, that’s another topic entirely.