How to Determine a Company’s Competitive Advantage Market and the importance of Research Gabriela Escobar Uribe BBus (Col) MBA IB (Aus) research by design Whether your business is large or small, Research by Design can tailor the scope of your market research programme to your needs and your budget. This white paper will provide you with a wealth of understanding of the market research process and its benefits. Gabriela Escobar Uribe BBus (Col) MBA IB (Aus) How to Determine a Company’s Competitive Advantage and the Importance of Market Research Published 2012 This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without written permission from Research by Design. Research by Design p:+61 7 3342 7792 e:[email protected] www.researchbydesign.com.au How to Determine a Company’s Competitive Advantage Research What is market research........................................... 2 The market research process................................... 3 When do companies need market research.... 5 Click on these section titles to take you to the major issues business must address… Who uses market research....................................... 6 Types of research.......................................................... 8 Research analysis methods....................................... 9 The end result................................................................. 11 Bibliography.................................................................... 12 the importance of Market Research Market and the importance of 1 the importance of Market Research 2 Every day markets become increasingly competitive. The problem many organisations now face is that they lack the mechanisms for detecting changes in the marketplace before it is too late... What is market research In an era fuelled by technological change companies who want to remain competitive need a constant inflow of market intelligence and research to optimise their business strategy and assist them with critical business decisions. This whitepaper provides an overview of the market research process and provides some basic steps to help managers determine whether or not they need market research and how they should go about it. Market research is the systematic and objective process of designing, gathering, analysing, and reporting information to support business and marketing decisions. It has two fundamental tasks within any organisation: the first is to help specify and supply accurate information to reduce uncertainty in decision-making. The second is to monitor the organisation’s performance after plans have been put into motion; thus allowing close control over the execution of the company’s operational, business and marketing plans. Market research ultimately makes a contribution to longterm strategic planning (Birn & Forsyth, 2001). Market research or competitive intelligence is the end result of gathering data and information, and analysing that information for strategic purpose (Evans, 2009). Its main objective is to help management understand the big picture which can easily be lost in any organisation’s day-to-day operations. It is not just about exploring other competitors, but also understanding the macro-environment and the market sector in which a company operates. This helps managers strategise and plan ahead with information based on actual facts from the competitive environment. Competitive willingness is not just about gathering facts, but also drawing findings and recommendations from them, and determining what the organisation’s next move needs to be based on hard facts. This ultimately represents a company’s competitiveness. Managers also rely on experience and their “gut feeling” to make many of their decisions, doing so in a very intuitive manner. And, taking into account management’s main objective is effective decision-making (Zikmund, et al., 2007), relying on intuition instead of a systematic and objective system might be prejudicial for any organisation in the long run. Market research is a tool, a sum of techniques, designed to provide as much information as possible to assist the decision-making process within organisations. It does not substitute or eliminate from the process management’s judgement or experience, but works as a support system by providing a better foundation on which to base business decisions. The market research process The following 10 steps (Burns & Bush, 2010) serve as a framework for this process. However, it is important to note that many market research projects might not be that straightforward. It is difficult to generalise when there is such a great diversity in market research projects and tailoring the steps to specific projects is highly recommended. The steps are as follows: 1. Establish the need for market research Market research is essential when management is faced with a decision that has many implications and for which there is insufficient or inadequate information to serve as a guide to determine what the best strategic decision should be. Not all managerial decisions require market research. It is the management’s role to determine which issues are crucial and need to be backed with facts and market intelligence. 2. Determine the issue Defining the issue/s needs careful consideration. The issue needs to be clearly defined in order to ensure that both client and researcher know what the desired outcome of the research should be. There are two types of issues: a. Fixing an existing problem such as decreasing sales. b. Analysing an emerging or new business opportunity such as buying into or entering a new market. Either way, accurate and timely information is essential to help understand and solve these business problems. 3. Establish the research objectives Research objectives and the issues are closely aligned, but are not quite the same. For example, if an organisation is considering altering their product, the research objective would be to determine the customer’s level of satisfaction with each of the product’s characteristics. By determining the research objectives, it is possible to know what must be done by the researchers so relevant information can be gathered. 