1.2 Spotting a business opportunity

Topic overview

Although this is a separate topic students need to relate these concepts to the contexts in which an

enterprise and an entrepreneur will be operating. They must be aware of the local and national business

environment and how this might impact on small business opportunities. Students must be aware of

this topic’s relationship with the other topics in this theme and how these areas may impact on business

decision-making.

Section Key Things to Learn

Customer needs Being aware of different customer needs such as price, quality, choice and

convenience

The importance of fulfilling customer requirements

Market research Objectives of market research

Methods and techniques

Qualitative versus quantitative research

Use of social media in market research

Importance of reliable data

Segmentation Benefits and methods of segmentation

Market mapping to identify gaps in the market

The competitive

environment

Strengths and weaknesses of competition

How competition affects business decisions

Customer needs

In order to successfully sell a product or service, a business will need to know what its customer needs

are. These can be summarised as:

providing the right product, of the right quality, at the right price,

at the right time, in the right place

These can be explained in a little more detail:

Quality: customers will want the product to be of the quality that they require and expect. This is not

necessarily high quality, as they may be happy with a cheaper product of a reasonable quality. There

will be some legal requirements related to quality, covered later in this companion.

Price: Customers will expect to pay a reasonable price for the good or service. Price can vary depending

on quality, timing, delivery arrangements and the popularity of the particular item. The price of rush

hour trains is a good example of how price can change according to different circumstances, in this

instance – the time of day!

Edexcel GCSE Business (9-1) Course Companion

© Tutor2u (www.tutor2u.net) 2017 Page | 13

Competition and choice: Most customers would like to have a range of options for their possible

purchase. This could include different brands, different quality and price combinations and even

different varieties of the same product.

Convenience: The growth in on line shopping and home delivery highlights how customer needs have

changed in recent years. Most successful retailers will now have websites and e-sales options that are

more convenient and increasingly expected by customers. Opening hours and location are also factors

that are affected by customer needs.

Meeting customer needs

Customers are arguably the most important stakeholder in a business. Without customers there is no

business.

Historically many businesses were more production focused. They produced what they were good at

producing and customers purchased the goods because there was no choice. In the global economy that

we now live in, this is not an option. There is too much competition and businesses spend large

amounts of time and money being customer focused.

A new entrepreneur will start with finding out and identifying what a customer wants and needs

through market research. He/she will then design a good or service that meets these needs and decide

on a price to charge that customers are prepared to pay. This will help the business to generate sales

early on and continue to make sales, which will help to secure the survival of the business.

Market research

Initially, the entrepreneur comes up with what he/she believes is a good business idea. But, how does

the entrepreneur check that this business idea will actually meet customer needs and therefore has the

potential to become a viable business? The answer is for the entrepreneur to conduct some market

research.

Market research for a start-up or small business needs to focus on the fundamental issues, such as:

þ How big the market is (measured by sales or volume)

þ How fast the market is growing and the potential for the market to grow further

þ Who the existing competitors are and their share of the market

þ How the market is divided up into segments, for example low price or high quality

þ What kind of customers there are in the market. It is important for a business to know what

their customer preferences are in terms of when and where they buy, and the prices they wish

to pay

An entrepreneur needs to be satisfied that there is sufficient demand for the product before the

business sets up. However, at the start-up stage, funds are often in short-supply, which restricts how

much market research an entrepreneur can carry out. Because of this, the entrepreneur should ensure

that he/she is conducting effective market research i.e. ensuring he/she has the right information to

make good decisions, rather than being overwhelmed with too much information taken from detailed

reports and statistics.

It is worth remembering that a small business can learn much about the market by simply trading,

talking to customers and suppliers on a frequent basis and reading the trade newspapers and

magazines. This type of market research is not only cheap or even free, but is very effective and will

help the entrepreneur to recognise what the business is doing right and what changes it should make.

Edexcel GCSE Business (9-1) Course Companion

© Tutor2u (www.tutor2u.net) 2017 Page | 14

Purpose of market research

The aim of market research is to gather information. This will enable the business to be informed in its

decisions and so reduce the risk of failure. Businesses will produce goods and services that the

customers want at a price they can afford. This will not just be based on guess work, but on accurate

and up to date data.

The following list describes some of the areas that market research can be used for:

þ Customers/target market – what type of person will buy the product or are currently buying it?

