Why you don’t need a market analysis

A market as a Second Order Chaos

Strategic thinking

A market as a Second Order Chaos

Few strategic meetings go without market analysis discussions. People from the marketing department prepare long and colorful PowerPoint presentations with charts and diagrams representing market players’ shares, CAGR, current trends, and forecasts. It is believed obvious that this information is crucial when it comes to strategic decisions. But when something is regarded as going without saying, it is better to be especially precautious. It is highly likely that we are dealing with a cliché shifting our thinking away from what is genuinely essential (and our minds love clichés because they save us cognitive energy, which is not always of use to us). I have participated in many such discussions and have never seen anybody exclaiming “eureka!” looking at those charts and coming up with a game-changing idea.

If a company is going to create a new market, the use of the market analysis is close to zero. For example, I doubt that Jeff Bezos could gain many valuable insights from the USA books market analysis back in 1994 when he established Amazon. It was enough to know that the market was huge to launch a venture. But even an old company in a mature market can’t learn much from the charts and forecasts because any market is a Second Order Chaos.

Second Order Chaos

There are two main classifications of chaos. A First Order Chaos is a system that doesn’t respond to predictions. The best example of such a system is the weather. It is chaos because it results from many independent factors. If the weather conditions become such that tomorrow it is going to rain, it will be raining even if all the meteorologists in the world forecast the sunny day. Such systems are predictable.

A Second Order Chaos is a system that responds to predictions. It is also chaos, but it changes differently. For example, imagine you are a stockbroker, and you read an article in a respected financial magazine forecasting that a company’s share price will rise. The chances are that you will decide to buy some shares, and so will do other stockbrokers, which will push the price up. It is a kind of self-fulfilling prophecy. Any market is a Second Order Chaos, and the systems of that type are unpredictable.

A market analysis brings a comforting illusion that the market chaos was somehow dissected, scrutinized, and, as such, understood, converted into an order. But we must not forget that the economic theories are still better at explaining market events retrospectively than predicting them. Collecting more data about current market conditions doesn’t help us much in foreseeing its future changes.

Chaos and strategy

The market analysis leads us to a mental trap because we are not just independent observers — we are an active participant. Let’s imagine we designed a strategy based on those flashy diagrams, believing in our future prognoses. But all the forecasts we’ve made, whatever elaborated they have been, were grounded on the current state of the market. But as soon as we begin executing our strategy, we will change the battlefield, so all our predictions will become outdated quickly.

A little bit old but still an impressive example of that is the first iPhone. When it emerged on the market, many companies sold smartphones. Do you remember their names — Nokia, RIM, HTC? But iPhone changed the game so much that all the notions about the market became outdated in several months. I don’t know if Steve Jobs looked at the market figures making decisions about the first phone by Apple (from what we know about him, it seems unlikely), but even if he did, I doubt he derived many insights from them.

Even if our strategy doesn’t imply launching a game-changer on the market, and even if it fails, we will make significant changes in the market every day, making our previous forecasts out of date. A company needs to update them daily to keep up with changes, but it doesn’t make much sense. It is better to invest this time and effort in customer research. Any organization earns money by fulfilling customers’ needs, so collecting insights into clients is a better investment. I will share more ideas about customer research in the following articles and in my upcoming book “Red and Yellow Strategies”.

Conclusion

All the above doesn’t mean that a company’s leadership should neglect market figures completely. It is valuable to know whether your market is growing or on the decline. It is necessary to consider core players’ market shares making big strategic decisions. But from my experience, a brief overview is more than enough. Many years ago, being a CEO, I tended to invest big money in market research, but I was never satisfied with the return on those investments. This data may be helpful for making some short-term decisions, but for strategy formulating purposes, it may be used only as supplementary materials.

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