1Market Analysis

Market Analysis

Presented by

Steven R. Kopits

April 2002

2Market Analysis

Agenda

• Market Sizing

• Market Share

• Industry Structure and Profits

3Market Analysis

Market Analysis

Trying to establish…

…by market analysis.

Total market size

Your company revenues (mkt. share)

Your company profits

4Market Analysis

Market Sizing

Where the market is…

…and where it’s going.

12

34

1

2

3

4

Establish current market size

Establish rate and shape of growth

Establish terminal market size (exit point)

Establish post-terminal growth (exit value)

5Market Analysis

Market Size = Your sales + sales of all competitors

Current Market Size

A competitor is defined from the customer’s perspective

GeographicPrimary Secondary

Pro

du

ct/

Serv

ice

Bro

ad

Narr

ow Current

competitors,who actually

competetoday for your

customers

Current competitors,who could – but don’t

–actively compete in

your marketCurrent competitors,

who compete• for part of your

market• nearly your product

NOT RELEVANT

6Market Analysis

It’s a summer’s day, 2pm on the beach. A customer goes into a convenience store on the boardwalk. He wants a drink. He can buy a warm Pepsi or a cold Coke (from a refrigerated case). Do these drinks compete against each other? What if the Coke is in .33L cans, the Pepsi in a 2L bottle?

Case Study

Market segmentation can be a subtle thing – but it is the customer’s perspective

that matters

7Market Analysis

Shape of Growth

Declining industry

Growth industry

Mature industry• Constant absolute growth• Declining relative growth• Stable P/E’s• Increasing absolute

growth• Constant relative growth• High P/E’s

• Declining absolute growth• Declining relative growth• Low P/E’s

Time

Sales ($)

Which industry are you in?

8Market Analysis

New Tech Industries

Why this shape?

• High unit costs• Poor organization• Changing business model• Long sales conversion cycle• Customer ignorance/resistance

Slow up-take of

product or service

9Market Analysis

Selling to corporates: entrepreneur experiences – Good initial meeting– Quick formal proposal

But corporates respond with– Lack of clear decision-making process– No clear decision-makers– Lack of urgency– Preference for established suppliers– Turf battles– Risk-averse manager behavior– Lengthy trials to become established supplier

Sales Conversion Cycle

Conversion cycle can take 2 years for corporate client

10Market Analysis

Customer Inertia/IgnoranceCust

om

er

Perc

eiv

ed

Sw

itch

ing R

isk Low

High

Value-added

One more…

NO SALE

A step up…

Sounds complicated…

Well, if…High

Value-added

Don't bother me…

Gotta have it…

Low High Low High

Low

NO SALE

No CompetitionCompetitive Environment

Aim for the green boxes.

11Market Analysis

Customer Inertia/Ignorance

• One more…

– Another product in a broad existing selection

– E.g.: FMCG’s (Coke, toothpaste)

– Critical Success Factors (CSF’s): brand awareness, efficient and broad distribution, efficient

production

• A step up…

– Clearly superior product in a broad existing selection

– E.g.: broadband internet access, Gevalia coffee

– CSF: credibility (brand awareness), demonstration, word-of-mouth recommendations

• Sounds complicated…

– Superior, but complex, product in an existing selection

– E.g.: major corporate softwares

– Characteristics: long and opaque decision-making process, multiple decision-makers, trials,

delays

– CSF: track record, financial strength, proven product, sales endurance

12Market Analysis

Customer Inertia/Ignorance

• Don’t bother me…

– Clearly superior product with no strong alternative, but non-material, non-core to client

– E.g.: energy efficiency project, alternative telecom provider to corporate client

– CSF: right contacts, timing, simple purchasing process

• Gotta have it…

– Clearly superior product with no alternative, core to client

– E.g.: Viagra

– CSF: show up

• Well, if…

– Clearly superior, complex product with no clear alternative, core to client—client will work

with vendor for successful outcome

– E.g.: new production technology

– CSF: client relation skills, trials and R+D focus, good at customization and documentation,

project management skills

13Market Analysis

• Ask potential customers about their needs

• For the product or service, identify

– Absolute benefit (in $) to customer

– Relative benefit (% of expenses)

– Strengths and weaknesses of current solution

– Perceived risk

• Decision making process

– Who can approve, who can veto

– How approval occurs (p&l ownership, initiator/champion, rounds/levels

– Timing (cycle, length of approval, trials)

Corporate Market Surveys

Do not speculate. Ask. Get information.

