3.

Idea Incubation: Factors determining competitive advantage, Market segment, blue

ocean strategy, Industry and Competitor Analysis (market structure, market size, growth
potential), Demand-supply analysis [4L]
******************************************************************

Idea incubation is a process for bringing ideas into reality. Incubation means hatching or
germination. It starts on a very fundamental level, often with a single individual who comes up
with a concept he or she thinks should be further explored. This individual brings others in on the
incubation process, making the idea stronger and more viable. Ultimately, the idea may be turned
into a product, assuming that funding can be secured and that the idea is commercially viable.
Many companies foster idea incubation by clustering workers together in collaborative
environments. Especially in the case of software companies, employees are actively encouraged
to spend work time pondering issues and ways to solve them. Cooperative groups work best for
incubation because other members of the group can identify strengths and weaknesses of the
idea, resulting in a stronger finished product. Many startup companies begin with idea incubation
in a house or restaurant somewhere.

A quick thinking entrepreneur can identify a problem, a solution, and a way to make the
solution marketable. Idea incubation may involve a simple problem and an innovative solution,
or a complex problem requiring creative effort by several individuals. If the incubation process is
successful, an entrepreneur can present a larger company with a concrete concept, resulting in
increased funding to develop it. As the idea becomes stronger, it is introduced to a wider group.
This allows incomplete ideas to be more thoroughly fleshed out before being promoted, which
means that ideas are less likely to be ignored and allowed to fall through the cracks. It also
means that as an idea gains momentum, the growing group of individuals associated with it can
contribute to the concept. Some companies offer their services as professional idea incubators.
These companies use a staff of individuals who are trained to think innovatively. Idea incubation
firms often provide support for product development all the way through the process from the
initial vague concept to commercial production. To foster idea incubation, an open environment
is needed. Rigid corporate environments with set bureaucracies tend to foster less idea
development. The free exchange of information, use of conflict as a development tool, and
equality between idea incubators allow companies to come up with innovative product concepts.
Teams are encouraged to take risks and think outside the box. Smaller companies tend to be
more successful idea incubators, due to the more egalitarian and open environment fostered
within small companies.

Successful incubation can result in products ranging from clothespins to computers. Ultimately,
strong leadership and executive skills are required, along with an entrepreneurial spirit. Once an
idea has been incubated, it needs to be developed, prototyped, and commercially presented.
Appointing a team leader can encourage this, along with creating a work environment in which
all employees are encouraged to make contributions.

MARKET SEGMENT

A market segment refers to a sub-group of customers that share common characteristics such as
interests, geography, age, demographic, or lifestyle. Commonly used in marketing strategies,
market segments help companies optimize their product or service to suit a given segments
needs. Often, market segments are used to identify a target market. Market segmentation is the
process of dividing a target market into smaller, more defined categories. It segments
customers and audiences into groups that share similar characteristics such as demographics,
interests, needs, or location.

Understanding Market Segments

A market segment is a category of customers who have similar likes and dislikes in an otherwise
homogeneous market. These customers can be individuals, families, businesses, organizations, or
a blend of multiple types. Market segments are known to respond somewhat predictably to a
marketing strategy, plan, or promotion. This is why marketers use segmentation when deciding a
target market. As its name suggests, market segmentation is the process of separating a market
into sub-groups, in which its members share common characteristics.

Criteria of market segmentation

To meet the most basic criteria of a market segment, three characteristics must be present. First,
there must be homogeneity among the common needs of the segment. Second, there needs to be
a distinction that makes the segment unique from other groups. Lastly, the presence of a common
reaction, or a similar and somewhat predictable response to marketing, is required. For example,
common characteristics of a market segment include interests, lifestyle, age, gender, etc.
Common examples of market segmentation include geographic, demographic, psychographic,
and behavioral.

How do you identify market segments?

Broadly speaking, to identify a market segment the following three criteria must be met.

1. To start, the main needs of a sub-group must be homogenous.

2. Second, the segment must share distinct characteristics.

3. Finally, the segment produces a similar response to marketing techniques. Prospective buyers
are grouped into various segments, often based on how much value they place on a product or
service.

Eight Benefits of Market Segmentation

The importance of market segmentation is that it makes it easier to focus marketing efforts and
resources on reaching the most valuable audiences and achieving business goals. Market
segmentation allows you to get to know your customers, identify what is needed in your market
segment, and determine how you can best meet those needs with your product or service. This
helps you design and execute better marketing strategies from top to bottom. Market
segmentation helps you get to know your customers, identify what's needed in your market
segment, and determine how you can best meet those needs with your product or service.

1. Create stronger marketing messages

When you know whom you’re talking to, you can develop stronger marketing messages. You
can avoid generic, vague language that speaks to a broad audience. Instead, you can use direct
messaging that speaks to the needs, wants, and unique characteristics of your target audience.
2. Identify the most effective marketing tactics

With dozens of marketing tactics available, it can be difficult to know what will attract your ideal
audience. Using different types of market segmentation guides you toward the marketing
strategies that will work best. When you know the audience you are targeting, you can determine
the best solutions and methods for reaching them.

3. Design hyper-targeted ads

On digital ad services, you can target audiences by their age, location, purchasing habits,
interests, and more. When you use market segmentation to define your audience, you know these
detailed characteristics and can use them to create more effective, targeted digital ad campaigns.

4. Attract (and convert) quality leads

When your marketing messages are clear, direct, and targeted they attract the right people. You
draw in ideal prospects and are more likely to convert potential customers into buyers. When
your marketing messages are clear, direct, and targeted they attract the right people.

5. Differentiate your brand from competitors

Being more specific about your value propositions and messaging also allows you to stand out
from competitors. Instead of blending in with other brands, you can differentiate your brand by
focusing on specific customer needs and characteristics.

6. Build deeper customer affinity

When you know what your customers want and need, you can deliver and communicate
offerings that uniquely serve and resonate with them. This distinct value and messaging leads to
stronger bonds between brands and customers and creates lasting brand affinity.

7. Identify niche market opportunities

Niche marketing is the process of identifying segments of industries and verticals that have a
large audience that can be served in new ways. When you segment your target market, you can
find underserved niche markets that you can develop new products and services for.

8. Stay focused

Targeting in marketing keeps your messaging and marketing objectives on track. It helps you
identify new marketing opportunities and avoid distractions that will lead you away from your
target market.

TYPES OF MARKET SEGMENTS

There are four main customer segmentation models that should form the focus of any marketing
plan. For example, the four types of segmentation are Demographic, Psychographic Geographic,
and Behavioral. These are common examples of how businesses can segment their market by
gender, age, lifestyle etc. Let’s explore what each of them means for your business and your
market segmentation strategy. Market Segmentation isn’t just about your business reaching
customers more effectively – it’s also about those customers seeing messaging that is more
relevant to them!

1. Demographic segmentation: The who

Demographic segmentation might be the first thing people think of when they hear ‘market
segmentation’. This is perhaps the most straightforward way of defining customer groups, but it
remains powerful. Demographic segmentation looks at identifiable non-character traits such as:

 Age (little shop)

 Gender (Raymonds for men, Gillete was for men, now into women with venus razors.
Titan Raga for women), men’s deodorant female’s deo
 Ethnicity
 Family size
 Income (Titan Sonata, cars for different segments level)
 Level of education
 Religion
 Nationality
 Profession/role in a company

For example. demographic segmentation might target potential customers based on their income,
so your marketing budget isn’t wasted directing your messaging at people who likely can’t afford
your product.

Demographic Segmentation
Where the above examples are helpful for segmenting B2C audiences, a business might use
the following to classify a B2B audience:

 Company size
 Industry
 Job function

Segmenting a market according to demographics is the most basic form of segmentation.

Combining demographic segmentation with other types can help you to narrow down your
market even more. One benefit of this kind of segmentation is that the information is relatively
easily accessible and low-cost to obtain. Because demographic information is statistical and
factual, it is usually relatively easy to uncover using various sites for market research.

How to gather demographic data

There are numerous ways to gather demographic data. One way is to ask your customers
directly. This can be time-consuming, but getting the information directly from customers will
help ensure its accuracy. If you go this route, be careful to be respectful in how you ask and give
customers sufficient response options so you get accurate results. You may also be able to obtain
demographic data directly from customers by looking at social media and other online profiles
where they may provide information about themselves.
You can also get demographic from second-party and third-party data providers including
marketing service providers and credit bureaus. Public records, such as those kept by the U.S.
Census Bureau and the U.S. Postal Service, can also provide useful information.

Collecting this data in a data management platform (DMP) will help you to organize it and use it
to target your marketing campaigns or content personalization efforts.

Demographic segmentation sorts a market by demographic elements such as age, education,

income, family size, race, gender, occupation, nationality, and more. Demographic segmentation
is one of the simplest and most commonly used forms of segmentation because the products and
services we buy, how we use those products, and how much we are willing to spend on them is
most often based on demographic factors.

2. Psychographic segmentation: The why

Psychographic segmentation is focused on your customers’ personalities and interests. Here we

might look at customers and define them by their:

 Personality traits(Titan launched fastrack for youth)

 Hobbies
 Social class(someone buying a 17 lakhs car leaving affordable ones)
 Life goals
 Values
 Beliefs
 Lifestyles

Compared to demographic segmentation, this can be a harder set to identify. Good research is
vital and, when done well, psychographic segmentation can allow for incredibly effective
marketing that consumers will feel speaks to them on a much more personal level.

In our experience working with luxury resort business Omni Hotels & Resorts, for example,
were aware that a big sector of the company’s target audience was always keen to get the very
best price they could. By targeting a notification campaign specifically towards comparison
shoppers, Omni Hotels & Resorts achieved a 39% conversion rate uplift.

Psychographic segmentation categorizes audiences and customers by factors that relate to

their personalities and characteristics.

Psychographic Market Segmentation Examples

 Personality traits
 Values
 Attitudes
 Interests
 Lifestyles
 Psychological influences
 Subconscious and conscious beliefs
 Motivations
 Priorities

Psychographic segmentation factors are slightly more difficult to identify than

demographics because they are subjective. They are not data-focused and require research to
uncover and understand.
For example, the luxury car brand may choose to focus on customers who value quality and
status. While the B2B enterprise marketing platform may target marketing managers who
are motivated to increase productivity and show value to their executive team.

Psychographic segmentation is similar to demographic segmentation, but it deals with

characteristics that are more mental and emotional. These attributes may not be as easy to
observe as demographics, but they can give you valuable insight into your audience’s
motives, preferences and needs. Understanding these aspects of your audience can help you
to create content that appeals to them more effectively. Some examples of psychographic
characteristics include personality traits, interests, beliefs, values, attitudes and lifestyles.

If you find that members of a demographic segment are responding differently to your
content, you might want to add in some psychographic information. While demographics
provide the basic facts about who your audience is, psychographics give you insight into
why people decide to purchase or not purchase your product, click on or ignore your ad and
otherwise interact with you.

Say you’re a furniture and home decor company, and you have a market segment consisting
of newlyweds in their 20s and 30s with a household income above $60,000. Some members
of this segment are converting, while others are not. When you add psychographic
information into the mix, you may find that people that purchase your products often value
community and friendships and are environmentally conscious. Based on this information,
you could create ads that show people entertaining friends in their home and emphasize the
environmentally friendly attributes of your brand.

You can collect this data in many of the same ways you can gather demographic data. You
can ask your existing customers for this information using surveys. You can also look at the
way people interact with your website and see what types of content they engage with,
which gives you insight into their interests and preferences. You can also supplement your
first-party data with second-party and third-party data.

Psychographic segmentation takes into account the psychological aspects of consumer behaviour
by dividing markets according to lifestyle, personality traits, values, opinions, and interests of
consumers. Large markets like the fitness market use psychographic segmentation when they
sort their customers into categories of people who care about healthy living and exercise.

3. Geographic segmentation: The where

By comparison, geographic segmentation is often one of the easiest to identify, grouping

customers with regards to their physical location. This can be defined in any number of ways:

 Country
 Region (Times of India launches different versions as per region)
 City
 Climate

For example, it’s possible to group customers within a set radius of a certain location – an
excellent option for marketers of live events looking to reach local audiences. Being aware of
your customers’ location allows for all sorts of considerations when advertising to consumers.

Using Yieldify’s tools, an online shoe store could show different products depending on where
the visiting customer was based: wellington boots for someone in the countryside, pavement-
friendly trainers for a city-dweller, strappy sandals to resort visitors, and so on!
In large nations like the United States, customers could be presented with options that match
with local weather patterns. Geographical identification is an important part of seasonal
segmentation, which allows businesses to market season-appropriate products to customers.

Some recent examples of proper geographic segmentation came from the response by e-
commerce businesses to the coronavirus pandemic. During lockdown stages, many businesses
shifted their focus to local communities to highlight how their services could still be accessed
online.

Conversely, as public spaces began to open up again purely e-commerce brands had to shift their
marketing plans to maintain the levels of business they had seen over the lockdown period.

Geographic segmentation is the simplest type of market segmentation. It categorizes

customers based on geographic borders.

Geographic Market Segmentation Examples

 ZIP code
 City
 Country
 Radius around a certain location
 Climate
 Urban or rural

Geographic segmentation can refer to a defined geographic boundary (such as a city or ZIP
code) or type of area (such as the size of city or type of climate).

An example of geographic segmentation may be the luxury car company choosing to target
customers who live in warm climates where vehicles don’t need to be equipped for snowy
weather. The marketing platform might focus their marketing efforts around urban, city
centers where their target customer is likely to work.

Geographic segmentation, splitting up your market based on their location, is a basic but highly
useful segmentation strategy. A customer’s location can help you better understand their needs
and enable you to send out location-specific ads.

There are several kinds of geographic segmentation. The most basic is identifying users based on
their locations such as their country, state, county and zip code. You can also identify consumers
based on the characteristics of the area they live in, such as its climate, the population density
and whether it’s urban, suburban or rural. Identifying characteristics can require you to get more
specific since one county could have rural, suburban and urban areas.

Dividing a market according to location is critical if you need to target an ad to people in a

specific area, such as if you’re advertising a small local business. It can also be useful if you’re
targeting a broad area because it enables you to tailor your messaging according to regional
differences in language, interests, norms and other attributes as well as the differing needs of
people in different regions.

You may need to change the language your messaging depending on the region you’re targeting.
People who live in different countries may also have different interests. Baseball is very popular
in the United States, for example, while cricket is more popular in India. If you’re marketing
sports equipment or publishing sports articles, you will want to take these different preferences
into account.
Companies can also consider different needs in different regions. A clothing company, for
instance, will show ads featuring warmer clothing to people living in cooler climates and show
the opposite to people living in warmer climates.
While typically a subset of demographics, geographic segmentation is typically the
easiest. Geographic segmentation creates different target customer groups based on geographical
boundaries. Because potential customers have needs, preferences, and interests that differ
according to their geographies, understanding the climates and geographic regions of customer
groups can help determine where to sell and advertise, as well as where to expand your business.

4. Behavioral segmentation: The how

Behavioral segmentation is possibly the most useful of all for e-commerce businesses. As with
psychographic segmentation, it requires a little data to be truly effective – but much of this can
be gathered via your website itself. Here we group customers with regards to their:

 Spending habits
 Purchasing habits
 Browsing habits
 Occasions
 Interactions with the brand
 Loyalty to brand
 Usage rate (reward points)
 Previous product ratings

All of these are datasets that can be harvested from a customer’s usage of your website. At
Yieldify, we utilize behavioral segmentation to deliver highly relevant and targeted
campaigns based on a number of behavioral patterns:

 Number of sessions to your website

 Number of pages visited
 Time spent on site
 URLs visited
 Page types visited
 Shopping cart value
 Campaign history
  Referral source
 Exit intent
 Inactivity, and more.

For example, we can distinguish between a first-time visitor and someone who’s already been on
your site multiple times but haven’t purchased. Based on this behavioral data, we can tailor our
messaging accordingly:

First time visitor: Hey, learn about our latest collection!

Returning visitor: Join our loyalty program and start saving!

Working with online wine club Vinomofo, we used behavioral segmentation to target three
distinct audiences: new visitors, returning visitors, and returning clients.

While demographic and psychographic segmentation focus on who a customer is, behavioral
segmentation focuses on how the customer acts.

Behavioral Market Segmentation Examples

 Purchasing habits
 Spending habits
 User status
 Brand interactions

Behavioral segmentation requires you to know about your customer’s actions. These
activities may relate to how a customer interacts with your brand or to other activities that
happen away from your brand.

A B2C example in this segment may be the luxury car brand choosing to target customers
who have purchased a high-end vehicle in the past three years. The B2B marketing platform
may focus on leads who have signed up for one of their free webinars.

One of the best examples of this type of segmentation is showing new visitors a $15 incentive in
exchange for joining the community. Returning visitors who had already subscribed but have not
redeemed their coupon yet were reminded on their first order incentive. Whereas returning
customers saw a campaign about Vinomofo’s premium services.

This targeted approach focused on purchasing habits reached a 34.02% conversion rate uplift
with new and 29.24% CR uplift with returning visitors!

You can also segment your market based on consumers’ behaviors, especially regarding your
product. Dividing your audience based on behaviors they display allows you to create messaging
that caters to those behaviors. Many of the actions you might look at relate to how someone
interacts with your product, website, app or brand.

Some types of behaviors to look at include:

Online shopping habits: You might consider a users’ online shopping habits across all sites, as
this may correlate with the likelihood they will make an online purchase on your website.
Actions taken on a website: You can track actions users take on your online properties to better
understand how they interact with them. You might look at how long someone stays on your site,
whether they read articles all the way to the end, the types of content they click on and more.

Benefits sought: This refers to the need a customer is trying to meet by purchasing a product.

Usage rate: You can categorize users based on usage rate. Your messaging will be different
depending on whether someone is a heavy user, medium user, light user or non-user of your
product.

Loyalty: After using a product for some time, customers often develop brand loyalty. You can
categorize customers based on how loyal they are to your brand and tailor your messaging
accordingly.

Behavioral data is useful because it relates directly to how someone interacts with your brand or
products. Because of this, it can help you market more effectively to them.

You can collect this data through various sources including cookies placed on your website, the
purchase data in your customer relationship management (CRM) software and third-party
datasets.

Behavioural segmentation divides markets by behaviours and decision-making patterns such as

purchase, consumption, lifestyle, and usage. For instance, younger buyers may tend to purchase
body wash, while older consumer groups may lean towards soap bars. Segmenting markets based
off purchase behaviours enables marketers to develop a more targeted approach.

BLUE OCEAN STRATEGY

Blue ocean is an entrepreneurship industry term created in 2005 to describe a new market with
little competition or barriers standing in the way of innovators. The term refers to the vast
"empty ocean" of market options and opportunities that occur when a new or unknown industry
or innovation appears.
Blue oceans represent new markets where, since they’re unknown, there are no players other
than the companies that create them.
It posits that creating a new market can be more beneficial than competing in an existing market
with established competitors. These new markets are blue oceans.

Creating a blue ocean is difficult and generally requires the company to innovate (a concept
coined as value innovation) in a way that creates a previously non-existent or unrealized demand.
Value innovation involves the pursuit of both differentiation and low-cost strategies to open up
new and non-competitive markets. This innovation may take place at any or all stages of the
value chain.

The result is the development of a market that is devoid of competition and allows for extensive
growth or growth potential without the need for competitive differentiation or cost advantage.

You can create blue oceans in one of two ways:

1. By creating an entirely new marketspace
2. By pushing the boundaries of an existing market.

Amazon is another good example of a blue ocean strategy.

Its founder, Jeff Bezos, set out to create the world’s largest online bookstore — and
succeeded.

Part of the success was the convenient and well thought-out online customer experience.

But it was also the fact that as an online store, Amazon could carry a much larger
inventory than regular stores because the books themselves were stored by the large
network of suppliers.

Of course, today, Amazon sells practically everything, from books to garden furniture. It
has even branched out into publishing, cloud hosting, grocery deliveries and more!

Examples of Blue Ocean Companies

A blue ocean is specific to a time and place. Ford and Apple are two examples of leading
companies that created their blue oceans by pursuing high product differentiation at a relatively
low cost, which also raised the barriers for competition. They also were paradigmatic of
burgeoning industries at the time that were later exemplified and emulated by others.

For example, Netflix is focused on providing great customer service instead of opening DVD
stores.
Uber didn’t spend money on buying cars to compete with taxi owners. They decided to create an
application that would connect drivers and customers in one place.
Ford Motor Co.
In 1908, Ford Motor Co. introduced the Model T as the car for the masses. It only came in one
color and one model, but it was reliable, durable, and affordable.3

At the time, the automobile industry was still in its infancy with approximately 500 automakers
producing custom-made cars that were more expensive and less reliable. Ford created a new
manufacturing process for mass-producing standardized cars at a fraction of the price of its
competitors.

