Changes in technology, the discovery of new knowledge, or the creation of new processes or business models can have a dramatic impact on a marketplace.
New technology often solves problems which were previously not able to be addressed or can significantly enhance productivity or reduce costs in solving existing problems. While there is always incremental innovation in products and services, radical innovation can dramatically affect an entire industry.
Radical innovations have one or more of the following features:
Radical innovations often replace existing products (DVD for video tapes), create new industries (internet commerce) and decimate existing ones (cars replacing carriages). Such innovations are infrequent but can have major long-term effects on industries, jobs and economies. Look at the impact of computer inventions on the USA economy.
A new business concept can itself have a major impact on an economic sector. This was the case with hub and spoke air travel, shuttle flights, low cost airlines, airline alliances and holiday packages on the travel industry. The planes were the same and the purpose was the same, moving people by air, but these changes dramatically changed the way in which the industry operated.
Thus new ways of doing business, often combined with advances in technology, can replace existing suppliers, create new demand and severely disrupt an industry.
When you examine high growth businesses, you can see that they all have their roots in one or more of these changes. Their markets are typically characterized by rapidly expanding demand but lack supply capacity to meet that demand.
They are often to be found in new emerging markets based around new technology or new knowledge and they are often providing a solution to a problem which hitherto was not able to be solved effectively or as economically.
Their products or services are typically sold into a global market so that local population size is not a barrier to growth. The growth of the overall market also allows them to readily access either venture capital funding or public funding to fuel the development of their businesses. Most growth businesses are established early in product (or market) lifecycles.
At this point the market is still reacting to the emerging product or service and the business is making sales which have the highest need, or are the least resistance, ie. the ‘low hanging fruit’. A large potential market where new products and services can find a reasonable size niche market is most often associated with rapid growth firms. This is partly because it is easier for new entrants to find an untapped source of demand but also because early entrants can diversify their products into versions that better fit specialist niche segments, but in doing so can still gain good margins.
As markets become more mature, more competitors move into the market, the easy sales are less frequent, it takes more marketing spend to gain marginal sales and markets get fragmented into smaller specialist niches.
With a growing or emerging market there is also less pressure on the firm to operate perfectly. They can afford to make some mistakes and to use some resources working out just how the market will develop. Where demand exceeds supply, prices are not sensitive to competition and each firm can find enough business not to have to fight on price.
Another type of market which can provide significant market potential is the replacement market for existing products where the new firm has a protected product which can significantly improve consumer utility through new features or a dramatic decrease in cost. This type of business relies on consumers turning over existing expired products to the new better one when they come up for replacement. The potential size of the replacement market and the rate of potential sales can be readily estimated in advance making this a very attractive proposition.
There is always a growth market in solving a persistent problem which wastes significant resources, whether public or private. Thus new safety features which save lives or new processes which reduce pollution and so on, will find a ready audience.
Most businesses are based on satisfying conventional demand where the market is saturated and mature. They sell commodity type products or products or services which have little differentiation. Thus they struggle to gain market share.
Businesses based on recent technology or recent changes in legislation will generally have better growth results where demand exceeds supply. To the extent they can differentiate themselves from their competitors, they can gain traction and growth. However, most businesses can move into the high growth area by shifting the business into a growth potential strategy.
This requires the entrepreneur to identify the current growth drivers in their current operations in order to exploit the underlying potential. Next, the business owners need to uncover those current or potential growth drivers within their industry. Once the future growth drivers are identified, the business needs to construct a plan to transition the business towards those areas where higher growth can be achieved.
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.
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