An Opportunity - But Is It Worth It?

New business opportunities arise constantly. You have only to walk down the high street to see new shops opening, stroll through the supermarket to test new products, buy a computer magazine to find the latest piece of software or browse through the local paper to find virtually any service you care to desire.

Moreover, you can probably convince yourself without too much difficulty that you had the idea first but simply did not have the time or inclination to put it into practice. After all, what is so very clever about an idea for a chain of hamburger restaurants, a new record label, a new specialist publisher, an accounting firm offering services tailored to the small firm, an even smaller personal computer? It must be easy.

 

Well, you only have to look at the closure rate of those self-same shops, the number of inventions that do not achieve even one sale, or the shelf-life of those new products or services to see that all too often people simply get it wrong - and at great financial cost and personal pain.

Why does this happen? It is due to many factors.

A recent study asked 486 bankers and accountants to give the reasons for client failure (see Figure 1). Respondents to this study were also asked the question: "Could the failure have been avoided?" Two-thirds replied "Yes". In their view, many businesses had been launched with a weak business concept and a lack of planning. In other words, the opportunity was not properly assessed.

Opportunity assessment is a continuous process of gathering data, reviewing the proposition, and reformulating the business concept. Most entrepreneurs will tell you that the business that was eventually created bore little resemblance to the one they had originally envisaged.

Market potential

The place to start is the market. After all, without customers who are prepared to buy the product there is no prospect of a business.

Unfortunately, exploring the market can be complicated. How is it defined? Is there more than one? How big is it? How many potential customers? Where are they located? Do you have a piece of technology with many potential applications? (See Figure 2).

But more important, is there a genuine need - and is it already recognised? By now, you should begin to see the potential elephant traps.

It is very easy to convince yourself that you would like to have it - so others must too. You would love to have your groceries delivered at 6.30 on a Friday evening - and the Internet now makes it possible to place an order. But how many people in your street or locality have access to the Internet and could be persuaded to switch their buying habits - and what would they be prepared to pay for the service?

Market share

The potential market may be large and there may be a genuine need but what percentage of customers do you think you can persuade to switch to your product? Indeed, who are the customers?

We all buy washing powder in the supermarket but we do not decide which brands are displayed on the shelves. That is the role of the supermarket buyer, who may prefer to deal with large suppliers offering a range of reliable, quality products than a new business offering a new, untried product.

In other words, you need to think about routes to market and the barriers you may encounter. Of course, this means looking at the competition and their likely reaction to your entry. For example, will they reduce their prices, increase their advertising or develop a similar product to try to squeeze you out? Part of the answer will depend upon how much of a threat you are likely to be to them - and this is often a function of size and market power. Clearly, the more diverse the competition and the smaller your target share, the greater your chances.

How do you find out? You do not need to invest in expensive market surveys - although it may be necessary later on - just ask a few commonsense questions. In other words, you should be looking to establish the "ball park" to see if it is worth spending time in more detailed market research.You are trying to "`prove the concept".

Certainly, you will be expected to answer these questions, and many more, if you are seeking to raise money. Investors need to be convinced that you understand your market-place and are realistic about your chances - and so do you. In the end, however, investors are usually more convinced by names and orders than by market surveys.

Routes to market

Establishing that there is a market is only the first stage. You now need to think about how to capitalise on the idea - and it may not be to start your own business.

The market may be highly concentrated, dominated by two or three global companies that also control the channels of distribution. So you may be advised to sell the patent, license it or become a partner in a joint venture.

For example, would you advise Pam (Figure 2) to set up as a farm equipment manufacturer?

In other words, there are two questions to be answered:

* Is there a market?

* Is there potential for an independent business?

If you decide to continue with a new start, remember competitors are rarely inactive. The best you can hope for is that they are slow and/or ineffective. You need to think about how much time you may have before competitive reaction will have a serious effect on your business - and what you can do to protect yourself.

Protection

Fundamental to the process of assessing the opportunity is the need to talk to potential suppliers, customers and subcontractors. "But what if they steal my idea?" is a constant concern. "What can I do to protect myself?"

Clearly, being first to market and establishing your brand is one way, as is asking your contacts to sign confidentiality agreements. However, there are three other legal forms of protection to consider:

* Patents: This refers to the invention of a tangible item, which incorporates novel features involving an innovative step and which is capable of industrial application. In the UK, it must not have been disclosed before the patent application, although this requirement varies by country. Granting of the patent gives the owner a monopoly on its use for a specified number of years. Patents are granted on a country-by-country basis.

* Registered design: Covers designs that are attractive. They may include a shape, configuration or pattern for a specific, manufactured article, such as a car.

* Copyright: Prevents the copying of original works, although in any court action it must be proved that copying has actually taken place. Great minds do sometimes think alike.

Business viability

So far you have been looking at market opportunity. You should also be thinking about the business opportunity. Evaluation of this will depend upon how you intend to arrange the business - to what extent are you going to subcontract manufacture of the product or provision of the service?

Clearly, the answer to these questions will, in turn, depend upon issues such as your skills, availability of subcontractors, quality and funding but eventually it will depend upon your financial analysis. Quite simply, you need to know the answer to two deceptively simple questions:

* What are the likely costs of the business and can you sell at a price that will produce a viable profit? Think about the possible margins - how much room for manoeuvre do you have if your estimates of either the price or costs are wrong?

* Is the forecast cash flow sustainable? Too many businesses have failed with positive margins but no cash simply because others would not or could not pay in time.