The Model T's market share jumped from 9% in 1908 to 61% in 1921, officially replacing the
horse-drawn carriage as the principal mode of transportation.4

Apple Inc.
Apple has repeatedly created blue oceans, starting with the iMac and going all the way
through to the iPod, iPhone and iPad — not to mention iTunes.

Apple Inc. found a blue ocean with its iTunes music download service. While billions of music
files were being downloaded each month illegally, Apple created the first legal format for
downloading music in 2003.5

It was easy to use, providing users with the ability to buy individual songs at a reasonable price.
Apple won over millions of music listeners who had been pirating music by offering higher-
quality sound along with search and navigation functions. Apple made iTunes a win-win-win for
 the music producers, music listeners, and Apple by creating a new stream of revenue from a new
market while providing more convenient access to music.

Red markets are established markets where all of the competing companies are fighting over the
same business. As a result, the water turns bloody (metaphorically speaking).
Blue oceans represent new markets where, since they’re unknown, there are no players other
than the companies that create them.

The counter to the blue ocean is the red ocean. A red ocean is a saturated market with industry
competitors. These competitors may possess a competitive advantage driven by cost,
differentiation, or niche market strategies. The result of the competition is destruction, which
draws the analogy of red blood in the ocean water. Thus, the red ocean generally offers less
opportunity for growth.

A blue ocean strategy seeks to avoid competition completely; thus, competitive strategies are less
important. Competitive strategies are necessary, but they are not adequate to grow a market
position. In a red ocean strategy, a structuralist view is that a competitive market is structured by
conditions that force firms to compete. This is also known as environmental determinism.
Gaining advantage in a red ocean is a supply-side focus where cost and differentiation strategies
are trade-offs. A blue ocean strategy adopts the belief that markets and industries are not
structured to beget competition. They can be reconstructed by industry players. This is a
reconstructionist view. This is a focus on generating additional demand rather than improving or
increasing supply through value innovation.

Pros of Blue Ocean Strategy

Here are a few of the advantages of using the blue ocean strategy:
1. Blue Ocean Strategy cooperates with organizations to find uncontested markets and avoid
matured and saturated markets.
2. It assists to move from the impediments of competing within the existing industry and cost
structure and to gradually migrate towards constructive value improvement. In short, it
demonstrates how to break free from the traditional strategic models and to expand profitability
and demand for the industry by using the analysis.
3. Value innovation is the backbone of a Blue Ocean Strategy. Value innovation is the alliance of
innovation with price, utility, and cost positions. It eventually creates new value/demand for
consumers and thereby, expands the chances of growth potential.
4. Blue Ocean Strategy enables a fundamental transformation in mindset. It develops mental
horizons and helps in recognizing the opportunities.
5. Blue Ocean Strategy is based on “time and again” proven data rather than unproven theories. It is
based on practical approaches that have proven results during live market executions.
6. Products under the concept of the Blue Ocean Strategy doesn’t make a consumer choose between
value and affordability. It is the simultaneous pursual of differentiation and low-cost theorem.
7. Creating blue oceans is non-zero-sum with high payoff possibilities.

Cons of Blue Ocean Strategy

Let’s us also look at a few of the common cons of using this strategy:
1. It’s quite difficult to come up with futuristic ideas and identify colossal and untapped markets.
2. Nominating an articulate Blue Ocean Strategy is a result of a calculated and detailed research
process backed by extensive analysis. It is to be kept in mind that there is no magic formula or,
silver bullet.
3. Venturing into a market in the early phase comes with baggage of risk. There is a high possibility
that the customers might not understand the grass root of the products and services because of
the absence of a fully developed technology.
4. Production of a new market is never easy because an organization has to be smart and clear
regarding its customer base and ways to impart education about new ideas, new products, and
new solutions. It also requires clarity about the trade-offs, obstacles and the workforce.
5. Opting for a different ocean i.e the Blue Ocean, requires a lot of patience, persistence trust,
preparation, and faith. It is also extremely paramount to look at initial indicators for confirming
the fact that “fishing” is not being done in a dead sea.
6. On finding a new ocean, other sharks from the saturated markets aka the Red Oceans and other
adjacent oceans will be lured to the new market. Thus, building strategically defensive
alternatives would be a wise step. Defensive alternatives majorly consist of brand power,
technological advancement, and speed of execution.

STRATEGIES OF BLUE OCEAN

Tips on applying the strategy
To cut the long story short, the blue ocean strategy suggests business owners focus on their idea,
perform a blue ocean market research to find something that differentiates the company from
other propositions and create a catchy tagline that communicates the product’s value.
Now, let’s talk in more detail about applying the blue ocean strategy.

 Analyze industries. First of all, you should start with a precise analysis of popular
industries and their products to identify a new trend or demand. Check if customers are
fully satisfied with already existing services.

 Define a problem. As soon as you find something that is not as good as it could be, think
about what you can do to solve this issue for customers and make them happier with your
offer. Do not think about what your competitors have done wrong, think about how you
can make the customers' lives easier.

 Follow four action blue ocean strategy framework. The authors of the book give us the
scheme to apply the strategy that includes the following points:

 Raise. What can be improved in the existing industry?

  Reduce. What results did the competition with other companies cause and can we remove
them?
 Eliminate. What features of the existing industry should be eliminated?
 Create. What new features can the company create that other businesses have never
offered?

 Implement. In case you have answers to these four questions, it’s time to implement the
strategy.

To better understand the way we can apply the blue ocean theory into practise let’s analyze three
well-known companies that successfully coped with this task.

Netflix

The first company that used the blue ocean strategy is Netflix, a popular subscription-based
streaming service. But at the beginning of its existence, in 1997, it was one more company
competing in the industry of DVDs rental and sales.
With the increasing popularity of the Internet, Netflix has become a streaming service with a
wide choice of films and TV series. Later they launched their shows and movies available only
on their platform. Netflix managed to change the shrinking red ocean into full of opportunities
for blue waters.
Let’s see what steps Netflix took to change the rules of a game.
According to the blue ocean strategy, Netflix analyzed the existing market and came up with a
couple of issues that could be improved to better satisfy customer’s needs. Netflix’s strategy can
be analyzed in four points:

 Eliminate. First of all, they eliminated physical stores and made all the films available
online. From that moment Netflix needed to pay only for a film license, without spending
money on buying and storing DVDs. At that time it was innovative for this kind of
industry.

 Raise. They raised the experiences process of watching movies has become much more
comfortable. You don’t have to leave their houses to buy a DVD. As well, if you close
the movie at some point, it is very easy to get back to the moment where you’ve stopped
watching. Finally, the payment process is very simple as it requires only a card number.

 Create. Customers have a great choice of movies available online. Netflix created
personal subscription-based accounts. Users can pay monthly and watch as many movies
as they want, without any limitations. As well, the service learns users’ preferences and
suggests films based on their previous views.

 Reduce. Netflix managed to reduce the cost as they pay only for obtaining licenses. They
got rid of expenses that are not compulsory in their industry but continued to offer high-
quality movies at an affordable price.

Netflix’s blue ocean idea was to make movies available online. When their competitors started
applying the same strategy, Netflix launched its original shows and films. This way they proved
that it is possible to switch to the blue ocean more than once in the same industry.
Uber

Image credit: CNEt

Uber is an online taxi service available in 42 countries and more than 200 cities all around the
world. Is Uber a blue ocean strategy? Yes. Though it didn’t invent anything new when it comes
to a product itself, Uber has changed the traditional way the transportation industry works. In
other words, they sailed into the blue ocean.
And again we will analyze their strategy in four points:

 Eliminate. Uber eliminated the inconveniences of booking a car, paying the driver
without change, the procedure of leaving a complaint, and the issue of booking
cancellation. Customers can easily find a taxi and track its location with their
smartphones. The application charges the user automatically after the ride so that
passengers don’t have to search for cash and pay the driver personally.

 Reduce. Uber solved problems of both drivers and customers by connecting them in one
app. The driver receives his/her order and money from the application and Uber just takes
its percentage from each ride.

 Raise. Uber has dramatically improved customer service. The application is fast, easy to
use, and very convenient. Passengers can rate the driver, so taxi owners care about their
reputation and strive to provide the best service.

 Create. With the help of new technologies and devices, Uber created a new market that
changed the essence of traditional taxi service.

At the introduction stage, Uber managed to create a market with no competition. Of course, later
other companies filled the niche, but Uber still dominates the market as it spread the service all
over the world.
INDUSTRY AND COMPETITOR ANALYSIS
Defined as “the collection of competitors that produces similar or substitute products or services
to a defined market”

• Industry segments are formed as the products or services of the industry are targeted to
particular subsets of the general market • Whether it’s an industry or a segment, it’s still referred
to as “the industry.
Industry and competitive analysis (ICA) is a part of any strategy development in firms and other
organizations. It contains a very practical set of methods to quickly obtain a good grasp of an
industry, be it pharmaceuticals, information and communication technology, aluminum, or even
the beer industry. The purpose of ICA is to understand factors that influence the performance of
the industry, and as well the performance of firms within the industry. An industrial analysis is
used to examine the past trends in an industry, the current demand and supply mechanics, and the
future outlook of the industry. It also acts as a guide to investors on the viability of investing in a
company.

The analysis is useful in offering recommendations in case an unexpected development happened

in the industry. An industrial analysis takes time and it is very complicated.

Industry analysis, as a form of market assessment, is crucial because it helps a business

understand market conditions. It helps them forecast demand and supply and, consequently,
financial returns from the business. It indicates the competitiveness of the industry and costs
associated with entering and exiting the industry. It is very important when planning a small
business. Analysis helps to identify which stage an industry is currently in; whether it is still
growing and there is scope to reap benefits, or has it reached its saturation point.
With a very detailed study of the industry, entrepreneurs can get a stronghold on the operations
of the industry and may discover untapped opportunities. It is also important to understand that
industry analysis is somewhat subjective and does not always guarantee success. It may happen
that incorrect interpretation of data leads entrepreneurs to a wrong path or into making wrong
decisions. Hence, it becomes important to collect data carefully.
COMPETITOR ANALYSIS

A competitive analysis is a strategy where you identify major competitors and research their
products, sales, and marketing strategies. By doing this, you can create solid business strategies
that improve upon your competitor's. Competitor analysis is the process of evaluating your
competitors’ companies, products, and marketing strategies.
 A competitive analysis can help you learn the ins and outs of how your competition works, and
identify potential opportunities where you can out-perform them.

It also enables you to stay atop of industry trends and ensure your product is consistently meeting
— and exceeding — industry standards.