What price will they pay and what features do they expect? Where would they like to purchase

the product? Overall, market research should be used to identify and understand customer

needs as exactly as possible

þ Promotion – how do my customers find out about products such as mine?

þ Identifying a gap in the market – which firms are my rivals? What prices do they charge and

what are their products like? Is there room in the market for a new business to open up offering

a similar product?

þ Demand – how will customer needs change in the future? Are incomes increasing? How will

technology change what customers want and how they expect to buy it?

Limitations of market research

No market research will be completely accurate. If it is concerned with the current market, it will

normally be based on data from a sample of the market. This may or may not be accurate. Costs will

restrict the quantity and frequency of market research and researching future markets may not turn out

as predicted. Rate of change in a market may also make research of limited value. In the IT industry, this

has meant some businesses being more producer focussed in bringing out new models, rather than

seeing what customers want first and then developing products to meet these specific needs.

Primary and secondary research data

An important distinction can be made between two broad kinds of market research data:

• Primary data: data collected first-hand for a specific purpose by the business

• Secondary data: research data that already exists that has been collected for a different purpose

Primary research can be designed to get exactly the data a business needs. The problem with this form

of research, however, is that it is usually time-consuming and expensive. Getting a market research

agency to conduct the primary research is one option often undertaken by big businesses, but the costs

are high and the business must wait for the results. Often for new businesses, primary research is done

by the entrepreneur, often informally through speaking to potential customers or completing basic

surveys or questionnaires.

There are various methods of primary research:

Edexcel GCSE Business (9-1) Course Companion

© Tutor2u (www.tutor2u.net) 2017 Page | 15

Observation, for example

counting customers,

watching what they buy

and when; can also use

video recordings or sales

data from till readings for

example

Works well in retail markets, for

example sit outside a shop and

watch how many people walk by,

look at the window displays, stock

layout etc.

Can see what consumers buy,

rather than what they say they will

buy!

Expensive and time consuming,

though larger businesses will use

data from tills which can provide

detailed sales records.

Surveys and

questionnaires

Surveys are the process

of getting market data,

often using a

questionnaire and

analysing the results

Questionnaires can be undertaken

by post, by telephone, face to face

or more commonly online. These

can be given to existing and

potential customers.

They are relatively cheap and can

produce good quality data, if the

sample size is large enough.

Data collected is usually

quantitative and therefore easy to

analyse.

Questions need to be well

designed, but reply rates are often

very low, especially for telephone

and postal methods.

They can be expensive and time

consuming for a large sample to

be obtained which truly

represents the views of the

general population.

Interviews

These are often

conducted face to face,

but can also be

conducted by phone

This is a good way to get detailed

insights from an individual.

Answers can be checked and

followed up.

These are often used in

combination with questionnaires.

Interviews are costly in terms of

time and may be

unrepresentative, as only small

numbers will be undertaken.

Results can be influenced by the

researcher asking leading

questions.

Focus groups

Groups of actual or

potential customers are

brought together to

discuss a product or

market

Focus groups are a good way of

getting detailed information about

customer tastes and preferences.

They provide detailed information

and opinions.

These can be costly and time

consuming to conduct and need

careful management to keep

individual opinions independent

of others opinions.

Only a small amount of data is

collected, so may not reflect the

viewpoints of others fully.

Secondary research

For new businesses, secondary research will be the main source of market research. This is because it

costs less and is quicker and easier to obtain. Examples of secondary research, which can often be

obtained free using the internet or by visiting local libraries, are:

Edexcel GCSE Business (9-1) Course Companion

© Tutor2u (www.tutor2u.net) 2017 Page | 16

Government information Provide detailed insights on the economy and on many industry sectors.

There is also population data published by the government based on the

census.

Competitor websites Valuable information on marketing activities of competitors including

their products, prices and promotional activities and materials. This may

include product ratings, which are often independent.

Customer reviews The internet provides data from product users who give ratings and

feedback about a particular product. In some cases these are

independent sites e.g. Trip Advisor, in other cases they are provided by

the business itself e.g. Amazon.

Trade associations, trade

press and magazines

Most industries have an industry association - they are a good source of

market analysis, which is particularly useful for new businesses which

may have little or no experience of the market.

Newspapers (printed

press)

Financial and economic information is provided on a daily basis.

Newspapers provide local, national and international data which is up to

date. They also provide case studies of other local businesses.

Market research reports Organisations such as Mintel and Keynote produce a wide variety of

expensive reports that analyse individual markets.

