What Makes a Good Business Plan: Discussing Competitors
In discussing the market for your product or service, you must inevitably discuss competition. There are very few, if any, products that enter a market without competing choices for consumers. If there truly is no direct competition for your product, then there really is no proven market for your product. Think carefully about this: The existence of competitors means that there are people out there buying a product similar to yours. The absence of competitors means that, as yet, no one is buying products similar to yours. Which entrepreneur would you rather be--the one fighting for a share of a proven market, or the one pioneering alone to establish a market? Recall what we said about visionaries, and guess which of these two is more likely to find financing.
The point is that competition is good, and that an honest assessment of your competitors can serve both to demonstrate a real-life need for your product and enhance your plan's overall credibility. All too often, business plans tend to minimize or marginalize the competitive environment. That's a big mistake.
Competition really describes the relationship between the supply of a product and the public's demand for that product. A student of microeconomics could give you a long-winded lecture about supply and demand curves, but you don't need it. Here in a nutshell are the chief flavors of competition:
1. No direct competitors: There is no established market for your product. You are a pioneer. Your success depends on your establishing a market.
2. There are one or more competitors, and they are profitable selling all they can produce: The market is larger than the existing suppliers can service. Your business can grow without cutting into anyone else's business.
3. There are one or more competitors, and they are moderately profitable, but are not expanding: The market is in equilibrium. There are enough suppliers to meet the market's demands. You can only succeed by taking market share away from existing players, and/or by lowering profits for all players.
4. There are a lot of competitors, and they are making very small profits: The market is saturated. You can succeed only be driving one of your competitors out of business, or taking him over.
These four situations also describe the life cycle of an industry, from nascency, through early and late growth, to maturity. Where you and your product fit into this cycle depends on your product. What's important is to understand your circumstance, because each scenario entails a different risk profile for you and your investors.
The safest situation is in scenario 2--early growth. That is where the most profits can be made with the least energy and risk. The market is established and proved, but the number of competitors still cannot keep pace with demand. If you know what you are doing, all you have to do is get your product out and known, and you will probably get customers and a share of the growing market. You need financing for the best of reasons, for marketing to capture more and more new customers.
The riskiest position is scenario 1--again, the visionary position. You have to create a demand for your product. You will need financing for research and development, for test marketing, for a media blitz to announce a new product. If you fail, you're done for. If you succeed, you will have established a mere toehold in a new market, and you will attract competitors who will see easy pickings in a scenario 2 high growth market. But, if you succeed and are able to raise significant barriers to competition, say by means of a patent or a dominating brand presence, then you might become the next Microsoft. High risk, but high reward, too.
To succeed in a scenario 3 environment would require a combination of better product and better business acumen than your competitors. Here you are fighting to take your competitors' customers away from them. Here you are betting more on your management and marketing skills than anything else, and so the quality of your officers will be of particular importance to investors. You need financing mostly for marketing.
The only reason to enter a scenario 4 competitive environment is to attempt to restructure the industry to make it more profitable. This is almost a risky as scenario 1. In both scenarios 1 and 4 you have to reinvent the market, with all the risks that such radical moves entail. Here the keys to success will be the ability to acquire existing players and rearrange their operations so that an industry leader will emerge. Management's experience in mergers and acquisition strategy and tactics will be the key selling point of such a venture. The money you raise will go largely to acquire other companies.
The other thing to consider is the rate at which your industry is evolving. Remember that investors will want to be able to cash out within four years, and that your projections should go out five years. If you enter a scenario 1 environment and create a market, how long can you monopolize the industry before the entry of other competitors drives it through a scenario 2 and 3 situation, leaving you with evaporating profits? If you enter a scenario 2 situation, how long are your relatively easy profits likely to last? You have to describe the competition not only as it exists today, but also as it is likely to exist and change during the life cycle of the plan and beyond. And don't just describe what is likely to happen in the future, incorporate your qualitative projections into your quantitative projections.
More than in any other part of the business plan, how you describe your competitive environment shows how serious you are as a businessman, and how honest you are with yourself and your investors. All business is fundamentally about competing for customer loyalty and patronage. One cannot compete successfully unless one can honestly and accurately assess the competitive environment. A business plan that blithely announces that there are no competitors, or that all existing competitors will be blown away, or that no competitors will be able to rise up against you, simply lacks credibility. Those grandiose concepts also filter their way into the projections, where they show up in the form of ever increasing sales with no end in sight, which in turn find their way into patently absurd valuations. All of us who have been around the patch a few times know that the world doesn't work that way.