Let's dive into a few more benefits of conducting competitive analyses:

 Helps you identify your product's unique value proposition and what makes your product
different from competitors', which can inform future marketing efforts.
 Enables you to identify what your competitor is doing right. This information is critical for
staying relevant and ensuring both your product and your marketing campaigns are
outperforming industry standards.

 Tells you where your competitors are falling short — which helps you identify areas of
opportunities in the marketplace, and test out new, unique marketing strategies they haven't taken
advantage of.

 Learn through customer reviews what's missing in a competitor's product, and consider how you
might add features to your own product to meet those needs.

 Provides you with a benchmark against which you can measure your own growth.

An industrial analysis is used to examine the past trends in an industry, the current demand and
supply mechanics, and the future outlook of the industry. It also acts as a guide to investors on
the viability of investing in a company.

The analysis is useful in offering recommendations in case an unexpected development happened

in the industry. An industrial analysis takes time and it is very complicated.

THE STEPS OF AN INDUSTRIAL ANALYSIS

1. Review available reports

Look for reports that focus on the industry you are about to enter or are operating in. If you have
not yet joined the industry, it will help you make a decision as to whether it is wise to invest in
the industry.

Understand that the information that was deemed relevant yesterday might no longer be accurate
today. A good example is government taxes which affect the operations of a business. The
government may change the tax at any time and if it does, the accuracy of the industry report is
affected.

2. Approach the correct industry

Every industry has sub-industries and in some cases the sub-industries are further subdivided.
Identifying the sub-industry that you intend to deal with will allow you to use the correct
industry analysis report.

3. Demand & supply scenario

The aim of entering into business is to earn profits. Profitability in an industry is determined by
the forces of demand and supply. When conducting an industrial analysis, you ought to consider
how the industry has performed in the past and what the future looks like.
 Future predictions on the viability of the industry will determine whether investors will invest in
the industry or not.

4. Competitor analysis
For you to come up with a good strategy to deal with the competition in the industry, you must
first understand the industry itself. After this, you can make informed choices on the best
competitive strategy to use. By the time you develop a competitor analysis, you should be able
to:

 Know your position in the industry

 Identify opportunities and threats within the industry

 Highlight the strengths and weaknesses of your organization

 Pinpoint the areas where strategic changes will lead to high returns
Competitor analysis is the process where you identify your greatest competitors and evaluate
their strategies to find out what their strengths and weaknesses are and how they relate to your
product or service. This analysis removes you from your comfort zone but also places you on the
path to success if you do it well.

The information that you receive from the analysis shapes your marketing plan. It will help you
identify what makes your services or products unique and what aspects of your products needs to
be upgraded to make them more competitive.

Example: Let’s say you are in the honey business and you have noticed your honey takes long to
move. As you carry out the analysis, you might realize that customers prefer one of your
competitor’s brands because of its packaging. So what do you do with this information? You do
not have to copy the exact packaging but you can carry out research to see what makes the
packaging more attractive. Now you will be better placed to compete with the competitor and
your honey will not stay long on the shelves before being bought.

To know your exact position in the market for your goods and services, you need to make
a competition grid. It is easy to make and it will give you detailed information about your
products and those of your competitors. First of all, think about the top four or five products that
compete with your products in the market. If you find it difficult to come up with the list, assume
you are a buyer and then imagine what products you would prefer other than your products.
Next, on the top of the page, write down the characteristics and features of each product and
service. The features of a product may include price, target market, method of distribution, extent
of customer service, and size.

For a service, the price, location of the service, prospective buyers, website and the toll-free
number can be used. This will give you an accurate position for your product.

How to conduct your competitive analysis

1. Identify your top ten competitors

This seems obvious, but it’s an essential first step. Do you know who your top competitors are?

If you sell a product or service online, you are likely competing with dozens, even hundreds of
companies going after the same group of qualified leads.
Whether you are a local, national, or international company, there is probably someone in your
company, often in the sales or marketing teams, who can quickly rattle off your top competitors —
as well as what differentiates them from you.

If you need a little help identifying your competitors, Google is a helpful resource. By simply
searching the type of service or product you are offering, it is pretty likely a few of your top
competitors will show up.

Another great way to discover who your top competitors are is by using online tools such
as SEMrush.

SEMrush is a great software to get a look into what other companies are ranking for your
keywords, and how you stack up against them. You can start with a 30-day free trial.

2. Analyze and compare competitor content

Once you've identified your competitors, you can kick-start your competitive analysis and dig a
little deeper to gain a better understanding of what type of content they're publishing.

Analyzing their content can help you determine what opportunities you have to help outperform
your competitors. What types of content creation do your competitors focus on? Blogs? Case
studies? Premium content?

Is some content gated? Are there newsletters, YouTube channels, or podcasts?

Once you've located their content, you can determine the quality, and you can see how it compares
to yours.

Be sure that you look for how frequently they are publishing, adding, and updating new content —
as well as what topics are they discussing.

At the bottom line, are they doing anything that you aren't?

If your competitors are consistently publishing case studies, this could be a part of the reason why
your quality leads are going to your competitors. A prospective client wants to know what it's like
to work with your company.

Next, take a closer look at their blog.

If your competitors tend to publish three times a week compared to your one article every two
weeks, it will be beneficial for your company to start generating more traffic to your site by
publishing more frequently about relevant topics.

However, don't just blog because you want to add more content; it won't generate more traffic if
the content you're adding isn't remarkable.

3. Analyze their SEO

Say your competitors have the same type of content, update it just as frequently, and produce high-
quality work. You might have to look more closely to find what they are doing differently.

It might be their SEO.

If your company has a blog, you know how important your SEO is. While conducting a
competitive analysis on the type of content your competitors are generating, it is also beneficial to
consider that content's SEO.

With the roll-out of algorithm updates like Google’s BERT, search engines are getting better and
better at understanding search intent.

Gone are the days when stuffing keywords into your content would guarantee a high search rank.

Instead, try to focus on beating your competitors at their own game.

If a competitor has an article that outranks you that shares six tips or tricks to produce better video
content, maybe you write something that shares eight or nine.

If a top result for tennis rackets is a few years old, try to outrank it with one that’s more up to date.

Does their list of top insurance providers leave out a big one? Does it fail to include a featured
snippet? Are any links broken?

When you look closely at the work of your competitors, you should be able to identify gaps and
shortcomings. Use the creativity and expertise of your team to fill in those gaps.

4. Look at their social media engagement

A company's presence on social media is becoming increasingly important, and each company is
utilizing each platform differently. Social media networks are a great way for companies to interact
with users and fans.

Additionally, businesses use these sites to share content.

The next step of your competitive analysis should be to determine how your competitors are using
social media and integrating it into their marketing.

Not only is it important to see if your competitors can be found on social media platforms, but you
also want to see how effectively they're using their profiles.

What type of information are they posting? What is their frequency? Do they have cover photos
and profile photos?

How about oft-overlooked platforms like Google My Business or Pinterest?

Next, check out engagement. Do their posts garner clicks? Do they have followers? Are they often
liked or retweeted? Are they posting photos that showcase events or company culture?

These are all questions you should be asking yourself when you are checking your competitors’
profiles. Remember, just because they have a profile does not necessarily mean they are winning
with social.

Don't just click off the page quickly; learn what they are doing. What can you do better?

5. Identify areas for improvement

After performing a competitive analysis, you now have a better idea and understanding of what
your competitors are doing.
Take all the information you gathered about each competitor and identify particular areas of your
own work that can be improved. If you’re looking closely enough, you’re bound to find
something.

Not only will you be able to identify key areas that you can improve upon in regards to your
content creation, search engine optimization, and social media engagement, but you can also help
establish your company's presence with potential customers, blog readers/subscribers, and social
media users.

Learn the best way to conduct a competitor analysis, and how it can help you improve your
products or services.

 Conduct a routine competitor analysis to understand your competitors' strengths and

weaknesses, and to identify gaps in the marketplace.
 A competitor analysis can help you enhance your product or service, better serve your
target audience, and increase your profits.
 A competitor analysis should include your competitors' features, market share, pricing,
marketing, differentiators, strengths, weaknesses, geography, culture and customer
reviews.
 This article is for new and established small business owners who want to analyze
their competition to improve their products or services.

It is important to analyze your competition at various stages of your business to ensure that you
are providing the best possible product or service at the right price for your customers. Learn
more about what a competitor analysis is, why conducting this analysis routinely can help your
business achieve success, and the seven-step process for conducting one.

What is a competitor analysis?

A competitor analysis is the process of identifying businesses in your market that offer similar
products or services to yours and evaluating them based on a set of predetermined business
criteria. A good competitor analysis will help you see your business and competitors through
your customers' eyes to pinpoint where you can improve.

"A competitor analysis focuses on identifying market participants positioned to encroach on your
opportunity and isolates each participant's operational strengths, substantive weaknesses, product
offerings, market dominance, and missed opportunities," David M.M. Taffet, CEO of Petal, told
business.com.

Why is a competitor analysis important?

It is important to conduct routine competitor analyses throughout the lifecycle of your business
to stay up to date with market trends and product offerings. A competitor analysis can reveal
pertinent information about market saturation, business opportunities and industry best practices.

It is also important to know how your customers view you in comparison to your competition. A
competitor analysis will give you a better idea of what services are currently available to your
target customer and what areas are being neglected.

"In some cases, you may find that you are at a competitive disadvantage, in which case you may
need to make a change in order to maintain your sales volumes," said Josh Rovner, business
consultant and bestselling author of Unbreak the System. "In other cases, you may notice that
 you have an advantage that could enable you to make a change that increases your sales or
profit."

A competitor analysis is important for both offense and defense. Comparing your business to
your competition shows you where you can improve as well as where you are excelling. It may
even help you identify a new niche that you can take advantage of.

What are the benefits of conducting a competitor analysis?

Analyzing your business against your competitors can help you in many ways. For example, it
will reveal which areas of your business, product or service need improvement. With this
knowledge, you can adjust your processes to better serve your target market and increase profit.
It can also show you new strategic opportunities to enhance your products or services and grow
your business.

"Understanding one's competitors allows one to distinguish oneself from the competition, focus
on the underserved market opportunities, determine the services to offer, identify the best
practices to employ, and isolate the worst practices and rotten players," said Taffet.

Once you conduct a competitor analysis, you can use it for benchmarking and measuring future
growth. Routine analyses will reveal market trends to keep track of and new players to be aware
of. It will also help reveal who your current competitors are throughout every stage of business.
Be sure to keep your analyses up to date.

"Too many businesses do a competitor analysis early on, and then neglect it once their brand is
established," said Colin Schacherbauer, lead content marketer at Investor Deal Room. "Industries
are constantly changing, and each time a new company enters your space, they are doing a
competitor analysis on you. It's important to continually evaluate your competitors."

