Entrepreneurs come up with new business ideas all the time. Often, they just plunge ahead to develop the product or service without really taking the time to 1) determine if market conditions are favorable, and, if they are favorable, 2) assess the ability of the business concept to take advantage of the opportunity. We have found that by following a focused, two-step process, you can reduce risks and improve the odds of success.
An entrepreneur can be easily distracted by the many, many variables that a new business must deal with. Rather than trying to assess all of them, it is important to focus on the primary influencers of the outcome. Our process forces entrepreneurs to focus on a very limited number of factors and then dig deeper into each of them to make sure they have as complete an understanding as possible.
Focus on the external factors first. This tells you if this is a good business to enter. External factors are things that you can’t control but must consider because they may have a strong influence on the outcome. Identify which three of the following external factors will affect the business most:
- Category growth – the growth of the market that you are competing for
- Competitive actions – what competitors are doing and what they are likely to do
- Customer behavior trends – changes in how customers are interacting or will interact with the market
- Changes in input costs – things that the business needs to purchase, including personnel costs
- Advancing technology – likely innovations that may affect the market
Narrowing choices down to only the top three from this list forces you to focus on only the most important influencers and not get caught up with side issues that have relatively minor consequences.
Next, carefully research the chosen three and prepare a written, thorough analysis of each, documenting the sources of information. From these analyses, then develop an overall written assessment of the size and the expected growth of the market available to the prospective business. Start with the size of the total category and then reduce that total by factors such as geographical proximity or competitive firms that would limit market availability.
For example, the overall assessment might conclude that the total local market for your product is $10 million growing at 5% annually over the next five years. However, expected actions by one strong competitor preclude any new entrant from taking any of the 40% share owned by this competitor. Also, there appear to be technological advances that another competitor is working on that would make it unlikely to take any of their 20% market share. As a result, the available market is reduced to the 40% that remains available to your firm.
At this point, you must step back and decide if the business opportunity is worth further effort. If the answer is yes, then you move on to a focused look at internal factors that need assessment. These are things that you can control and that you need to manage going forward. Again, as we did with outside factors, we need to focus on the things that matter most so we force a choice of three from the following list:
- Personnel – do you have all the people you need or, if not, are they available?
- Uniqueness of the product or service – how differentiated is your product or service?
- Marketing strategy – what benefits will you pitch and how will you do it?
- Ongoing innovation – how often must the product or service be updated to remain competitive?
- Intellectual property – is patent protection important to success?
- Operating efficiency – if the market is highly price-sensitive, can you be a low-cost producer?
Then, as done for external factors, prepare detailed, written descriptions of each of the three internal factors that clearly state where you stand on each and what your plans are going forward. Now develop a projection of market share that this business is likely to achieve, taking into consideration the influence of each of these factors.
For example, you may have a product that will be unique in the market and have one particular feature that will make it superior to the current competitors. Your marketing strategy is focused on this one benefit and you have developed a persuasive way to communicate it to prospective customers. You have a patent on this feature so competition cannot duplicate it. Overall, you feel that the total of these advantages will allow you to capture 20% of the market (half of the available 40% determined from the assessment of outside factors above) in five years.
If you are convinced that your analysis of the top three external and internal factors provide a reasonable chance of success, you are ready to develop a detailed business plan and financial model that will fill in the details and reveal what funding is required and what the expected return on that investment will be.
The key behind the approach is to force yourself to limit your analysis to a small number of factors – to distinguish between what truly matters and what is relatively trivial.
You can apply these ideas to virtually any business opportunity. As you think about ways to narrow your focus, document your findings, and develop a plan, here are three references that may be helpful: