ANALYZING THE MARKET ! In the last lecture, you considered the question “Who cares, and why?” as you explored your idea for a new venture. Another way of phrasing that question is, “Who's going to buy this?” A more technical term for the second line of questioning is market analysis, the topic of this lecture. A follow-on to that question that will be discussed in the next lecture is, “How else are people satisfying their needs today?” Together, these questions form the most critical issues you face when putting together a business plan. A business plan is a document that lays out the “who, what, when, where, why, and how” of your potential business. While formal business planning is outside the scope of this course, you can find more information in the readings and in later lectures to guide you in important aspects. For now, we will dive into the heart of any sensible plan for launching a new product or service: market analysis. SIZING THE MARKET All too often, when you ask an entrepreneur “Who's going to buy this?” the answer is, “Everybody,” or “It depends,” or “I'm not sure yet, but it's a cool enough product that somebody must want it.” - Page -2 That’s not going to cut it. To really know whether it’s worth investing time and resources in building a business you have to size the market opportunity. And here, the bigger the market, the better. If it’s going to cost you $10 million to develop a product that is useful to only 100 people, each of whom is willing to pay $10 for your product, then obviously that’s not a very interesting business proposition—even if the product is amazing and works just like you promise it will. Two commonly used approaches are “top down” and “bottom up” market sizing. In the top-down view, you look at the entire population, and determine what percentage of it you might be able to serve. For example, if you think you’ve got a solution to the common cold, you might learn that 100 million people suffer from colds each year. You might also discover that last year people spent approximately $3.5 billion on over-the-counter cold medicines in the U.S. Many entrepreneurs fool themselves into thinking that all they have to do is capture 1% of that market—and bingo!—they’ll rake in sales of $35 million. That may well be the case, but how do you know you can capture any of the market? Another approach is to work from the bottom up. With this method, you look at what you can realistically sell given your available means. You could note that you live in a town with 10 drugstores, - Page -3 that you have two salespeople, and that they could conceivably pound the pavement for 10 hours a day. You could calculate how long it would take you to call on each of the pharmacists at these drugstores and measure the foot traffic and total sales in each of the stores. With some quick calculations you could estimate how much cold .

1. ANALYZING THE MARKET
!
In the last lecture, you considered the question “Who cares, and
why?” as you explored your idea for a new venture. Another
way of
phrasing that question is, “Who's going to buy this?”
A more technical term for the second line of questioning
is market
analysis, the topic of this lecture. A follow-on to that question
that
will be discussed in the next lecture is, “How else are people
satisfying their needs today?”
Together, these questions form the most critical issues you face
when putting together a business plan. A business plan is a
document that lays out the “who, what, when, where, why, and
how” of your potential business. While formal business
planning is
outside the scope of this course, you can find more information
in
the readings and in later lectures to guide you in important

2. aspects.
For now, we will dive into the heart of any sensible plan for
launching a new product or service: market analysis.
SIZING THE MARKET
All too often, when you ask an entrepreneur “Who's going to
buy
this?” the answer is, “Everybody,” or “It depends,” or “I'm not
sure
yet, but it's a cool enough product that somebody must want it.”
- Page
-2
That’s not going to cut it.
To really know whether it’s worth investing time and resources
in
building a business you have to size the market opportunity.
And
here, the bigger the market, the better. If it’s going to cost you
$10
million to develop a product that is useful to only 100 people,
each
of whom is willing to pay $10 for your product, then obviously

3. that’s not a very interesting business proposition—even if the
product is amazing and works just like you promise it will.
Two commonly used approaches are “top down” and “bottom
up”
market sizing.
In the top-down view, you look at the entire population, and
determine what percentage of it you might be able to serve. For
example, if you think you’ve got a solution to the common cold,
you
might learn that 100 million people suffer from colds each year.
You
might also discover that last year people spent approximately
$3.5
billion on over-the-counter cold medicines in the U.S. Many
entrepreneurs fool themselves into thinking that all they have to
do
is capture 1% of that market—and bingo!—they’ll rake in sales
of
$35 million. That may well be the case, but how do you know
you
can capture any of the market?
Another approach is to work from the bottom up. With this