PERFORMING A COMPETITOR ANALYSIS

Goal of competitor analysis

1. Identify competitor strategies and actions planned

2. Determine the competitor to compete with

3. Predict a competitors reaction to your actions

4. How to use the behavior of the competitor for your firm’s advantage

CONDUCTING AND PREPARING YOUR COMPETITOR ANALYSIS

1. Conduct research

2. Gather competitive information

3. Analyze competitive information

4. Determine your own competitive position

 Step 1. Conduct Research
Conducting research during a competitor analysis sounds like a complicated process that should
be carried out by professionals, but it is not true. Some professional commit to carrying out such
research in case you want to use their services.

The problem is, if your business is new or just in its initial stages, the services of the professional
might be expensive at that stage. After your business has grown, then you can incorporate the
services of the professional together with your personal research.

But since you need to carry out the research, let me show you some things that can make the
process easy and doable. To be able to do a thorough research, ask yourself the following
questions;

 Who are my competitors?

 What makes them my competitors? Is it the products or services that they sell?

 Do I stand a chance to compete with them?

 What market share do they hold?

 Which strategies have they used in the past?

 What strategies are they using now?

 What are the threats that they face?

 In what ways do the customers see them positively and negatively? How can I take advantage of
the negative customer reviews?

 How long have my competitors been in business?

 How do they advertise their products and services and what is the frequency of the adverts?

 Do they provide me with an opportunity that I can take advantage of?

 What is the strength or weaknesses of my competitors?

 How can you rate your competitors regarding;

o Employees

o Pricing incentive

o Customer service

o Resources

o Quality of service or products

o Hours of operation?

Step 2. Gather Competitive Information

Secondary sources of information provide accurate information that can be used to prepare an
industrial and competitor analysis. In case you may be wondering what secondary sources of
information are, they are sources that were developed to meet another purpose apart from your
current need, but they contain information that can help you prepare an excellent industrial and
competitor analysis.
 The sources are available to the general public either for sale or free of charge. Secondary
information is cost effective to access, and it can be retrieved after publication through electronic
means. Some sources of information that you can use include:

 Sales brochure: A sales brochure will provide you with information about the strategy that your
competitor is using. For example, you can learn how the company is positioning itself and its
products in the market and the benefits and features they prefer when selling. Make sure you get
hold of any new brochures that the company produces as it can tell you if the company has
changed its strategies.

 Your sales team: As a company, you need a team that places you out there and gathers
information on how to make sure you take dominance in your market or industry. Train your
sales team to be your ears and eyes in the marketplace and gather as much helpful information as
they can. The sales team is in direct contact with the customers so they must learn how to gather
firsthand information from them. It should be done in a clever way otherwise, the customers may
find it to be in poor taste. Customers are the best marketing and sales people because they do not
have anything to lose so they speak the truth, and they do it for free. For that reason treat them
nicely when asking for information. A good strategy would be to ensure that you have
established a relationship with the customer before asking for the information. That way, they
will not feel used which is what you want to avoid.

 Other employees: Your employees interact and relate with employees from your competitors.
Probably they meet when delivering goods to various destinations or when placing orders for
supplies. Besides, since you and your competitor are in the same industry, your employees are
likely to change employers amongst you. If you have employed employees who were previously
employed by your competitor, try to get as much information about your competitors as possible.

 Consider the customer service that you and your competitor provide if you both sell the same
products at the same price. Call one of their customer care representative and notice how they
respond to your complaint or query. Like a good spy, buy one of the products from your
competitor. The aim is not to promote them in business, but to learn how you can catch up with
them in business. Use the product to check out the technological innovations, mode of
manufacturing, manufacturing costs, and any weakness or capability about your competitor that
you can pick from the product.

 Advertising: A company uses an advertisement campaign to tell the potential customers the
importance of their product and service and to entice them to buy it. So, as you look at your
competitor’s advertisement, think like a customer for a moment. That means, look out for what
the company wants you to see. Look at every effort that they have made to attract the customer.
Some of the things to look at include the benefit of the product, any special discount, and product
features. This information will help you understand why customers prefer your competitor’s
products. You also need to view the advertisement from a business person’s perspective so that
you can learn how to make your advertisements. Be keen on how often the advert appears, the
most preferred medium of advertising, the tone and design of the advertisement, and try and
estimate the budget set for the advertisement. In case your competitor advertises on a medium
that none of the other competitors use, you should know that the competitor is looking for a new
market.

 Trade associations: People in the same industry join trade associations which help them in
fighting for their rights, provide valuable information concerning the industry, and help sponsor
meetings and trade fairs for the industry. In most cases, the trade associations gather and publish
reports and statistics on industry news. They also highlight the companies that are doing well. As
a business person, this gives you an opportunity to analyze information about your competitors.
Just by looking at the information closely, you can even predict upcoming businesses that might
soon compete with you.
 Annual Reports: If your competitor runs a private company, you can get the annual reports
from friends, family members, and people who own stocks in the company. For publicly-owned
companies, their reports can be found on websites or securities commissions. Annual reports
have information about the revenues, sales volume, total market share, events like the acquisition
of board members, financial information.

 Newspaper and magazine articles: If you are serious about beating your competitors, you
cannot afford to ignore this source. The information contained in the source can move your
business to the next level very fast. People go out of their way to deliver your competitors’
strategies without knowing it just by writing articles, product reviews, and such. Companies
uncover their next plan through newspapers and magazines in interviews. Articles give
information on how your competitor’s organization is run and any innovation they are working
on. Journalists use clever ways to extract this valuable information for you. By being keen on
product descriptions, you can discover the strengths and weaknesses of your competitor’s
products. Instead of using a lot of time looking for the exact articles, visit any library and request
the librarian to help you find the specific articles. It will take them a short time to find, and you
will also learn how to do it next time.

 Direct observation: By using this method, you gather the information for yourself first-hand.
You need to use good strategies so that your actions do not backfire and garner your company a
bad reputation. If your products are sold in a retail outlet, visit the outlet to find out:

o The stock available, for your competitor and your company,

o How the products are arranged or displayed on the shelves,

o Any additional sales strategy that your competitor is using like discounts or complimentary
products.
 Your competitors: Yes, they can give you information about themselves. It is normal for people
to talk about their achievements, success, future plans, and such. Your competitors are not any
different; in fact, they might give you a lot of information hoping to intimidate you.

Step 3. Analyze Competitive Information

The reason why you were gathering the information is so that it can help you gain a competitive
edge. You should analyze the information to get the market share, your competitor’s weaknesses
and strengths, product information, and marketing strategies.

We will go over the four areas that the information should help you in and how you can analyze
the information to give you a detailed breakdown of each area.

Market share
Market share is the performance of your products when it comes to sales. The leader with the
highest market share can:

 Set the standards of the service or good in the market

 Control the perception of the service or good among the customers

The leader is therefore not afraid to spend their resources to maintain the largest market share in
the industry.
Product evaluation
The goods and services that you provide solely exist to meet the needs of your customers.
Therefore, it is important for you to gather information about the features that your customers
want and those that would entice future customers.

Remember, there is general information about the features and benefits that customers prefer, but
that does not mean that you cannot differentiate your service or product by adding more or
different features. As long as the added features are beneficial, they will tip the customers to
favor your products or services.

To get a proper analysis of this information, come up with a list of the benefits and features that
customers prefer. Your sales team and employees will provide this information. Make a table
where you compare your products vis a vis your competitor’s products’ benefits and features.
Tick against the feature if your competitor’s product has the same features.

The features are easy to identify and quite obvious. A product either does or doesn’t have a
feature; there is no gray area, and no explanations are required. The benefits, on the other hand,
are tricky. Most businesses use the benefits as a sales strategy.

It is only the customer who can give an accurate benefit as they are the end users. For example,
your competitor might find it easy to use one of their products, but customers might find it
cumbersome and difficult. So in such a case, whose opinion is correct?

Since you have the information about how your competitor’s products compare with the
customer’s expectation, the next step is to evaluate your product. Use the same procedure as that
for your competitor’s.

Now, compare how your product or service compares to your competitor’s products. Is your
service or product unique in any way? How does it compare to your competitors’?

The more unique your service or product is, the higher the chances of attracting more customers
as compared to your competitor. The evaluation is important in highlighting features that you
need to concentrate on and can lead to innovations in your business.

Apart from the features, compare the price for your products. Is your price higher than that of
your competitors? Is their price higher? What is contributing to the high prices? Are your
production costs higher? How is your price affecting your sales? The price that you set should
enable you to gain a profit and at the same time attract customers to your products.

Even as you compare your prices, you should be aware that your competitor might lower his or
her prices for various reasons. First, it may be a strategy to attract customers to his products. You
will realize that the prices go up again after some time if your competitor just wanted to increase
their market share. At other times, they are going through a hard time financially, and they need
the money urgently. So they opt to sell at a lower price to attract more people to clear their stock.
Cheeky but true, rumors come in handy in such cases. Though rumors are not always right, they
have some grain of truth in them.

After the analysis, you might realize that your competitors’ products as well as yours have the
same features and even cost the same. You might, therefore, wonder why your competitors are
ahead of you in the competition. Well, you need to have a look at their internal operations. They
are probably saving some money there or doing things more efficiently.

Let me show you how these five factors can greatly make a difference between you and your
competitors:
 Company morale/ personnel motivation – How motivated are the employees? Are they
committed to their work? How productive are they? The employees drive the vision of your
organization. Therefore, if they are not committed to the organization, or they are not efficient;
being a leader in your industry might just be a pipe dream.

 Financial resources – How are your competitors regarding financial stability? Financial stability
determines how your competitors will react when their market is threatened. If they are stable,
they will counter the threat by quickly creating a way out but if they lack the financial capability,
it will take them time to counter the threat.

 Operational efficiencies – How are your competitors saving time and reducing costs? In some
companies, they offer free delivery for products beyond a particular amount. This strategy will
encourage customers who buy in bulk.

 Strategic partnerships – If your competitor produces washing machines, they might collaborate
with a detergent company in a promotional campaign. Such collaborations make your
competitors better known. What strategies does your competitor apply and what kind of
relationships does he keep?

 Product line breadth – This is the ease with which your competitor can increase their revenue
just by selling products that relate to their current products. Remember your competition is not
only in the number of clients but also amounting to earnings that you get. Your revenues
determine your position in the industry just as the number of customers is also important.
An interesting lecture with Michael Porter where he walks you through a competitive analysis
of different industries.

