Higher potential businesses can identify a market niche for a product or service that meets an important customer need and provides high value-added or value –created benefits to customers. Customers are reachable and receptive to the product or service, with no brand or other loyalties. The potential payback to the user or customer of a given product or service through cost savings or other value-added properties is one year or less and is identifiable, repeatable, and verifiable. Further, the life of the product or service exists beyond the time needed to recover the investment, plus a profit. And the company is able to expand beyond a one- product company. 

For example, the growing success of an Internet provider company. At prevailing rates, one can utilize its service for less than N500 an hour, and many providers of similar service can readily bill more than the N500 an hour for what would otherwise be unused data. If benefits to customers cannot be calculated in such Naira terms, then the market potential is far more difficult and risky to ascertain 

Lower potential opportunities are unfocused regarding customer need, and customers are unreachable and/or have brand or other loyalties to others.  A payback to the user of more than three years and low value-added or value-created properties also makes an opportunity unattractive. Being unable to expand beyond a one-product company can make for lower potential opportunity.

Market Structure

Market structure such as evidenced by the number of sellers, size distribution of sellers, whether products are differentiated, conditions of entry and exit, number of buyers, cost conditions, and sensitivity of demand to change is significant. 

A fragmented, imperfect market or emerging industry often contains vacuums and asymmetries that create unfilled market niches – for example, markets where resource ownership, cost advantages, and the likes can be achieved. In addition, those where information or knowledge gaps exist and where competition is profitable, but not so strong as to be overwhelming, are attractive.

An example of a market with an information gap is that experienced by Abuja   entrepreneur who encountered a large Lagos company that wanted to dispose of a small, old office building in downtown Lagos.  This office building, because its book value was about N150 million was viewed by the financially oriented firm as a low value asset, and the company wanted to dispose of it so the resulting cash could be put to work for a higher return.  The buyer who had done more homework than the out-of-town sellers, bought the building for N150 million and resold it less than six months for more than N 500 million

Industries that are highly concentrated, that are perfectly competitive, or that are mature or declining are typically unattractive. The capital requirements and costs to achieve distribution and marketing presence can be prohibitive, and price-cutting and other competitive strategies in highly concentrated markets can be a significant barrier to entry.  Revenge by normal competitors who are well positioned through product strategy, legal tactics, and the like, also can be punishing to the pocketbook.

Market Size

An attractive new venture sells to a market that is large and growing (i.e., one where capturing a small market share can represent significant and increasing sales volume). A minimum market size of more than five hundred million naira in sales is attractive. Such a market size means it is possible to achieve significant sales by capturing roughly five percent or less and thus not threatening competitors.  For example, to achieve a sales of N1billion in a N100 billion market only requires one percent of the market. Thus a recreational equipment manufacturer entered a N60 billion market that was expected to grow at 20 percent per year to over N100 billion by the third year. The founders were able to create a substantial smaller company without obtaining a major market share and possibly incurring the wrath of existing companies.  

Growth Rate 

An attractive market is large and growing (i.e., one where capturing a good share of the increase is less threatening to competitors and where a small market share can represent significant and increasing sales volume). An annual growth rate of 30 percent to 50 percent creates niches for new entrants, and such a market is a thriving and expansive one, rather than a stable or contracting one, where competitors are scrambling for the same niches. Thus, for example, a N10 billion market growing at 50 percent per year has the potential to becoming a N100 billion  industry in a few years, and if a new venture can capture just 2 percent of its sales  in the first year, it can attain sales in the first year of N200 million. If it just maintains its market share over the next five years, sales will grow significantly.

Market Capacity

Another signal of the existence of an opportunity in a market is a market at full capacity in a growth situation – in other words, a demand that the existing suppliers can’t meet, timing is of vital concern in such a situation, which means the entrepreneur should be asking, Can a new entrant fill the demand before the other players can decide to and then actually increase capacity?

Market Share Attainable

The potential to be a leader in the market and capture at least 20 percent share can create a very high value for a company that might otherwise be worth not than book value. For example, one such firm, with less than N50 million in sales, became dominant in its small market niche with a 70 percent market share.  The company was acquired for N300 million in cash. A firm that will be able to capture less than 5 percent of a market is unattractive in the eyes of most investors seeking higher potential company. 

Cost Structure

A firm that can become the low cost provider is attractive, but a firm that continually faces declining cost conditions is less so. Attractive opportunities exist in industries where economies of scale are insignificant (or work to the advantage of the new venture). Attractive opportunities boast of low costs of learning by doing. Where costs per unit are high when small amounts of the product are sold, existing firms that have low promotion costs can face attractive market opportunities. 

(Part 2 continues in the next article)



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