Analyzing the market environment and understanding its competitive advantage are two essential factors for the success of a startup.
As an entrepreneur, you may unexpectedly meet many questions while building a new venture such as, “will my product work?”, “Is the technology good enough?” or “How much will the competition be in the future?” blah!
Instead of panicking, you need to understand the given factors to have a clear idea of the current market situation and future potential growth.
How to Analyze the Market Environment
Understanding and analyzing the market environment can increase the success rate of your startup. An entrepreneur must understand and use these factors in his/her business.
Let’s understand how to analyze the market environment:
Marketing environmental analysis is a strategic analysis tool. There are many strategic tools to analyze the market environment, but the most popular one is the PESTLE analysis.
How to analyze the market environment by using PESTLE (Political, Economic, Social, Technical, and Legal) factors:
1. Analyzing Political Factors
Political factors are government regulations. As an entrepreneur, you need to consider national politics and international politics to analyze the market.
● Stability of the current government in the future
● Import and export regulations
● Freedom of press
● Tax Laws
● Government’s involvement in trade unions and regulations
2. Analyzing Economic Factors
Economic factors help you assess your target market data and its contribution to the country’s economy. You must consider the below-mentioned factors when you evaluate the market.
● Credit availability
● Labor cost
● Interest rate
● Fiscal and monetary policy
● Stock market trends
● Inflation rate
● Exchange rate
3. Analyzing Social Factors
Social factors help you analyze the behavior and mindset of potential customers based on geography and demographics. You can analyze the factors as per your business requirements.
● Family size
● Income level
● Buying behavior
● Price consciousness
● Savings and investments attitude
Related Article: How to create an effective business plan for your startup?
4. Analyzing Technological Factors
Technology plays a crucial role in business development. You need to understand the technological factors that can influence your venture idea.
● Technological changes
● Level of automation
● Technological awareness
● Research and development
5. Analyzing Legal Factors
Legal factors ease the starting and doing business in the market. Understanding the legal structure is important as it tells you how favorable laws are for your startup.
● Consumer protection laws
● Employee protection laws
● Product regulations
● Patent infringement
● Government procurement laws
Understanding and assessing the industry forces enable you to identify the risks and opportunities for your startup. It assists you in determining the relative position of your company in the industry. Let’s understand the industry by Porter’s 5 forces model.
Porter’s 5 Forces Model
Porter’s Five Forces Model identifies and examines five competitive forces that shape every industry and help you understand the strengths and weaknesses.
1. The threat of new entrants into the industry
The ease and difficulties for a company entering the industry are determined by the entry barriers such as set up capital, ease of operation, etc. The higher the entry barrier your competitors face, the more market power to your venture gets.
A high entry barrier for new rivals allows you to build an enduring venture.
Related Article: Steps To Analyze Your Idea For Startup
2. Buyer power
Your customers’ power can force down the prices of the products or services and demand better quality or more service. If a business has a small market, the buyers have a higher power to dictate prices. It is always better for an entrepreneur to have weak buyer power.
3. Supplier power
Suppliers can influence the price of the product and the quality of your final product. Think about it. Your idea is to start a venture that makes potato chips. Since there are many potato suppliers in the market, competition among them gives you the advantage of switching from one supplier to another to buy potatoes at a reasonable price and lowers suppliers’ power to dictate price. It’s ideal to have many suppliers in the market you are entering into. This will lower the power of suppliers due to greater competition among them.
4. Competition in the industry
Competition in the industry is determined by the number of companies available in your target market. Let’s take the e-commerce industry as an example. If your venture is to sell clothes online, you will face a lot of competition as there are already so many players in the market like Flipkart, Myntra, Amazon, etc. You will need substantial investment and a robust strategy to sustain in the market. You, as an entrepreneur, should prefer the industry that has less competition.
5. Threat of substitutes
A product or service that may offer similar benefits to your customer is called a substitute product or service. Let’s understand this by the example of the automobile industry. The sales of electric cars are expected to reach 5.3 million units, globally, by 2023.
The Gasoline automakers may face threats of being substituted by Electric automakers and PAVs (Personal Aerial Vehicles) in the coming years.
The likelihood of being substituted depends on product differentiation. The threat is always higher for generic undifferentiated products. As an entrepreneur, you must offer a unique product or service to lower the threat of substitutes.
Related Article: All You Need To Know About The Legal Structure For Your Startup
Understanding the Competitive Advantage
So far, we have understood how to analyze the market. Now, Let’s understand the competitive advantage. According to Wikipedia, a competitive advantage in business is an attribute that allows an organization to outperform its competitors. It may include access to natural resources, such as high-grade ores or a low-cost power source, highly skilled labor, geographic location, high entry barriers, and new technology.
According to Michael Porter, you can achieve a competitive advantage over your plan smartly for the below-mentioned factors.
1. Cost Advantage
If your startup produces the same quality product or service available in the market and sells it at a lower price, you will have a competitive advantage over other peers. Xiaomi, a Chinese Smartphone manufacturer, takes the cost advantage to capture the market share of smartphones by targeting middle-income families. It makes Smartphones that offer the same quality and experience of premium phones but at a lesser price.
2. Differentiation Advantage
You get a Differentiation advantage when your venture provides better products and services than your competitor in terms of quality, features, design, experience, availability.
Let’s understand this by taking Apple as an example. Apple is known for its innovation and commitment to developing new products. Its ability to develop innovative products gives it a differentiation advantage that no other tech companies can achieve.
If you thoroughly understand and follow the above factors in your startup. Your business will definitely flourish in any market situation.