Platy’s Web Excursions

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Web Excursions 2022-07-29
platylinks.substack.com

Web Excursions 2022-07-29

Platy Hsu
Jul 30
Share this post
Web Excursions 2022-07-29
platylinks.substack.com

Finding Power: How To Do Market Analysis

  • No single factor is decisive.

    • For example, execution and all its subcomponents (leadership, management, finance, ops, etc) are of course key to any individual company’s ability to successfully accomplish their plan.

    • But I focus on strategy rather than execution

  • The question is, what kinds of strategies generate market power?

    • fuse together the ideas of the three most important theorists in business strategy: Clayton Christensen, Michael Porter, and Hamilton Helmer

  • The Process

    • Define the market.

      • You can go as broad or narrow as you want, but what’s most important is that you nail down

      • A) the job-to-be-done / use case, and

      • B) the general product category that serves that use case.

    • Identify the basis of competition.

      • Why do consumers choose one product over another?

      • What attributes are most important?

      • Which are good enough, where no further improvement is felt?

      • And which dimensions of product quality are felt to be lacking and in need of improvement?

    • Map the value chain.

      • What is the chain of activities that needs to be performed for raw resources to get translated into finished products?

      • What companies are involved, and which activities do they control?

    • Locate the position of power.

      • Which activities in the value chain shape the end-user’s experience the most?

      • These are the key activities that relate to the basis of competition.

      • Which companies perform these activities?

      • Who does it best?

    • Trace the source of that power

      • Using Hamilton Helmer’s 7 Powers as our list of options

        • (scale economies, network economies, counter-positioning, switching costs, branding, cornered resource, and process power)

      • we’ll see which one has the biggest impact on the user experience, and therefore is the source of their power.

    • the most important thing to know and remember about analyzing a market is that

      • all power ultimately stems from finding a way to play an indispensable role in some important chain of economic activities

      • that translates supply into demand.

  1. Define the market

    • The first mistake is to pick a generic market definition that

      • has little bearing on what you’re actually interested in, and

      • confusedly use it as a stand-in for the real market you would like to go after

    • New products rarely slot in perfectly to existing markets, so it’s useful to analyze the status quo with a bit of healthy detachment.

    • Official categorization schemes like the NAICS (North American Industry Classification System)

      • make it seem like the economy is composed of atomic, permanent, industries that were handed down from God,

      • but in reality the lines between industries are blurry and constantly evolving.

    • So you should think more like an evolutionary zoologist, and less like an old-school Linnaean taxonomist that believed all earthly species were set in stone since the beginning of time.

    • the framing is that people don’t “buy” products, they “hire” them to perform some job in their life.

      • It’s based on the classic quip that people don’t want a quarter-inch drill bit, they want a quarter-inch hole.

    • an example of how a market definition should look:

      • Product category: business writing delivered via email newsletter

      • Job-to-be-done: understand what’s happening in the industries I care about at a deeper level than the news will tell me about, so I can make better decisions and advance my career.

  2. Identify the basis of competition

    • The basis of competition is the collection of product attributes that cause customers to choose one product over another.

      • For example, you might choose a smartphone on the basis of price, photo quality, and screen size—

      • or, more realistically, a subconsciously prioritized list of these and many more factors.

    • don’t forget about marketing and distribution

    • The hard part about determining the basis of competition is figuring out what people actually think.

      • Often people’s priorities aren’t that clear to them.

      • They may say or even think they want one thing, then act a different way when push comes to shove.

      • There are all sorts of interesting psychological theories about this (my favorite of which is contained in the book The Elephant in the Brain)

      • but needless to say, discovering the truth here is more art than science.

      • Honest introspection and judgment-free observation are just as powerful tools as user interviews and surveys.

    • the easiest way around it is to just look at what is selling, and ask yourself what’s different about it as compared to the alternatives.

      • Sometimes it’s actually more valuable and easy to see the differences when you compare #1 in a market to a really small competitor.

      • Often #1 and #2 are really serving slightly different jobs-to-be-done, which is why they’re both successful

    • The basis of competition for business writing delivered via email newsletters is…

      • Relevance - does the content speak to things I can relate to my personal experience?

      • Clarity - do I understand what it is trying to convey?

      • Surprisingness - is it unexpected?

      • Importance - does it feel like knowing it will make a difference?

      • Truth - is the information accurate?

      • Fun - do I enjoy having this voice in my head?

  3. Map the value chain

    • create a map of the value chain.

      • Essentially we want to lay out in as much detail as is practical all of the companies and activities

      • involved in the creation of value for this market

    • What would be even better was if this visualization showed the relative economic value and power captured by each step.

    • It may not seem clear at first why exactly we are mapping the value chain. There are two reasons.

      • it’s just an important excuse to understand in detail everything that happens in the industry

      • we’re doing it so that we can perform the next step of our analysis, which is key.

  4. Locate the position of power

    • Re-read the “basis of competition” you wrote down

    • Look at your map.

      • For each activity, ask yourself how big an impact it makes on the “basis of competition.”

      • Put one star next to anything that has a discernible impact, and two stars next to anything that has a huge, decisive impact.

    • If there are multiple important bases of competition, and different activities have a different impact on one or the other,

      • you could color code them or come up with some system to remember which activity has what impact on what basis of competition.

    • different activities have different attributes,

      • some of which are more powerful and harder to copy than others—

      • making the entity that controls that activity more indispensable.

  5. Trace the source of that power

    • For each activity that makes a big impact on the user experience and forms the basis of competition,

      • think about what it takes to be able to do it well.

    • Some activities, like reading a lot, take time, energy, discipline, and a little bit of money.

      • It’s not necessarily easy to copy, but it’s also not that hard

    • Scale economies - when your cost structure benefits from scale

    • Network economies - when your value proposition benefits from scale

    • Counter-positioning - when your competitors are disincentivized to copy you

    • Switching costs - when your customers are disincentivized to leave you

    • Branding - when quality is hard to discern, or signaling is important

    • Cornered resource - when nobody can access a key ingredient you control

    • Process power - when you evolve a complex process that nobody can copy

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Web Excursions 2022-07-29
platylinks.substack.com
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