Common problems in business models - Market Share

Common Pitfalls when estimating Market Share

There are a few things that seem to pop up on a regular basis when a business analysis / business plan is being developed.  More often than not, these are the product of biases and short-circuited heuristics on the part of the analysts and business owners involved.

When I'm doing an analysis review (and especially when I'm doing a long day of these reviews) I start with this list and immediately look to make sure these problems don't exist:

Competitive environment is poorly understood

Most of our business decisions address a competitive environment in which we are the incumbent.  This sometimes trips up business managers who are looking to extend our business into adjacencies or into transformational arenas.  If the plan doesn't comprehend the current competitive situation as well as how that competitive environment is evolving, it's time to go back and break out Porter's Five Forces again.

Market share ramps too quickly

I occasionally see some really enthusiastic projections.  I mean, really enthusiastic.  For example, a brand new product, that serves a market we're not familiar with, customers we don't currently do business with, through channels we're unfamiliar with, but we'll ramp up our volume faster than the last iPhone.

Peak market share is too aggressive

I see this one a lot.  The logic seems to be "if we can't capture first place in the market, why would we even enter?"  This might be true, but it doesn't mean that we will capture first place in the market.  If the peak market share for a product introduction is not consistent with the competitive environment, it needs to be adjusted.  Similarly, if the peak market share makes volume assumptions that we can't physically produce with our current manufacturing facilities, supply chain and channel structure, it needs to be adjusted, too.

(more to come)

Important questions to ask when reviewing an analysis

Over the years I have had the opportunity to participate in many, many valuation exercises.  I have been asked to review or assist with many more.  In time, I have built up the following list of "review concepts" -- questions to ask and things to look out for when checking out somebody's work.  It's a good list to check my own work, too.

I'll just dump the list here, and maybe add some commentary in the comments.

Sources of Data

• Are all sources for inputs cited, with the name of the source and the date of collection?
• Is the data still recent?
• Do the numbers align with commonly accepted inputs from other sources, especially those that are "company dogma"?
• Is there good, historical research to support the forecasts?
• When estimating market sizes, are the market segments in the model defined specifically enough to be meaningful?

Time Horizon

• Does the model forecast the full spending horizon (or is there a spending hockey stick that occurs just after the model cuts off)
• Does the spending model comprehend all required spending (or just direct spending in this organization), common pitfalls I have seen in the past include:
• make sure you don't forget software spending!
• make sure you don't forget support spending!
• Does the model exclude terminal value (there is no excuse for terminal value these days)

Uncertainty

• Is there a "Tornado"?
• are the drivers of critical uncertainty at the top of the tornado well understood?
• Are all the "usual suspects" present in the tornado?  From my experience, these are:
• Market Share
• Price
• Completion Date
• Do all of the important inputs have ranges defined for their inputs?
• Is the Prospect start date (first volume) mechanically tied to the Project completion date (it should be!)

Interdependencies

• Are key dependencies on other programs or investments comprehended?
• Are major sources of risk external to the program identified?
• "Roadmap Risk" -- the risk that key ingredients from other partners will not be done on time or will be cancelled outright.
• "O/S Risk" -- the risk that the assumed operating system for the product will be irrelevant by the time it's done
• Competitive Risk -- the risk that a new competitor will appear, or that an existing competitor will change strategies
• Technical Risk -- the outright risk that we won't be able to complete the product at all.

Business model drivers (for new ideas)

• Is the value proposition for the product or service well understood?
• Do we understand what our customers want and how to reach them?
• Is the cost structure realistic?
• Are there regulatory issues we need to be aware of?
• Is the idea easily digestible by customers/management?

Career Capital - Useful traits

What are the personality traits that are associated with a good employee?  When hiring, what should you look for?

Conversely, we all work for somebody so what are the traits we should develop in ourselves?

I saw this list some place.  It isn't mine, but I can't remember where I found it.  It's a good list:

1. Action-oriented
2. Intelligent
3. Ambitious
4. Autonomous
5. Leadership
6. Cultural fit (personality)
7. Upbeat
8. Confident
9. Successful
10. Honest
11. Detail oriented
12. Modest
13. Hard-working / results-oriented
14. Marketable / presentable
15. passionate

I think one of the most interesting ones on that list is "marketable/presentable".  I know many people who fail to separate their work persona from their personal life persona.  I sometimes struggle with this, as well.  There is a constant battle between being authentic and being marketable.

