Pre-start-up: discovering and evaluating a business idea

Discovering a business idea

Spotting opportunity

This may involve incremental product/service innovation and market expansion.

The main source of opportunity is change – if you are looking for opportunity, look for change.
^ Changes in technology, law and regulation, market and industry structures, demographics, culture,
moods, fashions.
Internet – source of business opportunity.
^^reviewing the environment for change is a prime source of business ideas – PESTEL.

Opportunity can also exist where markets are failing to meet changing customer needs – through
dominant logic, laziness, ignorance or just because it takes time for the market info to be acted on.

Drucker (1985) believed that innovation could be practices systematically through a creative analysis
of change in the environment and the opportunities it generates.

Drucker’s ‘basic symptoms’ of change:

1. The unexpected
Unexpected success/failure or an unexpected event – nobody can predict the future, but an ability to
react quickly to changes is a real commercial advantage.

2. Incongruity
Difference between what actually happens and what was supposed to happen – unexpected outcomes
produce opportunities for firms that are able to spot them.

3. Inadequacy in underlying processes

Improving process engineering – especially important if product is competing primarily on price.

4. Changes in industry or market structure

Unexpected change (technology, legislation…) created an opportunity to strategies about how the
firm might cope – first-mover advantage is worth striving for.

5. Demographic changes
Caused by changes in birth rates, medical improvements…

6. Changes in perception, mood and meaning

Cause by ups and downs of th economy, culture, fashion, etc – in-depth interviews/focus groups can
give an insight to these changes.

7. New knowledge
Can be scientific or non-scientific – amounts to the disruptive innovation and challenges to market
paradigms.

Value chain:

One way you can discover inadequacies in underlying processes or question market paradigms is by
analysing the value chain in an industry – behind this is the idea that real advantages in cost or
differentiation can be found in the chain of activities that a firm performs to deliver value to its
customers.
Primary activities of the value chain:

1. Inbound logistics – receiving storing and disseminating inputs.

2. Operations – transforming inputs into a final product.
3. Outbound logistics – collecting, storing and distributing products to customers.
4. Marketing and sales.
5. After-sales service.

Secondary/supporting activities:

1. Procurement – purchasing consumable and capital items.

2. Human resources management.
3. Technology development – R&D…
4. Firm infrastructure – general management, accounting, etc.

Each generic category can be broken down into specific activities unique to each firm or industry.
^ Analysing costs associated with each activity and comparing them to the value perceived by
customers helps identify mismatches.

Entrepreneurial opportunities arise when customers can derive greater value by modifying the value
chain, even if it increases costs, or if costs can be reduced without affecting customer value.
^ Examples include low-cost supply due to proximity to key suppliers and high-quality products let
down by inadequate after-sales services.

Entrepreneurial firms can add value through close relationships with customers and suppliers.
A successful entrepreneurial strategy involves identifying sectors with weak relationships and
strengthening them to create value.

New business ideas introduced globally provide a source of innovation.

Ideas take time to spread, and the window of opportunity varies worldwide.
Success depends on being in the right place at the right time.
The internet enables start-ups to exploit overseas markets, but local restrictions on foreign
competition can also benefit start-ups.
^^ Examples of regional equivalents include Baidu in China (Google), Yandex in Russia (Google),
Alibaba in China (Amazon), Digikala in Iran (Amazon), and Qzone, RenRen, PengYou, or Kaixin in
China (Facebook).

Exploring change to find business idea

The more ideas you come up with, the more likely you are to find one that is viable – the following
techniques allow you to come up with ideas.

Brainstorming.
PESTEL analysis – political, economic, social, technological, environmental, legal changes that allow
you to spot a gap in the market, creating an opportunity for the business to exploit.

Futures thinking – used to think about the future.

^ For example, based on the changes identified by a PESTEL analysis, it can help develop further
insight into the implications of that change, ahead of defining the commercial opportunity .It tries to
take a holistic perspective developing a vision about the future state after the change has taken place.
^^ From this, the commercial opportunities can be identified, again using brainstorming.
Current constraints to action are ignored, and in this way the barriers to change are identified. Some
barriers may indeed prove to be permanent or insurmountable, but many might not be. Objections are
therefore outlawed, and disbelief suspended at the initial ideas stage. Only later on might options get
discarded once the barriers are considered. The key to thinking about the future is not to assume it will
necessarily be like the past. Change is now endemic and often discontinuous.

