Who is your competition?

One of the most useful competitive analyses I've seen for planning entries to new markets is Michael Porter's "Five Forces Analysis" work, first done by him in 1980.
 

(I'd also recommend reading Crossing The Chasm by Geoffry Moore. See "Books I like in the right column.)

Porter suggests that a market for a product or service tends to stabilize.   But, forces are at work to destabilize the market.  So, as the entrepreneur begins to try to figure out the competitive possibilities, think about from which of these forces the greatest threat comes.

Those forces are:

1. Threat of New Entrants.
2. Threat of bargaining power of suppliers.
3. Threat of bargaining power of customers.
4. Threat of substitutes.
5. Rivalry among existing competitors.

Threat of New Entrants. 

• Do you have the ability to enter this market with cost advantages that give you a competitive edge over existing participants?
• Does your offering cross the chasm - provide a leap in capabilities that make existing products less viable or too highly priced?
• Can you get adequate distribution or do the existing competitors have the existing channel all sewn up?

Threat of bargaining power of suppliers. 

• Do you rely upon a few large suppliers who can demand a disproportionate share of your profits, making you less competitive?  One obvious, well worn example is the relationship between newspapers and paper mills.  (Old media jokes notwithstanding.)

Threat of bargaining power of customers.

• Are you selling to elephants?  Our software company sold to very large customers.  As competitors entered the market, switching costs were insufficient to prevent the elephant from sitting where he chose.  They exerted a lot of pressure on price.  This pressure again makes the company less competitive.  The best response is continuing differentiation in product evolution and pricing strategies.  We were doing ASP style pricing in 1989, as one example. 

Threat of substitutes. 

• Are you entering with a product that is an alternative to the way the market is serviced today?  I recall the early fax machines at GE that cost thousands of dollars to purchase, and dollars per minute to use.  This was the market that FedEx entered with FedFax.  (We pick up your document with our truck, fax it to our office in the city it is destined for, and then deliver it within four hours with another truck.)  Both products were promptly crushed by the much less expensive fax soon thereafter.  And now, for most of us, email has replaced the fax.  Are you the new email or just FedFax?
• Are you competing for dollars that the customer may choose to spend with you and not in some entirely different category? 

If you're offering something quite different from the status quo, an important consideration is the relative power of rivals as you enter this market.  There are plenty of examples of large, established competitors who were threatened by upstarts with better, unique offerings.  Even with plenty of intellectual property protection, in a market of large, powerful competitors, there is danger.

Of course, if your rivals are largely new entrants and your product is strongly protected, and you can execute, my bet is you win.