Just because a market is big does not mean it’s desirable. When evaluating entering a new market it’s important to try and assess the space’s future prospects. Clearly, there is a lot of masked complexity here. What you really want to be looking for, however, is the obvious problems.
Technology innovation is often a predictive indicator. From typewriters to answering machines, or floppy disks to CD’s there are countless markets that have faded away due to technology. You need to ask yourself if the market is going the way of the dinosaur.
The health of the downstream consumer market is also key. In some markets this may be clear, but in more complex models like B2B2C or even B2B2B2C it may be difficult to identify. What you want to focus on is likely the 2C element. When the horse and buggy passed into history, it wasn’t just the buggy, but the blacksmiths who reshoed the horses, the companies that made the hammers and anvils used by the blacksmiths, etc. It was carnage!
Changing financial ratios may get a bit more technical, but they can also lend insight. Take the recent meltdown of the newspaper business. At one point not long ago it was one of the largest industries in the world. As the reach and adoption of the web started to hit saturation you didn’t have to be the Oracle of Omaha to foresee where the space was headed. For a number of years, however, they were able to mask their declines by substituting debt for revenue.
In making your market assessment the future looking prospects of the market should be an important consideration. You don’t need to get overly analytical, but want to identify the obvious warning signs.
Takeaways:
• The future outlook of a market is a key component of its attractiveness
• Don’t confuse the size of a market with its prospects
• Avoid markets facing technology obsolescence or regulation issues
• Health of the market is largely dictated by the 2C element