Benefits and drawbacks of secondary research

By its nature, secondary research will vary in terms of its usefulness. Some drawbacks are as follows:

ý The research has been created for a different user and a different purpose, so may not be

exactly what the business is looking for

ý Data may be out-of-date, as it will have been completed in the past

ý Information might be biased, because of its previous use or inaccuracy

ý Data is generally available to everyone, so competitors will see the same information

However, secondary research has many benefits particularly to a new business:

þ The information is readily available, particularly online, so research can be done quickly

þ It is generally cheaper than primary research and in many cases it is free

þ Good secondary research provides an excellent overview of a target market and can save time

compared to primary research, particularly if the market is distant or spread over a wide area

Quantitative and qualitative market research

The distinction between primary and secondary research is really about the different sources of market

information. A different way of thinking about market research is to consider two main approaches –

qualitative and quantitative market research.

Qualitative research

Qualitative research is based on opinions, attitudes, beliefs and intentions. This kind of research deals

with questions such as “why?”, “would?” or “how?”

Edexcel GCSE Business (9-1) Course Companion

© Tutor2u (www.tutor2u.net) 2017 Page | 17

Qualitative research aims to understand why customers behave in a certain way or how they may

respond to a new product. Given that these opinions are often obtained from small numbers of people,

the findings are not necessarily statistically valid and may be difficult to draw conclusions from.

However, such data can highlight potential issues, which can then be explored through quantitative

research.

Focus groups and interviews are common methods used to collect qualitative data. This kind of data is

often revealing and useful, but it is costly and time-consuming to collect, particularly for a start-up.

Quantitative research

This is research based on larger samples and therefore should be more reliable, but it can be time

consuming to analyse and carry out. Quantitative research is concerned with data and addresses

questions such as “how many?”, “how often”, “who?”, “when?” and “where?” Questionnaires, that

contain closed questions, are the most common method to gain quantitative market research.

The results of quantitative research will generally be in numerical form, for example:

• 35% of customers rate the new product as “attractive”

• 70% of potential customers use the internet to buy their hotel accommodation in Dorset

• 3 out of 5 customers will buy a new food product after being offered a free in-store sample

• Average ratings of a product are 8.5 out of 10

Social media and market research

Most market research is out of date before it can be used. It takes time to collect, analyse and present

findings. Social media, as a form of market research, has many advantages compared to more

conventional methods:

þ It is very quick. If a small business uses Facebook and/or Twitter then reactions to new products

or situations will be on Facebook in minutes and can provide instant feedback

þ Provides an insight into the market in which the business is competing through the social media

of competitors

þ There are free tools available that allow businesses to collect social media statistics. Although

there will be some costs incurred by the business in terms of staff time analysing this data,

overall using social media will be very much cheaper than undertaking questionnaires, surveys

and consumer panels.

þ Users are engaged in the comments process and will interact with the business and each other.

Comments can also be followed up, for example using Facebook private messaging, to gain

further data and information.

þ Can allow links to the promotional use of social media which may form part of the firm’s overall

marketing plan.

However, there are disadvantages:

ý Although it is claimed that 80% of people with internet access engage with social media, it is

much harder for a business to engage with its actual and potential customers. This could mean

that the feedback provided through social media comments is not representative of actual

opinions and may just represent a small number of comments of people who do not like change

or new ideas.

ý There is a danger of social media becoming too negative and this message spreading very quickly

in a viral fashion.

Edexcel GCSE Business (9-1) Course Companion

© Tutor2u (www.tutor2u.net) 2017 Page | 18

ý There will be a need for staff training involved in this process, which will increase costs and be

time-consuming.

ý For a small business, the monitoring of social media can become very time-consuming, which

can detract from other important roles in the firm.

Reliability of Data

Important business decisions will be made on the basis of market research and therefore it is vitally

important that it is reliable. Reliability will mean that the results indicate the true situation that the

research is trying to find out, for example, the research reflects the views of the whole target market

accurately.

However, there are many different reasons why market research results might not be reliable. These

can be summarised as follows:

Bias: Most market research involves taking samples. The choice of these samples may well involve some

bias either through the time, location or type of people chosen. Smaller samples are more likely to be

biased, but large samples are expensive and time-consuming to conduct.

Out of date: Any research will be out of date once it has been collected. But some, especially secondary

data, can be very out of date and not a reliable representation of the current situation facing a business.

