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.