Scoping is one of the most important roles that we play as Product Managers in terms of defining the value of an opportunity in a given market. Scoping's key activity is defining the addressable market opportunity. The challenge with this activity description is that "addressable" is a subjective term. One of the key questions I pose in determining market addressability is the industry structure in terms of the competitive market share.
The Herfindahl-Hirschman Index is an interesting tool to make determinations with regard to market competitiveness. The Index is calculated by adding the sum of the squares of the percentage market shares of the firms within the industry. The answer can range from 0 to 10,000. What this Index can help do is a few things:
1) If a market shows a high HHI, it is useful to quickly look for barriers to entry of some sort among the market leader. These could be IP barriers, manufacturing scale efficiencies or relationships. This quick look can identify the challenges that your new product concept must overcome to succeed int he marketplace.
2) Where the HHI is high but you cannot readily identify barriers, besides acting as a caution to dig deeper, it may suggest a huge potential opportunity as the space has not yet attracted sufficient competitive pressure.
3) If HHI is low, it is useful to try and gauge profitability of the market given a quick back-of-the-envelope calculation of costs with your Operations group to see if you could make money in the market. It could be that the market is so highly competitive that there is little to be gained by your entry. On the other hand, a highly profitable market with low HHI could be an opportunity for market consolidation.
4) HHI is also useful for pinpointing target market segments to attack if your objective is to assault a competitors line as a wedge versus a typical flanking maneouver if you lack the agility or versus a direct assault if you lack the cash flow or institutional strength.
Some companies build HHI into their early Scoping gate reviews. This may be ok as one variable in an equation, but I find that it tends to oversimplify a complex figure. The real value is in its interpretation.