This can result in incorrect decisions being made.

Inaccurate: Either the question or the answers can result in inaccuracies. If the question is not clear,

then the answers given will be of little use. Quantitative data will often have numerical scores rating

products, but these often mean different things to different people. For example, some people will not

give 5*s, whilst others will. Qualitative data will give people’s opinions, but the opinions given may not

cover all the areas required and respondents may be reluctant to make negative comments, particularly

if interviews are conducted face to face.

There are many examples where specialist market research companies get it wrong, so small and new

businesses must be particularly careful not to base too much of their decision making on too little

market research.

Market segmentation

Once a business has undertaken market research, it will have a clearer idea of who its customers or

potential customers are likely to be. The business may then decide to concentrate on certain groups of

customers, in order to gain some advantage over its competitors. This also means that the business can

develop some expertise and reputation when targeting this specific group.

This means that most businesses do not try and sell to the whole market population. They choose a

smaller part or segment of the market to concentrate on. This is particularly the case with small

business start-ups. Businesses are then in a better position to meet their distinct customer needs more

exactly.

The table below summarises some of the benefits to a business of segmenting the market:

Edexcel GCSE Business (9-1) Course Companion

© Tutor2u (www.tutor2u.net) 2017 Page | 19

Better matching of

customer needs

Customer needs differ; creating separate products for each segment

provides customers with a better opportunity to buy products that meet

their specific needs; this will increase sales

Better opportunities for

growth

Market segmentation can build sales, for example customers can be

encouraged to "trade-up" after being introduced to a particular product

with an introductory, lower-price

More effective

promotion

By segmenting markets, the target customers can be reached more often

and at lower cost, as there is less waste in the promotion used

Gain a higher share of the

market

Through careful segmentation and targeting, businesses can often

become the market leader, even if the market is small

There are many ways in which a market can be broken down into segments.

A very popular method of “demographic” segmentation looks at factors such as age, gender, and

income. These are described briefly here, along with other common methods of market segmentation:

Gender We all know that males and females demand different types of the same product;

great examples include the clothing, hairdressing, magazine, toiletries and

cosmetics markets

Age Businesses often target certain age groups; good examples are toothpaste, look at

the variety of toothpaste products that are available to buy that target children and

adults, and toys, for example pre-school, age 5-9, age 10-12, teenagers and family!

Location Another approach is known as geographic segmentation, which will divide the

market up by area. This could be as wide as a country or continent, for example the

“European market”, but for some small businesses it could just be the local town or

village, which usually relates to small service businesses such as shops and cafes

Social class Many businesses believe that a consumers "perceived" social class influences their

preferences for cars, clothes, home furnishings, leisure activities and other

products and services

Income Because it is perfectly possible to earn large sums of money in all occupational

classes, segmentation by income level is also undertaken. Producers of luxury

goods and services will often use this type of segmentation, so that they do miss

out on potential customers

Lifestyle This method of segmentation is where potential consumers are grouped by their

activities, interests and opinions; examples include hobbies, types of holiday

preferred or whether people are interested in politics or not

Limitations of segmentation

Whilst it is possible for small businesses to gain considerable benefits from segmenting the market

there are however some disadvantages:

ý Lack of information and data: some markets are poorly researched with little information about

different customer needs and wants. This is particularly relevant for small businesses, where any

research conducted may be inaccurate, insufficient or out of date.

Edexcel GCSE Business (9-1) Course Companion

© Tutor2u (www.tutor2u.net) 2017 Page | 20

ý Difficulty in measuring and predicting consumer behaviour: humans don’t all behave in the

same way all of the time. The way that they behave also changes over time. A good example is

the “grey generation” i.e. people aged over 50. The attitudes and lifestyles of the grey

generation have changed dramatically in recent years. This can lead to missing potential

customers through inappropriate targeting with relevant products.

ý Customer segments can be hard to reach, once they have been identified: it is one thing

spotting a segment; it is another finding the right way to reach target customers with the right

kind of marketing message in that segment! They may be difficult to reach and inform about

goods or services.

ý All market objectives: some small businesses will not just want to target one segment; they may

have ambitions on a bigger scale, so will be looking to expand their geographical area or the type

of customer.

Market mapping

Once an entrepreneur has identified an appropriate segment of the market to target, the challenge is to

position the product so that it meets the needs and wants of the target customers.