Unfortunately, there are no simple answers to these questions. So you need to think about what may go wrong - sales take longer to take off or are only half expectations, customers take longer to pay or suppliers are not as reliable in quality or delivery as you had been led to believe. Your licence to operate as a restaurant does not arrive until after Christmas.

What would these do to the build up of your sales? In short, what are the critical success factors for your business, how likely are they to happen, how can you mitigate against them and how fatal could they be?

Is it worth it?

By now you must be wondering. However, remember that you will already know many of the answers or have access to help through your business contacts, friends and family. You simply need to take a cold hard look at all aspects of your idea in order to convince yourself and others that it might work.

The crawl-out costs

One final question - what are you prepared to lose? What are the crawl-out costs if things go wrong? This is the dreaded issue of risk. There are four types:

* Financial: can you afford to lose your investment?

* Career: can you return to your previous job or career?

* Family and social: how will it affect your social reputation?

* Psychic: how afraid are you of failure?

Which of these worries you the most - and would it stop you? In reality, few successful entrepreneurs think in these terms. They simply see the "upside" of an opportunity and provide contingencies to "manage the downside"n

* Market research

* Get your hands dirty. Even if you have the money to pay others to carry out some of your market research, it is better to do at least part of it yourself. By interviewing and observing potential customers you pick up important information about their behaviour that can help you to fine tune and better sell your concept, both to the customer and to possible sources of finance.

* Focus on the quality of research rather than quantity. Certainly, you must interview a sufficient number of people about your product and market ideas. However, do not just focus on the individuals you interview. Ask yourself about the quality of the information you are gathering.

* Be prepared and flexible in undertaking research. Always be clear about what data you need to gather and who you wish to speak with. At the same time, be prepared to change techniques (for example, move from surveys to focus groups) and to include others in the process. The research is a learning process. You may receive information that points you in other directions and to other sources. Follow your instincts and be willing to probe and experiment as required.

* Use an iterative approach. That is you should plan to go out, collect information, return and reflect and plan to go out again. Do not see your evaluation process as a single event that provides you with a "yes" or "no" answer. Reflection on what you are learning is key.

* Even if you are excited, do not lead the witness. One problem which entrepreneurs sometimes encounter is that they cross the boundary between testing their ideas with potential customers and selling their idea. You want honest evaluation. If you signal that you are only interested in getting people to accept what you are saying, you will be defeated in your evaluation. You may get positive results, but they are meaningless.

* Be prepared to change the product or service. Part of not trying to sell your ideas is that you must be open minded about the possibility of modifying your product or service. Test alternative combinations of features in the market. Part of the iterative process is that you may modify the product or service during the course of the market research and evaluation.

* Do not get frustrated at the lack of data. You are assembling information to complete a puzzle. It is rare that you will find information directly affecting the evaluation of new opportunities. In the end, you just want to make sure you are approximately correct and that you have considerable margins for error even if your forecast is a little off.

* Realise that you will continue to learn after initial introduction. The actual product introduction process is also an opportunity for evaluating opportunity. You should prepare methods of collecting information around the introduction so that you can make quick adjustments that will maximise your potential for success.

Daniel F Muzyka

Figure 1

Eighty seven individual reasons were listed as contributing to the failure of an owner-managed firm. These were reduced to 24 themes

1 Capital structure 2 Management team

3 The economy 4 Customer diversity

5 Financial management 6 Owner attitudes

7 Rising costs 8 Lack of planning

9 Pricing 10 Suppliers

11 Marketing 12 Growth

13 Quality 14 Adverse publicity

15 Ill health 16 Partnership problems

17 Obsolescence 18 Reliance on grants

19 Family succession 20 Legislation

21 Cost of money 22 Personnel problems

23 Fire, flood 24 Industrial injury

Clearly, more than one factor contributed to the failure of a business, and seven combinations emerged.

1. The unlucky (35 per cent) businesses that were obviously under-capitalised but less so than the rest. There was no obvious over-riding feature to explain their failure.

2. Those with poor systems (21 per cent) had a wider customer base than the rest and suffered less from the effects of the economy. Nevertheless, an inadequate capital structure and a poor management team was combined with poor financial management.

3. Those with marketing and market problems (14 per cent) tended to have a narrow customer base and a management team with poor marketing skills.

4. Those out of balance (11 per cent) had been seriously affected by a general rise in costs, an under-capitalised balance sheet, poor financial management, inadequate market planning and, in some cases, a reliance on grants.

5. Those out of control (9 per cent) had poor financial management, an inadequate management team, and tended to underprice and overtrade. This was often compounded by poor quality and poor labour relations.

6. The niche businesses (9 per cent) suffered from narrow customer and supplier bases.

7. The disasters (1 per cent) suffered more than the rest on all except one of the dimensions - financial management.

Source: Sue Birley and Niki Niktari: The Failure of Owner-Managed

Businesses: The Diagnosis of Accountants and Bankers, The Institute of Chartered Accountants, London (1995).

Figure 2

Pam Murphy had a slurry problem on her farm. The slurry pit was leaching into the local river. So, she had a machine designed that would separate the slurry into solid and liquid.

However, leaving a batch of solid for a couple of weeks, she found it had heated up, destroyed all the germs and "cooked" into a perfect, friable fertiliser.

Pam thought: "I am going to sell that" and so the concept of Cowpact was born. In the first year, she sold 25,000 bags by mail order. But that was just the beginning. Pam had a product that could be sold to either the gardener or farmers or both, and the copyright on a process/machine that could be sold in the farm equipment market.

What should she do? Where was the greatest opportunity?