Agile Strategy Institute

Market structure, value chain and ecosystem

Market structure, value chain and ecosystem are related concepts that essentially help understand the participants in a market, their roles and relationships, and how total market value is apportioned amongst them. Structure is about the supply / demand dynamics, particularly the concentration of and balance of power between buyers and suppliers, as described by Michael Porter with his well known five forces framework ⁹.  The value chain, a concept also developed by Porter based on McKinsey’s business system framework, describes the sequence of value creating activities in a business or a market ¹⁰. First introduced by James Moore, the concept of the market ecosystem is broader, encompassing customers and the oftentimes complex web of players and relationships in an industry, particularly technology-based industries ¹¹.

All of these are valuable tools, but at a minimum it is important to gain an understanding of the primary groups of players in a market, and the basic economics of the market. First and perhaps most important is to understand the different customer segments – groups of customers with similar characteristics and buying behaviors. In addition, it is important to understand the basic value chain or business system in the market, which may include component suppliers, system manufacturers, and various levels and types of distribution channels. And for both customers and the value chain, you need to understand the trends in the market, and where it is moving.

The more you learn about the market, the better you will be able to design a successful business model for that market. You can gather much of the information you need through secondary online research. In addition, interviewing key market participants such as leading customers, channel partners, vendors, trade association executives, journalists and research analysts will provide a rich understanding to supplement your online research. Using these approaches and some of the tools described above, we have found that in practice it is possible to develop a reasonable first level understanding of a market within weeks.

Understanding the current make up of the market and its likely evolution

The next step is to understand each of the markets you are seriously considering in more detail. Specifically, you need to understand where the market is on the technology adoption cycle, as well as the market’s current structure, value chain and ecosystem. Understanding the market in some detail is necessary in order firstly, to properly identify customers who truly have unmet needs, and secondly, to design an optimal business model for that market.

Technology adoption lifecycle

The technology adoption lifecycle was first developed by Joe Bohlen, George Beal and Everett Rogers of Iowa State College ⁶,⁷,⁸, and it became widely accepted in the technology industry after being popularized by Geoffrey Moore, who identified the well known chasm that typically exists between the early adopters and the early majority.   

For purposes of market evaluation, it is important to understand that the nature of each market, and as a result the business model required for that market, is different at different stages of the technology adoption lifecycle. If the market you are addressing is at an early stage, or is only just forming, perhaps because your technology category is new, then you face a strategic challenge that is completely different from an established, relatively mature market.

There are also significant differences between different types of early stage markets, depending on how new to the world the technology is – for example, the challenges faced by IBM introducing the world to the PC (what do I need it for?) versus those faced by Google introducing a better kind of search engine. There is no space to detail these challenges and how to approach them in this paper, the interested reader is encouraged to consult the references.

Using knowledge brokering to improve business processes

Useful article from McKinsey

https://www.mckinseyquarterly.com/Strategy/Innovation/Using_knowledge_brokering_to_improve_business_processes_2512

Identifying and evaluating possible markets

You should begin identifying and evaluating a full range of possible markets well before actual product development begins, ideally during the initial ideation and concept stage. Generating a first list of possible markets is normally pretty easy for most innovation teams – a typical brainstorming session can develop an initial list of dozens of potential markets.  This initial list can then be grouped into a logical set of potential markets, which can subsequent be revised and expanded through additional research and conversations. The goal is to uncover every possible market opportunity for your technology, and miss none.

Once you have a comprehensive set of possible markets to consider, you need to evaluate each one to see if it is worth investigating in more detail. This will necessarily be a first level, relatively superficial evaluation, in order to reduce the list of possibilities to a manageable number to evaluate in more depth.

One approach to doing this is to use a version of McKinsey’s well known nine-box matrix first developed for GE ⁴. This matrix reflects Peter Drucker’s guidance that a central principle of managing effectively is to pursue your most attractive opportunities with your greatest strengths ⁵. 

The matrix assesses market attractiveness on one dimension, and business strengths on the other.  Each of these dimensions is measured through several criteria. Market attractiveness criteria include market size, rate of growth, the urgency of customers’ felt needs and competitive intensity.  Business strength criteria include relevance of the company’s technologies and products to the market, the company’s knowledge of the market, the extent to which the company has demonstrable prior experience in market, and its access to target customers and other key contacts in the market.

While the nine-box matrix was developed for corporate strategy (managing a portfolio of business units), we have found it useful and easy to apply to evaluating market potential for innovation.  A simple scoring system can be devised to rank each of the market attractiveness and company strength criteria for each market opportunity. These scores can be assessed either informally through team discussion and consensus, or more formally based on data gathered through secondary research.

The result of the evaluation will be a short list of potential markets which score relatively high on both market attractiveness and business strengths. Each of these now must be researched in more detail.
Note that in practice this is an iterative, not a linear, process. Normally the first pass evaluation is based, by necessity, on many “guesstimates”. As new information comes to light during the detailed analysis of your short listed markets, you can go back to your initial list, change the evaluation and perhaps change which markets are on your short list.

How many markets should you pursue?

There may be many potential markets for your new technology or product. However, extensive experience, popularized by Geoffrey Moore in Crossing the Chasm, suggests that technology innovations should focus initially on a single target market ³.

Why is this? Surely new ventures need to avoid putting “all their eggs in one basket”? The reason is because superficially, markets are simple, but as you engage with them, they rapidly overwhelm you with complexity. Truly understanding and successfully navigating a market is a substantial effort – and new ventures typically do not have the resources or management bandwidth to properly focus on understanding, building a reputation in, and winning customers in more than one market, at least initially.

Moore’s prescription (which he terms the “bowling pin” strategy) is good advice for most innovations and new ventures – first secure a solid foothold in an initial target market, which will provide the foundation for a solid, profitable business. Based on this foundation, you can then enter additional markets. 

Note that you may need to test several different markets before finalizing on the best one for your single focus. This is necessary both to validate your market research and often also to generate much needed revenue in the venture’s early stages. As such, it may well be sensible for start-ups to do some low cost selling into several different markets in the first few months post initial product launch. The goal of this activity, however, is to confirm as quickly as possible the one market that will help propel your business to sustainable profitability. 

Importance of market selection

Selecting which markets and customers to serve is arguably the first and most important business model decision, as this decision becomes the primary driver of pretty much everything else the business does. It is in this sense that Peter Drucker famously said that the purpose of a business is “to create a customer” ¹.

In addition, a growing body of evidence suggests that choosing the right markets creates more value than having superior products or sales and marketing capabilities. For example, recent research by McKinsey & Company, Inc. suggests that substantially all growth in the large, multi-business companies they surveyed came from high growth market niches rather than through market share gains of slower growth markets ².

Practical experience confirms this. Far too many new ventures go after markets that happen to be known to their founders or corporate parents, regardless of the market’s inherent attractiveness or need for the innovation being offered. As a result, these companies face long, costly battles to win customers and grow revenue. Had they followed the guidelines in this article from the beginning, many of these companies (including dozens with whom we have had direct experience) would have saved substantial amounts of time, capital and energy, and would have greatly enhanced their prospects for success.

Selecting and understanding markets for technology innovation

We recently introduced a new business model framework for technology innovation comprising five primary components: markets, products, processes, people and economics (see What is a business model? A new approach). In this paper, we explore the first component of this framework – markets.

The goal of the market component is simple and clear: to focus your business on a large, growing market with urgently felt needs that are not being met by current offerings. 

However, in practice it is challenging to accomplish this ideal. In some cases, it seems that there are no unmet needs for the new technology. In other cases, innovators can be overwhelmed by the number of apparent market opportunities for their new technologies and products.

This paper discusses the importance of finding and selecting the right market, and how to go about doing so systematically and thoughtfully so that you maximize the chances for your venture’s success.

Transition the best of your portfolio into the main business

Over time, you will develop a large number of innovations, possibly in all elements of the business model. As you nurture, experiment with and develop each one, you also need to balance total resources and results across the portfolio. Your goal should be to identify which of the portfolio has grown to the point where it is both valuable and sustainable, and then transition those select few into the main business, where they will be subject to the normal metrics of the main business, and where they will have the potential to grow into substantial businesses in their own right.

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New innovation-based businesses require a different approach to execution. By understanding the challenges and following the best practices presented in this article, you will maximize your ability to launch exciting new markets, products, business models and ventures successfully.

Continually adapt and refine your business model

As you progress through the initial stages of business launch, flexibly adapt and refine your original concept. Perhaps the initial target customers were not as interested as hoped – but there is another market that is interested, and you may not have originally considered. Or the “whole solution” customers need requires you to refine your offering and find a partner. Perhaps your initial sales and marketing strategy proves unsuccessful – but a completely different approach begins showing results. Or your economic model needs significant adjustment to reflect the real economics of the business. This approach should be strongly encouraged - rather than stakeholders objecting to “we’re always changing”, the core values of the new venture need to emphasize a continual search for a better way.  

Look to extract maximum value from all experiments 

Not all your innovations will succeed as you might hope. Some will do so – perhaps better than your dreamed. More will probably fail to deliver the value you expected. Regardless of whether a particular innovation is a success or failure, your goal should be to generate the maximum value possible from each innovation. Successful innovations should become significant businesses. Unsuccessful innovations can still be valuable in terms of lessons learned, under different owners, or for their component elements.

Test quickly and cheaply to start

In the early stages of launching a new innovation-based business, focus on testing every aspect of the business model as quickly and cheaply as possible. Do as much on paper as you can. Use prototypes and mock-ups to get initial feedback. Do everything on a small scale, constantly refining each element, from product features and pricing to sales, marketing and operational practices. Only once you are sure through repeated testing that you have an aspect of the business beginning to firm up should you commit real investment to build it up to full production scale. 

Gather and review feedback constantly  

Feedback is central to experimental execution. You cannot have too much of it. Identify and track a wide range of metrics, not just financial results. Seek as much feedback from as wide a range of stakeholders as possible. Customers are naturally the most important – involve a range of customers every step of the way. In addition, seek feedback from all other market participants – channel partners, alliance partners, vendors, market analysts and other influencers, investors, even competitors. In doing so, seek to understand the realities as they are, not as you wish them to be. Compare feedback and actual results of your product, market and operational tests with your initial assumptions and expectations.