One way to do this is to use a “market map”. The market map illustrates the range of “positions” that a

product can take in a market based on two dimensions that are important to the identified target

market.

Examples of those dimensions might be:

• High price v low price

• Basic quality v high quality

• Low volume v high volume

• Necessity v luxury

• Light v heavy

• Simple v complex

• Lo-tech v high-tech

• Young v old

Let’s look at an illustrated example of a market map. The map below shows one possible way in which

the chocolate bar market could be mapped against two dimensions – quality and price and locates the

products of the competition:

Edexcel GCSE Business (9-1) Course Companion

© Tutor2u (www.tutor2u.net) 2017 Page | 21

How might a market map be used?

One way a market map can be used is to identify where there are “gaps in the market,” in other words

where there are customer needs that are not being met. For example, in the chocolate bar market,

Divine Chocolate is a social enterprise which aims to provide better income for cocoa farmers in

developing countries. It successfully spotted that some consumers were prepared to pay a premium

price for very high quality chocolate made from Fairtrade cocoa and therefore developed a product to

meet these specific customer needs. Equally, Green & Black’s exploited the opportunity to sell premium

chocolate made from organic ingredients. Both these brands successfully moved into the high

quality/high price quadrant of the market map, before too many competitors beat them to it.

The trick with a market map is to ensure that market research confirms whether or not there is actually

any demand for a possible “gap in the market”. There may be very good reasons why consumers do not

want to buy a product that might potentially fill a gap identified in the market map, for example who

would want to pay a high price for a low quality product?

The Competitive Environment

Businesses will try to produce a good or service where they do not face much, if any, competition.

However, in reality, all businesses will have some form of competition. This competition might be strong

and direct, i.e. there are many businesses producing very similar products, or indirect i.e. competitors

are producing goods or services that represent an alternative way for consumers to spend their money.

If there is a little competition, this gives even a small business considerable market power.

Competition

When looking at competition in more detail, the first consideration is to determine what a market is.

One definition of a market is that it is a place where similar goods and services are bought or sold.

Similar would mean that buyers could make choices. This is not always a direct alternative, for example

a choice between going to the cinema, going out for a meal or buying a new computer game. Markets

are also not always physical places, as much of today’s business takes place through online transactions,

where competitors’ products can be bought and sold. Some of the effects of direct, indirect and no

competition on a business can be summarised as follows:

Competition Description Impact on business decisions

Direct: product Businesses have competitors that

produce a very similar product.

Businesses will try and make their products

different, so they can charge more for them or

gain customer loyalty. This may be through

reviewing the quality of the product. A local café

will aim for good customer service or a

children’s play area, so that it is different from

nearby national coffee shops. This will attract

new and regular customers to their particular

business.

Direct:

price

Prices will be very similar if not

identical. For example, petrol prices

are normally very close to each

other, despite the petrol station

visited.

Small businesses might decide to sell their

products cheaper, but risk being in a price war.

In this case, the bigger business with the most

market power will tend to win, as they are more

likely to be able to afford to lower their prices.

Edexcel GCSE Business (9-1) Course Companion

© Tutor2u (www.tutor2u.net) 2017 Page | 22

Competition Description Impact on business decisions

Direct: location In a local area, a business may

compete with other similar

businesses. For products, this can

be across a wide geographical area

or even international depending on

the costs of distribution.

Small businesses may try and choose an area

where they can target their products without

competition, or where competitors target

different market segments. A small local

hairdresser may be able to work out an area

where it can avoid competition from similar

businesses.

Indirect Consumers may choose a good or

service that has similar

characteristics (leisure, transport),

but is not a direct competitor.

Trains, buses and cars may all be

ways of getting to work and

therefore do compete with each

other for customers, but indirectly.

Some customers will be affected by changes to

an indirect competitor; some customers will not

change to, or from, the indirect competitor. For

example, people may prefer to use a local

independent cinema even though other leisure

choices exist.

None A business has no competition or its

product is sufficiently different

from any alternative.

Small businesses can charge higher prices and

make good profits, particularly if they are

targeting a particular segment. Quality however,

might suffer due to the lack of competition. This

can make the business complacent, which can

result in competitors being attracted to the

market.

The competitive environment is often out of the control of a business, but the decisions that it makes

will be very much influenced by competitors and the threat of future competitors. New and small

businesses face particular problems as they can be targeted by other businesses that would prefer to

dominate profitable markets themselves.