Finding Power: How To Do Market Analysis

Market analysis is usually boring. It’s a fill-in-the-blank exercise that reveals little about the sources of power that shape an industry, or the history of how the governing dynamics emerged.

But it doesn’t have to be this way. Good market analysis is fascinating. It uncovers answers to deep questions, such as: why do some companies in an industry play such an indispensable role that they become huge, profitable, long-lasting businesses? And why do other companies in the same industry end up short-lived, thin-margined, and small? These are mysteries that should be fun to unravel!

There are many ways to approach the challenge. No single factor is decisive. For example, execution and all its subcomponents (leadership, management, finance, ops, etc) are of course key to any individual company’s ability to successfully accomplish their plan. But I focus on strategy rather than execution when I study an industry, because brilliant execution of a flawed strategy still yields a bad business, and for any possible good strategy, someone is probably going to figure out a way to execute it. In other words, execution is necessary but not sufficient. And while execution is of course a worthwhile area of focus, I am personally more interested in the strategy side.

The question is, what kinds of strategies generate market power?

To answer it, I developed a process that fuses together the ideas of the three most important theorists in business strategy: Clayton Christensen, Michael Porter, and Hamilton Helmer. (Two Harvard PhDs and a Yale PhD, in both economics and business—they know their stuff.) I’ve studied their work basically full-time over the past two years and as a hobby many years before that, and their teaching on how markets work has probably been the single most important factor that enables my writing to reach 50k+ subscribers each week.

So this week, I decided it would be fun to lay out the process I use for analyzing an industry. I hope it’s useful to entrepreneurs, who need to find the right entry point that will give them the best chances of success, and to understand the motivations of the incumbents they might wish to sell to or partner with. I also think it’s helpful for anybody who wants to understand and contribute to the business strategy context that shapes the work they do every day. I think this kind of analysis is also critical for investors, who obviously want to back businesses that will end up with (or sustain) some sort of market power.

Of course, this stuff is not as scientific as I would like it to be. We’re not talking about molecular biology, where we can pin down cells in a microscope and manipulate them millions of times to understand exactly how everything works. But I am fairly certain there’s more to business success than just luck. I think certain principles of strategy are knowable, and of course any good strategy is based on an accurate perception of the terrain around you. So while this isn’t a silver bullet, and I can’t promise any specific career results, I can at least say that I am betting my career as an entrepreneur and investor on it, and personally believe knowledge of strategy has lots of value. There’s a reason it’s taught in every business school and obsessed over by most top founders, investors, and CEOs.

With this preamble out of the way, let’s proceed!