Competitive strategies and objectives

The objectives set the pace for the strategy to be used. For example, if competitors want to
increase their market share, they may decide to decrease the prices for their products for some
time then increase it when the number of customers increases. What do your competitors want to
achieve? Some objectives include:

 To create new markets for their products

 To work towards being the market leaders in the industry

 To maximize their market share and to increase it

 Your competitors might want to enjoy short or long term profits

 To introduce new products in the market

 When the competition is stiff, your competitor might just want to protect their market share
With every objective, your competitor has a strategy of achieving it. So, the sooner you identify
the objective your competitors are acting on, the sooner you will devise a counter strategy.

Remember, the type of strategy that your competitor uses does not harm their revenue otherwise;
it will lead to losses. As you formulate a strategy, remember to use one that will not affect or will
increase your earnings. Some of the strategies include:

 Engaging in innovation – By doing this, your competitor improves the features and usability of
his or her current product or service. If you are in the industry of manufacturing cooking oil,
your competitor might change the packaging of the container. To be specific, he might calibrate
the lid so the user can weigh how much cooking oil they use every time they cook.
 Reduce the price – This strategy increases the number of customers. The reduction in price does
not result in losses, and if it works well, it does not affect the profits. This is because, if more
people buy the product, the profit margins remain the same.

 Advertising – You cannot be in business and fail to advertise. How else will people know that
you exist? If your competitor deliberately focuses on advertising, then they want many people to
know about their products. This increases the number of individuals who will be willing to try
out their products and also increase their customer base. If many people who try the product like
it, then many will want to adopt the product or service for use in their daily lives.

 Buying out or merging with a competitor – This increases the number of customers and the
market share. The strategy that your competitor uses can help you establish the position of your
business at any time. A competitor that focuses on the current customers without trying to attract
new customers may as well not be thinking of introducing new products in the market.

Step 4. Identify the strengths and weaknesses of your competitors / Determine your own
competitive position
A good competitive strategy takes advantage of the weakness of your competitors but with the
awareness of their strengths. Look at what your company does better than your competitors.
Consider their areas of weaknesses as you look at their strengths.

Additional factors to look at:

 New players – New businesses come with new ideas and innovative ways of doing things.
Initially, their ideas might seem almost worthless, but you might be surprised at how much the
customers might respond positively to them. Customers love changes and if the new players
offer better solutions, then why won’t the customers follow them?

 Future competition – Your competitor analysis should predict how future competition will look
like. Who will be your competitors then? What will make you relevant even in the future? If you
introduce new products, how long will it remain to be competitive in the industry? If the future
looks bright for you, your investors will also be confident in investing in your business

 Shakeups – When companies change their management, they experience a shakeup. It can either
be felt in the volume of sales, employee turnover, and changes in policies in the organization.
When your competitors are going through such changes, make sure you are ahead of how things
are taking place. It is an opportunity to overtake them in that moment of instability. Also,
employees fear for their jobs, and they are normally ready to change jobs during that period. If
you have vacancies, or you can create one, why not hire your competitor’s best employees?

 Barriers to entry – Form of barriers includes;

o Market saturation – When there are already enough people offering the same service in the
market, new businesses will fear to enter as the competition is already too high.

o High investment requirements – Only businesses who can afford the high investments can
penetrate the business. This locks out small companies from entering the market.

o Patents – Any new product or service that has patent rights cannot be duplicated by anyone. It,
therefore, protects the company that originally came up with the idea.
After the analysis, you should be able to know clearly if you are a follower, new entrant or a
market leader. Your position will guide you to identify your key areas of competitive
disadvantage or advantage.

It should also point out to opportunities and problems that your firm is facing. Look at price
revisions, market penetration, product line needs, and distribution coverage.
Finally, to come up with and implement a marketing strategy that will secure and strengthen your
position in the market, integrate the demographic analysis with your competitor analysis.

COMPETITOR ANALYSIS USING PORTER’S FIVE FORCES MODEL

Porter’s five forces were formulated as a starting point for understanding the competitive
landscape and coming up with strategies in which companies operate. So today, you can use it in
your business to plan to come up with strategies that place you at a better position with your
competitors. When you are faced with a lot of competition, the profit margins diminish as you
cannot charge more than your competitors are charging but you need to make a profit.

The five factor model by Porter was created to help businesses assess the nature of competition
in the industry and to come up with strategies to deal with the competition. To have a complete
understanding of the model, we will look at the five forces that determine competition, how the
model can be used, the do’s and don’ts of the model, and the criticism of the model. The five
forces determine the profitability in the industry, the rate of competition, and how attractive the
market will be to competitors. Porter’s Five Forces is a framework that examines the
competitive market forces in an industry or segment. It helps you evaluate an industry or
market according to five elements: new entrants, buyers, suppliers, substitutes, and
competitive rivalry. According to Michael Porter’s model, these are the key forces that
directly affect how much competition a business faces in an industry.
 1. Five Forces in Competitor Analysis
The threat of substitutes, competitive rivalry, and threat of new entrant are classified as
horizontal forces. Vertical forces include the bargaining power of suppliers and that of buyers.
We will now discuss the five forces identified by Porter.

1. Competitive Rivalry
This is the rate of rivalry among competing firms. If it is high, then the companies’ strategy,
profits, and prices are affected altogether. The more the rivalry, the more the pressure the
existing firms will experience. If the rivalry is not much, the companies will enjoy autonomy in
setting the prices for their goods and products. The customers will not have a variety of choices
to choose from so the sellers will dictate the prices as they wish. However as new companies
enter the market, the prices are streamlined by the competition.

Competitive rivalry is high when there is a low exit or high barriers of entry, when the products
in the market have the same benefits and features, when the companies operating in the market
area are of the same size, and when the industry is growing slowly. When companies have
similar strategies, the rivalry is also high.

2. Threat of new Entrants

Competition is not only limited to existing companies; new companies planning to join the
industry pose a threat to the existing businesses. Industries with high profits tend to attract many
companies.

To curb the high entrance, the industry places barriers of entry to limit the number of new
entrants. Otherwise, many companies would join the industry and reduce the profits earned.
Barriers to entry include:

 High initial capital

 Patents and property rights

 Government-driven obstacles
 Access to specialized infrastructure or technology

 High switching costs for clients

 Difficulty in accessing distribution channels and raw materials

3. Threat of Substitutes
Substitutes are products that can be used on behalf of others and still serve the same purpose. A
good example is Coke and Pepsi which are both soft drinks.

When setting prices, the two companies have to be aware of the substitute’s prices. If one sets
the prices so high, they will lose customers as they will have an alternative product.

In the marketplace, when there are many competing products and services, it becomes difficult to
set the price of the service or good as you wish. You must, therefore, set the price in accordance
with the way the other players in the market have set theirs. Trends and fads, relative prices,
brand loyalty, and switching costs affect threat to substitutes.

4. Bargaining Power of Buyers

The customer is always right and more so when they have the power to influence the prices in
the market. In an industry where the buyers purchase goods in bulk or where there are similar
products being produced, the buyers control the prices.

If a business insists on a particular price, the buyer might as well buy from another company
with the same kind of goods.

5. Bargaining Power of Suppliers

The production service relies on raw materials from suppliers. The suppliers can influence the
competitive edge of business by setting the prices for the materials, determine the availability of
materials, and dictate terms of trade.

For suppliers who supply goods to many companies, they can decide to increase the cost of raw
materials, and if the businesses do not have much choice, they will have to pay more for the
materials. To avoid these inconveniences, maintain a steady and strong relationship with
suppliers.

You do not have much choice but to pay the high prices if the suppliers are limited in number.
Some suppliers have proprietor knowledge or patent rights to supply the raw materials. You
cannot also afford to complain about the price if you know that switching to another supplier will
be expensive for you.

Additional things to look at when using Porter’s Five Forces Model

For success when using the model, as you use it;

 Consider the stage the industry is at

 When there are more than three competitors in the industry

 Be keen on the changing nature of markets and industries

 Consider how the government impacts the industry

 Remember that it is an industrial analysis; use it to analyze an industry, not an individual
company.
In as much as the model has been successfully used, critics, among them Stewart Neil critic the
model in three ways. The first criticism was that buyers, suppliers, and competitors were separate
entities who never influenced each other directly. The critics also cited the creation of barriers or
structural advantage as a source of value. Thirdly, they critiqued the assumption that stated that
in an industry, there will always be low uncertainty, and so participants in the market can plan
ahead on how to counter the competition.

Recent developments
Developments on macro and micro level of the industry affect the industry. So, take a look at the
sector valuations, industrial developments, global comparative valuation, and innovations in your
industry.

Focus on industry dynamics

An industrial report focuses on a specific industry. Also, the analysis is helpful only if it
produces important information about the industry. So, delve deep into the industry and make
sure you have a complete understanding of every aspect of the industry. Be it tax requirement,
the demand and supply trends, and the market leaders in the industry. Have it all to come up with
a powerful strategy to succeed in the industry.

When to Use Porter’s Five Forces

This framework is useful when you want to analyze the competitive structure of an industry.
Looking at the five forces can provide insights into how attractive it is to enter a new
market, for example. This is helpful if you are considering whether you should expand your
product offering to reach new customers.

Competitor analysis using Porter’s Five Forces can also provide insights to help you shape
your strategy to the competitive landscape of your industry. For instance, if the threat of
substitutes is high, you may seek to mitigate that competitive force with a strategy focused
on building brand affinity among your customers.

2. SWOT Analysis
The SWOT framework helps you evaluate the internal (Strengths and Weaknesses) and
external factors (Opportunities and Threats) that impact your business or a course of action.
When to Use a SWOT Analysis
SWOT analysis is often used in strategic planning to help identify a potential competitive
advantage. For example, your strong relationships with suppliers might give you the
opportunity to offer prices that are lower than your competitors’. But you can also apply it
in much narrower situations. You can use it to evaluate a decision by looking at your
strengths, weaknesses, opportunities, and threats relative to the decision, for example.

Marketing agencies often perform a marketing SWOT analysis as part of their competitive
landscape analysis (CLA) for clients. They may compare strengths and weaknesses across
competitors for various marketing channels, such as website, blog, social media, digital ads,
and organic search. This helps them determine recommendations for a client’s strategy.

4. Growth Share Matrix or BCG MATRIX

The Growth Share Matrix is an analysis framework that classifies the products in your
company’s portfolio against the competitive landscape of your industry. Developed by the
founder of the Boston Consulting Group (BCG) in 1970, the model gained widespread
acceptance for helping companies decide which products to invest in based on

competitiveness and market attractiveness.

