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Understanding Your Business Environment


The role of your environment and its forces in business strategy, executional tactics and performance measurements.

Because you don't operate in a vacuum, you must stay on top of the state of the economy and industry - this includes your operating area(s) and any feeder areas.

Consider the role of your environment and its forces in business strategy, executional tactics and performance measurements.

The Situational Analysis

To get an idea of the state of the industry in your city, for example, you'll want to do a situational analysis. This is market condition analysis looks at variables such as similar facilities, product or service offering, pricing, customer base, marketing and promotion, economic climate, etc. Both direct and indirect competitors should be included in your analysis.

The analysis will give you a clear picture of existing dynamics and will point to future changes that will impact you positively or negatively.

Identifying your Competitive Set

Once you have done your analysis, you'll want to define your competitive set. Your competitive set will consist of direct competitors within your trade radius. What constitutes direct competition?

You need to determine your trade radius from a number of factors, derived from marketing studies that identify how far customers travel to come to you or your distance from key locations. Those businesses within this radius will be considered potential direct competitors. However, there might be a business outside this radius that could still be considered part of your set. For example, a hotel on the opposite side of the city might consider a similar or identical property at the other end as a direct competitor if each claims specialized products and services not offered anywhere else in the city: for example a Ritz Carlton on one end and a Four Seasons on the other.

Just because other businesses in your trade area sell the same products, does not mean they are direct competitors. Take the hotel industry for example. All hotels sell rooms; some just rooms, others offer more like pools, meeting rooms, restaurants, etc. Those that sell only rooms cannot consider those that offer more as direct competitors - they're just not in the same class and rarely target the same clientele. A Marriott hotel is not the same as a Comfort Inn, even if they occasionally end up with similar clientele. However, if the Comfort Inn has banquet facilities, the Marriott could likely become a competitor for that specific feature.

Once you've narrowed it down to radius, service/product offering and target clientele, you've got your competitive set.

Market Share

From your competitive set, you establish the share of market you command. For example, let's assume 3 hotels belong to your competitive set: Market Set No. Rooms/ Units % of market inventory Hotel A 20 12.5% Hotel B 50 31.3% Hotel C 30 18.8% Yours 60 37.5% Total 160 100.0%

So your hotel's base share is 37.5% of the competitive set's market. Now, why is this important? Because you can use this as a measure of what constitutes your fair share of the market and therefore determine how much you're penetrating it. You can't simply look at your own internal figures to see how you're performing - you need to see how you're performing in relation to the market!

Market Penetration Index

Fair market share means that under any given conditions, your number of rooms/units rented should equal your base share; it is expressed as an index called a penetration index.

Let's look at a sample competitive set. The economy hasn't been to good, and the hotels in this set have been experiencing a decline in travelers to the area. Market Set No. Rooms % of market inventory No. Rooms Rented % of rented market inventory Market Penetration Index Hotel A 20 12.5% 16 12.5% 100.0 Hotel B 50 31.3% 50 39.1% 125.0 Hotel C 30 18.8% 10 7.8% 41.7 Yours 60 37.5% 52 40.6% 108.3 Total 160 100.0% 128 100.0% 100.0

As you can see, only 128 rooms were rented on this particular day within your set. Even though you rented less than your full complement of rooms, you ended up with 40.6% of all rented rooms, much more than your fair share, over penetrating the market by 8.3 points! Hotel A achieved their fair share. Hotel C didn't even come close to achieving their fair share, actually losing share to your hotel and Hotel B. Of course, Hotel B outdid you, too!

The point to be made here is that a drop in rentals, units, dollars per transaction or sales may have nothing to do with poor management. Yet, the ability to maintain share, and even expand it when resources are dwindling, is a great measure of keen management.

You can do similar market share and penetration indexes with other performance metrics such as average daily rate, average ticket, revenues, and transactions for example. The hotel industry is tracked closely enough to provide these wonderful statistics. Your industry may also track market share to the local level. If it doesn't, I suggest you write your industry association and get them to lobby for establishing a system.

About the Author

Letzen Maldonado is Founder and Senior Managing Director of Management Aides, a firm providing practical business information and professional writing services.

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