4. Determine what types of data are available Researchers must determine the type of information they need to use according to the research methodologies outlined in Step 3. There are two types of information: primary and secondary. The former is gathered specifically to explain the problem at hand, while the latter is information which already exists. All researchers start by collecting secondary research as it is less costly and easier to collect. Whenever secondary data is insufficient or inadequate, researchers must resort to primary information for their research. It is said (Evans, 2009) that secondary and primary research adhere to the 80/20 rule, wherein the first effort to find information (secondary research), 80 per cent of the data volume is found with only 20 per cent of the total time; while the remaining 20 per cent of the data is found through primary research and takes about 80 per cent of the time spent overall. Figure 1: The 80/20 Rule Secondary Research Primary Research Volume of Data 80% 20% Time Spent 20% 80% Source: Evans, 2009 5. Determine the research methodologies Even though each market research project is different, three main classifications define market research, which is then categorised into two different methodologies. The first is Exploratory Research, which focuses on collecting as much information as possible on a subject of which little is known. Descriptive Research then utilises qualitative or quantitative methodologies that describe the variables who, what, when, where, and how. The final research category, Causal Research, is used to answer the one question descriptive research does not – why. It is used to understand cause and effect through observation. Two methodologies then further support the analytical process; the first is Quantitative Research. This focuses on answering questions using data that can be precisely and numerically measured. Alternatively, Qualitative Research is used to explore variables that cannot be numerically measured, such as consumer tastes. the importance of Market Research Like any systematic and objective process, market research has certain steps that should be followed in order to achieve the desired outcome. Knowing and understanding these steps can assist an organisation by enabling management to determine how to spend the organisation’s resources (such as time and money), in the most efficient manner. 3 the importance of Market Research 4 6. Determine the best way to collect data Accessing data and information can be done in a variety of ways. Over the past few years, the internet has had a significant effect on data collection, making it less costly, more efficient and easily accessible. From Google to specialised websites with specific content, businesses can now access an almost overwhelming amount of data and information. However, researchers must not limit themselves to online access, since non-electronic mediums such as books, technical manuals and ad hoc reports are still a valid source of information. While accessing secondary research does not usually represent a challenge, accessing primary research can be difficult. Researchers must determine which method they will use to approach their research subjects, whether it is face-to-face, electronically, or via non-electronic options such as mail surveys, intercept interviews and so on. 7. Determine the best analytical methods to understand the data This step depends on the objective of the market research i.e. what is the business issue at hand that needs to be solved. Given the diversity of analytical tools, it is important to select the method that best suits each project’s needs, including budgetary constraints. Researchers can use several methods to answer one specific question. Determining the research methodology allows researchers to get the best understanding from the data they have collected in order to maximise research outcomes. 8. Collect the data Integrity of data collection, particularly primary research sampling, is critical. Incorrect data sampling can easily skew and corrupt data that can then go on to provide inaccurate readings. Statistical sampling errors need to be taken into account when doing analysis where non-sampling errors can occur when the methods used to gather the data are manipulated by those in charge of the collection. However, validation methods can always be used to prevent this from happening. The same applies for secondary and desk research, cross-checking and validating sources is crucial to ensuring the integrity of the data. 9. Analyse the data Once the data has been collected, it must be collated, validated for errors and tabulated. The type of analysis to be done depends on what has been determined by the researcher in Step 7, always taking the research objective into consideration. 10.Present the findings and recommendations The importance of this step is often overlooked. It is through the final report that the researcher is able to properly communicate the results of the study to the client supported with the integrity of the various market research methodologies. Researchers should not only focus their energy in providing key findings but also include an overview of key recommendations or an interpretation of the data. Figure 2: Steps in Market Research Step 1 Establish the need for market research Step 2 Determine the Issue Step 3 Establish the research objectives Step 4 Determine what types of data are available Step 5 Determine the research methodologies Step 6 Determine the best way to collect data Step 7 Determine the best analytical methods to understand the data Step 8 Collect the data Step 9 Analyse the data Step 10 Present findings and recommendations 5 When do companies need market research 1.Time constraints Since market research takes time, managers might not be able to use it where they have to make quick decisions. In this case, management will have to rely on the information at hand and their experience to make such decisions, regardless of the importance. However, a company’s competitive advantage relies on timely and accurate data. Acquiring knowledge that might indicate trends or explain a market’s characteristics can become an organisation’s competitive advantage, only so long as the intelligence can be utilised before competitors can react. 