How to Evaluate New Markets

There is one thing almost all entrepreneurs have in common; they want to grow.  They seem to have an insatiable appetite for more; more customers, more margin and more revenue.  The most fundamental of entrepreneurial questions is what business to be in, and expansion into new markets can reframe everything from branding to resource requirements.

Within our work (as strategists and facilitators of strategic planning retreats), clients often pre-determine the industry they are in based on some core competency. While the core business may be somewhat static, selecting what sectors and niches to focus on can be tricky.

While many business executives focus on the things they can be good at, the capabilities of the firm only tell half the story.  One must also decipher what products and services customers will value. The question of market scope can be be best addressed through an assessment of “industry structure”. Industry structure demonstrates how a series of economic and technical  attributes determine the strength of an industry. [i] Ignoring industry structure is like standing in the ocean in high tide; one can attempt to swim with the current or against it.

Companies should seek to capitalize on favorable market forces and then align their capabilities to profit from the most attractive markets. Much has been written about the Five Forces model (originally authored by Michael Porter), but a contemporary view of the theory would suggest that entrepreneurs must consider the following:

1. Savvy customers have access to information, and hence more suppliers. They leverage the information to work suppliers against one another.  Customer’s buying power is promoting commoditization in most every industry. A world of reverse auctions and the like depress prices beyond fluctuations in economic conditions.
2. Suppliers have been chomping at the bit to raise prices (in a period of zero inflation). They must be more inventive in their approach in charging fees (such as airlines charging for baggage, and upgraded economy seats). For B2B companies, there must be a clear understanding of what services customers are willing to pay for, and which they will demand for free.
3. Low cost entrants will seek out business segments with low entry barriers and use price as a disrupter. With the development of eBusinesses, virtual offices, outsourcing of customer service and production, competitors can emerge quickly.
4. Substitutes are adopted much faster than in the past. Within about a year, local storage was replaced by products such as Carbonite, which months later was made irrelevant by Dropbox and Evernote.  These products came to market with a price that can’t be beat – free.
5. Switching costs are low unless suppliers provide a barrier to exit, such as warranties, etc.  For example auto manufacturers make special offers to induce existing leasing clients to stay in the fold.  Conversely, cell phone providers often provide lower prices to non-customers in an effort to make them switch, resulting in poor customer loyalty.

Every industry has a unique set of variables that synthesize these forces. Expansion is often necessary, but entering new markets should be approached with data, evaluation of the “five forces” and an abundance of caution.

All of this being said, executive teams should be purposeful about where their future growth will come from. It is overly convenient to believe that one’s existing market will continue to provide a satisfactory level of growth.

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