There are two components to industry/target market feasibility analysis: industry attractiveness and target market attractiveness.
1. Industry Attractiveness:
Industries vary in terms of their overall attractiveness. In general, the most attractive industries have the characteristics depicted in Table below. The top three factors are particularly important. Industries that are young rather than old, are early rather than late in their life cycle, and are fragmented rather than concentrated are more receptive to new entrants than industries with the opposite characteristics. You also want to pick an industry that is structurally attractive—meaning start-ups can enter the industry (in various target markets) and compete. Some industries are characterized by such high barriers to entry or the presence of one or two dominant players that potential new entrants are essentially shut out.
TABLE: CHARACTERISTICS OF ATTRACTIVE INDUSTRIES
• Are young rather than old
• Are early rather than late in their life cycle
• Are fragmented rather than concentrated
• Are growing rather than shrinking
• Are selling products or services that customers “must have” rather than “want to have”
• Are not crowded
• Have high rather than low operating margins
• Are not highly dependent on the historically low price of a key raw material, like gasoline or flour, to remain profitable
Other factors are also important. For example, the degree to which environmental and business trends are moving in favor rather than against the industry are important for the industry’s long-term health and its capacity to spawn new target or niche markets. Are changing economic and societal trends helping or hurting industry incumbents? Are profit margins increasing or falling? Is innovation accelerating or waning? Are input costs going up or down? Are new markets for the industry’s staple products opening up or are current markets being shut down by competing industries? You can’t cover every facet of an industry; but you should gain a sense of whether the industry you’re entering is a good one or a poor one for start-ups.
2. Target Market Attractiveness
As mentioned, a target market is a place within a larger market segment that represents a narrower group of customers with similar needs. Most start-ups simply don’t have the resources needed to participate in a broad market, at least initially. Instead, by focusing on a smaller target market, a firm can usually avoid head-to-head competition with industry leaders and can focus on serving a specialized market very well. It’s also not realistic, in most cases, for a start-up to introduce a completely original product idea into a completely new market. In most instances, it’s just too expensive to be a pioneer in each area. Most successful start-ups either introduce a new product into an existing market (like Sprig Toys introducing new toys into the existing toy market) or introduce a new market to an existing product (like InstyMeds is introducing vending machine sales, which is a new market, to prescription medicines, which is an existing product).