4. method,
you look at what you can realistically sell given your available
means. You could note that you live in a town with 10
drugstores,
- Page
-3
that you have two salespeople, and that they could conceivably
pound the pavement for 10 hours a day. You could calculate
how
long it would take you to call on each of the pharmacists at
these
drugstores and measure the foot traffic and total sales in each of
the
stores. With some quick calculations you could estimate how
much
cold medicine you might be able to sell in a month.
If you have an entirely new product category, look at potential
customers in related markets and their spending habits and
technology-adoption history. For example, if you had been the
first
person to bring the lightbulb to market, it would have been

5. impossible to measure the amount of money people spent on
lightbulbs. But you could have looked at sales of candles, whale
oil,
and other substitutes.
PICKING THE RIGHT MARKET
Let’s look next at how to determine the size and dynamics of a
target market. Two terms used here are total addressable
market and initial target market.
For the sake of discussion, imagine that you’ve developed a new
method for sharpening cutting blades. To calculate your total
addressable market, you might add up all of the people in the
world
who do any sort of cutting: surgeons, machine-tool operators,
chefs,
lumberjacks, and so on. You could look at such sources as
industry
- Page
-4
reports, census data, analyst projections, and annual reports
from

6. public companies to calculate the total addressable market.
That’s a long list of potential customers, and there are many
ways to
approach buyers in each of those groups. You can’t possibly do
it all.
Just because there are millions of people in the world who
might
want to use your product doesn’t mean that they’re all going to
appear at your door the day you open for business. You need to
focus, and think about the group with whom you’re most likely
to
succeed.
You might decide that surgeons spend lots of money on
sharpening,
but they might be slow to make buying decisions, so you might
not
want to start with them. Loggers might be easy to reach if you
live
in a town near lots of trees, but they might be hesitant to
embrace
new technology. You might need to go after a less than ideal
initial
market as a way to generate some early sales and amass the

7. resources needed to go after the more lucrative larger market
later.
You need to pick an initial target market. But which one? To
figure
that out, you have to understand how a potential market works.
UNDERSTANDING MARKET DYNAMICS
Once you’ve identified a possible market, you’ll want to
determine:
• What do buyers spend now?
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-5
• Who do they spend it with?
• How do they make their spending decisions?
• What features are important to them?
• What overall values, quirks, and tastes do they have?
In the article you read by Bill Sahlman, he described the once-
glamorous disk-drive industry as “a structural disaster area”
back in
1997 when he was writing the article. And he called the
information services industry then a “paradise.” The hot

8. industries
today have naturally changed, but the questions you need to
address have not. Surely, if given the choice, you’d rather sail
away
from disaster and into paradise. How do you know which way
you’re headed? You’ll want to look at the trends:
Is the market growing, and how fast? If you have invented a
new
type of headphone, for instance, you may look at the sales of
iPods
and other music players each quarter to estimate how fast your
target market is growing.
What makes the market grow? For example, new-home sales
influence the market for lumber.
Is growth the result of an overall expanding market or
customer switching? If you are a cell phone manufacturer and
notice that cell phone sales are increasing, the increase could be
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-6

9. because (a) people who have never before owned cell phones
are
purchasing them, (b) more people are buying a second device,
or
(c) a combination of both factors. Based on the first scenario
where
first-time users are driving sales growth, you may choose to
build
simpler cell phones. But you might build phones with advanced
features if second-phone purchasers are driving the market’s
growth.
Why will people switch to your product or consider a new
purchase? A lightbulb that provides light for 100 hours, when
compared with a candle that lasts for three hours, has an
important
advantage your customers must be made aware of.
What are the product life cycles in your market and the
required technology investments to stay ahead of the curve? For
example, if you manufacture vacuum cleaners, the product life
cycle
is relatively long. The market does not expect you to introduce
a

10. new model every three months. But if you develop software,
product life cycles are relatively short and you will constantly
be
working on the next release. The resources you need to develop
products are dictated to a large extent by the product’s life
cycle and
the investments required to stay competitive.
Who has buying power in your industry’s value chain? If you
are
the manufacturer of a product that is distributed to consumers
through a retailer, a large chain such as Walmart has a high
degree
- Page
-7
of buying power compared with the mom-and-pop store down
the
street. Walmart can dictate terms that the smaller stores cannot,
such as the price, quality, and delivery schedule your product
must
meet. More on this subject is in the next module.

