Musings on Strategic Investigation, Performance Improvement, and Rhetoric

Six Common Mistakes People Make When Analysing Markets

Market analysis is a difficult science.  So it's not surprising that most attempts that we review contain mistakes and gaps that put the whole analysis, and its consequences for the business, into question.  Even worse, it's our view that the strategy gurus who propose and push high level market analysis models inadvertently cause many more problems than they solve, and are probably the single biggest group of culprits causing shoddy market assessment.

Here are six common mistakes. 

1. The analyst looks only at a macro level

It's important to look at markets at a high level, at growth, trends, competitive environment, etc, and the macro view is what the text books prescribe.  But looking only at this level misses what for us is the most frequent area of critical insight: what customers and potential customers value and pay for now; and what they are going to value and pay for in the future.  There is one place that the revenue and profit pool of a market is going to come from, and that is customers' spend, budgeted or unbudgeted.  There is one source of revenue and profit for each individual supplier to that market, and that is winning some or all of that spend.

Unless you're a cartel, monopoly or lobby group, then you're in the business of providing value for value.  You need to know what results customers need to achieve, how they propose to achieve them, how they decide who will support them in doing so, and the value they place on that support.

The clue to where the customer places most value? Where they intend to spend money.  This is either unidentified and consists of a price they are willing to pay to solve a problem; or is identified in the form of next year's budget.

This micro analysis has got enormously more business value than the macro-level equivalent of quantifying emergent (unbudgeted) and established (budgeted) markets.  What would you rather know, the macro overview that the market has grown by 4% with a trend to cloud computing, or that your target customers are under pressure to reduce infrastructure support costs by an average $15m and will pay 70% of the savings to reliable outsourced suppliers with reputations for service responsiveness? 

2. Where micro analysis is done, it is done cursorily, uncommercially, or just plain badly

Talking to customers about their plans, desired results, budgeted spend and supplier requirements is a golden opportunity to understand some critical facts: where customers place future value, the corresponding source and size of a pool of profit for you, and how to win that business.

Unfortunately, most analysts miss this golden opportunity by delegating the exercise to market researchers or untrained, poorly-briefed graduates.  These people are briefed to ask mindless, well-trodden questions about likes and dislikes, strengths and weaknesses; or they get interviewees to rank elements of the value proposition in terms of importance and performance. If you ever listen in to one of these interviews, you'd be shocked by its tedium and superficiality.  The consequent information is sometimes useful.  But it's only useful if it supplements some much more important and tangible information: which elements of the budget are growing or shrinking and by how much; who the budget holder is and how they make buying decisions; what causes people to stay with or switch from incumbent suppliers; what characteristics suppliers need to have in the future to win business; how the supplier can help them make or save more money.

Asking questions like these takes skill and commercial acumen, but their answers are worth more to you than every market research report you could ever commission. 

3. The analyst doesn't take enough care to define his market

"What market am I analysing?" is a much more important and difficult question than it looks at first sight.  Let's take an imaginary organic pet food manufacturer, based in Wales.  Does my market include every potential customer of pet food, even though my product costs three times as much as the non-organic market leader?  Or is it organic pet food, which is defined by the product and some kind of customer sentiment?  Or is it premium pet food, defined by some kind of price and quality level?  Do we include or ignore the supermarket customers that we will never access because we're too small to be stocked by the big chains? How much of the UK do we count as our market? Do we include continental Europe?  If so, how much of it?  Do we include dry food, even though we only do wet? Etc, etc.

The reason I've banged on with this definition example is that every definition I suggested gives you a completely different market, with different size, growth, trends, competitive set, etc.  And the definition you use for one circumstance, say understanding how your core customer group is growing, will likely be different for another equally valuable circumstance, such as how big could demand be if you cut prices by 30%.

The damaging temptation is always to ignore these factors and define the market according to what data is available, which gives you a substantiated quantification of a (probably) irrelevant market.  In our experience, you are almost always better off taking care to define your market to be as relevant as possible to your situation, and accepting that will need to use bottom-up assumptions to estimate the market size, structure and growth. 

4. The analysis obsesses about the competitive environment, to the exclusion of all else

Michael Porter's five forces are a very useful checklist, core competence/strategic intent is a useful mindset, the disciplines of market leaders and the 7S framework can help create insight.  I'll keep my thoughts about The Art of War to myself.  These common strategic tools can have value - competitive intensity is usually the most dominant driver of margins - but they're not the whole toolbox.  They usually only cover the competitive side of the picture and miss such fundamental issues as whether demand is shrinking or growing, what customers actually value and plan to pay for, and what your company actually, distinctively offers.

This obsession with macro competitive postioning distracts the analyst or manager from both the demand side, and from the micro analysis that solves the germane issue: what you actually need to do to make more money.

5. The analysis places far too much confidence in forecasts

Most analyses that we see use a single forecast for the future; no scenarios, no what-ifs, no ranges.  Even worse, that forecast is usually a projection of the recent past with little thought to what might drive any changes, or what the leading indicators are, or anything that might tell us what confidence we have in our estimates.

There is one thing that we can be sure about with all of our forecasts, and that is that they will be wrong.  If we took a moment to analyse the success of our historical attempts at forecasting individual markets, we would all be humbled by our enormous margin of error.  As humans, we regularly and grossly overestimate our ability to predict the future.  If our business relies on such forecasting performance, with no margin for the likely large error, then there is a high probability that it will be seriously compromised.

It's therefore wise to be realistic about our ability to forecast and act accordingly.  We have to accept that we cannot predict the future, we can only prepare for it.  So there is much more value in acknowledging our lack of prescience, and developing a series of scenarios.  Of course we need budgets and targets, but the discpline of working through how we can survive the disaster scenario, or how we can generate sufficient capacity in the optimistic case is of more tangible value than complacently forecasting and hoping that we're right.

6. There is a disconnect between market analysis and sales forecasts

I've lost track of the number of plans I've seen where the market grows at one rate, and the business grows at a completely different rate, almost always faster than the market.  There's rarely any justification for this implied share gain.  It's possible if the company has just entered a market, or if its product is suddenly better, or if it has a new channel, or if it has something else new and advantageous, or if its competitors have decided to lie down and let it win some of their pitches.  Our default position is to assume no share gain unless there's a very good reason to assume otherwise.  Anything else generates cognitive dissonance in our rational analytical minds.

So there you have it.  Six common mistakes, any one of which can cause a market analysis to be unhelpful, devalued or just plain misleading.  We see many, many more mistakes, but the list is too long to cover in this forum.

I hope by raising them that we have averted some problems and implied some solutions.  I don't have a catch-all unbreakable golden rule for analysing markets effectively.  But my best one is this: business transactions are about providing value and being rewarded for doing so, so to understand the market you need to look for where that value is, and follow the money.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN