Growth Markets: Definition, Opportunities & Risks

Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.

As more companies and products enter the market, the startup stage gives way to growth markets. In this lesson, we'll discuss how growth markets are unique, and the opportunities and risks they offer.

What are Growth Markets?

As more firms follow startup companies into a new industry, products begin to be more diversified and the markets enter the growth stage. Growth markets exist when the size of the market continues to grow at an increasing rate. The expansion of a growth market isn't only associated with the slow, organic growth that comes with an increase in population or current customers, but it is primarily driven through new customer acquisition.

Some good examples of markets that are currently in the growth stage include mobile applications, solar power, and telehealth services. Each of these markets has seen total sales increase by at least 20% per year for at least the last 3 years and they are all seeing the effects of being a growth market.

Economic Attributes of Growth Markets

Along with the rapid growth in market size, there are other economic attributes associated with growth markets. There are good opportunities for profit in growth markets, since demand tends to be stronger than supply. Because of these profit opportunities, new companies enter the market to try and capture those profits, resulting in a market with competition based more on product differentiation than price.

As markets continue through the growth phase, market leaders emerge. These may be the startup companies that developed the industry, such as Google and Apple in the mobile application operating system market. Other times, the companies involved in getting the market to the growth phase are taken over by new competitors, such as when Nokia and Blackberry were eclipsed as market leaders in the cell phone market.

When consumers start to select market leaders, market share beings to coalesce around those market leaders. Profit opportunities still exist for other firms, but market leaders have been able to identify the differentiating factors consumers want most so smaller firms with niche products are less successful. This can start to lead to consolidation in the industry, with larger firms buying smaller firms that have good products or niche market appeal.

Opportunities and Risks in Growth Markets

Operating in growth markets can be very profitable since there are opportunities for producers to differentiate their products and there tend to be good profit opportunities. Gaining market share is easier since the market tends to be fragmented with differentiated products and consumers are not tremendously price sensitive. Because consumers are active and profitable, gains in market share are also valuable. Finally, competition is not generally based on price, so companies can focus on marketing and product differentiation to drive their strategy.

Of course, where there are opportunities, there are also risks. Just like the startup phase was risky because of uncertain demand, the growth phase has elements of uncertainty that can be very costly to companies. The two most significant risks in the growth phase are related.

First, it can be very hard to anticipate how long the growth phase will last. An effective, profitable strategy during the growth phase is very different than a profitable strategy in the mature phase (the phase following growth). If the growth phase ends sooner than companies realize, they may be left with excess inventory, in the middle of implementing a failing strategy, or a step-behind their competitors in a race to mature market strategies.

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