Mind maps a moa of related ideas from one original idea – it helps develop and refine a business
opportunity, whether it is spotted or created.

Researching and evaluating the business idea

The importance of research

Market research is essential before you launch a business.

Who your customers might be and why they should buy from you.
You also need to find out about your competitors – who they are and what their strengths and
weaknesses might be.

This is all helps minimize risk and uncertainty and provides some basis on which to make the
decisions about marketing strategy.

For a start-up, any information is probably of value, but the key question that needs to be answered is:
why should anyone buy from you rather than from your competitors?

Your backers will expect you to have a thorough understanding of your market/industry and trends
within it.

Unless you start out to create a completely new-to-the-world industry, it is likely that there will be an
existing market or industry that sells similar goods or services to the ones you propose. Understanding
this industry will help you start to fine-tune and evaluate your idea. It will give you an insight into
your potential customers and how to reach them. It will help you identify and assess that competition
and start to develop your business model and competitive strategy. Indeed, understanding the
shortcomings of companies in an industry can sometimes yield new business opportunities which may
lead you to come up with a better or completely different business idea.

Defining your market or industry

The first challenge is to identify and define your market or industry.

Most markets or industries have some underlying structural conditions that help define them and that
influence the degree of competition within them.

The first step in industry analysis therefore is to describe the key elements of the industry’s structure.
However, defining the industry you are in can be more difficult than you think. An industry is any
group of firms that supplies a market, but markets are rarely homogeneous. After all, they are made up
of customers with a wide range of needs. An industry is likely to comprise a number of markets or,
more accurately, market segments. The competition within these segments can be very different, and
as a result the profitability of individual companies within an industry can vary widely.

An industry is likely to comprise a number of markets – drawing the boundaries of your industry and
the market segments within it is therefore a question of judgement.

Market/industry typologies – life cycle

Completely new
- High risk, but also potential for high returns.
- Customers difficult to identify.
- No competitors.
- Gaining first-mover advantage very important.
- Opportunity to dominate the market.
- Likely to be high marketing costs – customers may not understand product/service benefits.

Emerging
- Few competitors.
- Customers starting to be identified.
- First-mover advantage still significant.
- Opportunity to redefine processes and procedures that are not operating effectively.
- Still opportunity to dominate the market.
- Marketing costs still likely to be high.
- Barriers to entry probably in the process of being established.

Growing
- Growing number of competitors.
- Product/service extensions likely to be emerging.
- Buying patterns becoming established.
- Aggressive marketing strategies in a fiercely competitive market.
- Dominant brands beginning to emerge.
- Competitive pricing.
- Market looks good on paper, but entrants may be too late unless their product/service is based
upon significant innovation.

Mature
- Well-established competitors – market might be fragmented or consolidated.
- Defensive pricing possible – meeting or beating new entrants.
- Difficult to break into market, competition strong.
- Opportunity to innovate based on existing product/service.
- Opportunity to innovate based upon process or after-sales service.
- Opportunity to innovate based upon established marketing processes.

Declining
- Market has a limited life expectancy.
 - Declining range of products.
- Opportunity to consolidate market by becoming dominant player – probably by buying out
competitors.
- May be opportunity to establish niche if reducing competitors means demand is still high.
- May be opportunity to cut costs by re-engineering production process to reflect reducing
market demand.
- May be opportunity to buy stock as ‘distress prices’ from companies going out of business
and sell on at a profit.
- Opportunity for radical product/service innovation.

Market/industry typologies – concentration

Fragmented – where there are a large number of competitors of about the same size, usually in a
mature or declining industry.
- Well-established competitors.
- Competitive pricing, limited profitability.
- Opportunity to consolidate industry and become market leader – probably by buying out
competitors.

Consolidated – where there are a few, large competitors, usually in a mature or declining industry.
- Well-establishes competitors.
- Defensive pricing possible – meeting or beating new entrants.
- Barriers to entry are likely to be high.
- Few entrepreneurial opportunities other than radical product or market innovation.

Far easier to start up in a fragmented rather than a consolidated market.

^ Consolidation often happens as industries mature and decline, when some opportunities for merges
or acquisitions start to emerge.

