Move guide
Test the market
Your report suggested a move on at least one of these three questions:
- whether the target's segments are growing, and by how much;
- whether the target has room to grow within them;
- whether the market is open to disruption or a downturn.
This move guide replaces the seller's market number with a model of your own, segment by segment. It sizes how much share the target can still take, and from whom. Then it tests demand against the shifts and the downturn that could take the market away.
1. When it applies
Use this move guide if your report placed any of these three questions at "Red flag" or "Doubtful".
| Question | Where it may sit today | Where this move guide aims |
|---|---|---|
| Are the segments the target plays in growing, and by how much? | Red flag: "The target's segments are declining and the case still assumes growth." Doubtful: "Growth is claimed at whole-market level, or assumed from our own market's instincts applied to an adjacent one we know less well." |
Supported: "Growth or decline is modelled on named, independently checked drivers, and the case is built for that direction: growth priced as growth, decline priced as share and cost." |
| Does the target have headroom to grow within its segments? | Red flag: "The target is already most of its segment; there is nowhere left to grow without a new market." Doubtful: "Headroom is asserted from a whole-market number that isn't the target's segment." |
Supported: "Headroom quantified relative to segment size, with the share it can realistically take, and from whom." |
| Is the market subject to disruption and / or cyclicality? | Red flag: "A visible substitute, technology, regulation, or a shift elsewhere in the value chain can take the market away, and being new to this market we would be the last to see it; or the growth market is one whose access depends on a single government or licence." Doubtful: "Disruption and cycle risks are acknowledged, then assumed away; nobody has looked beyond the target's own step in the value chain." |
Supported: "Disruption and downturn scenarios tested across the value chain, and demand holds in each." |
If all three already sit at "Supported" or higher, skip this move guide.
Segment growth and disruption are warning questions on the strategic buyer check. A low answer on either moves the report's verdict toward "Slow down".
2. What to do
Four steps. They take three to four weeks.
- Build a driver model for each segment the target plays in, and set it beside GDP. Where the market is new to you, use outside sources you can check.
- Where a segment is declining, model the decline instead. Say how many players the market supports, who closes first, and what share you keep.
- Size the target's share of each segment. Write down where the next points of share come from, and from whom.
- Name the substitute, technology, rule or value-chain shift that could take the market away during your ownership. Test demand against it and against a recession, and price what you find.
Table A below holds the segments, the headroom and the tests.
3. What to produce
One table.
Table A. The market, segment by segment
| Segment | Growth (% a year) | Drivers and sources | Target's share (%) | Next share from whom | Disruption or downturn tested |
|---|---|---|---|---|---|
A segment with no driver behind its growth number is the seller's number.
4. A worked example
Illustrative. Written for this move guide. It describes no client.
An industrial gases company is looking at a distributor of welding supplies. The information memorandum says the market grows at 6% a year.
The segments.
- The distributor sells to three segments. Construction grows with building starts. Mining follows commodity prices. Repair shops are slowly declining as vehicles need less welding.
The headroom.
- In construction, the distributor holds a fifth of its region. The next share would come from two smaller rivals who lack its delivery fleet.
The tests.
- A downturn in building starts like the last one would cut its construction sales by a quarter for two years. The company priced that into its offer.
Four weeks on.
- 3 segments modelled on their own drivers
- 1 declining segment, priced as share and cost
- 1 downturn test priced into the offer
On a retake, all three questions could be answered at "Supported".
What it looked like in our work
From our own work. Figures changed.
For a buyer of a branded food manufacturer, our due diligence split the market's growth by channel into volume and price. Most of the growth was price. In one channel, volume was falling.
- 3.0% a year growth in value across the whole market
- 1.1% a year growth in volume across the whole market
- −0.6% a year volume through small independent stores
| Channel | Value (% a year) | Volume (% a year) | Price (% a year) |
|---|---|---|---|
| Supermarkets | 3.4 | 1.4 | 2.0 |
| Convenience and petrol stores | 3.8 | 1.2 | 2.6 |
| Small independent stores | 2.0 | −0.6 | 2.6 |
| Whole market | 3.0 | 1.1 | 1.9 |
The market was growing, but mostly on price. A buyer's case had to hold up if price growth slowed, and could not rely on the shrinking channel at all.
5. Effort and dependencies
- Deal leadOwns the model and the downturn test.
- Market analystBuilds each segment from its drivers and sources.
- Experts and customersCheck the drivers the model rests on.
What you need
- The definition and the participation map from defining the target.
- Outside sources for each driver, and the last downturn's figures.
How long
- Three to four weeks.
What gets in the way. We have seen these in our own work:
- A forecast that was really something else. For a vehicle-accessories maker, the market forecast collapsed to a forecast of new-vehicle sales. Penetration depended on vehicle type, and not on time.
- The seller's share growth, re-tested. For a healthcare provider, the share-growth case was replaced with a fair-share test. The uplift fell sharply.
6. How will you know it worked?
The test is whether each segment's number rests on drivers you checked yourself. Retake the check when Table A is full. Each of these should be true when you answer:
| Question | You can answer Supported when | A document alone does not count if |
|---|---|---|
| Are the segments the target plays in growing, and by how much? | Each segment's growth or decline is modelled on drivers checked independently. | The model reproduces the seller's market number. |
| Does the target have headroom to grow within its segments? | Headroom is sized against each segment, with the share it can take and from whom. | Headroom is measured against the whole market. |
| Is the market subject to disruption and / or cyclicality? | Disruption and downturn are tested across the value chain, and demand holds in each. | The risks are listed, then assumed away. |
The worked example is illustrative.
Think we've used your work without proper credit? Tell us and we'll fix it.