2.Availability of data Managers need to be aware of the types of information at their disposal, both internally and externally. Whenever there is a lack of information to support a decision, market research should be considered a viable option. Managers should also evaluate whether the information can be gathered through secondary research, or if primary research is more appropriate. The potential source of information needs to be balanced with the cost related to acquiring the data and its reliability. 3.Nature of the decision Managers face making many decisions, from the inconsequential, to those with long term and significant ramifications. The value of market research will then depend on the value of the decision to be made; for example, the more strategic or tactical the decision, the greater the need for market research. Market research can not only evaluate existing managerial decisions, but also provide market intelligence to support short and long term planning decisions. It is therefore imperative that research remains bias free, giving the most realistic results. One way to ensure that market research remains neutral is to make it independent from any other part of the company or from the company itself. 4. Benefits and costs Managers need to weight the value market research has against the cost, and identify and analyse alternative courses of action and benefits each could bring to the organisation. From an investor’s point of view, market research can be analysed as such. Managers should determine whether or not its rate of return would be acceptable, if the expense can be justified by the insight brought into the decision-making process, and whether investing in market research would be the best use of the organisation’s resources. the importance of Market Research There are four main factors managers should consider prior to commissioning market research. The following serves as a guide to ensure that market research outcomes are as effective and rewarding as possible. Who uses market research the importance of Market Research 6 Many different kinds of organisations use, and need to use, market research. Traditionally, the biggest users are the large and often, multi-national competition-driven consumer goods companies. However, the last few years have brought with them an increase in market research usage by small and medium organisations, usually companies working in the manufacturing and service industries. Non-profit organisations and governmental agencies have also begun to apply market research in order to determine ways to maximise their resource allocation. Accurate, relevant and timely data acquired through market research has become an ally to a broad range of organisations, regardless of the nature of their work. Organisations can use market research in many different ways. When determining the issue, managers tend to focus on one or more of the areas outlined in this diagram. Market Planning Keep track of market trends and customers’ needs: •identifying and analysing •identifying, measuring levels of acceptance for and personifying new products or services consumer behaviour and attitudes •measuring customer preferences •assessing market profitability •tracking shifts in competitive activity •analysing general market data •sales forecasting. •analysing potential new business areas •identifying and analysing new markets for products Market Planning (Crouch & Housden, 2003, pp. 16-18) Corporate Planning Create and measure short and long term strategic plans: •competitor analysis •forecasting and predicting future demand for products •market share and or services profitability analysis •identifying new markets •determining marketing problems and issues •assessing the strengths and weaknesses of the •evaluating corporate organisation and comparing identity and image it to the competitors perception •measuring customer •acquisition and divestment satisfaction selection. •industry and market structure and composition Distribution Planning Corporate Planning Distribution Planning Determine the most effective distribution channels: •penetration level •channel selection selection •distributor cost analysis •stock check policies •margin analysis for •inventory policy selection. wholesalers and retailers •incentive policy design Competitive analysis is critical for managers formulating corporate or divisional strategies. Product Planning •gathering new product ideas and identifying possible product modifications •concept testing •product testing – usually before it is launched into the market •packaging testing •product name testing •comparative testing •product line simplification •determining perceived product/service quality in the market. They also must be capable of critically assessing their own organisation’s performance, over time, relative to its competitive peers. Colley, et al., 2004 Product Planning Promotional Planning Promotional Planning Price Planning Used to select effective and persuasive communication methods. This section is divided into two parts: Communications Planning •generating brand positioning •message design and content •creative position development •ad pre-testing •ad post-testing •multimedia communication strategies •developing optimum communications mix Sales Force Planning •defining sales areas •testing selling techniques •defining sales targets •sales performance evaluation •compensation system evaluation. Price Planning Market research can give an indication as to what the price range for products/services should be. The price determination process can be extremely complex for certain companies, especially those in highly competitive markets. Figure 3: The Uses of Market Research Source: Gabriela Escobar Uribe BBus (Col) MBA IB (Aus) the importance of Market Research Characteristics of products and services can be adapted according to customers’ wants and needs: Executives and planners must be aware of the levels and trends in performance of their competitors to determine the best direction for their divisions and parent corporations. 