Updated: Jul 17
Defining Markets: Industries, Segments and Spaces
Thousands of books have been written about markets over the last five decades, but despite this, confusion persists in how markets are described, categorised, analysed and measured.
Some of this confusion arises from the conflation of markets with customers. In reality a market is the sum total of all the buyers and sellers in the area or region under consideration (for example, countries, regions, states, or cities). The value, cost and price of items traded is determined by the forces of supply and demand in a market.
Most estimates of market size are based on industry-level classification which provides a static ‘backward-facing view’ based on historic data. While this can provide a useful starting point, its value is limited when looking at dynamic markets with shifting boundaries, changing structures and new players in the market. Market research companies and strategic consultants spend a lot of time and money estimating industry sizes, in particular to support investment decisions.
The most obvious and common response to this challenge is to decompose industries into market segments, where the size of the market can be deduced from industry level data and verified against the components of the segment. This depends on defining and subdividing a large homogenous market into clearly identifiable segments having similar needs, wants, or demand characteristics. For example, estimates of the size of the healthcare industry can be used in order to understand the medical devices segment.
Conventional market assessments have depended largely on the notion of defining market segments, which are rooted in the way markets have developed historically, so they most accurately reflect mature industries and the labels used to describe them. This approach lacks any analytical framework or taxonomies, except being under pinned by the well-known SEIC code system: most published data over the last three decades is organised in this way. Issues appear when working at the leading edge of innovation – for example, how do you understand the structure and size of the emerging market in personalised medicine? Or how do you define the media and entertainment industry where the roles of content producers, telecommunications companies and device manufacturers can now overlap significantly?
The answer to this problem lies in defining market spaces which reflect new opportunities & relationships. Even though there are issues about reconciling historical data, at least the actors and the relationships can be understood much more clearly.
Value-chain analysis is the key to defining market spaces
Michael Porter revolutionised our understanding of market structures in the 1980’s using the idea of value-chain analysis, where the focus is on understanding the relationships between the players in a particular industry, and using this to understand competitive advantage(1). This approach was very influential in shaping corporate strategy for the next two decades even though it was constrained by two key issues:
it put the company being assessed firmly at the centre of the value chain,
and then focused strongly on the industry supply chain around the company.
The Porter view provided a rather ‘static’ view of value chains, rooted as it was mainly in research on mature, successful North American corporations. This made it quite difficult to apply the approach to the more dynamic emerging world of rapidly changing market spaces, even after several attempts to extend Porter’s work, for example to define circular value chains with feedback loops.
The Triple Chasm Model response to this challenge has been to turn Porter’s work ‘inside-out’ - instead building market-space-centric value chains, where the focus is on the prevailing or emerging market space: we identify the value creation, translation and delivery components first, then assign the activities covered by any firm against this more ‘external’ value chain. Building a market-space-centric value chain requires a more precise definition of a market space, understanding the value translation processes in the market space, and more precisely capturing the roles of the different players in this space. Market-space-centric value chains are focused on connecting the source(s) of value creation to the ultimate delivery of value to the customer, understanding and connecting all the steps in between.
Our approach to building market-space-centric value chains depends on first building this new map showing these relationships. This enables us to do several important things:
identify activities which no longer seem relevant (what some people refer to as value destruction, which can result in some companies having to dramatically change what they do, or disappear)
add new value-adding activities which did not previously exist (for example, where machine learning can create new activities in between scanning equipment and radiologists)
re-order value-translation processes, so that some things may be done in a different order in the future
and identify opportunities for new players to integrate value-adding steps to deliver new product and service offerings not previously viable. One area in particular, where this can have a big impact is where digital technologies can create new technology-enabled companies (as opposed to technology companies).
Market-space-centric value chains provide a powerful framework which can be used to shape propositions, map competitors, identify partners & suppliers, and understand the impact of regulation.
Porter, M.E. (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press, New York