Estimating your market size

Estimating the size of a new market resulting from disruptive innovation or market paradigm shifts is
almost impossible.
Even determining the size of a segment within an existing market can be complicated.
Market research provides limited data, making it difficult to accurately assess potential market size.
Market size can be measured in value or units, but it's crucial to differentiate between various market
types:

Potential market – size of the general market that might be interested in buying a product.
TAM – size of your prospective market – those in the potential market who might be interested in
buying your particular product – reflects total sales of competing products.

SAM – size of the target market segment you wish to serve within the TAM.

Penetrated market – size of the SAM you capture.

SAM is the market segment you are targeting, given any restrictions such as demographics,
geography, language, technology etc.
Market share = penetrated market / SAM.
If you are seeking funding, your backers will expect you to try to describe both your TAM and SAM
and estimate their size and the trends within them.
They will expect you to be able to explain and justify how you will achieve your penetrated market.

Identifying your competitors

Direct competitors
- Those offering similar or identical products/services.
- Most important – compete directly and you need to understand how you are different and
better than them – how will you convince their customers to switch to you?

Indirect competitors
- Those offering close substitutes.
- Where you still need to persuade customers using the ‘inferior’ competitors offering to
switch.

Future competitors
- Those who could enter your market in the future.
- If your new venture is successful, it will attract new competitors – who will they be?

Desk research allows evaluation of competitors' products, size, profitability, and distribution methods.
^ Assessing their strengths and weaknesses compared to your own is crucial, along with determining
if they target the same customer segments and the quality of their value proposition.

Differentiation and the sustainability of your competitive advantage are vital considerations.
Understanding competitors' influence on the market's competitiveness is essential, especially in the
context of disruptive innovation.

It's important to analyse barriers to entry and legal protections for your product or service.

Investors expect a thorough understanding of competitors and their strengths and weaknesses, as
you'll be competing against them in the market

Assessing industry competitiveness

Porter’s Five Forces (1985)

1. Competitive rivalry in the industry

The competitiveness of an industry is crucial for analysis.

Depends on the number and size of firms, their concentration (fragmented vs consolidated), the
industry's newness and growth stage, and product differentiation, brand identity, and 'switch costs.'
Intense competitive rivalry reduces a firm's ability to charge high prices, impacting profitability.
Factors such as industry concentration, differentiation, and switching costs play vital roles in
determining industry competitiveness and a company's pricing strategies.

2. Threat of substitutes

Customers buying products depends on factors like the relative price performance of substitutes,
switch costs, and customer propensity to switch due to changing tastes or fashion.
If there's a significant threat from substitutes, a firm struggles to charge high prices.
For instance, in a price-sensitive fashion market, a small firm with a poorly differentiated product
would find it challenging to command high prices.

3. Threat of new entrants

Barriers to entry prevent new competitors from entering an industry.

These barriers can include legal protections like patents, economies of scale, unique products, brand
identity, distribution access, government policies, switch costs, and capital requirements.
Switch costs refer to the expenses associated with changing to a different product.
Companies with patent or copyright protection might feel secure from competition.
The higher the threat of new entrants, the weaker a firm's bargaining power and control over prices in
that market.

4. Power of buyers

Buyer power in an industry is determined by the size and concentration of buyers, their purchasing
volumes, access to information about competitors, switch costs, and the degree of differentiation of
the product they buy.
Fewer, large buyers with substantial purchasing power and good information tend to have stronger
bargaining positions, allowing them to keep prices low.
For sellers, especially in concentrated industries, dealing with powerful buyers like major supermarket
chains can lead to squeezed profit margins due to their strong negotiation positions.

5. Power of suppliers

Supplier power in an industry depends on the relative size of firms and other factors.
When there are fewer large suppliers, especially in concentrated industries, with distinct products
crucial to smaller firms, the smaller firms have limited bargaining power.
This weakness hampers their ability to maintain low costs, as powerful suppliers can dictate prices.

Important:

The higher the degree of differentiation and inbuilt switch costs for your product/service, the more
likely your business is to succeed.

There is the question of the number of competitors you face (concentration). Typically, the fewer
competitors you face, the more likely you are to succeed – although this might mean there is a very
limited market for your product/service.
^ However, this generalization depends on the market power of these competitors. If you are entering
a market where there are few competitors, they might combine to deter your entry. You need to think
very carefully before entering a market dominated by a few big companies because they will have
well-established market positions and the resources to fight off new entrants.