7 the importance of Market Research 8 Types of research A company’s competitive advantage is based on knowledge. The manner in which an organisation is able to acquire knowledge about its market and apply it will determine its ability to survive in today’s globalised market. Understanding the market is one of management’s most important tools. It is essential to the survival and growth of any company. A company can use different types of research to gather as much intelligence as possible. The following provides background information on the various types of research available to management. Ad Hoc Research Continuous Research Field Research This is used whenever a company is looking to expand its general knowledge base. By using basic or pure research methods with a continuous approach, organisations are able to determine trends or detect changes in the market before their competitors do. This type of research is also used to verify the applicability of any given set of theories or to understand how academic concepts apply to real world scenarios. Desk Research This type of research ideally suits gathering secondary information. It is so named because this type of research can be done using the internet as the main source of information. The main issue researchers face is that some of the information found online can be from unreliable sources whose information might not be able to be verified. The vast amount of data and information online can become overwhelming for researchers who do not know how to delimit their search, or even what to look for. Dated information, incorrect facts, wrong scope in research papers and credibility are just some of the drawbacks that researchers need to address. A sample of credible sources is listed below: •Australian Bureau of Statistics (ABS) •All three tiers of government – Local, State and Federal •RSS Feeds •Google/Google Alerts •Media Statements •Customers and Competitors •Professional Associations and Trade Publications, for example: –– Housing Industry Association (HIA) –– Industry Capability Network (ICN) –– IBIS Reports. This type of research is used whenever there is a need for applied research. It is conducted in order to assist in the decision-making process for a specific problem. This type of research is less broad, and information sought is much more specific than the continuous research process. Used for primary research, field research focuses on obtaining specific information that cannot otherwise be sourced through secondary research options. It is through this process that researchers are able to design research methods that will allow them to acquire specific competitive information to solve a predetermined business issue. There are a range of research methodologies that can be employed, each of which has specific functions, advantages and disadvantages. When selecting which methodology they will employ, researchers must take into account variables such as cost, timeframe and specificity of the information needed. Some of the research methods most commonly used are: •face-to-face interviews •telephone interviews •focus groups •online surveys •observation. (Zikmund, et al., 2007) 9 Research analysis methods Product Life Cycle By dividing a product’s life cycle into four distinct phases, it is possible to determine what aspects of the product’s market strategy are the most important and should be management’s main focus. This method divides all products’ life cycles into four main phases: introduction, growth, maturity, and decline (Encyclopedia of Small Business, 2002). The main objective of this analysis is to maximise the value and profitability of products at each stage, doing so by determining the most efficient and effective allocation of the company’s resources. SWOT Analysis This analytical tool is used to determine and evaluate the Strengths, Weaknesses, Opportunities, and Threats that surround any project or business venture. These four elements allow the researcher to understand internal and external factors that affect the business in both a favourable and an unfavourable manner (Hali, 2007). By doing this type of analysis, managers can clearly determine which negative elements need to be minimised or changed, and which positive elements should be maximised and used as a competitive advantage. Porter’s 5 Forces This model is an analytical tool designed to weigh-up risks and opportunities. The model determines the internal forces that affect a business, such as the bargaining power of suppliers and customers; and the external forces in the microenvironment, such as the threat of substitute products, the risk posed by established rivals, and the threat of new entrants (Pringle & Field, 2008). By evaluating these elements, it is possible to establish the competitive intensity and attractiveness of a market, thus allowing management to determine whether or not to enter a market, or determine a plan of action to improve the company’s competitive position in a particular market. Value Net Model (PARTS) explains this model as a way to understand all players that interact with a business, not as a negative force, but as value-adding entities. Each of these cooperative forces adds value in unique ways, which are analysed through the PART Model: Players, Adding Value, Rules, and Tactics. Players are analysed and divided into two groups: customers and suppliers, and competitors and complementors, which mirror each other. The analysis is simply the set of rules or behaviours by which the players interact with each other. Moreover, the tactics are the way players interact with each other to create value, based on the relationships and perceptions they have of each other. The scope overlooks the breadth and reach players have within the group. Their connections, both within the group and outside, create value for the players. Evans (2009) the importance of Market Research While there are many research analysis methods, not all are suitable for every case. Researchers must be able to determine which model suits their problem best and offers the most advantageous analysis of the available information. Customer Segmentation Analysis 10 the importance of Market Research This type of analysis allows management to focus on those segments that provide the greatest growth in the market. By providing information