11. Do external factors influence the potential size of your
market? Suppose you have an idea for a breakthrough vehicle
that
will provide transportation for people at a price point that is
equivalent in cost to $2 per gallon of gasoline. If the price of
gas is
$4 per gallon, then you have an interesting value proposition,
and a
big market. If the price of gas is $1 per gallon, then you don’t.
The
size of your available market will vary based on factors that you
don’t control. How will you plan for this?
It is also important that you look at market segments. There are
many ways to do this, but here are a few examples to consider:
• Geography: “Customers in the Northeast bought 60% more
heating oil during the winter of 1999 than the average U.S.
buyer”;
• Industry: “Financial services firms comprise 40% of the
market
for supercomputers”;
• Type of buyer: “Early adopters seeking a professional edge

12. make up 40% of the market for BlackBerry phones”;
- Page
-8
• Distribution channel: “30% of customers shop at Walmart at
least once a week”;
• Market share: “Coke owns 45% of the market, Pepsi owns
40%, and assorted juice drinks own 15%.”
When trying to determine the size of the market for a new
product,
look closely at what you will be replacing. If it is a brand-new
product category, you can estimate your initial sales roughly
based
on existing sales of substitutes. You can refine your estimates
further based on consumer response to trial offers and the
number
of repeat users who return to purchase your product.
You will want to continually recalibrate your estimates based on
what you learn as you try to sell your product. If results are
lower

13. than what you were hoping for, you should examine whether the
product you’re trying to sell can be modified to be more
appealing
to a larger segment of the market.
To learn more about strategies for conducting market research
and
segmenting markets, glance back at the marketing course you
took.
Look as well to the readings for targeted strategies that apply to
new
ventures.
- Page
-9
PICKING YOUR NICHE
Now comes the point where you have to decide. Once you
understand the major sea changes that are under way in society,
you have to make any number of educated guesses, such as how
people are changing their behaviors, and which emerging
technologies will have a profound effect on what people buy
and
how they buy it.

14. Then you must find a niche where you think you can make a
difference. After you’ve picked your niche, follow these steps:
1. Know the story: Learn all you can about the history of the
market. Why does this opportunity exist now? Who has come
before you and tried to solve it in other ways? What is the
source of the problems that you aim to solve? Understand the
history of the market you’re about to enter in order to avoid
repeating mistakes that have tripped up others.
2. Identify experts: Who understands this market today, and
what are they saying about it? Who are the thought leaders
whose opinions you want to cite in justifying the market
need? Take the time to listen to expert opinions on the future
of the market you want to enter.
3. Learn how to keep score: Which metrics will you measure to
determine whether the market is adopting your solution?
- Page
-10

15. Metrics can range from “at least 40% of my customers must
become repeat customers” to “my customer base should grow
at least twice as big within 30 days.” Also establish what your
next steps will be if a product is a runaway success, or not.
4. Know how to keep ahead of the competition: How will
others respond to you, and how will you in turn respond to
them? Study how competitors react to the introduction of
your product and whether their responses are consistent with
what you expected. (More on this is in the next lecture.)
About making that important choice, Jack Welch writes
in Winning:
Starting a new venture ... means making a bet. Most people
instinctively hedge their bets, even as they place them. The
irony is that such hedging can doom a new venture to failure.
When launching something new, you have to go for it
—“playing not to lose” can never be an option (pp. 206–207).
Once you’ve placed your bet on a market, you have to give it
everything you’ve got.
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16. -11
WHAT’S THE BIG IDEA?
!
You absolutely must have a great idea before you can start a
company. Of course, you say. Got that.
But wait a minute. How do you know it’s really superior? And
does
anyone other than you think it’s the greatest gift to humankind?
You have to validate the idea.
GAUGING AN IDEA
How do entrepreneurs know their idea is a big-time winner?
First,
it’s important to remember that you won’t always know in
advance.
You just have to get out there and try things. That said, there
are
some things that are worth trying more than others. Let’s talk
about
how to tell a good idea from a dud.
Knowing whether you’ve got a good idea is an iterative process,
and

