Writing a Business Plan: The In Group

Once when I was a business consultant working with small to medium start-ups, one of my clients who ran a small sandwich shop told me that the volume of customers was below their projections, and no one could figure out why. There was one Subway location nearby, but no other businesses that would account for the lack of traffic. I had an idea of what might be going on, so I suggested we take a look around the neighborhood and see if we could figure things out. We got into my old Pontiac and started driving around…

On the next block from the sandwich shop was the Subway. My client pointed it out to me, and said “See it? They don’t seem to be that busy, either.”

“Maybe that’s not the problem,” I replied. As we came to the end of the block there was a McDonalds, a Burger King and a Wendy’s on the corners. “What about them?” I asked.

“Those aren’t sandwich places,” my client replied. “Those are burger stands.”

“They’re places where you can get lunch to go for under $10, right?” I asked, turning left.

“Well… Yeah, I guess,” said my client.

On the cross street was a strip mall with a Chinese takeout place and a taco stand in it. “What about those?” I asked.

“Those aren’t sandwich places either,” said my client. “Are they really competing with us?”

I shrugged. “Think back before you owned a sandwich shop,” I requested. “Did you ever eat things other than sandwiches for lunch?”

At the next corner I turned left again, driving past two more burger stands (a Jack in the Box and a Carl’s Junior), a Taco Bell and an Arby’s. There was also a little hole-in-the-wall deli, which made sandwiches according to the sign in their window. “I count nine,” I said, turning left again to head back to our starting point.

“Ten, actually,” my client replied, sadly. “The supermarket here has a deli counter that sells sandwiches; I’d forgotten about them.”

“So, ten other options in a three-block square area,” I replied. “And that doesn’t even count places that deliver to this neighborhood, or sit-down restaurants that might be around here.”

“I get the point,” said my client, and sighed heavily. “Does this mean we’re done for?”

“Not at all,” I replied. “It just means you can’t base your strategy on being the only economical lunch option in the neighborhood. Let’s go back to the shop and talk about some other ways of bringing in customers.”

Now, I told you this story as an introduction to the idea of Strategic Groups, as we call them in business school. The basic idea is simple: consider what other companies in your area of operations meet the same customer need that your product or service meets, keeping in mind that not all of them will be in exactly the same industry that you are nominally in. For example, a doughnut shop, a convenience store, a McDonald’s, an IHOP and a bagel stand may appear to have nothing in common – until you realize that all of them will sell you a cup of coffee and something to eat for breakfast. If the entrepreneur who owns the bagel shop thinks that he or she is the only game in town and fails to take the competition (and the resulting customer power) into account, the bagel shop is unlikely to prosper. By the same token, a Sears, a Target, a Walgreens, a Wal-Mart and a Best Buy may not appear to have much in common – but you can probably buy a television set or a radio in any one of them. And if you attempt to open a specialty electronics store in a market that has all of these national competitors in it already (or any three of them, for that matter) you’re likely to have problems unless you are ready to fight for your share of the customers…

Of course, your business may not have any competitors within driving distance; if you’re entirely web-based you might not have neighbors in the conventional sense at all. But the Strategic Groups analysis remains as useful as ever, even for purely electronic merchants. It’s not enough to look at who is running a business exactly like yours; you need to consider who is running a business that serves the same needs as yours. Honda and Rolls-Royce both make cars, but a Honda is not a substitute for a Rolls, and vice versa. A pizza joint does not make tacos, but both businesses will be competing for the same segment of the dining-out market. Before you begin operations – and, if at all possible, before you begin writing your business plan – it’s worth taking a moment to look around and see what business you are REALLY in, and who will be fighting with you over the same customers…