Swotting up to find gaps in the market

Finding a space in the market that is unchallenged by competition is the Holy Grail of positioning strategy. Unfortunately these spaces – known as market gaps – are often illusive, and the benefits of finding one are often equally illusory. Although competition is a fact of life, it makes business difficult, contributing to an ever-downward pressure on prices, ever-rising costs (such as the funding of new product development and marketing), and an incessant need to outmanoeuvre and outsmart rivals.

In contrast, the benefits of finding a market gap – a small niche segment of a market that is unfettered by competition – are obvious: greater control over prices, lower costs, and improved profits. The identification of a market gap, combined with a dose of entrepreneurial spirit, is often all that is needed to launch a new business.

In 2006, Twitter founder Jack Dorsey combined short-form communication with social media, providing a service that no one else had spotted. Free to most users, revenue comes from firms who pay for promotional tweets and profiles: Twitter earned advertising revenues of $582 million in 2013.

Not all gaps are lucrative, however. The Amphicar, for instance, was an amphibious car produced in the 1960s for US consumers who wanted to drive on roads and rivers. It was a quirky novelty, but the market was too small to be profitable. This was also true for bottled water for pets – launched in the USA in 1994, Thirsty Cat! and Thirsty Dog! failed to entice pet owners.

Snapple, the manufacturer of healthy tea and juice drinks, is a firm that has successfully found a sustainable and profitable niche. A glance at the beverage counter of any supermarket reveals that dozens of brands compete for sales. Many firms have failed in this ultra-competitive market: for example, Pepsi tried to capture a non-existent market for morning cola with its short-lived, high-caffeine drink, AM.

Success for Snapple came from positioning the product as a unique brand – Snapple was one of the first firms to manufacture juices and drinks made completely from natural ingredients. Its founders ran a health store in Manhattan, and the firm used the slogan: “100% Natural”. Snapple targeted commuters, students, and lunch-time office workers with a new healthy “snack” drink, combining its Unique Selling Proposition (USP) with irreverent marketing and small bottles that were designed to be consumed in one sitting. Distribution was through small, inner-city stores where customers could “grab-and-go”. These tactics helped to secure a profitable and sustainable niche, distinguishing Snapple from its rivals in the 1980s and 1990s. In 1994 sales peaked at $674 million.

Unoccupied market territory can present major opportunities for firms, but the challenge lies in identifying which gaps are profitable and which are traps. During the 1990s, many firms became excited about the potential of the “green” market, across a whole range of goods. But this market has failed to materialize in any profitable way. This marks one of the potential pitfalls in identifying market gaps based on market research: consumers often have strong attitudes or opinions on trends or issues – such as ecology – that they are disinclined to consider when purchasing products, especially if they affect cost. Many market gaps, it seems, are tempting, but illusory.

Whether a firm is long established or in its start-up phase, a key strategic issue is its competitive advantage – the factor that gives it an edge over its competitors. The only way to establish, understand, and protect competitive advantage is to study the competition. Who is competing with the firm for its customers’ time and money? Do they sell competitive products or potential substitutes? What are their strengths and weaknesses? How are they perceived in the market?

For Ray Kroc, the US businessman behind the success of fast-food chain McDonalds, this reportedly involved inspecting competitors’ trash. But there is a range of more conventional tools to help firms to understand themselves, their markets, and their competition.

The most popular such tool is SWOT analysis. Created by US management consultant Albert Humphrey in 1966, it is used to identify internal strengths (S) and weaknesses (W), and to analyse external opportunities (O) and threats (T). Internal factors that can be considered as either strengths or weaknesses include: the experience and expertise of management; the skill of a workforce; product quality; the firm’s financial health; and the strength of its brand. External factors that might be opportunities or threats include market growth; new technologies; barriers to entering markets; overseas sales potential; and changing customer demographics and preferences. SWOT analysis is widely used by businesses of all types, and it is a staple of business management courses. It is a creative tool that allows managers to assess a firm’s current position, and to imagine possible future positions.

When well-executed, a SWOT analysis should inform strategic planning and decision-making. It allows a firm to identify what it does better than the competition (or vice versa), what changes it may need to make to minimize threats, and what opportunities may give the firm competitive advantage. The key to strategic fit is to make sure that the firm’s internal and external environments match: its internal strengths must be aligned with the external opportunities. Any internal weaknesses should be addressed so as to minimize the extent of external threat. When undertaking SWOT analysis, the views of staff and even customers can be included – it should provide an opportunity to solicit views from all stakeholders. The greater the number of views included, the deeper the analysis and the more useful the findings. However, there are limitations. While a firm may be able to judge its internal weaknesses and strengths accurately, projections about future events and trends (which will affect opportunities and threats) are always subject to error. Different stakeholders will also be privy to different levels of information about a firm’s activities, and therefore its current position. Balance is key; senior managers may have a full view of the firm, but their perspective needs to be informed by alternative views from all levels of the organization. As with all business tools, the factor that governs the success of SWOT analysis is whether or not it leads to action.

Think of founding principles to avoid losing focus

In 2001 the list of companies with the highest market caps was dominated by blue chips. General Electric, Microsoft, ExxonMobil, Walmart, and CitiGroup — all were businesses led by managers who were experts in efficiency and optimization and who grew their businesses by making them work better than they had previously.

