Industry/Target Market Feasibility Analysis

                    Industry/target market feasibility is an assessment of the overall appeal of the industry and the target market for the product or service being proposed. There is a distinct difference between a firm’s industry and its target market, which should be clearly understood. An industry is a group of firms producing a similar product or service, such as computers, children’s toys, airplanes, or social networks. A firm’s target market is the limited portion of the industry that it goes after or to which it wants to appeal. Most firms and certainly entrepreneurial start-ups typically do not try to service their entire industry. Instead, they select or carve out a specific target market and try to service that market very well. Sprig Toys is not trying to target the entire children’s toy industry. Its target market is parents who are willing to pay a premium for super-safe, environmentally friendly, educational toys.
                   There are two components to industry/target market feasibility analysis: industry attractiveness and target market attractiveness.
Industry Attractiveness
                   Industries vary in terms of their overall attractiveness.6 In general, the most attractive industries have the characteristics depicted in Table 3.5. 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 newentrants 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.
                   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.
                    Information that addresses each of these issues is available via industry reports published by IBISWorld, Mintel, Standard & Poor’s NetAdvantage, and similar fee-based databases that are typically free if assessed through a university or large public library’s Web site. These resources are listed in
the Internet Resource Table in Appendix 3.2. The First Screen, which is the feasibility analysis template included in Appendix 3.1, includes a section that draws attention to the most important issues to focus on regarding industry attractiveness during the feasibility analysis stage of investigating a business idea.
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).
                    The challenge in identifying an attractive target market is to find a market that’s large enough for the proposed business but is yet small enough to avoid attracting larger competitors at least until the entrepreneurial venture can get off to a successful start. Tommy John, a maker of men’s undershirts and the subject of Case 3.1, is an example of a company that has targeted a market that meets these criteria. Tommy John began in 2008 by making customfitted men’s undershirts, and has recently expanded to men’s briefs. The undershirts are sold under the brand name Second Skin, based on the idea that they fit so well they feel like a “second skin” when worn. Tommy John started by selling through a single retailer, and eventually persuaded Neiman Marcus to give its undershirts a try. Today, Tommy John undershirts are sold in Neiman Marcus stores nationwide, and are making their way into other retailers as well. Although Tommy John operates in the $30 billion worldwide market for men’s undershirts, it has carved out a specialized target or niche market for itself and is gaining momentum. One key to its success is that it has remained laser-focused on a clearly defined target market. The number one question the company gets is when it will start producing women’s undergarments. So far it’s resisted, preferring to remain focused on its Second Skin line of men’s undershirts.7
                   While it’s generally easy to find good information to assess the attractiveness of an entire industry, discerning the attractiveness of a small target market within an industry is tougher, particularly if the start-up is pioneering the target market. Often, under these circumstances, information from more than one industry and/or market must be collected and synthesized to make an informed judgment. For example, H2OAudio, first introduced in Chapter 2, makes waterproof housings for the iPhone and the iPod. The waterproof housings permit iPhone and iPod users to listen to their devices while swimming, surfing, skiing, or engaging in any activity where the iPod might get wet. The question for a product like this is what market to assess? There are no SIC (Standard Industrial Classification) or NAICS (North American Industry Classification System) codes for the “waterproof iPhone and iPod housing” industry or market. Obviously, a
combination of markets must be studied, including the iPhone and iPod markets, the iPhone and iPod accessories market, and the market for water and snow sports. It would be important to not only know how well iPhone and iPod accessories are selling but also what the current trends in water and snow sports are. If iPhone and iPod accessories are selling like hotcakes but water and snow sports are on a sharp decline, the target market that H2OAudio is pioneering would be much less attractive than if iPhone and iPods were selling well and interest in water sports and snow sports were rapidly increasing.
                    The sources of information to mine and tap are also not as transparent when investigating target market attractiveness opposed to industry attractiveness. Say you wanted to piggyback on H2OAudio’s idea and create super-durable airtight housings (which are near indestructible and don’t allow any dirt or dust
in) for smartphones for people who participate in extreme sports (i.e., mountain biking, hang-gliding, skateboarding, motocross, etc.). How to best assess the attractiveness of this target market is not entirely clear. Table 3.6 includes a list of suggestions, which illustrates the type of creativity that’s required to find
information on a narrowly defined target market. Ultimately, it will require a synthesis of data and facts collected from various sources to get a sense of whether creating super-durable airtight housings for smartphones for extreme sports participants is an attractive target market. You’ll need to construct a similar list of potential sources of information to assess the attractiveness of the target market to which your product or service will attempt to appeal.