that helps design targeted marketing and service campaigns, companies are able to reach those customer segments that are the most appealing to the business, targeting them with offers specifically suited to their needs and preferences (Dalton, 2006). Without a correct customer focus, businesses are at risk of allocating resources to a broad customer segment, leading to poor growth and lower profitability. Not all business is good business. Strategic Business Units (SBU) Porter’s Four Corners Analysis This predictive tool seeks to determine the likely course of action competitors might take in response to an organisation’s strategy. By profiling the competitor and its motivations, management can determine an accurate and realistic prediction of how the competitors might react to certain situations. This is based on elements such as internal culture, value system, mindset, and assumptions. The four analytical corners are as follows: •the manager’s assumptions •their strategy •their capabilities, and •their drivers (Evans, 2009). Supply Chain Analysis This is a quantitative analysis of the relationship between suppliers, manufacturers, distributors, and retailers (Beamon, 1998). It allows managers to understand the value transfer between the parts along the chain, and to identify and analyse where the problematic areas might be in order to maximise efficiency and profitability. Whenever a company has different SBUs, a periodic analysis allows managers to detect those areas in which they should invest further or divest; all as a part of their overall business strategy. Each strategic business unit needs to be analysed both internally and externally with a review of the overall industry attractiveness, and the SBU’s attractiveness. For the former, elements such as potential growth, competitive position, capital investments needed, economic conditions, regulatory issues, and various other factors come into play; whilst for the latter a SWOT-like assessment is done to determine the SBU’s attractiveness (Evans, 2009). After placing these ranked elements together, managers can easily detect which of their SBU’s need their attention the most. STEEP Model This model gives management a general framework to determine how the external environment in which they operate will impact on their organisation’s strategic plan and competitive capacity. The model monitors the complete competitive landscape by looking into the Social, Technological, Economic, Ecological, and Political aspects of the market (Evans, 2009). It effectively audits the externalities businesses must operate within, and helps managers understand the potential changes that might occur, allowing them to stay ahead of their competitors. 11 the importance of Market Research The end result An increase in globalisation across all markets, and the surging growth of the internet, continuously shapes and defines the role of market research. These two elements constantly change the environment in which companies operate. In today’s volatile business environment, information is the key to powerful decisions. In today’s business environment, information is power. And, information is the key to competitive advantage. The competitive advantages listed below can all be determined through market research: •distribution models such as strategic partnerships •market niche enhanced with specialist in-house training •enhanced product or service features •store locations •sustainability credentials. Managers must keep up with the ever-increasing flow of change around them, even those changes that seem of little significance or might not even be noticeable at first. Change is inevitable and managers who expect market conditions to stay the same risk the rapid demise of their business. The only real defence managers have to protect themselves and their organisations is to evolve with the marketplace, and the only way of doing so is by having a continuous flow of information and intelligence. This can only be provided by market research. Market research is a set of tools designed specifically to make managerial judgement more precise, thus improving business efficiency and profitability. No matter what the organisation or the business sector, all successful businesses need to understand the environment in which they operate. Today’s world is increasingly competitive, and it is the manager’s role to make sure their organisation is as responsive to their markets as possible. Market research is a tool that serves as a guide, a compass to navigate through markets filled with competitors and other externalities where only the fittest survive. This whitepaper has been specifically written to remind all managers of the importance and value of market research, to value timely information in a volatile market, and to act on it. As important as experience and gut decisions are, they are not enough. Managers need to gather as much intelligence as possible to ensure that they make the most efficient, effective and productive decisions for their organisation. the importance of Market Research 12 Bibliography Birn, R. & Forsyth, P., 2001. Market Research, s.l.: Capstone Publishing. Burns, A. C. & Bush, R. F., 2010. Marketing Research. Sixth Edition ed. New Jersey: Prentice Hall. Colley, J. L., Doyle, J. L. & Hardie, R. D., 2004. Corporate Strategy. Illustrated ed. s.l.:McGraw-Hill Professional. Crouch, S. & Housden, M., 2003. Marketing Research for Managers. Third Edition ed. Great Britain: Butterworth Heinmann. Encyclopedia of Small Business, 2002. Product Life Cycle. 2nd edition Vol 2 ed. Detroit: Gale Virtual Reference Library. Evans, M. H., 2009. Course 12: Competitive Intelligence, Arlington, VA: Excellence in Financial Management. Hali, S. M., 2007. SWOT analysis. The Nation, 06 November. Lambin, J. J., 2000. Market-Driven Management. First Edition ed. Chippenham: Palgrave. Pringle, H. & Field, P., 2008. Chapter 8 – Porter’s Five Forces. In: Brand Immortality: How Brands Can Live Long and Prosper. s.l.:Kogan Page. For further information or to discuss any issues that may be solved through market research contact: Research by Design p:+61 7 3342 7792 e:[email protected] www.researchbydesign.com.au research by design 2012