At this step, we study the attractiveness of the market/industry that this idea targets.
We want to answer this question:
Is the market large enough?
This is very important, as some markets/industries are not attractive to start-ups to work in, and this attraction is due to many things, as we will explain.
First: Market size
TAM: Total Available Market
Focus on: Total market / size
Example: the total LED Market: approx: 10b USD annually.
SAM: Serviceable Available Market
Focus on: Your own technology/ services
Example: The Total white color LED market (Segment of total LED market): approx. 100m USD annually.
SOM: Serviceable Obtainable Market
Focus on: Which realistic market share can be obtained by myself considering:
- competition
- trends
- expected demand/forecast
- countries
- my sales/distribution channels
Example: SOM Egyptian market this year: approx. 10m EGP.
Second: Sturdy market attractiveness
A scientist called “Porter” studied market forces and their interactions, then systematically collected them into the “Porter 5 Forces Model” for practically studying market/industry attractiveness.
Porter Five forces model
Porter’s Five Forces model evaluates five key forces that determine the setting in which companies compete. Hence, the attractiveness of the industry based upon these five considerations:
1) The rivalry among the companies competing in the industry,
2) The bargaining power of suppliers in this the industry,
3) The bargaining power of buyers in this industry,
4) The threat of new entrants to the industry, and
5) The threat of substitute products or services.
1.Rivalry among companies competing in the industry
The strongest of the five forces in the majority of industries is the competition that exists between companies that operate in a certain market. Markets are made dynamic and fiercely competitive by this power. In general, an industry is more attractive when: There are many competitors, or, at the other extreme, fewer than five.
Competitors do not share the same capabilities or size.
The market is expanding quickly.
There is an opportunity to market a different kind of good or service.
2. Bargaining power of suppliers
The sector is less appealing the larger the advantage that suppliers of essential raw materials or components have. In general, a sector is more attractive when:
Many suppliers sell a product to the companies in that sector.
The products that suppliers offer can be replaced by alternative products.
It is simple for businesses to change suppliers or substitute items.
When the things supplied to the industry make for a relatively tiny fraction of the cost of the industry’s finished products.
3. Bargaining power of buyers
Buyers have the potential to control businesses significantly. Customers exert a significant amount of influence when there are few of them and switching to a competitor’s offering is inexpensive. In general, a sector is more appealing when:
“Switching costs” for industry customers are high.
The number of buyers is high.
Customers seek things that are unique.
It is difficult for customers to acquire information about sellers.
The products sold account for a small fraction of the total cost of their customers’ finished goods.
4. Threat of new entrants
The threat to current businesses in an industry increases with the number of possible new entrants. This is especially true in sectors where entry barriers are minimal due to a lack of :
- need for finance
- specialised knowledge
- distribution channels
- and other factors.
When these conditions occur, an industry is often more attractive to new entrants and hence more threatening to existing businesses:
- There are no economies of scale.
- Low initial investment is needed.
- Cost advantages are independent of business size
- Customers are not loyal to brands.
- Governments do not impose barriers to new businesses joining the market.
5. Threat of substitute products or services
Alternative goods or services have the power to completely disrupt an industry. In general, a sector is more attractive when:
There are few good alternatives available.
Prices of substitutes are not significantly less than those of the products in the market.
High switching costs for buyers
Entrepreneurs can assess the possibility for their company to make respectable sales and profits in a specific industry by looking at the influence these five variables have on that sector, which will help them determine whether or not that sector is a good fit for their business.
Keep in mind that an industry is more desirable the lower its score. (See the picture above).