14Market Analysis

• Describes the position of the potential customer with regards to your product or service

• Signal customer willingness to buy; useful for VC’s• Can be an extension of a marketing survey—asking can be better

than selling!• Should be specific

– Detailed description of customer need– Detailed description of the proposed product/service– Price– Timing– Required approvals– Key conditions– Key limitations– Risk assumption

• Non-binding

Letters of Intent

To have value, an L-o-I must be specific.

15Market Analysis

Market Share

• Based on your relevant market

– Your competition from the customer’s perspective

– Your geographic area

– The market you can and plan to serve

• You can refer to total market for establishing market

share in percentage terms

• Assess the market both top down, bottom up

16Market Analysis

• Price leader – No. 1 in market share– Economies of scale

– First mover?

• Quality leader– Superior product/technology

– Strong organization

• Middle of pack– Good technology

– Reasonable price

• Minor player– Niche market

Potential Market Share Strategies

17Market Analysis

Industry Structure

• Market share depends on industry structure• Geography

– National, regional, or global

• Concentration– Significant economies of scale

• Production, sales, advertising, purchasing, financing, R+D, distribution, brand awareness/credibility

– More typical in mature industries

• Fragmentation– Customer ‘stickiness’– High switching costs– Low economies of scale, low scalability

What is your current industry structure? What will it be at exit?

18Market Analysis

Share Strategies by Industry Structure

Which are you?

Strategy RequirementsConcentrated Fragmented

Market leaderTop 3

price leader simple business model,lots of capital,acquisitions,superior technology or organization,'first mover'

20-60% 15-25%

Quality leaderRank: 2-6

quality leader superior R+D,good execution,good mgmt

15-25% 10-15%

Middle of packRank: 4-8

good price,flexible service,loyal customers

organic growth,modest capital,not too R+D oriented

10-15% 5-8%

Minor playerRank: below 8

occupy niche,too small or difficultfor major competitors

good understanding of a specific market <10% <5%

Market Share

19Market Analysis

• Situational (Soft) Advantages

– Smarter, harder working management

– No response from competitors

• Structural (Hard) Advantages

– Based on structural characteristics of the business vs. competition

Comparative Advantage

VC’s prefer good – but not necessarily brilliant or macho – management leveraging a structural

advantage

20Market Analysis

• Employee compensation structure

• Geographic coverage

• Mix of products

• Decision-making process

• Brand positioning

• Distribution channel

• Skill set

• Capital

Some Structural Advantages

• Credibility

• Production equipment

• Unions

• Regulation

• Cost structure

• Ownership

• Corporate culture

21Market Analysis

Profit margin is function of

– Market share

– Industry structure

– Industry growth

– Company comparative advantage

Forecasting Profit Margins

Understanding market forces are key in projecting future profit margins

External Factorsfrom market analysis

Internal factors

22Market Analysis

Typical Profits Margins

Pre-tax Net Income/Sales

Low Med High

None(monopoly)

+5% +10% +15%

Limited(mkt. leader)

+0% +5% +10%

Normal(middle of pack)

-5% 10% +5% Low: <8% real revenue growth

Intense -10% -5% +0%Med: 8-16% real revenue growth

Extreme(minor player)

-15% -10% -5% High: 17+% revenue growth

Industry Growth

Degre

e o

f Com

peti

tion

23Market Analysis

• A note about valuation

– Exit profit margins and post-terminal growth prospects will determine post-terminal values

Post-Terminal Values

24Market Analysis

Terminal Market Size

0

50

100

150

200

250

300

350

YR1 YR5 YR10

Time

Sales

Terminal value: reality check, future growth prospects

Realitycheck

Post-terminalgrowth

25% CGR

15% CGR

8% CGR

25Market Analysis

Contact Detail

Steven Kopits

mobile: +1 508 685 1200

email: steven.kopits@gmail.com