Achieving Sustainable Growth Through Adjacent Markets: Determining Market Attractiveness

In the first post of our blog post series, ENGINE’s Brian Reuter and Linda Shea addressed “Defining Adjacencies,” based on a webinar that ENGINE Insights recently hosted, “Achieving Sustainable Growth Through Adjacent Markets.”

In our second post in this series, Brian & Linda will take you through the second part of this webinar, “Determining Market Attractiveness.”

Brian Reuter:

A key player criteria that we recommend to clients to consider when you evaluate new opportunities are these three. Attractiveness, customer appeal and acceptance and relatedness to your core business. Now, you may have others besides these, and that’s fine, but these are three key ones that we’ve discovered need to always be present in any evaluation you do of new opportunities. So market attractiveness, what we’re trying to figure out there is, is the market big enough?

An example. I have a lot of clients that will say they’re only interested in an opportunity if it’s at least 100 million dollar market and if you think about that, it makes sense. If you enter a market and let’s say you can grab 5% market share and it’s only 100 million dollar market, that’s a $5 million business. So if you go into markets that are much smaller than that the opportunity just isn’t as attractive, and also, is it growing? Most people are looking for double digit growth so they can ride that growth wave.

People need to understand the pricing cost structure of the leaders and their profitability. That helps them understand is it profitable enough to be of interest and want to pursue and then also, is there a way for us to achieve similar profitability through pricing and costs as what the current leaders have achieved? So those are some of the questions that need to be answered in market attractiveness. What do we need to look at in customer appeal in the customer area, Linda?

Linda Shea:

There are a couple things to think about here. I think definitely one of the first questions you want to be able to understand is, where your customers buy your solution. There’s really an important kind of question underneath all of that and that is, are you looking at a target that is the customers that you have today, or is it a new set of customers, and you need to understand their interest in buying the solution, whether it’s your existing customers or a new set.

You’ll also need to know whether or not, once you understand the interest in buying, how large is this opportunity within the market, how large is the need? You’ll also want to be able to think about the credibility and the acceptance for your brand to enter the market. I think this is something that gets overlooked from time to time, where businesses seem to think, particularly if the target is their own set of customers, but of course, those customers would consider a new offering.

Dependent upon how close it is to your core business, they may but in other situations you might be surprised to find out, they would have a bit of hesitation. So it’s something to make sure that you begin to explore and understand. Then of course, anytime you’re moving into a new space, you want to make certain that you’re understanding the competition. Certainly traditional players as well as new entrants, you want to understand not only how you are perceived, but how you’re perceived relative to competitors that are in that space today. Brian, do you want to talk about the aspect of relatedness?

Brian Reuter:

We say related this to your core business, another way to think about that is, do you have expertise you can leverage to pursue this new opportunity? The way to look at that is, where are the similarities between your existing business and expertise and the new market that you’re looking at? Or another way to look at it is, Do you have any specific type of core competencies or expertise that you can leverage to pursue that? For example, have you developed a new technology that might have competitive advantage over other solutions? So that’s what we’re getting at about relatedness to the core. The more expertise you have to leverage into the new opportunity, better your odds are of winning and level of risk is reduced.

So we’re going to dive into each one of these areas, market attractiveness, customer and related this to the core in a little bit more detail to give you a better understanding of what we need and what it takes to uncover this information and make those decisions. So when we’re evaluating the market attractiveness, there’s three main things we look at. One is the market size and growth and forecast, the competitive situation and the value chain. So when it comes to the market size, growth and forecast, there’s four methods we typically use to size up that market.

So one is collect public data, two is roll up competitor sales, three is, quantitative surveys and then an alternative method. So, Linda, why don’t you share some insights about how we leverage published data.

Linda Shea:

Sure. I would say just as we look across the page here, there’s certainly pros and cons to each approach as Brian mentioned a moment ago. I really think as you take a step back and think about, how do you learn and how do you estimate the size, you want to think about scale and you want to think about just how precise do you actually need to be? Is it 100 million dollar space to move into, $500 million space, a billion dollar space with opportunity, size of the space and the opportunity for your business. That’s really what you’re trying to quantify.

One of the first place that you can turn to is published data. Now, you want to make certain that the space that you’re considering is, in fact a market that is highly tracked. If it is, you’ll find a lot of information. You want to be sensitive as you’re looking at that information, to begin to be able to cross check it in terms of the accuracy, whether it’s looking at sales data, whether it’s looking at other forms of financial information, so that you feel as if you have made certain that the data that you’re looking at, that you may perhaps ultimately rely on has been cross checked.

