No business is an island. Competitors are always knocking on your customers’ doors. How you approach dealing with that competition weighs heavily in assessing your company’s value. Buyers measure that value according to three primary factors – barriers to entry, market size, and dominant market share.
Barriers to Entry
Determining “barriers to entry” is a way of figuring how hard it is for a would-be competitor to break into your market, steal your customers, and take away your prospects. Barriers are those things that are hard to get, often due to the expertise required. A few examples are patents, licenses, or necessary large capital investments. Barriers come in four categories – legal, technical, strategic, and brand loyalty – and in all shapes and sizes. While many are apparent, many are hidden. You need to understand all the barriers that keep your competitors out of your market. As they make gains to overcome those barriers, you need to make them higher. For example, pay attention to technology breakthroughs you can achieve that make your products more compelling.
Whatever barriers you raise, your focus needs to be on how your company competes for customers using those barriers. Getting your customer to understand that your service or product is better than any competitor’s is key. Barriers to entry keep your competitors out of your market. Analyze your operations and look for weaknesses, delays, and lags in innovation. Your competition will never give up, so you must never relax, even if you are in the lead.
Large Potential Market
Companies with a large potential market are always more attractive to buyers. There are a lot more profits to be gained in a $5 billion industry than in a $5 million niche. When you understand the size of the market you’re in, you’ll know how much you can grow. Is your industry growing, plateauing, or shrinking? Are new technologies, products, or processes driving growth or threatening demand? It’s much easier to grow when your industry is expanding. If you are in a shrinking industry, you should adjust your product line and your technology and aim for larger markets.
Dominant Market Share
Every company likes to claim leadership in its respective industry. The marketing world is replete with misinformation and puffed up presentations. Achieving true market dominance is usually done through exploitation of barriers to entry (patents, technology, knowledge, etc.) and consolidation. You know how dominant you are, and buyers, through their due diligence, will come to know too. So be matter-of-fact about assessing where you are in the industry and what your prospects for growth really are. Is the industry fragmented or dominated by a few companies? A fragmented industry usually means an opportunity to consolidate. Get ready to explain how consolidating an industry will be valuable to a buyer. Setting a clear vision of your company’s growth opportunity will entice higher-quality buyers.
Conversely, if you compete in an industry with a few large companies, remember the saying, “When the elephants dance, the grass gets trampled.” Your clear explanation of how you compete against market-dominating businesses helps buyers assess your operating stability and potential. Companies that successfully compete in this type of setting are valuable and attractive.
How a business competes successfully is impacted by many factors. Three of these factors – barriers to entry, market potential, dominant market share – are entwined. Strong barriers often create strong market opportunities and lead to market dominance. Not all companies will follow that thread. The ones that do are the ones that will attract the right buyers and prosper.
This is the third article in our Value Driver series. Click below to explore the other topics.