How businesses find attractive markets

Modern organizations need to consistently investigate the external environment in order to expand their operations in new markets or market segments and remain viable and competitive. Businesses launch into attractive markets in order to identify profitability opportunities, and competitive forces. Environmental forces are dynamic and business environment gets increasingly competitive. To anticipate the event of unfavorable changes, environmental analysis – as a stage of strategic planning - is concerned with identifying opportunities and threats evolving from an organization’s external environment.

Through environmental analysis managers get prepared to proceed to timely adjustments in the event of impending problems. Moreover, the organization adapts swiftly to the changing needs and wants of its customers. In this context, the identification of attractive markets evolves as a requirement to anticipate saturated markets with limited growth prospects. In particular, environmental analysis investigates the economic growth of a market and performs industry analysis.

ECONOMIC GROWTH

A major characteristic of an attractive market is a robust outlook for economic growth. Economic growth relates to:

• Favorable demographics with growing workforces, which fuel domestic consumption.
• Booming demand for commodities and rising export revenues, which strengthen the economy.
• Prudent fiscal and monetary policies, which boost economic fundamentals and foster stability and growth
• Strong domestic and export-led growth, which boosts manufacturing.

INDUSTRY ANALYSIS

Organizations investigate industry characteristics as well. The most important feature of an industry is the entry barriers because the more the entry barriers the more difficult to get into the industry. In particular, organizations need to assess:

• If there are high mobility requirements, which restrict the diversification of the market, industry or, product/service,
• If patents and licensing requirements are required
• What is the situation with scarce locations, raw materials, and distributors
• If there are economies of scale, which decrease the average cost per unit through increased production

Moreover, industry analysis involves:

• Competitive structure, which, according to Porter’s five forces analysis, involves the threat of entry of new competitors (new entrants), the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers and the degree of rivalry between existing competitors.
• Demand, which refers to the aggregate demand of all potential customers for a specific product or a service over a specific period.
• Cost structure, which refers to the expenses of manufacturing a product or providing a service. It involves transaction costs, sunk costs, marginal costs and fixed costs.
• Degree of vertical integration, which refers to the degree to which a firm owns its upstream suppliers and its downstream buyers
• Degree of globalization

Along with environmental and industry analysis, financial analysis reveals profitability metrics, market share estimates and growth prospects. In particular:

FINANCIAL ANALYSIS

• Liquidity metrics, which measure the firm’s ability to meet its short-term obligations
• Activity metrics, which measure the firm’s effectiveness in using its resources
• Leverage metrics, which measure the firm’s debt financing
• Profitability metrics, which measure management’s effectiveness
• Market metrics, which measure the firm’s relationship with the stock market
• Growth metrics, which measure the firm’s ability to maintain its economic position in the growth of the economy and the industry