New Business Opportunities: How to Identify Them – What type of business should you start?
Finding the answer to this crucial question is the next important step in this process.
Most people make the mistake of starting a new business to sell the products they like to purchase. For instance, readers start bookstores, animal lovers start pet shops, people who love to dine out start restaurants, javaholics start coffee houses. While this seems perfectly natural, it’s actually a backward approach to starting a new business.
Market research is the first step to determine what kind of business you should start. Listening to what the market has to say will help you uncover what customers are searching for and either not finding at all, or not finding it quite the way they want it. By listening to the market, you can find “customers in search of a business.”
According to Stephern C. Harper, the first law of entrepreneurship is, “You need to offer what people want to buy, not what you want to sell.” Customers do not buy what you like, they buy want they want.
But hot to identify new business opportunities? You can use this six-step process to help identify what type of business to start:
Step 1: List problems in the marketplace. The first step you should use to identify a possible business opportunity is to listen to the marketplace and compose a list of areas where people’s needs are not being met well enough — or at all.
Do not restrict yourself to one particular type of product, service, or geographic area. Keep an open mind and a broad perspective for possibilities.
In The McGraw-Hill Guide to Starting Your Own Business, Harper presents an interesting approach created by Richard M. White, Jr., for identifying problems or “gaps” in the marketplace. According to White, you can find opportunities in almost any aspect of life. He uses the example of looking at problems encountered by adults. Through a sequence of questions, White divides adult life into work versus leisure. He then narrows his focus to the time of day when adults encounter problems. In this example, he concentrates his attention on problems people encounter “after work but before dinner on weekdays.”
White’s list of problems includes fatigue, heavy traffic, help you determine whether you have the feet are tired and hot, clothes are rumpled and cling, the dog must be take out to do its business, telephone solicitors are irritating, and so on. White indicates that hundreds of problems are common just during the brief “leisure-adult workday postwork-predinner” time interval. The same market gap analysis could be applied to other aspects of life, such as adults traveling with preschool-age children via airlines, owners of powerboats over 20 feet long after the summer is over, or college freshmen moving away from home for the first time.
In Step 1, just list the problems you can identify in the marketplace and don’t try, at this time, to determine the worth of each problem. During Step 2, you’ll find out if there are any hidden business opportunities within the list of problems.
Step 2: Identify Corresponding Business Opportunities
Now it’s time for you to examine each problem or gap you identified in Step 1 and decide if it can be converted into a business opportunity. As you do this, keep in mind that each problem or gap might contain many business opportunities.
You should invest sufficient time to expanding each problem or gap in order to see all the possible business opportunities each may hold. Step 2 calls for an open mind and mental dexterity.
Keep in mind that Step 2 only deals with identifying as many business opportunities as possible within each identified problem. At this point, avoid deciding which business you should do or which business might be profitable.
Step 3: Determine the Needed Capabilities and Resources. Using the list you’ve compiled in Step 2 of problems and the corresponding business opportunities, examine each potential business venture and determine what capabilities and resources each needs.
Again, you should avoid ruling out any possibilities just because you’re not familiar with the business or lack experience in it. It’s tempting to investigate only those areas you’re already acquainted with as an employee or customer, but if you follow that logic, you might overlook exciting and exploitable emerging opportunities. Also, if you only explore familiar areas, you take the risk of getting involved in areas where the market could be saturated quickly. Remember, if you can go into a type of business with little effort, others (your potential competitors) will see that same easy opportunity.
Do not attempt to do an in-depth analysis of the necessary capabilities and resources as you review your list. Instead, try to determine if there may be factors that will keep you from pursuing each opportunity. Consider the following while reviewing each possibility:
Do you already have or can acquire (through learning, hiring, or partnership) the knowledge and experience necessary to create and maintain customers?
What are the technological, equipment, legal, investment, and time requirements?
As you review the list of opportunities, you may find that some of them require considerable education or experience. If you don’t have the time to learn the skills and you find that no one with the capabilities you lack is available to hire or bring in as a partner, then you should drop that opportunity from the list. You should also drop the opportunity if you find you cannot secure the essential resources.
Step 4: Project the Financial Dimensions of the Remaining Opportunities.
Next, you need to analyze the financial side of the remaining opportunities. Examine each potential business venture and determine:
*The expected level of sales, expenses, and profit
*The initial capital required
*The projected cash flow for each business
This stage of analysis focus on whether you will be able to create and maintain customers for a sufficient level of profit to justify the effort, investment, and risk.