You may also find as you want to drill down into particular geographies, or perhaps certain product lines, or perhaps even segments of a customer population, the data might get a little thin. It might be hard to find, it might not be broken down to that level. So that might be something that might pose a bit of a challenge for you. There’s no doubt whatsoever that published data can be an efficient method, a low cost method and if it isn’t a highly tracked market, it may be the right source for you. In other spaces, it might not yield enough. In that case, Brian, I think you’re going to talk about looking at competitor sales.

Brian Reuter:

Yeah, so let’s say you’ve done some digging into published data, you can’t find any equity reports or syndicated market research or government data or what have you on the market. An alternative way that you can try to size it up is looking at competitors in the market and figuring out their sales. Now if it’s a fairly concentrated market, this method works. So for example, let’s say you discover that through talking to people in the industry or something that there’s, say four or five competitors that command 70% of the market.

Well, if you kind of get that insight from an expert or somebody in the market somehow, a customer that might know about it, then you can do a little competitive intelligence work and roll up the sales of those competitors into a market size. So if there are publicly traded competitors, that’s great. There’s going to be lots of financial information about them, and you can go dig into that.

Now, if the markets are too, let’s say they’re little niche and so the competitors do not report them out separate in their financial statements, it’s everything aggregated to a higher level, then you might have to do some field work, which means you’ve got to get out there and start talking to people in the industry. They’re the competitor, recent former employees or customers or things like that to understand what the competitors sales are in that area, but as long as the market’s fairly concentrated, that’s an effective way that you can size up a market and get a sense of the size and the growth through the competitors sales. So another method is serving customers. How do we do that, Linda?

Linda Shea:

So if we think about quantitative surveys, and then overlay the piece of customers, there’s lots of ways to identify customer groups and to reach out to them. I think you want to make certain that if you’re used to quantitative research, you typically have an aspect of quant research that drives you to make decisions and that’s all about precision. So I’d ask you to kind of relax a little bit on the precision piece here, because it certainly as I indicated earlier, it really is about a sense of structure.

With that said quantitative surveys is an approach. I think you’re going to want to make certain that you’re able to get to your target audience. So you’ve got a fairly decent incidence level. Otherwise, it gets very costly very quickly and we know that there’s a lot of agile methods out there today to really help us reach those audiences very quickly, and in some cases, very cost efficiently. It certainly gives you a lot of accuracy.

Instead of reading information, and trying to deduce from that information what you think the customer may be doing with an offer, you can ask it straight out. There are things that maybe are not quite as easy to ask straight out to someone as you can get through published data, but quantitative surveys and of customers can be another way in which to investigate and to help you estimate market size. Brian, do you want to talk about alternative methods?

Brian Reuter:

So when we can’t get into market size through these other methods we just described, we have something unique called an alternative method, which usually based on production or distribution or end use data is something that’s published, that we can leverage along with something we might call like relational data by talking to people in the industry that can give us some rules of thumb and estimates and put it all together to calculate an alternative method.

In fact, we’re going to go into that in a little bit more detail, just to explain that further. So when I talk about basis data, what I’m referring to there is you will almost always be able to find some kind of quantified information about a market. It might not be the size of the market, but something that could relate to it. You might find some volume production data or maybe you can find some data about a market related to the market, you’re trying to size up. Say, you’re trying to size up a market of a certain type of product and you can’t find that but that product is used in other things and you can find data on that.

It’s things like that, there’s always some way to find something that’s quantified. That becomes your basis data. Then we go out and talk to people in the industry to find information about the specific market you’re interested in, and how it relates to the basis data that you’ve uncovered. Then when you put those two together, you can size up a market. So let me give you a really, really simplified example of that. Let’s say we’re trying to understand the United States market for kitchen sinks, new kitchen sinks in remodeling projects. So not new construction, just remodeled.

Well, if we went out to the US Census Bureau, we can identify that there are 242,700 residential remodelers in the United States, that becomes our basis data. It’s something related to what we’re trying to figure out, or it’s connected to it. Then if we go do some interviews with remodelers, we might find let’s say we go out and interview 20 of them and we find out that they do, on average, four kitchens per year, four remodels per year. Well, we can do the simple math and say that relates to roughly a little shy of a million sinks per year that are used in remodeling projects. So that’s the basics of the idea and how that works.

The next thing we look at is the competitive situation. So the competitive situation is really important because that helps you figure out how well a competitor is or is not doing in the market that you’re considering. So it also helps you understand the dynamics of the market and what you’re going to have to do to compete effectively if you choose to enter it. So looking at the profitability of the leaders gives you insight into your own profitability if you chose to enter it, how is it that they’re achieving that profitability? What kind of pricing do they have to offer to get at that profitability and yet be able to get the sales that they need?