Fast forward to the present, and the list looks strikingly different. Apple, Alphabet, Microsoft, Amazon, and Berkshire Hathaway now top the list, with Alibaba, Facebook, and Tencent close behind. They are for the most part young firms led by founders and their teams, bold leaders who continually prioritize new growth over efficiencies to their core businesses.

Many things have happened in the intervening years to contribute to this shift, but the signal is undeniable. The market now rewards the long-term vision and continual investment in new growth represented by these younger enterprises.

Large enterprises have been responding to these developments for some time, mainly by applying the methods of startups such as lean experimentation, design thinking, and agile development. While these tactics are necessary and useful, when used alone they serve merely as Band-Aids to the problem.

The change that enterprises need to undergo in order to regain their growth trajectories is more profound, and it must start at the very top. To generate new growth, CEOs must stop thinking of themselves as chief managers and start thinking of themselves as refounders.

Refounders are leaders who, despite not having started the company, think with the mindset of a founder. They do not focus their energies on incremental growth through endless optimization, but instead look to leverage their company’s assets to build new offerings, move into new markets, and create next-generation solutions.

Satya Nadella of Microsoft is a great example of a refounder. When Nadella took over the CEO role in 2014, he immediately began refocusing the company on growth. “If you don’t jump on the new,” he proclaimed, “you don’t survive.” Nadella challenged the company to see beyond its legacy products like Windows, invested heavily in new technologies like AI and SaaS, purchased LinkedIn to plug Microsoft services into the company’s social graph, and more. Through it all, he has emphasized the importance of long-term thinking, taking a test-and-learn approach, and obsessing over customer satisfaction, among other values. The market has rewarded Nadella’s moves and his mindset: Since he took the helm, the company’s share price has more than doubled, and in 2016, after years of stagnation, Microsoft regained its place on the top-five market cap list.

You don’t need to be Satya Nadella to be a refounder, though. We work with CEOs of large enterprises who are in the process of refounding their companies, and while coaching them on this process we’ve seen firsthand what works best for them. Based on these experiences, here are five actions that leaders can take to move from a manager mindset to a refounder one.

Shift Your Mindset

Strategists in mature businesses think in terms of total addressable markets (TAM), which allows them to size a potential business and plan accordingly; refounders think in terms of total addressable problems (TAP). They ask, How many people have a problem that this solution could address? Besides exposing existing markets, a TAP mindset uncovers potential opportunities before there’s a market for them.

For example, in the 1980s a standard TAM view of cell phones would have suggested a modest market consisting of mainly lawyers, business leaders, and doctors — after all, they were the demographic using the first generation of phones. A TAP view, by comparison — asking “Who has problems that a mobile phone could address?” — would have suggested larger potential markets, ranging from everyone trying to make ad hoc plans with friends to entire populations without landlines looking to get their first phone connections. A TAP worldview allows you to discover future markets instead of playing only in developed ones.

Don’t Seek Consensus

When it comes to decision making, big-to-bigger enterprises look to gain consensus as a way of minimizing the risk of failure; in contrast, refounders recognize that new opportunities lie outside of the realm of consensus. As Marc Andreessen, of venture capital firm Andreessen Horowitz, says, “If something is already consensus, then money will have already flooded in and the profit opportunity is gone.”

Knowing that, refounders seek, as Jeff Bezos says, to disagree and commit — acknowledge differences of opinion and move forward together anyway, recognizing they are making a bet on a conviction and may ultimately be wrong. Grounding decisions in evidence-based conviction allows them to move faster while arriving at potentially great ideas before the rest of the consensus-driven world.

Use eBay feedback as a PR opportunity

Whether you are a business trading on eBay, or turn to it to fulfil business supplies, eBay is a very useful place to turn to. The feedback function in particular is a good source of marketing.

Whenever you buy or sell a product, you get the opportunity to leave feedback about your experience. This feedback is available to view by others who investigate your profile to see if you are worth buying from.

When someone buys a product from you, take the time to leave a bit of feedback, whether or not they do it for you. This increases their trustworthiness profile and while they may not do the same for you, you have at least done all you can on your part to ensure a repeat customer.

The eBay feedback left for others page is a useful page to log who has bought from you. You can also use it, after a period of a few months, to send messages to those who appear there, as a follow up to see if they require a repeat purchase.

What kind of feedback should you leave for others? The “thanks for your purchase” remark is a slightly perfunctory one that people leave. But you can do better than that. After all, people can see the feedback you’ve left for others. That kind of remark merely suggests to others you are an average business seller, nothing special.

When leaving feedback for others who have bought from you, leave something more personable, such as “I appreciate your quick payment.” Why? That one character, “I”  instantly transforms your business from a faceless one to one with a more personal touch, and encourages repeat business, as well as attracts others to you.

Don’t seize on the chance of feedback to do some self promotion though. Leaving “Thank you for buying from myname.com” feedback for others who buy from you is an own goal, one that is self serving and actually puts people off from buying from you again.

Similarly, as a buyer, use the opportunity for feedback to thank your buyers with a personal message. “A* seller” kind of feedback isn’t enough, and merely presents you as “Can’t be bothered”.

But why should you leave good feedback for others when you have bought from them? Why should you bother?

The reason is that the feedback you leave for others and the feedback you receive are under scrutiny by others. Even people who may consider buying from you may check the feedback you leave for things you have purchased, to get an idea of your trustworthiness.

In conclusion, eBay feedback, both for your sales and purchases, is a chance to market and present yourself as a personable business who would make the extra effort. The feedback that you bother to give could tip the scales in your favour when it comes to potential future sales.