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Business terms

A couple weeks ago I sent my business partner in one of my projects a list of indirect competitors.  He, a television producer without a business background, replied that they are not competitors.  That made me realize that the many terms used in business are very confusing and their subtleties are unclear.  So I put together a little glossary of some terms that are often misused/mistaken.

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Direct competition vs. Indirect competition:  Direct competition is pretty clear but what about indirect competition?  For example Netflix’s direct competitor is Hulu.  They’re both streaming video platforms.  An indirect competitor can be the simple antenna TV or something that can be a technology that is still in R&D.  Over the air TV broadcast isn’t necessarily a streaming on-demand platform but it is a substitute video entertainment/content delivery system.  So a competitor can be something that is obvious or something that is not so conspicuous.

Industry vs. Market:  Industry is what your company is in.  It is your competitors, your supply chain, and related companies.  They are essentially the parties that sell to the market.  The market is your customers.  They are the buyers of your product or service.  When industry publications write “market size” they are talking about the amount of money that can be made from the customers.

Sector vs. Segment:  Sector is a subsection of an industry.  The “telecommunications industry” for example is made up of thousands of sectors; the router sector, the ground wire/cable sector, the GPS tech sector, etc.  Industry term is only as broad as the scale of your analysis.  If you are analyzing just the GPS sector, then you can say “GPS industry” and then breakdown the relevant sectors within that industry.  Segment is a subsection of a market.  A segment of the “millennial market” is tween girls, etc. (when a segment is referencing a group of people, then it can also be called demographic).  A segment of the “restaurant market” is Mediterranean restaurants.

Revenue vs. Profit (income):  Revenue is the money that is coming in before costs, expenses, taxes, depreciation, etc. are taken out.  Once those pesky things are taken out you have profit.  There is gross profit which is revenue – expenses, and and net profit which is revenue – expenses – taxes.  Then there is retained earnings, which is another step!

There are many many more (branding, PR, etc.) so if you are unsure, please feel free to ask!

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Product/Service life cycle

One of the first in a business plan is determining where on the product/service life cycle curve the product sits.  It is always helpful in any Industry and Market Analysis to get a macro view of where the product/service is in its life cycle. 

What is the product/service life cycle?

It is the birth, growth, progression, and ultimate passing of any product/service.  For example, a CD came into the market around the early 90s.  This is the birth/introduction stage.  It gained popularity and was one of the most preferred data transfer methods until recently.  So for the next ten years, it was in the growth and in the early 2010s entered the maturity phase.  Now, it is in the decline phase.  Microsoft Office is installed online when purchasing a new laptop.  No more CDs.

Of course, not all products/services will die out.  They may die out eventually but will make one or two more resurgences.  Take, for example, baking soda (sodium bicarbonate).  The earliest use of naturally forming sodium bicarbonate was used by ancient Egyptians as a component of the paints they used in hieroglyphics.  Sodium bicarbonate was also used in the 1800s in commercial fishing to prevent freshly caught fish from spoiling.  Baking soda continues its long life cycle in many, many uses, including cleaning, cooking, neutralization of acids and bases, not to mention the elementary school volcano science experiment, and more.

Product/Service life cycle curve

Maybe there will be a new use for CDs that will revive the CD, but without major modification (which will essentially change the actual product and will actually create a new/different product), it will be unlikely.  Wherever your product/service is in its life cycle, with enough investigation, a new spin could be created to find a niche demand (market segment).

Launch and Grow Your Business

Contact us for help determining where your business offering is in the product/service life cycle.

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David vs. Goliath the story of Netflix vs. Blockbuster

David vs. Goliath

Over the weekend, I was doing some industry analysis for a client. She had a great idea, and a novel one at that. Well, it turns out that there was one other company in the same niche. A direct competitor…that has the early mover advantage. This reminded me of David vs. Goliath the story of Netflix vs. Blockbuster.

So what do you do when you’re the new kid on the block?  Like anything else, with lots of hard work and a great deal of luck.  Let’s look at the case of Netflix vs. Blockbuster for guidance.