What kind of infrastructure has the company developed to achieve that level of profitability? What kind of competitive advantages do they have that you’re going to have to compete against? All of those become critical in helping you assess the competitive situation that you’re going to face if you choose to enter it. Linda, can you share an example of assessing the competitive situation or market?

Linda Shea:

Sure. There are a couple of situations that come to mind. I think today as we look at, I’m going to speak a little bit in the business to business environment. There’s a lot of, I think consideration today as you look at agreements between two businesses and particularly trying to understand what’s happening with the competition. A lot of the clients that we work with today are certainly keeping their finger on the pulse of what competitors are doing and how difficult they may or may not be to work with.

It certainly opens up a door for conversation with customers in terms of their tolerance for those pain points, service level agreements and other situations where they will, they just cannot take on the added work if a supplier is not delivering. In one particular case, we see that in the manufacturing environment, there have been a lot of challenges to get product where it needs to go. In some cases, you can look at very large dollar relationships that might be dispersed around the globe, but the ability to get product to them is absolutely critical.

In fact, when product doesn’t arrive when it needs to arrive, they can shut down manufacturing sites, costing hundreds of thousands of dollars on an hourly basis. So one of the avenues that we’ve recently pursued is understanding in those very large dollar relationships with very specific types of products, the ability to look at 3D printing on site in the customer’s location. So if you think about it, you start to look at kind of challenges in the supply chain, you start to look at challenges with competition and you start to think about how can you create some disruption there.

So the example there is just meant to help you think about, there are ways to create disruption. There are ways to understand some of the positives and the negatives about the competition, and to consider that as a part of an adjacency move that might allow you to create that form of differentiation that your competitors, perhaps are not able to copy overnight.

Brian Reuter:

Thanks, Linda. So sometimes people come to us and say, okay, that’s all fine and dandy, but how do I get that information? Some of that information obviously, is going to be protected by competitors. It may not necessarily be trade secret, but they’re not going to be just handing out to everybody if they ask about it. So some of that may be published. You might be able to get some of that from, well say the presentation to investors, or analysts that public companies make. You may find some from interviews with CEOs or other executives in the company, but likely you can’t get everything and that’s where field competitive intelligence research comes into play.

So that requires some good conversational interviewing skills. If you call up and start talking to people in the industry, and just drill them with a bunch of questions, they may not be interested in having a conversation like that, but if you come in and have a conversation with them and are willing to share some of the information that you know, so that there’s sort of value in having discussion with you, that’s the way you work on collecting insight about those competitors and understanding how do they achieve the profitability they have, what their pricing strategies are.

The way we usually do that is by starting with people that are easier to find, and more willing to talk and then moving our way in towards the competitor themselves. So, for example, industry analysts and consultants, they’re watching competitors all the time, they’re watching the market, they’re trying to understand what’s going on, they have a really good handle on those markets and an understanding of them, they can be great sources to get started with and give you some of the answers that you need.

Then you just keep moving in talking to people in the market that are closer and closer to the competitor. Sometimes the only sources of information that have the insight that you need are going to be former employees of the competitor or the competitor themselves. So, we usually start with, in that case, the former employees. They’re less guarded about information. They’re not in situations where they are unable to share, especially if they’ve left the competitor, say for a year or so.

They can have great, great insight. All of this has to be done in an ethical way. So when we do this kind of research for clients, it’s all aboveboard. It’s all ethical. We never misrepresent who we are, but that also means that sometimes people won’t talk to you. So you have to have some strong skills and resources for identifying those kinds of people and then talking to those kinds of people to be able to do this, but this can be imperative in your evaluation of a new market, because you may have some information that you need to know to complete your evaluation of it, and if it’s not published somewhere, you’re going to have to do some level of field competitive intelligence work.

The third component then or the third criterion is the value chain. The reason that’s important is that when you look at the value chain, there’s multiple points obviously in the chain and the point in the chain that you decide to take a look may not necessarily be the most attractive area, it may be the one that you found. So, some clues lead you there but it’s very important to look at that point, but also, at least one step prior and after that point in the chain, because you might find that there is a more profitable area, or an area that’s growing better.

Or you might find that there is a value chain or a vertical integration play there for you. If you look at that and identify, you might have some expertise to come in and do the vertical integration play there and disrupt that market a little bit, like the Tesla example that we offered before. So that’s why it’s critical to look at the value chain, not just at the point of interest that came into but at least one step up above and below, because you might find other opportunities there that are better suited than the one you started off with.

 

Keep reading to find out more about our third post in this series, where Brian and Linda address “Gauging Customer Appeal and Acceptance!”

Want to learn more about how you can achieve sustainable growth through adjacent markets? Contact us now!

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