Running a market analysis: which data can carry a decision

Which four pieces of information does a decision need?

A market analysis becomes useful the moment it answers these four questions. Everything else is decoration.

• How big is the addressable market? Not the industry, but the part you can actually reach with your offering, your sales channel and your region. That number is regularly a fraction of the number in the study.
• Which direction is it heading? Over three years, not one. One year shows the business cycle, three years show a trend.
• What share can you win? Limited by capacity, sales reach and how willing customers are to switch. A number without those limits is a wish.
• Who makes the money today? If nobody earns a margin in a growing market, growth is not an argument for entering it.

The fourth question gets skipped most often, and it overturns most entry decisions. A market can grow and still be unattractive for everyone involved, for example when customers negotiate hard or an upstream input dictates the price.

Before the four questions comes a definition that determines their answers: the market boundary. "The market for industrial valves" is not one. "Shut-off valves from DN 200 up for waterworks in Germany and Austria" is. The boundary needs three elements: product type, customer type and region. Without it, every source delivers numbers for a different field. The analysis then ends with values that differ by a factor of ten.

Why is total market volume the least important number?

Because no company serves an entire market. The number impresses in presentations and answers none of the questions on the table.

Here it is as a calculation: according to industry association figures, the European market for a component group is four billion euros. You manufacture in a tolerance class that covers about one fifth of that volume, ship to three countries and serve buyers above a certain lot size. That leaves roughly 180 million addressable. Your capacity covers 25 million. The number a decision hangs on is the last one, not the first.

The big number is only useful as a cross-check. If your bottom-up estimate and your share of the association figure are far apart, one of the two contains a flaw in reasoning. That is the real value of a study: in the comparison with your own calculation, not in its number.

Why a number alone explains nothing

Because two figures can move together without one causing the other. That sounds academic and costs a lot of money in practice.

An example that comes up regularly in strategy sessions: the per-unit profit of a product has risen over five years, even though market share has fallen. Competitive theory says higher market share goes hand in hand with higher profitability on average. Here the opposite is happening. Before that turns into a strategy, you need to settle the question of what depends on what.

• Per-unit profit may have risen because unit costs went down. In that case it has nothing to do with market share.
• Market share may have fallen because new competitors entered, the way Chinese manufacturers took share from Apple and Samsung.
• Or the segments have shifted relative to each other: the mass market is shrinking, the premium segment is growing. In that case you are losing share in a market that is itself getting smaller.

Each of these three explanations leads to a different decision. If you do not keep them apart, you optimize at the wrong end. Be just as unsparing here as in the analysis itself: the consequences determine what becomes of the company.

Where does the data come from in mid-sized companies?

From five sources. The most expensive one is rarely the best.

The order in the table is also a recommendation for how to proceed. If you start with your own quote statistics and fifteen customer conversations, you'll know more about your market after two weeks than you would from reading a study.

Two sources are deliberately missing from this list. We don't talk to competitors' employees, because nothing comes out of it that you could cite as a basis in a leadership meeting. And figures from consulting proposals are sales material, not findings. Both are delicate and practically useless on top of that.

How many customer conversations are enough?

Twelve to twenty, provided they're in the same segment and follow the same structure. After that the answers start repeating, and that's exactly your signal to stop.

The selection matters more than the number. Three groups belong in it: customers who buy from you, customers who buy elsewhere, and companies that solve the problem themselves. The second and third groups deliver the insights, and the third is the hardest to reach and the most valuable.

The questions determine the value. "Would you buy this?" gets you politeness. "What did you buy last time, how was the decision made, and who was involved?" gets you behavior. Past behavior is the only reliable information a conversation yields.

How do you build up the potential from the bottom?

Through the number of possible customers, their annual demand, and a share you can justify. This calculation is fallible and still better than any top-down derivation, because every assumption in it is named and therefore testable.

One scenario: according to a company database, there are roughly 900 companies with a matching profile in your target region. Based on your customer conversations, you estimate that about a third have the demand on a regular basis. Average annual revenue per customer is €40,000. That puts around €12 million in the addressable market. With one field sales rep and twelve to eighteen months of lead time, five percent of that is a plausible target for year two.

Write down every assumption alongside its source. If the number doesn't materialize later, you can say which assumption was wrong. Without that link, a missed number only leaves the impression that market analysis is reading tea leaves.

When is the analysis done?

In StrategyFrame®, market analysis is one of six modules in the situation analysis within the ANALYZE step, not a project in its own right. That sets the standard for "done": the result is one to three sentences that someone who has never seen the tables can understand. Everything below that is material and goes into the appendix.

When the decision it was made for can be made with it. That's the only useful standard. It makes a lot of analyses considerably shorter.

In practice: two to four weeks for a market entry decision, with half a day of work per week. It takes longer only when no one has written down the decision at stake, so people collect whatever they can find.

What remains afterward is a document of three to four pages: the four figures above, the assumptions with their sources, the consequence, and the question of what development would make you reassess the decision. That last point turns an analysis into a tool that's still worth something a year later.

Contradictory numbers are the norm here and no reason to keep digging. If the industry association statistics show a growing field and your own quote statistics show falling prices, both are usually right: the market is growing in a segment where you don't compete. Contradictions like these belong in the document rather than being resolved. They're often the most useful statement in it, because they reveal a shift before it shows up in your numbers.