The main objective of the market and industry assessment is to determine if there is enough demand to justify the business' existence (credible market size) and to evaluate assumptions underlying the company's expectations about the structure and behavior of the major industry incumbents. For example, the share of the total market controlled by the top companies in the industry provides an indication of the structure and conduct expectations. A highly concentrated industry (i.e., few companies control a large market share) will be a more difficult market to enter, but it is also one in which new entrants are likely to make the most gains most quickly. What investors are looking for in this assessment is how uniqueness allows the company to carve a market space for itself to avoid direct competition from entrenched incumbents.
Avoiding direct competition with entrenched incumbents is a major asset for a new company. The easier and longer a new product can go unnoticed by incumbent companies, the better it is for the new company. By avoiding the attention of incumbent companies, the new product can establish a toehold in the market without directing scarce resources to address the incumbent’s reactions.
Andrew Grove, former CEO of Intel Corporation, points out in his book, Only the Paranoid Survives, how Intel continued to treat emerging companies in the computer chip industry as "segment zero" because these companies avoided a direct assault on Intel. By the time Intel felt the competitive pressure of these new chip manufacturers, they had established themselves in particular market segments.
In the case of Whole Foods Markets, because it focused on organic products, a product category not recognized by many of the major grocery retailers for more than a decade, it had the free space to grow profitably without having to endure price wars and other competitive reactions.
Wal-Mart Stores, Inc. used the same strategy to grow into the world's biggest corporation. Wal-Mart avoided detection from the leading retailers of the time by presenting a discount store model and locating its stores in small towns and away from shopping centers.
Access to inputs is critical for effective production efficiency in agricultural value-added businesses. Two principal dimensions of access are important in the case of agricultural inputs:
- physical access to ensure operational efficiency; and
- geographic distribution of access to minimize production risks.
The agricultural value- added business plan should discuss this and provide strategies to address both. In assessing these strategies, producer-investors should balance the increased cost of inputs against the enhanced efficiency emanating from the risk reduction strategies.
Support from established players in the supply chain minimizes the entry difficulties experienced by new entrants into any market. One of the major supporters for a new agricultural value-added business is product distributors who provide access to markets through their well-established networks. Therefore, the company's market analysis should indicate to the players in the supply chain who would benefit from its relationship and how they can help it reach its target market quickly and efficiently. For example, securing a supply contract from a major retailer can provide a major boost to success for a new company. Similarly, being able to secure the commitment of a major user of one's products prior to production could make the difference between success and failure. For an investor, the credibility of these suppliers can build confidence in the business proposition and provide a participation incentive.
However, these relationships must be judged on their sustainability and effectiveness. For example, Future Beef Operations, a value-added beef processing company established in Arkansas City, Kansas, had Safeway identified as a committed customer in its business plan. Unfortunately, its value proposition was counter to Safeway's business model -i.e., the company was proposing to sell high quality case-ready beef products while Safeway traditionally rewarded its meat buyers for margin. Potential investors should scratch the nature of stated relationships a little more to understand if there are obvious inconsistencies in the value the company is proposing and the way the partner is known to do business.