If your personal life persona is naturally highly-polished, buttoned-down and carefully worded then that's probably fine -- lucky you!  If your natural persona is not highly diplomatic and you aspire to a role that requires careful diplomacy then there's a conflict -- adopt a different work persona or adopt a different career objective or prepare for a pretty frustrating slog.

"Decision Intelligence"

What are the steps of successful business strategy?

• Market Intelligence (outside facing)
• Market Sizing/forecasting
• customer trends, workloads, size, growth
• drivers, sensitivity, elasticity
• current customer groups, neighbors.  things your products could serve
• what are the customer needs for each group of customers?  what measures of performance and quality are important to them and what is their utility curve?
• Design Win Pipeline
• What RFQ and RFP are in the pipeline?
• What products best fit the customer requirements, both on roadmap and off roadmap?
• What are our chances for each opportunity?
• probability of the win
• size of the win, assuming we do win
• Prospect Estimations (workload / sku mapping)
• how will products play in the market, given the needs of the customers?  how do the performance/quality characteristics of these products match up to the needs of the customers?
• What does the competitive environment look like?  How do our products stack up?
• How much market share can we expect to capture?
• How much can we charge for our product?
• Business Intelligence (inside facing)
• Product Roadmap / communication
• what products do we have in the market now?  what about our competition?
• What products are in the pipeline?  What products are we not currently developing but could be?
• what are the important performance/quality characteristics of those products?
• what is the cost structure for those products?
• Project Planning/execution
• When will our products be ready?
• What resources will we need to develop our product?
• What resources will we need to bring our product to market effectively?  To support our customers?
• What risks are there to our project planning?  How can things go wrong, and if they do, what will the impact be?
• Execution Risk
• Upstream Roadmap risk
• interrelationships between project decisions  - 
• what projects are required for other projects?  
• what projects are required to build a product?  
• what projects help shape the markets? 
• what projects are required to take a product to market?
• Decision Intelligence
• Project strategy (portfolio) / funding
• funding decisions - what projects to do / cancel / keep alive
• Enterprise Risk
• What major pivot factors exist that would radically change the value of our company?
• What decisions would we make differently if we had perfect information?
• How can we hedge our bets most effectively?

Fun shows with asshole philosophies

Two shows have been driving me crazy lately... they are #Game of Thrones and #The Walking Dead.

They drive me crazy because I really want to like both of them.  I like Zombie/post-apocalypse stuff and I like the Medieval/fantasy stuff.  These are two shows that are made for grown-ups, have legs and are about things I like in my entertainment.  But they both frustrate the living hell out of me, and I think I know why.

They're both made by assholes.

For example, let's talk about the philosophy in The Walking Dead.  Or better yet, read this Cracked article that does.

Let's talk about the philosophy in Game of Thrones... I'm not even sure there is one.  It seems more like just a mysognyistic hate-fueled fan-fiction written by a miserable person out to punish everybody except Samuel Tarly.  Which isn't surprising from this guy:

For cripe's sake, just look at the guy.

Which brings me to my point.

Immersing yourself in literature is a sense of immersing yourself in the philosophy of the author.  It is actually very intellectually exposed because --as the reader--you let your guard down.  The lessons and morals of the story slide through unexplored by your rational mind because they come through the activities and repercussions that the characters face.  We rarely think through what the lesson is, and whether or not it is valid.

So why the hell are we watching so many shows that have such terrible philosophies?  Why are people who are clearly assholes making so much of our entertainment?

enjoying life

One of the most enjoyable states of being is "flow"... when a person is doing something he's good at.
Flow feels natural, as time effortless slides by, accompanied by a satisfied feeling of competence.
Flow only happens when a) you're good at something and b) you're doing it

therefore, if you want to enjoy your day, get good at some things you can do every day, and do them every day.

Stuff you should always know about your business

There are the things that any business leader should know about his/her business.  If this information isn't available to you, right off the top of your head, you need to memorize it ASAP:

PNL

Current / Historical

1. ASPs
2. Margins
3. Spending trends

Proforma

1. Forward Looking Financials
2. Impacts of risks/opportunities
1. Top 3 risks
2. Top 3 opportunities

Investment Profile

1. Spending by year
2. Headcount by location by job type
3. BTI and details about why

Business Value

1. NPV
2. Sensitivity / Tornadoes
3. Top 3 risks/opportunities

Customer Forecasts

1. Volume and revenue
2. Probability of win
3. Ranges on estimates