Market opportunity describes a company’s potential for growth and significant increase in value, which is one of the investor’s key requirements.
”When you focus on problems, you’ll have more problems. When you focus on possibilities, you’ll have more opportunities.”
Market opportunity can be divided into five areas: market size, market niche, turnover potential in five years, the competition situation and momentum.
Market size provides the best insight into a company’s theoretical growth potential. Market size can be estimated by means of three segments: total market, applicable market and target market. (figure 4) The size of the total market must be big enough to enable a 1–5% market share to provide the prerequisites to obtain significant turnover. The applicable market provides prospects for the medium term and the total market for the long term. You should not attempt to present a market share exceeding 50%, as this is seldom credible. The majority of companies never exceed a 10% market share.
Figure 4. Sizes and definitions of various types of markets
A market niche opens up potential growth for a company. Sometimes even large markets lack a market niche on account of legislation or other sectoral ”regulations” (e.g. Finland’s railway transport – operators are needed but the access to the market is prevented).
Thecompetition situation reflects the decree of fragmentation of current and future markets and barriers to entering a sector. The less competition there is in a sector and the more fragmented it is, the more attractive the situation is.
Turnover potential in five years assists in understanding sales, strategy and the operating model. In other words, a company must give some thought as to whether its ”overall package” is ready from a market point of view to operate in a growth market.
Momentum or Market Traction determines the momenta company is on the move. Sometimes even a good idea fails to product results if the time is wrong (compare Navigators: Benefon ESC 10 years too early vs. Nokia at the right time). Determining momentum and market traction is one of the most difficult things for an investor, as the aim of the company may be to break down existing operating models that are based on people’s accustomed models of behaviour.
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