According to BCG, products fall into one of four quadrants in the matrix, each with a
corresponding strategy:
1. Question marks are high-growth but low-market-share products, often new products
with high potential. These should be invested in or let go, depending on how likely a
product is to become a star.
2. Stars are products that are likely to achieve high growth and high market share. Your
firm should invest heavily in these products.
3. Cash cows are low-growth but high-share products. These are products that bring in
cash and can fund investment in your stars.
4. Pets are low-share, low-growth products considered failures. Your business should
reposition these products or stop investing in them.
DEMAND SUPPLY ANALYSIS

In a market economy, the level of demand and supply of all goods and services jointly
determines the price level and quantity of that good (or service) in the economy.

When is a Supply Demand Analysis Used?

The law of demand states that (with a few exceptions) as price rises, the quantity demanded of
any good or service would be lower. The law of supply implies that higher the price received by
a supplier, the quantity supplied will rise. Thus, demand is often a downward sloping curve in
the price-quantity plane, while supply is an upward sloping curve. The intersection of the supply
and demand curve denotes the market equilibrium, which in turn determines the equilibrium
levels of price and quantity of the particular good (or service) in the economy. If the present
demand for a good (or service) in the economy is higher than the equilibrium quantity, the
situation is described as that of an excess demand. Excess supply is also defined in a similar
fashion. Changes in Supply and demand (and thus the equilibrium price and quantity) of any
good or service could be governed by a lot of factors, such as: changes in policies, unpredictable
shocks to the economy, business cycle fluctuations like a recession or a boom, or even simply
over time (long run versus short run). It also depends on the nature of the market (whether the
market is perfectly competitive or monopolistic etc.). The analysis of all the above could be
termed as the study of the supply and demand, or simply, 'Demand Supply Analysis'.

A demand and supply analysis is a vital tool used in economics to inform business decisions.
When it is done accurately after considering factors such as trends and seasons, a supply and
demand analysis can anticipate the effects of market shifts.

What Is Demand and Supply Analysis?

At the core of a supply and demand analysis are two laws: the law of demand and the law of
supply. According to The Business Professor, the law of demand stipulates that the quantity of
demanded goods and services lowers with the rise of prices. Conversely, the law of supply
stipulates that the number of goods and services supplied increases with a rise in price.

Britannica explains that a supply and demand analysis indicates the relationship between the
quantity producers want to sell at various price points and the quantity consumers will buy.
Including a demand and supply analysis in a business plan is one of the best tools business
owners can use to predict their next moves. By analyzing various factors that affect supply and
demand, businesses can predict the amount of product they should produce at a particular price
point to yield the most profit.
How to Interpret Supply and Demand

In a graph, the demand curve is represented by a downward curve based on the relationship
between what consumers want and what they can pay. As prices rise, demand decreases. If
consumers cannot afford a product, they won’t be interested in buying it. When plotted on a
graph with price on the vertical axis and demanded quantity on the horizontal axis, the demand
curve slopes downward as price increases and quantity decreases. The steepness of the curve
depends on the current influences on demand.

In a supply analysis, the supply curve is plotted onto the same graph – with prices on the
vertical axis and quantity on the horizontal – as an upward sloping curve. Based on the number
of goods produced, the supply curve factors in input resources, labor, technology and
regulations to accumulate its data.

The equilibrium is the point where the two curves meet. This point indicates where the market
balances and the quantity supplied matches the demand. Businesses can adjust their prices or
supply to find the equilibrium point and use workforce planning to meet an upcoming
predicted demand.

Supply and Demand Influences

Many factors influence supply and demand trends. Five common factors that influence demand
are consumer preference, income level, substitute prices, complementary goods and future
expectations.

Many products become popular based on trends; However, trends don’t last forever. As
consumer preferences shift, demand for formerly popular products will likely decrease. Similar
to trends, future expectations also influence buyer habits. For example, if the consumer expects
prices to decrease, they may wait to purchase later, such as buying holiday decorations after
the holiday season has ended.

However, complementary goods, which are items that are traditionally bought together, affect
demand differently. If one item becomes cheaper, such as pancake mix, the demand for maple
syrup is more likely to increase. Production costs, technology advances, the number of
suppliers and government regulations can all affect supply trends. For example, advances in
technology can influence supply by cutting costs in the production chain, making it cheaper to
produce more product.

In economics, demand is described as “desire backed by adequate purchasing power”. It is

defined as the amount of a commodity which a consumer is willing to purchase at a given price
in a period of time. In economics, the demand for a commodity refers to both the desire to
purchase the commodity as well as the ability to pay for it. Since a business would not be able to
exist if there was improper demand estimate or demand forecast, hence demand analysis is one
of the most important aspects of managerial economics and it is studied in great detail.

The step 1 in demand analysis begins by understanding the various types of demands which exist
in the market.

Demands can be categorized as follows :

1. Individual demand – This is the demand by an individual consumer. These demands

include demands for clothes, shoes and other such products.
 2. Household demand – This kind of demand is by a household and includes products like
washing machines, refrigerators, and homes.
3. Market demand – When the demand of all the individuals and households in the market
are considered, it is referred to as Market demand.

Some other types of demands are :

1. Direct demand – this kind of demand satisfies human wants directly. Examples of this
demand are food and clothes.
2. Indirect demand – this kind of demand are used to produce consumers goods. Goods for
production come under this kind. It is also known as Derived demand.
3. Joint demand – when more than a single commodity is required to satisfy a single need,
then this kind of demand of called as Joint demand. An example here would be tea leaves,
sugar, and milk – all of which are required to meet the single demand for tea.
4. Composite demand – this kind of demand is able to meet several wants at a time.
Electricity, which meets the needs of several households, comes under this kind of
demand.
5. Competitive demand – this kind of demand occurs when a commodity competes with its
substitutes. The toothpaste of different brands have this kind of demand.

The 2nd step in demand analysis begins by understanding the factors involved in creating
demand.

Factors in creating demand and Demand Analysis

Several factors affect the demand for a product or service. These factors are as follows:

1. Price of the commodity itself – This is one of the most important determinants of demand
– for the individual, household as well as market demand. When the price of a product
rises, demand generally falls.
2. Income of the end user – This is another important determinant of all kinds of demand.
Since demand depends on the income of consumers, it rises with increasing income.
3. Taste and preferences of the end consumer
4. Price of substitute products and complementary products – Demand for a commodity
changes with the price of substitute and complementary products. An example here would
be a change in petrol prices can alter the demand for petrol cars.
5. Expectation about future prices of the product – if consumers expect the price of the
commodity to rise in a few months, the demand for that particular commodity would
increase while it would fall if there is an expectation that the price would reduce in future.
6. Advertisements – this is another important factor that affects demand. A cleverly
advertised product would help increase the demand for the product while a shabby or
misleading advertisement would inadvertently decrease the demand for the product.
7. Taxation policies – this again has a direct effect on the demand for a product. An example
would be a rise in the income tax that citizens pay. Since this would mean less disposable
income, demand for products could see a downfall.
8. Other factors such as traditions, customs, seasons, social factors and others too have an
effect on the demand for a commodity.

Demand analysis formula – Demand Function

Demand function is a mathematical relationship between the quantity demanded of the

commodity and its determinants. It can be represented as
Q = f ( Demand determinant)

Where Q = quantity demanded of a commodity

Demand functions are generally of two kinds. They are:

1. Individual demand function – this is the mathematical relationship between the demand by
an individual consumer and the determinants of individual demand.
2. Market or aggregate demand function – this is the mathematical relationship between the
market demand for a commodity and the determinants of the market demand.

Law of Demand

Law of Demand was given by Alfred Marshall and it describes a consumer’s behavior in
demanding a commodity in relation to the variations in its price. The law states that other things
remaining constant; the higher the price of the commodity, the lower is the demand and lower
the price, higher is the quantity demanded. In other words, demand of a product varies inversely
with a price when other things remain unchanged.

The conventional law of demand is given by the following formulae :

Qx = f (Px)

Where Qx= Quantity demanded of commodity x

Px= Price of the commodity x

Law of demand is generally operational due to its variations in substitution effect and income of
the consumer. The following table will simplify the law of demand:

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Let us now plot a graph for the above table.

As we can see, the demand curve slopes downwards from left to right. This is due to the
following effects:

1. Law of Diminishing marginal utility – according to this law, as a consumer goes on

buying more and more units of a commodity, its utility to him goes on decreasing. Thus, in
order to get the maximum satisfaction, the consumer buys a commodity such that the
marginal utility of the commodity is equal to the price of the commodity. Thus, he
purchases more units when the price is lower and less quantity when the price is higher
2. Income effect – it is a commonly known fact that a price drop increases the purchasing
power of consumers and vice versa. This is called an income effect.
3. Substitution effect – when the price of a goods falls while the price of its substitutes
remains constant, the consumer buy more of the product.

Like everything else, the law of demand too has exceptions. These are listed below :

1. Expectations about future price

2. Veblen effect or commodity with snob appeal
3. Giffen products
4. Consumer’s psychological bias

Demand for Goods and Services

Economists use the term demand to refer to the amount of some good or service consumers are
willing and able to purchase at each price. Demand is based on needs and wants—a consumer
may be able to differentiate between a need and a want, but from an economist’s perspective
they are the same thing. Demand is also based on ability to pay. If you cannot pay for it, you
have no effective demand.

What a buyer pays for a unit of the specific good or service is called price. The total number of
units purchased at that price is called the quantity demanded. A rise in price of a good or
service almost always decreases the quantity demanded of that good or service. Conversely, a
fall in price will increase the quantity demanded. When the price of a gallon of gasoline goes up,
for example, people look for ways to reduce their consumption by combining several errands,
commuting by carpool or mass transit, or taking weekend or vacation trips closer to home.
Economists call this inverse relationship between price and quantity demanded the law of
demand. The law of demand assumes that all other variables that affect demand (to be explained
in the next module) are held constant.

An example from the market for gasoline can be shown in the form of a table or a graph. A table
that shows the quantity demanded at each price, such as Table 1, is called a demand schedule.
Price in this case is measured in dollars per gallon of gasoline. The quantity demanded is
measured in millions of gallons over some time period (for example, per day or per year) and
over some geographic area (like a state or a country). A demand curve shows the relationship
between price and quantity demanded on a graph like Figure 1, with quantity on the horizontal
axis and the price per gallon on the vertical axis. (Note that this is an exception to the normal rule
in mathematics that the independent variable (x) goes on the horizontal axis and the dependent
variable (y) goes on the vertical. Economics is not math.)

The demand schedule shown by Table 1 and the demand curve shown by the graph in Figure
1 are two ways of describing the same relationship between price and quantity demanded.

