How important is it for small manufacturers to do a market feasibility study? Well, whether it’s the established manufacturer about to enter a new market, or a new business venture about to start full-scale production, doing a market feasibility study is the essential first step in defining the conditions of success. Sometimes referred to as a market assessment, this tool is meant to answer all those pressing questions small manufacturers and business owners have about their future market.
The Importance of Market Feasibility Studies
When thinking of a market feasibility study, think of the steps needed to analyze the health and future growth potential of a given market. In this case, the feasibility study will analyze the market’s current conditions, its future growth rate, the threats within the market and ultimately, what these threats mean to the new business venture. These threats could come from the market’s customers, the new venture’s future competitors, competing industries & technologies and from the market’s vendors and creditors.
It’s the threats caused by vendors and creditors that small manufacturers must pay particular attention to. After all, if vendors have tight purchasing terms & high MOQs (minimum order quantities), or if creditors have poor financing options with tight payment requirements, then the market may not be worth pursuing. In essence, the feasibility study is more important than the business plan because the study aims to determine the market’s health and the new venture's conditions for success within the market. Even the best laid business plan will fail if the market itself isn’t worth pursuing, or if it’s on a steady decline. Therefore, the feasibility study outlines the criteria for the new venture’s success by addressing these aforementioned market threats.
For small manufacturers looking to pursue a new market, the feasibility study is meant to answer those questions that concern them most. To summarize these concerns, we’ll break them down into the following: 1) Threats posed by customers 2) Threats posed by future competitors 3) Threats posed by competing industries & technologies 4) Threats posed by vendors & creditors. Simply put, the feasibility study aims to review these market players and influencers so as to determine the new venture's roadblocks to success.
Every market has a personality. Every market has customers who act a certain way, and ultimately buy a certain way. What makes sense in one market, doesn’t necessarily make sense in another. For instance, as a small manufacturer, your company may benefit from strong customer relationships. Ultimately, your market may be one where the customer-vendor relationship is valued above all else. However, what happens if your company is about to enter a market where loyalty is a premium no customer can afford? What do you do when you enter a market where quality and service isn’t easily differentiated from one product to the next, and the only overriding customer concern is lead time and price? The fact is, every small manufacturer about to enter a new market must first take the time to understand the customers in that market. This means to understand what drives them to make purchases and what their expectations are with respect to their vendors. Define the market and the customers in it.
2. Threats Posed by Future Competitors
Some markets are dominated by a few large players. Other markets are more competitive and have multiple companies all vying for a bigger piece of the pie. As such, each market is ultimately defined by the companies in those markets. In some markets, there may be so many competitors that the thought of an additional one is of little consequence to anyone. However, in other markets, companies may have the clout and power to back up their threats with real action.
Granted, collusion is against the law, but it’s also very difficult to prove. As a small manufacturer, it’s essential to understand your future competitors. Understand their market share, their strengths, weaknesses and ultimately, the power and clout they have at their disposal. How will they react when you come on the scene? What resources do they have that can stop you from achieving your goals?
3. Threats Posed by Competing Industries & Technologies
There is nothing like ignoring the importance of the market feasibility study only to find out later that the market is on a steady decline and about to be taken over by a competing industry or technology. This goes directly to the heart of the market’s health. Where is the market going? What is its growth rate over the next 5, 10, 15 and 20 years? Granted, the longer the forecast, the less accurate the projection. However, it’s imperative that you understand what the competing industries and technologies are. To give you insight into how easily things can go wrong, just think about the decline of the Palm Pilot form its original heydays.
Another example might include the rapid decline of the Optical Media Industry because of the large numbers of online downloads. Today’s companies must understand the constant threats posed by competing industries and technologies and how quickly these threats can make a company’s product offering stale and outdated.
4. Threats Posed by Vendors & Creditors
As a small manufacturer, it’s essential that your company properly manage the supply chain within its new market. You need parts and materials without fail and at a cost that makes sense. You simply can’t afford to have any downtime or lost time in manufacturing because of a lack of available materials. As such, it’s imperative to guard against incidences of “OOS” (Out-of Stock). To do that means to clearly define the abilities of the vendors in your future market. This means you should concentrate your efforts towards answering the following types of questions.
- Where are vendors located?
- What payment terms do they offer?
- What is their standard lead time on parts & materials and what impact will this have on your company’s inventory costs?
- Have you calculated your company’s future freight costs as they pertain to incoming and outgoing shipments of parts & materials?
- Have you investigated the original equipment manufacturers (OEMs) in your future market?
- Are you aware of the equipment manufacturer's terms, their equipment financing options, their lead times and turn around times on spare parts and ancillary items?
- How are banks and credit unions when extending credit to your future market? Do they see the market as financially secure, or a huge credit risk, and what if any impact will this have on your company’s ability to finance the new business venture?
Granted, these are a lot of questions. However, when small manufacturers look to better understand their future market, they must rely upon the knowledge accrued from an in-depth market feasibility study. Of particular importance are the threats posed by vendors and creditors. Managing a supply chain is fraught with issues. Small manufacturers are often at a loss to compete with larger competitors with larger purchasing power.
Entering a new market poses its own set of challenges with respect to how fast and easily the new venture will be able to secure its materials and parts for production. Be sure to account for the supply chain costs to support your new business pursuit. Understanding how vendors, creditors, competitors and customers behave in your new market, will go a long way to securing your new venture's success.
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