Does Energy Have a Future?

Market Research

October / November 05 By: Grace Brill Volume 3 Number 5

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Although the bulk of effort devoted to market research will generally be aimed at understanding customers and the competitive environment, it would be a mistake to ignore an investigation into the larger industry dynamics that can impact your startup's success.

First, you will need to understand high-level structural issues. Does the industry you plan to sell to consist of 26 companies or 2,600? At the most basic level, too few potential customers may suggest that the market is too small for you to be successful. Beyond that, industry structure will impact your sales and marketing efforts, influencing decisions such as how you will reach customers.
The number and distribution of customers will also have implications for larger strategic issues—€”for instance, a small universe of influential customers may result in a situation where customer bargaining power results in margin erosion.
Balance of power may also be something to be aware of. Are there clear industry leaders whose behavior will have a disproportional impact on whether other players adopt your innovation?

Another factor you will want to assess is the overall complexion of the industry. Is this a staid industry satisfied to make do with incremental innovations, or one in the throes of great upheavals, where players are looking for cutting-edge ways to reach the next level? This is often something to consider when deciding which of several markets to pursue first. You definitely do not want to choose as your first market an industry that is inherently conservative and where new innovations are adopted only after several years of vetting and assessment. Is the industry cyclical? It helps to know beforehand if there are lifecycle issues, and, if so, where the industry is now in the cycle as this will have implications for cash flow, product adoption, and perhaps even the need for a different market to balance downturns in the cyclical one.

It is also important to learn what is considered normal practice in the industry. For instance, are there standard ways of distributing the product? Unless your business model is predicated on pioneering a new distribution channel, it would probably be best to stick with current distribution practice and focus innovation efforts on the solution itself. Even if a novel form of distribution is a key element of your plan, you still need to have a thorough understanding of the status quo in order to position your alternative effectively.

If you have experience in the industry you will be selling into you probably have a decent understanding of many of the industry issues you will face. It is those who lack this experience who are more likely to be blindsided by industry challenges that are not immediately apparent to outsiders. For instance, a newcomer to the medical device industry will probably be aware of the need for a regulatory strategy, but may be less familiar with the complexities of the reimbursement process or the dominance of group purchasing organizations, both of which can be powerful barriers to entry.

Sometimes, these issues are fairly obscure and not obvious to an outsider. Let's say you have come up with a novel power generation innovation that will need to be integrated with other components to create a whole system. Are you sure that you understand all the issues having to do with warranties for system components? This may be an issue the industry has grappled with and that all customers or resellers will be concerned with—€”you don't want to find out too late that you should have tackled the component warranty bugaboo at the outset.
Another issue that I will lump broadly under the "industry" rubric is that of related or complementary products and how they might impact your own solution.
Sometimes this relationship is so strong as to cause product dependencies. For instance, in certain advanced imaging arenas, development of actual imaging capability has outstripped the ability of image processing software to make sense of all the data. In a case like this, adoption of the imaging technology may lag until software development has caught up.

In some cases, industry research may lead you to identify challenges that you had not considered before. I have worked with several clients who found that issues involving labor and collective bargaining created a type of barrier to entry for which they needed to find workarounds. Perhaps not deal-killing, but something you want to identify sooner rather than later.

Luckily, finding out about potential industry pitfalls is not that difficult. The standard method of combining secondary and primary research will usually yield clear insight into industry structure, norms, dynamics and realities. The main challenge is admitting to yourself that these factors are not merely incidental to your business case but may be more central to it than you had originally imagined.

Grace Brill is director of market research at Technology Ventures Corp.