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What should I include in the competitive analysis portion of my business plan?
Barriers to entry, competitors, and how you will beat them. In this section, you are trying to identify all of the aspects of the market that could keep you out. Many business plans simply identify the competitors and products that will compete with their intended products/services; however, this is only one-half of the story.
If there are a certain number of competitors or competitive product/services, why is that? There has to be some factor that keeps others producer/providers from entering the market. These are commonly known as “barriers to entry”. In the market analysis, you made the determination that the market is sufficiently big that you could be successful by grabbing even a conservative percentage. So, now:
- Tell why others aren’t entering the market;
- Tell why you will be able to enter the market;
- List those who are going to attempt to keep you from taking their market share or will try to take your market share;
- List how you will be successful in taking their share, making the pie bigger, or fighting off their attempts.
If there is market potential, why are others NOT in this awesome market?
What are your barriers to entry? Assuming that you are not yet in the market, what is it going to take to get there? This will generally be the same explanation as to why others are not in the market. Remember, the chances are not good that you are the first person or business to come up with an idea for a product or service. There has to be something that is keeping others out. This may not be obvious at first, but identifying these early will allow you to make adjustments to meet these hurdles.
Identify the barriers to entry and explain how they may affect your business or industry. Common barriers to entry include:
- Funding or Capital Concerns – How much capital is required upfront? Will it require some level of revolving capital needs? Where are you going to get this capital?
- Legal Barriers (Licensing, Regulatory approval) – Is there a required state or federal license? Does the product or service require inspection and approval by a state or federal regulatory agency? Is the business subject to some state or federal regulation that is subject to change? (ex. Labor laws, foreign embargos, etc.)
- Costs of Production – Is there a cost of production that is inhibitive in starting out? (Ex. Many older companies avoid the high cost of production due to production methods established when costs were lower.)
- Cost of Sales and Marketing – Suppose you have the perfect product. How are you going to let people know about it? (Remember, the Apple operating system was superior that of Microsoft in the early days of each company. Nonetheless, Microsoft dominated the market with a largely inferior product.) Can you market and pitch sales sufficiently to create customer awareness and drive sales of your product. Often you will have to market far more than the established brands in order to convert existing customers to your product.
- Logistical Concerns – How are you going get your raw material or other supplies for conducting business. How are you going to deliver your goods or services to your customers? Will it involve outsourcing or international shipping? Will this require strategic presence or distribution centers in various locations? All of these go into logistical concerns. Basically, you need to brainstorm of how every aspect of the business that requires the movement of product or material from one place to another will take place. Much of this information can be gleaned from competitors or businesses with similar business models. Understanding the logistical concerns will allow you to estimate costs and budgeting. Further, you may uncover a logistical aspect that supplies a competitive advantage to another business or, potentially, your planned business.
- Required Skills and Knowledge – Who are you going to need to involve in order to carry out your business? It’s a common mistake for the entrepreneur to believe that he or she can carry on too many of the actual business functions. If you haven’t realized, you will be preoccupied with countless tasks and will not be able to carry on many of the tasks that you now assume will be your responsibility. You need to have an understanding of what you don’t know have the time or ability to do. Again, look to competitors or similar businesses to determine the skills or market knowledge necessary to carry on your planned business operations.
- Employee Concerns – Employee concerns are countless and daunting. There is no way to project for the types of employee troubles that you may face in starting your business. Types of employee issues include: hiring, training, employee benefits (healthcare, retirement), union negotiations, lawsuits (discrimination or hostile environment), and firing. The employee concerns for which you can plan include hiring, training, and employee benefits. All of these issues can entail considerable costs that were not previously anticipated. Planning and buying insurance for unplanned legal events can help to minimize these issues.
- Intellectual Property – How are you going to protect your process or product? Does your product or service involve or potentially infringe on the intellectual property rights of others? Generally, the only way to protect your intellectual property is through patent, trademark, copyright, or trade secret. Some businesses develop around a product or service with the idea that they can start up under the radar of competitors and then grow quickly before competitors can catch up. This is commonly referred to as, “running faster” than the competition. In general, this is a last resort strategy as outrunning a competitor with superior funding is very difficult. Start by looking at the nature of your product or service and try to determine the best way to protect or establish defendable ownership or intellectual property rights.
- Taxation – Every business is going to pay taxes on the identifiable profit. The question is how much tax you will have to pay. Are there any tax advantages that exist for carrying on your business? Importantly, what tax advantages are your competitors employing that allow them to carry on business in an otherwise unprofitable venture. For example, there may be economic development or energy savings associated with your business venture. Another example is the effect or choosing a particular business entity above another. If you are going to need to use Net Operating Losses from the current year to offset personal income tax then an LLC may be a better option than an S-Corporation. Again, a percentage of tax savings can make a considerable difference in the profit margin or overall profitability of your business.
- Strong Competitors – How strong are the competitors? What tactics are they likely to employ to defeat your product or service or to keep you from stealing market share? A large, well-capitalized competitor may be able to engage in a price war that you cannot withstand. This will require both primary and secondary research of your actual and potential competitors. (This concept is developed further below.)
Now, address each of the above-listed competitive barriers and explain how you will deal with the current situation, the situation that will arise along your projected growth path, and any contingent changes in these factors that could affect these businesses.
Competitive Analysis – Who Will You Have to Compete within This Market Space?
Who will be your competitors? Here you should prepare an exhaustive list of the players who will compete against you in your immediately relevant and prospective markets.
- List each competitor’s name, location, and give a brief profile of their product or service.
- Create sub-categories and groupings for the competitors who are your most direct competitors.
- Classify the extent to why the subcategorized competitors are the greatest threat. (You will list aspects such as location, percentage of the market held – customer base, type of product or service lines, competitive or innovative nature of the firm, etc.)
- Expand on the secondary or indirect competitors. (Give an explanation of why you believe their product or service is a competitor to yours. This could explain how their product or service is a substitute product. Explain the situation in which these secondary or indirect competitors would be the greatest threat to your projected business, e.g., if they offer an inferior good (product or service) then a downturn in the economy may drive customers away from your more economically elastic product.
- Explain how your product or service is superior (or competitively advantaged) against each competitor’s product service. The most difficult part of this component is identifying all of the characteristics that customers covet in the product or service, such as: design, speed, ease of use, dependability, price, customer service, etc. It may be useful to use a table listing the attributes of the products side-by-side. This allows for quick assessment by third-parties, as well as provides a framework for you to conceptualize the market position of your product or service. You can create multiple tables comparing your product or service to each category or individual competitor. You will need to compile the lists of competitive factors for that competitor or competitor’s product. Note: These individual tables may not fit within the body of the business plan. You can always append or attach them to the end of the business plan.
Conclusion: Developing a Competitive Analysis section requires a great deal of research and knowledge about other businesses’ products or services; however, the most difficult portion is assessing your product or service strength and weaknesses. In developing this section it is important to as honest and objective as possible in analyzing your value proposition. It may be useful to enlist third parties who are unbiased or unrelated to your business to provide their opinion on your product. This will help avoid the cognitive bias that nearly all entrepreneurs have when assessing the competitive strengths of their own product or service. Remember, even if you can explain away any fears or negative perceptions that customers have about your product, the customer’s input is extremely valuable. You will not be there to explain away these fears or concerns at the point in which the customer learns of the product. These will be the perception issues that you have to address in marketing your product or service.