In 2004, Blockbuster was the proverbial Goliath with about 9,000 stores globally and revenues of over $6 billion.  Netflix was David and had started just 7 years prior.  Fortunately, it had several things going for them:

1.  Hard work

  • Competitive Advantage – Netflix’s algorithm takes user ratings on movies they rented and then makes recommendations for other films that they might like, including movies that the viewer may have never heard of.  This rating-based recommendation is very commonplace now (seen everywhere from Pandora to Amazon), but in 1997, Netflix’s algorithm was a competitive advantage.  Viewers get recommendations they really enjoy, customer retention & satisfaction increase, and money comes in.
  • Constantly Improve – One of Netflix’s criticisms is that DVD delivery is often slow.  Creating a logistics and inventory management system that receives orders and quickly sends out products, in addition to receiving returns and repackaging for reshipment, was key to customer retention & satisfaction.  Netflix is still staying current by moving from DVDs to streaming VOD.

2.  Lots of luck

  • Competition was Flat-footed – Blockbuster kept the same mentality of a 1985 video rental shop.  They held on dearly to their late-fee revenue source, and its high fees and strict enforcement soured customers’ views of the business.  The late-80s/early-90s business model put them behind.  All they did was immitation.  In 2005, they finally did away with late fees.  In 2009, they introduced Blockbuster Express, a DVD rental kiosk designed to compete with Redbox.  By now, customers are streaming videos and renting DVDs at kiosks, while Blockbuster is trying to offload their many stores.
    • Additionally, Blockbuster did not consider the rapidly expanding prevalence of broadband internet in US homes. By 2009, 68.7% of US households had broadband internet. Also, in 2008, the Broadband Data Improvement Act, a bill to improve the quality of federal and state data regarding the availability and quality of broadband services was passed, ushering a digital highway for movie streaming.
  • Competition Thoughtlessly Expanded – Blockbuster rapidly expanded, adding its 1,200th store by June 1990 and 9,000 stores worldwide by 2004.  They wanted to be the biggest.  And fast.  They filled their stores with not just movies but video games, candies, and other goods.  Unfortunately, all these stores require operating expenses.  Operating expenses that were greater than the gross profit (i.e., Revenues minus Cost of sales).  Also, among many stumbles (which is much too long for this post but I put some references below so you can read to your heart’s content) is they failed to anticipate how media consumption will change.  From analog to digital.

Fast forward to today, Netflix has a share price of over $400, revenues of $4.37 billion USD, and over 2,000 full-time employees.  Blockbuster is bankrupt. David had defeated Goliath.

However, like most engaging stories, the end is never the end.  Dish Network purchased Blockbuster and its remaining 1,700 stores on April 6, 2011 for $233 million and took over Blockbuster’s $87 million in debt and liabilities.  Dish now continues to license the brand name to franchise location, and keeps its “Blockbuster on Demand” video streaming service and the “Blockbuster@Home” television package for Dish subscribers.  Maybe this strategy to resuscitate a nearly-dead brand  sounds foolish.  However, so did mailing out DVDs.

For more info:

http://www.referenceforbusiness.com/history2/93/Blockbuster-Inc.html

http://www.ibtimes.com/sad-end-blockbuster-video-onetime-5-billion-company-being-liquidated-competition-online-giants

http://www.fastcompany.com/1690654/blockbuster-bankruptcy-decade-decline

http://www.getfilings.com/o0000930661-02-000951.html

Click to access BBI_10_K.pdf

Contact us for help with Industry and Market research so you can make the right decisions for your company.

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A gadget’s journey

This holiday season little thought goes to the awesome path the various components of electronics takes to make it to the store shelves and under our tree.

From mines, to factories and cargo ships, many gears of the global economy work together to bring us our shiny electronics.

Read the entire here.

Of course not only electronics take this journey. Everything from food to t-shirts make a similar trek before reaching us.

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How to gauge uncertainty within an industry

One way as shown in Harvard Business Review is measuring demand uncertainty vs. technological uncertainty.  There are others, such as low barriers to entry (i.e. competitive climate) and bargaining power of suppliers, but that is for another discussion.

When there is uncertain demand, your revenue stream becomes jeopardized.  For example, you know people have to eat everyday, so the demand uncertainty of a restaurant is relatively low compared to that of construction.  New construction is highly dependent on whether the overall economy is doing well or not.  So does eating out at restaurants, but a burger costs less than a building.  Remember, this is all relative.

Technological uncertainty, can be described as the rate in which the technological landscaping is changing.  For example, will new inventions come along to disrupt existing methods?  Are new materials being developed?  Going back to the restaurant and construction example, the technology of a restaurant (e.g. grills, spatulas, etc.) have been relatively consistent compared to that of new construction materials and architectural structures.

In the end, one ways to gauge the uncertainty of your industry is looking at how stable demand is and how stable the technological climate of your product/service is.

Here is a comparison of various industries plotted by their relative uncertainty.

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