Figure 1. A Demand Curve for Gasoline. The demand schedule shows that as price rises,
quantity demanded decreases, and vice versa. These points are then graphed, and the line
connecting them is the demand curve (D). The downward slope of the demand curve again
illustrates the law of demand—the inverse relationship between prices and quantity demanded.

Price (per
Quantity Demanded (millions of gallons)
gallon)

$1.00 800

$1.20 700
Price (per
Quantity Demanded (millions of gallons)
gallon)

$1.40 600

$1.60 550

$1.80 500

$2.00 460

$2.20 420

Table 1. Price and Quantity Demanded of Gasoline

Demand curves will appear somewhat different for each product. They may appear relatively
steep or flat, or they may be straight or curved. Nearly all demand curves share the fundamental
similarity that they slope down from left to right. So demand curves embody the law of demand:
As the price increases, the quantity demanded decreases, and conversely, as the price decreases,
the quantity demanded increases.

Confused about these different types of demand? Read the next Clear It Up feature.

Is demand the same as quantity demanded?

In economic terminology, demand is not the same as quantity demanded. When economists talk
about demand, they mean the relationship between a range of prices and the quantities demanded
at those prices, as illustrated by a demand curve or a demand schedule. When economists talk
about quantity demanded, they mean only a certain point on the demand curve, or one quantity
on the demand schedule. In short, demand refers to the curve and quantity demanded refers to the
(specific) point on the curve.
Supply of Goods and Services

When economists talk about supply, they mean the amount of some good or service a producer
is willing to supply at each price. Price is what the producer receives for selling one unit of
a good or service. A rise in price almost always leads to an increase in the quantity supplied of
that good or service, while a fall in price will decrease the quantity supplied. When the price of
gasoline rises, for example, it encourages profit-seeking firms to take several actions: expand
exploration for oil reserves; drill for more oil; invest in more pipelines and oil tankers to bring
the oil to plants where it can be refined into gasoline; build new oil refineries; purchase
additional pipelines and trucks to ship the gasoline to gas stations; and open more gas stations or
keep existing gas stations open longer hours. Economists call this positive relationship between
price and quantity supplied—that a higher price leads to a higher quantity supplied and a lower
price leads to a lower quantity supplied—the law of supply. The law of supply assumes that all
other variables that affect supply (to be explained in the next module) are held constant.

Still unsure about the different types of supply? See the following Clear It Up feature.

Is supply the same as quantity supplied?

In economic terminology, supply is not the same as quantity supplied. When economists refer to
supply, they mean the relationship between a range of prices and the quantities supplied at those
prices, a relationship that can be illustrated with a supply curve or a supply schedule. When
economists refer to quantity supplied, they mean only a certain point on the supply curve, or one
quantity on the supply schedule. In short, supply refers to the curve and quantity supplied refers
to the (specific) point on the curve.

Figure 2 illustrates the law of supply, again using the market for gasoline as an example. Like
demand, supply can be illustrated using a table or a graph. A supply schedule is a table,
like Table 2, that shows the quantity supplied at a range of different prices. Again, price is
measured in dollars per gallon of gasoline and quantity supplied is measured in millions of
gallons. A supply curve is a graphic illustration of the relationship between price, shown on the
vertical axis, and quantity, shown on the horizontal axis. The supply schedule and the supply
curve are just two different ways of showing the same information. Notice that the horizontal and
vertical axes on the graph for the supply curve are the same as for the demand curve.

Figure 2. A Supply Curve for Gasoline. The supply schedule is the table that shows quantity
supplied of gasoline at each price. As price rises, quantity supplied also increases, and vice versa.
The supply curve (S) is created by graphing the points from the supply schedule and then
connecting them. The upward slope of the supply curve illustrates the law of supply—that a
higher price leads to a higher quantity supplied, and vice versa.

Price (per
Quantity Supplied (millions of gallons)
gallon)

$1.00 500

$1.20 550

$1.40 600

$1.60 640

$1.80 680

$2.00 700

$2.20 720

Table 2. Price and Supply of Gasoline

The shape of supply curves will vary somewhat according to the product: steeper, flatter,
straighter, or curved. Nearly all supply curves, however, share a basic similarity: they slope up
from left to right and illustrate the law of supply: as the price rises, say, from $1.00 per gallon to
$2.20 per gallon, the quantity supplied increases from 500 gallons to 720 gallons. Conversely, as
the price falls, the quantity supplied decreases.
Equilibrium—Where Demand and Supply Intersect

Because the graphs for demand and supply curves both have price on the vertical axis and
quantity on the horizontal axis, the demand curve and supply curve for a particular good or
service can appear on the same graph. Together, demand and supply determine the price and the
quantity that will be bought and sold in a market.

Figure 3 illustrates the interaction of demand and supply in the market for gasoline. The demand
curve (D) is identical to Figure 1. The supply curve (S) is identical to Figure 2. Table 3 contains
the same information in tabular form.

Figure 3. Demand and Supply for Gasoline. The demand curve (D) and the supply curve (S)
intersect at the equilibrium point E, with a price of $1.40 and a quantity of 600. The equilibrium
is the only price where quantity demanded is equal to quantity supplied. At a price above
equilibrium like $1.80, quantity supplied exceeds the quantity demanded, so there is excess
supply. At a price below equilibrium such as $1.20, quantity demanded exceeds quantity
supplied, so there is excess demand.

Price (per Quantity demanded (millions of Quantity supplied (millions of

gallon) gallons) gallons)

$1.00 800 500

$1.20 700 550

$1.40 600 600

$1.60 550 640

 Price (per Quantity demanded (millions of Quantity supplied (millions of
gallon) gallons) gallons)

$1.80 500 680

$2.00 460 700

$2.20 420 720

Table 3. Price, Quantity Demanded, and Quantity Supplied

Remember this: When two lines on a diagram cross, this intersection usually means something.
The point where the supply curve (S) and the demand curve (D) cross, designated by point E
in Figure 3, is called the equilibrium. The equilibrium price is the only price where the plans
of consumers and the plans of producers agree—that is, where the amount of the product
consumers want to buy (quantity demanded) is equal to the amount producers want to sell
(quantity supplied). This common quantity is called the equilibrium quantity. At any other
price, the quantity demanded does not equal the quantity supplied, so the market is not in
equilibrium at that price.

In Figure 3, the equilibrium price is $1.40 per gallon of gasoline and the equilibrium quantity is
600 million gallons. If you had only the demand and supply schedules, and not the graph, you
could find the equilibrium by looking for the price level on the tables where the quantity
demanded and the quantity supplied are equal.

The word “equilibrium” means “balance.” If a market is at its equilibrium price and quantity,
then it has no reason to move away from that point. However, if a market is not at equilibrium,
then economic pressures arise to move the market toward the equilibrium price and the
equilibrium quantity.

Imagine, for example, that the price of a gallon of gasoline was above the equilibrium price—
that is, instead of $1.40 per gallon, the price is $1.80 per gallon. This above-equilibrium price is
illustrated by the dashed horizontal line at the price of $1.80 in Figure 3. At this higher price, the
quantity demanded drops from 600 to 500. This decline in quantity reflects how consumers react
to the higher price by finding ways to use less gasoline.
 Moreover, at this higher price of $1.80, the quantity of gasoline supplied rises from the 600 to
680, as the higher price makes it more profitable for gasoline producers to expand their output.
Now, consider how quantity demanded and quantity supplied are related at this above-
equilibrium price. Quantity demanded has fallen to 500 gallons, while quantity supplied has risen
to 680 gallons. In fact, at any above-equilibrium price, the quantity supplied exceeds the quantity
demanded. We call this an excess supply or a surplus.

With a surplus, gasoline accumulates at gas stations, in tanker trucks, in pipelines, and at oil
refineries. This accumulation puts pressure on gasoline sellers. If a surplus remains unsold, those
firms involved in making and selling gasoline are not receiving enough cash to pay their workers
and to cover their expenses. In this situation, some producers and sellers will want to cut prices,
because it is better to sell at a lower price than not to sell at all. Once some sellers start cutting
prices, others will follow to avoid losing sales. These price reductions in turn will stimulate a
higher quantity demanded. So, if the price is above the equilibrium level, incentives built into the
structure of demand and supply will create pressures for the price to fall toward the equilibrium.

Now suppose that the price is below its equilibrium level at $1.20 per gallon, as the dashed
horizontal line at this price in Figure 3 shows. At this lower price, the quantity demanded
increases from 600 to 700 as drivers take longer trips, spend more minutes warming up the car in
the driveway in wintertime, stop sharing rides to work, and buy larger cars that get fewer miles
to the gallon. However, the below-equilibrium price reduces gasoline producers’ incentives to
produce and sell gasoline, and the quantity supplied falls from 600 to 550.

When the price is below equilibrium, there is excess demand, or a shortage—that is, at the
given price the quantity demanded, which has been stimulated by the lower price, now exceeds
the quantity supplied, which had been depressed by the lower price. In this situation, eager
gasoline buyers mob the gas stations, only to find many stations running short of fuel. Oil
companies and gas stations recognize that they have an opportunity to make higher profits by
selling what gasoline they have at a higher price. As a result, the price rises toward the
equilibrium level. Read Demand, Supply, and Efficiency for more discussion on the importance
of the demand and supply model.

Key Concepts and Summary

A demand schedule is a table that shows the quantity demanded at different prices in the market.
A demand curve shows the relationship between quantity demanded and price in a given market
on a graph. The law of demand states that a higher price typically leads to a lower quantity
demanded.

A supply schedule is a table that shows the quantity supplied at different prices in the market. A
supply curve shows the relationship between quantity supplied and price on a graph. The law of
supply says that a higher price typically leads to a higher quantity supplied.

The equilibrium price and equilibrium quantity occur where the supply and demand curves cross.
The equilibrium occurs where the quantity demanded is equal to the quantity supplied. If the
price is below the equilibrium level, then the quantity demanded will exceed the quantity
supplied. Excess demand or a shortage will exist. If the price is above the equilibrium level, then
the quantity supplied will exceed the quantity demanded. Excess supply or a surplus will exist. In
either case, economic pressures will push the price toward the equilibrium level.

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 Price is what you pay for services or goods that you acquire; Cost is the number of inputs that
incur in producing the product of the firm.
 The price will remain the same for all the consumers or customers. Cost is also the same for all
consumers or customers. However, the Cost differs only for the firm that prepares it.

DEMAND IS TO BE SEEN FROM CONSUMERS SIDE

SUPPLY IS TO BE SEEN FROM SELERS SIDE, HIS PROFITS