Entrepreneurship: Market Analysis, Industry Factors, and Business Planning

Even though a market may appear ripe for new ventures to enter,

it seldom pays off to launch a startup too hastily just to have first mover advantage

If you are not well-prepared, later entrants who are better prepared will

quickly overtake your business

First things to do before starting a business

- determine who your target customers are

- decide what size business the founders' desire

- define your industry

It is important to determine

- superiority to what already exists in the marketplace

- growth potential in the market

- other avenues for growth available

Three ways to define a market segment (micro)

- who the customers are

- where the customers are

- how the customers behave

Three macro-market questions

- is there large enough to allow many competitors the opportunity to serve different segments without getting in each other's way

- what are the predictions for your market's short-term growth rate

- what are the predictions for your market's long-term growth rate

measure market trends in as many different ways as possible

consider demographic, sociocultural, technological, regulatory or other natural trends.

do not fall in love with

your business idea

five macro level factors to assess your industry

- threat of entry

- supplier power

- buyer power

- threat of substitutes

competitive rivalry

fast growing markets can be attractive to entrepreneurs

but growth is not always an indicator of profitability

A good industry is often more important than

a good market, business idea, or management team

Industries do not remain constant

they vary in attractiveness over time

even in unattractive industries,

firms can be successful if they had developed a sustainable competitive advantage

Factors of a sustainable competitive advantage

- proprietary elements such as patents and trade secrets

- superior organizational processes, capabilities, or resource that are difficult for others to duplicate or imitate

- an economically viable business model, in that the company will not run out of cash quickly

Consider the following for a company to be economically viable

- will revenue be adequate in relation to capital investment required

- how much will it cost to attract and maintain customers

- are gross margins sufficient to cover the necessary cost structure

- are operating cash cycles favorable

a patent is not very useful if

a competitor can develop a different product or service that is a cheaper and/or more effective alternative to yours

knowledge gained from experience and success in one industry can

sometimes blind entrepreneurs to important differences within other industries

Three key elements that drive an entrepreneur's dream

- a mission that determines what kind of business to build or what kinds of markets to serve

- a set of personal aspirations that guides the level of achievement to be sought

some level of risk propensity that indicates what sort of risks are to be taken and what kind of sacrifices are to be made in pursuit of the dream

three things for founders to consider in personal aspirations

- how big they want the business to become in terms of sales, profits, number of employees, number of locations, and so forth

- what role they want to play in the organization, in terms of wanting to be a leader or manager

- how long they want to remain involved in the organization

consider for risk willingness

- will you risk a secure salary and the things that go along with your current employment, and if so, for how long?

- will you risk losing control of your business?

- will you put your own money at risk and how much?

- will you risk your home or time with your family and loved ones?

- do those you love accept the risk you plan to take?

Venture capitalist likely won't take the risk of investing in your business unless

they see that you are willing to bear a certain level of personal risk in your own business

once you accept venture capital

your business is no longer truly yours

entrepreneurs must be able to identify the critical success factors within their industry to

assemble a team that can execute on these factors

to identify CSFs in the industry answer the following

- which few activities are the ones that, if gone wrong, will almost always have severely negative effects on company performance?

- which decisions or activities, done right, will almost always eliver disproportionately positive effects on performance?

It often pays off to keep things simple,

offer a product or service that fills a specific need, and focus on developing processes that ensure quality

recruiting and maintaining experienced executive who can execute

is often critical to success

key attributes for the leaders of a company

understand that customer tastes, needs, preferences, and so forth change over time and that all companies must be able to adapt in order to survive

important to recognize trends or changes in the marketplace that your company can take advantage of by

collecting information about trends from sources external to your firm

- must fully integrate the information as being important and useful

important to have connections

- up the value chain to suppliers who deal with the leaders in your industry and with firms in other industries that might offer products/services that are substitutes for the offerings that you provide

- down the value chain to potential customers in target markets that you might eventually serve in addition to the markets you plan to target at the outset

- across your industry with competitors and with firms from other industries that offer substitutes, so that you can gain some perspective to accurately gauge changes in market conditions

when your sales increase, it's good to know if they are doing so because

you are gaining market share or if you are simply benefiting from a tide that floats all boats

two domains that are deal breakers

- micro-market: target segment benefits and attractiveness. if your opportunity does not provide a differentiated solution to a customer's pain, better faster or cheaper, forget it and move on to something else

- team domain: ability to execute on CSFs, the ability of you and your team to execute on critical success factors. if you cannot deliver results here, then this opportunity is not for you

5 common traps

1. the large market fallacy. attract lots of competitors. often have low barriers to entry

2. the better mousetrap fallacy. capitalizing on technology rather than on a target customer

3. the no sustainable business model trap. the relationship between target segment benefits and attractiveness and sustainable advantage must be viable. need economic viability

4. the me-too trap. high threat of entry and lack of sustainable advantage can cause a large number of competitors to pursue the same opportunity.

5. the hubris trap. overconfidence of entrepreneurs who have experienced past success

four common business plan flaws

- opportunity is fundamentally flawed

- persuasive nature of business plans, with its main purpose often being to raise money, forces their proponent entrepreneurs into the "everything about my opportunity is wonderful" mode

- most business plans are focused on the entrepreneurs, their idea, and why the idea is wonderful. they are "me focused" and "my-idea focused," rather than "customer focused."

- there is an abundance of uncertainty in most entrepreneurial opportunities even after you have put time an effort into a rigorous seven domains analysis.

overcoming business plan flaws

- come up with an idea that you think might fly, one that solves genuine customer problems or needs

- assess and shape your idea using the seven domains

- write a customer-driven feasibility study that lays out the conclusions you've reached from your data and analysis

good entrepreneurial ideas tend to come from the following

- opportunities created by macro-trends

- opportunities found by living and experiencing the customer's problems

- opportunities created through scientific research

- opportunities proven elsewhere that you can transform and adapt for the local context of the where you hope to do business