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It was a brisk Sunday afternoon in Warsaw, Poland.
At the main square of the city, my wife and I met her parents for a coffee. Her father asked me for advice on his great business idea over an Irish coffee. Not only did I appreciate his request, but I hoped the idea would work well enough to avoid any stress.
His strategy seemed sound, but I was hesitant. He planned to buy short-term rental apartments near the Tatra Mountain range in Poland. This is our favorite winter destination. We go there every year for our beloved regional cuisine. My tourist side loved the idea.
Then, my entrepreneur side, the side that spent years looking at the big cities in Poland to decide where not to open a business, thought the opposite: another tourist guesthouse in the Podhale was a bad idea.
Demand Analysis and Supply Analysis: One Should Not Be Apart from The Other.
The Tatra Mountains have long attracted travelers for winter sports and New Year’s parties, as well as summer school trips and excursions. A long-established destination, there the hospitality business is well-developed.
That is, they are well-prepared for the competition. Hotels and B&Bs in Zakopane (Podhale’s winter capital) have existed for generations. Inefficient businesses are soon forgotten there. Most survivors know what they’re doing and do it well. It is a difficult environment for novice and unskilled players.
My father-in-law thought another rental flat in the mountains would be nice because the area is popular with tourists. Indeed, it is. But he overlooked that the competition for these travelers is fierce.
Starting a hospitality business in Zakopane is like driving a Formula 1 vehicle in the Monaco Grand Prix just after getting a driver’s license.
A Pragmatic Approach to Demand Analysis in Low Barrier Markets
Imagine you live in Amarillo, Texas, and your kids want to start a lemonade stand to earn money during the summer. They will be the first vendor in the neighborhood to sell fresh, chilled lemonades due to the hot weather and high pedestrian traffic.
If Joe and Sue work hard, they may earn enough money to buy a new bicycle!
The kids are so ecstatic that you scarcely need to assist them to raise it. Less than a week in, the business is growing and the costs are paid The seemingly optimistic goal of earning enough money to buy a bicycle now seems too modest. Nevertheless, on a Friday afternoon, Joe goes to you in desperation.
Mark, from across the street, also launched a lemonade stand this morning. Your children only had half the number of customers they usually have!
You blame yourself for missing the obvious. You berate yourself for instilling false expectations in the little ones about the success of the company and the acquisition of new bikes. The heat, the pedestrians… How can you not expect the neighbors’ kids to eventually challenge your kids?
How could you not understand that lemonade booths are a low-barrier market? As a fact, you, Joe, and Sue were attracted by a high-demand market without noticing the claws of low entry barriers.
In a Harvard Business Review essay, George Day stated:
High levels of profitability or promises of huge capital gains draw new competitors like magnets. It is axiomatic in economics that every opportunity bears the seed of its own reversal. This is the law of nemesis: Nothing good lasts indefinitely because others will want to share it.
What Are “Barriers to Entry” in a Market
Entry barriers are anything that stops an entrepreneur from quickly entering a market. This “anything” can be:
- The necessity of large investments, as in the aerospace industry.
- Intellectual property, as in the pharmaceutical industry.
- Rules and concessions from governments, as seen in port operators.
- Location (discover more about it in this article about business location analysis)
- Costs associated with switching providers, or switching barriers. This is true for business applications like IT systems.
- Supply contracts. In some markets, exclusivity clauses prevent new entrants. For example, finding a supplier of neodymium, a mineral used in wind turbines, is difficult. Suppliers of neodymium already have exclusive contracts with a few sectors.
It is critical to identify hurdles and conduct a thorough competitive analysis in attractive markets.
Because having many customers is useless if you have even more competitors!
3 Essential Competitive Analysis Survey Questions
Before you begin your competitive analysis (one of the essential things to consider before starting a business), ask yourself three questions:
1. Who are my rivals and what are their advantages?
2. How can I match or beat their performance while keeping costs down?
3. Are the products and services we provide different from those of our competitors? (Be honest here, don’t protect your darlings).
The answer to the first two questions varies drastically by market. Some of them will have extremely distinct competitors.
In the case of the lemonade stand, Joe and Sue’s competition was Mark. In other cases, you’ll be competing with companies from other industries for the same consumers.
Conclusion: How to Write a Competitive Analysis in a Business Plan
The competitive analysis is the first step in any business plan. Without this understanding, your business plan will not be complete.
The goal of the competitive analysis is to identify the competitors in your market and their strengths and weaknesses. You then need to determine how to compete against them.
A competitive analysis is necessary because without knowing who your competitors are and what they are offering, you cannot build a better business plan to beat them.
Keep in mind that you should approach the competitive analysis from an objective perspective. That means avoiding writing about vendors that you have a personal relationship with or vendors that provide a service for your company. Instead, focus on building an unbiased view of how each competitor stacks up against each other and against you in the marketplace.
Your main goal is to have a complete roadmap with a comprehensive understanding of how the market evolves so you — the entrepreneur, the manager, the ship captain— can make an informed decision.
The first thing is to answer these 3 quests:
- Who are my rivals and what are their advantages?
- How can I match or beat their performance while keeping costs down?
- Are the products and services we provide different from those of our competitors? (Be honest here, don’t protect your darlings).
Once you answer these 3 questions, the roadmap for your unique competitive advantages will take shape to be inserted into your business plan.
This is a fantastic initial step for every business.
For more insights for entrepreneurs and small businesses, I recommend this book: All the Hows of a First-Time Business Owner: There is a thin line between bankruptcy and the freedom to be an entrepreneur
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Levi Borba is the founder of expatriateconsultancy.com, creator of the channel Small Business Hacks and The Expat, and a best-selling author. Subscribe to my articles (for free) and receive (also for free) the ebook “The Blueprint for First-Time Business Owners”.