Step 4 tries to answer three questions:
*How much money will it take to start each type of business?
*What return (profit) on investment will each opportunity yield?
*How soon will the business be able to generate a positive cash flow?
The third question is critical because too many businesses run out of money before they can stand on their own.
Step 5: Rate the opportunities in terms of personal preferences, financial worthiness, and perceived risk.
Now it’s time to rate each remaining business opportunity on the following criteria:
*Personal preference
*Financial worthiness
*Perceived risk
Keeping your personal preferences in mind, rate each remaining opportunity on a scale of 1 to 5. As you do this, ask yourself which of the business opportunities you are willing to invest the next few years of your life in. If you’re excited about spending 60 or more hours each week for the next five to 10 years without vacation to pursue a particular business opportunity, then give that opportunity 5 points. However, if you find the opportunity to be moderately interesting and would consider hiring someone else to run the business if you get bored, then give it 3 points. If after reviewing an opportunity you find it to be contrary to your interests and you wouldn’t even want to be a limited partner in it, then drop it from your list.
Rating Financial Worthiness
If your preliminary financial projections (pages 39-42 of the course text) for an opportunity’s first five years reveal the average annual return to be at least 30 percent, then give the opportunity 5 points. If the project annual return is 2 to 3 percentage points above the threshold rate, then give it 3 points. Any business opportunity that appears to be unable to generate at least a 6 percent return on your investment before taxes should be dropped from the list. Even if you gave that opportunity a 5 on the personal preferences scale, you should think twice before considering it any further.
Rating Perceived Risk
The final criterion for Step 5 is rating perceived risk. If the business opportunity is almost certain (a 0.9 or 90 percent chance) to succeed and you consider your data to be sound, then give the opportunity 5 points. This would be the case if you had a patent on a product, had direct access to all the raw materials, and had customers already lined up with money in their hands to buy it. This set of circumstances is relatively rare, however — most business opportunities have their fair share of risk. Conversely, if the opportunity seems to have substantial risk associated with it at
every turn (like a high probability that Wal-Mart will be locating near it), then give it a rating of 1 or 2.
Step 6: Select the Business Opportunity to Pursue
You should now be in a position to narrow down the list of opportunities to one or two potential ventures.
Rank each remaining opportunity on a 15-point scale. The 15-point scale gives each of the three factors (personal preference, financial worthiness, and perceived risk) equal weight. However, if you want to place more weight on personal preference, then you can either drop all opportunities that score less than 3 points on for personal preference or double the number of those points and rank the opportunities on a 20-point scale, as in Example B below. The following rating of two potential ventures indicates that Opportunity 5 is superior to Opportunity 3 if the three factors are given equal weight (Example A). The rating system indicates that Opportunity 5 has more merit even though it has a lower personal preference rating. In Example B, personal preference is given twice the weight of the other factors. In this case, the additional weight for personal preference results in both opportunities being tied with 15 points.
Example A: Equal Weighting for All Three Factors
Opportunity #3:
Personal preference (4) + Financial worthiness (4) + Perceived risk (3)
= 4 + 4 + 3 = 11 points out of 15 possible points
Opportunity #5:
Personal preference (3) + Financial worthiness (5) + Perceived risk of
(4) = 3 + 5 + 4 = 12 points out of 15 possible points
Example B: Higher Weighting for Personal Preference
Opportunity #3:
Personal preference (4 x 2) + Financial worthiness (4) + Perceived risk
(3) = 8 + 4 + 3 = 15 points out of 20 possible points
Opportunity #5:
Personal preference (3 x 2) + Financial worthiness (5) + Perceived risk
(4) = 6 + 5 + 5 = 15 points out of 20 possible points
Ranking the opportunities on the 15-point scale will point to the best opportunity for you at this time. Hopefully, the best opportunity scored at least 10 points on the 15- point scale, with no factor receiving a score of less than 3 points. If none of the opportunities scored 10 or more points, then you have three course of action:
You can accept the best opportunity, even though it scored less than 10 points (but you should avoid this temptation). Start the whole six-step process all over again. View the time you invested in pursuing a business opportunity as a learning experience.
If you think all the good business ideas are taken, think again. Behind every problem of modern life is a solution — and therein lies a business opportunity.