17. can sometimes take time. There’s a bit of a chicken-and-egg
problem. To really know whether you have a winning idea
you’ve
got to invest time and resources, do your homework, and get
some
early customer engagement.
But how do you know whether your idea is good enough to
warrant
investing those resources? In many cases, you’ll never know.
You’ll
- Page
-2
have to dive in, assemble a great team, and be responsive to
changes
in the marketplace.
Even so, you should move forward with a solid sense that
you’ve
got enough of a big idea. Let’s start with a few simple questions
to
help you know when you’ve got something big on your hands.
These
form the basis of much of the work we’ll do in later lectures,

18. when
we explore these topics in more depth.
Before you know whether it’s worth the effort to do all that
exploration, however, start with these four strategies:
1. Know your history;
2. Know your customer;
3. Know your competitors; and
4. Know the state of the art.
Know your history. You’re proposing a new product or service
because you believe the world can be better, and that customers
will
be happier or more productive with your offering. How did the
world get to this point? As an example, maybe you’re thinking
of
building a new travel-search website that helps people find low
airline fares. How did the airline industry get to the point it is
at
today? How do companies sell tickets and consumers get
information about flights now?
- Page

19. -3
A sequence of events has unfolded over time, numerous
stakeholders have played a role in the value chain,
organizations
have become stuck in their ways, customers have come to
expect a
certain type of behavior, and so on. How have all of these
pieces
come together and pointed toward a new way of doing business
that
people will value? Once you understand how the world got
where it
is today, you’ll be in a much better position to tell whether your
“big
idea” is consistent with the arc of where the industry or market
is
going.
Know your customer. We discuss this topic in depth in the next
lecture about market analysis. But as a simple exercise: Tell a
story
about a day in the life of one human being who is going to be

20. happier as a result of your new big idea. Learn all about this
person
and how she makes decisions.
Don’t just say a product will be popular. Tell people exactly
how
someone’s life will change as a result of your product. If it’s a
truly
compelling big idea, you’ll be able to answer this question in a
simple way.
Know your competitors. If you’ve got a big idea, how come
nobody
else is doing it? Surely there are other smart people out there
who
have thought of this idea or something similar before. Lock onto
a
unique angle, or new resources you’ll bring to bear on the
solution.
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-4
It may even be a matter of timing. Maybe the market wasn’t
ready
when others tried to introduce the product previously. That’s

21. OK.
Plenty of start-ups have succeeded with a later launch, but be
prepared to explain why you’re the one who is now in a position
to
win.
Know the state of the art. If you’re proposing a new way to
build
or do something, understand the ingredients necessary for your
innovation. It might be a big idea to produce an electric car that
goes 500 miles without a charge. But is this something you can
feasibly build? What elements will you rely on to build your
vision,
and are they within reach?
Another important guiding principle for a young company is to
focus and keep it simple. Don’t try to design a product that does
everything for everybody. Find the minimal amount of special
value
you can deliver, focus first on nailing that, and then go from
there.
WHO CARES?
Once you’ve tested an idea, a useful follow-up question is,
“Who

22. cares, and why?”
This seemingly flip question actually has two insight-packed
meanings. On the customer side of your venture: Who might
care
about what you’re developing? On the business side of your
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-5
venture: Who is fundamentally committed to working with you
to
keep your idea moving forward?
There will be lots of twists and turns along the way, and you
will
frequently have more than one grand idea. Develop a collection
of
stakeholders who will guide you through the adaptations and
adjustments you’ll doubtless make to fine-tune a rough idea.
As the leader of a new business venture, you must possess the
ability to sense when changes are needed, and to gradually keep
taking new steps forward.

23. Charles Darwin said that it is not the strongest of the species
that
survives, nor the most intelligent. It is the one that is the most
adaptable to change.
To launch a new business right, know how to read your
customers’
responses, and how to quickly alter your vision to match the
feedback you’re getting. Sense and respond should become your
new
mantra in a world of constant change.
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-6
Question 1
In one of the reading assignments this week Jack Welch states,
“ There may indeed be no time like the present to start anew.”
· Identify a company, product, service, or ‘big idea’ that came
to market during the recent economic downturn.
· Discuss some of the reasons why this company’s launch was
successful (or possibly unsuccessful) in the current US
economy.
Readings
· Welch, “Flying Solo – A Reality Check”
· Welch, “Company Man or Free Agent”
· Welch, “This is a Good Time to Launch the Right Business”