Discovering New Business Opportunities PDF

Discovering NEW Business Opportunities JOHN ENGLISH & Babette Moate discovering new business opportunities This page intentionally left blank discovering new business opportunities JOHN ENGLISH & babette moate disclaimer The information contained in this book is to the best of the authors’ and the publisher’s knowledge true and correct. Every effort has been made to ensure its accuracy. Neither the authors nor the publisher accept any liability for any loss, injury or damage caused to any person acting as a result of information in this book nor for any errors or omissions. First published in 2009 Copyright © John English and Babette Moate 2009 All rights reserved. No part of this book may be reproduced or transmitted in anyform or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without prior permission in writing from the publisher. The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10 per cent of this book, whichever is the greater, to be photocopied by any educational institution for its educational purposes provided that the educational institution (or body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL) under the Act. Allen & Unwin 83 Alexander Street Crows Nest NSW 2065 Australia Phone: (61 2) 8425 0100 Fax: (61 2) 9906 2218 Email: [email protected] Web: www.allenandunwin.com National Library of Australia Cataloguing-in-Publication entry: English, John W., 1944– Discovering new business opportunities / John W. English, Babette Moate. 978 1 74175 740 8 (pbk.) Includes index. Bibliography. New business enterprises—Australia. New business enterprises—Australia—Management. Business planning—Australia. Success in business—Australia. Other Authors/Contributors: Moate, Babette. 658.0220994 Typeset in 12/14.5 Minion by Midland Typesetters, Australia Printed and bound in Australia by Griffin Press 10 9 8 7 6 5 4 3 2 1 Contents Preface vii Part A Business opportunities 1 What is a business opportunity? 3 Identifying a viable market. Anticipating the risks. Finding the right business model. How change creates business opportunities. The rise of the solo business. 2 The diversity of business opportunities 19 Parallel opportunities. New market opportunities. New product or service opportunities. Radical opportunities. Part B Identifying a viable market 3 Potential demand 41 Market size. Market growth. Market stability. Sustainability. Extensions. 4 Market approval 54 Needs and wants. Recognition. Compatibility. Complexity. Distribution. 5 Competitive strength 66 Differentiation. Value. Customer negotiating leverage. Supplier negotiating leverage. Competitors. Part C Anticipating the risks 6 Boundary risks 81 Regulatory risk. Technology risk. Environmental risk. Socio-economic risk. Dependence risk. vi discovering new business opportunities 7 Establishment risks 96 Planning risk. Marketing risk. Deliverables risk. Liquidity risk. Personal risk. Part D Finding the right business model 8 Skills and experience 111 Marketing expertise. Technical expertise. Financial expertise. Operational expertise. Managerial expertise. 9 Resources 126 Financial resources. Physical resources. Human resources. Intellectual resources. Network resources. 10 Dollars and sense 142 Sales forecast. Profitability. Cost structure. Financial structure. Cash flow. Part E Commercial feasibility 11 Evaluating a new business opportunity 163 Questionnaire: Evaluating your idea. Evaluation answers. Commercial feasibility. Making your decision. 12 Developing a start-up strategy 183 Understanding your customers. Finding your niche. Creating competitive strength. Adapting to change. Writing a business plan. Appendix: Self-employment evaluation 196 Bibliography 213 Index 215 Preface Discovering New Business Opportunities has been written to show you how to identify new business ideas and sharpen your judgement about which ones are worth pursuing. The emphasis is on smaller businesses, but the principles apply equally to businesses of all sizes. You can also use the information in this book in other ways. You can use it to help you improve the commercial potential of a business opportunity. You can use it to re-evaluate a business opportunity whenever you decide to change the way you approach it. And you can use it as a framework for explaining a business opportunity to people who are in a position to help you. The book is divided into five parts: Part A examines the nature of a business opportunity. It explores the key components of a successful business opportunity, how change creates business opportunities, the diversity of business opportunities and the rise of the solo business. Part B looks at ways to identify a viable market. It examines criteria for evaluating the potential demand for your idea, how the market will receive your idea and the competitive strength of your idea. Part C is concerned with anticipating the risks associated with your idea. There are boundary risks, such as legal requirements or changes in technology, that might constrain its commercial potential and establishment risks, such as financial and personal pressures, that might impede the start-up process. Part D is devoted to finding the right business model. It focuses on the skills and experience needed to put your idea into operation, the resources required to underpin it and the financial outcomes you can expect. viii discovering new business opportunities Part E guides you through a technique for judging the commercial feasibility of a new business opportunity. It walks you through the evaluation process, provides a method for assessing commercial feasibility and offers suggestions for constructing a start-up strategy and writing a business plan. Having a structured method with which you can assess a new business opportunity is enormously valuable. Some people believe that the leap from a new idea to market entry is only a short distance and they often don’t recognise how complex, costly and time consuming the process can be. The result is that many people go into business blindly and postpone the day of reckoning until the cost of failure is very high. This is why it is important to assess the commercial feasibility of your idea very early. With the method outlined in this book you can make an early assessment and thus decide if your idea has enough commercial potential to take the plunge. Discovering New Business Opportunities draws on many years of teaching and research into business start-ups. Former university students have inspired me to find fresh and informative approaches to learning about entrepreneurship and small business development. Hundreds of IDEAS workshop participants have contributed toward refining the method used in this book. I am grateful to my collabora- tor and co-author, Babette Moate, for her insight into contemporary business opportunities and her ruthless editing. I also thank the University of Tasmania and in particular my colleagues at the Austra- lian Innovation Research Centre for their encouragement. John English Part A BUSINESS OPPORTUNITIES 1 What is a business opportunity? 2 The diversity of business opportunities This page intentionally left blank 1 What is a business opportunity? Identifying a viable market 3 Anticipating the risks 4 Finding the right business model 5 How change creates business opportunities 6 The rise of the solo business 15 A business opportunity is an idea with compelling commercial poten- tial. Most of us have seen or imagined ideas that we might turn into a business. Some ideas have the potential to be commercially successful and others do not. The question we answer in this book is how do we tell them apart. You will know the difference between an idea and a real business opportunity when you can confidently answer ‘yes’ to three BIG questions: Can you identify evidence of a viable market? Can you anticipate the risks involved? Do you have a business model that makes sense? A business opportunity is not a guarantee of success but it does represent a likely prospect for creating a successful business. In the chapters that follow, we will explore how to uncover ideas for new business opportunities and how to evaluate them for their commercial potential. In this first chapter, each of the three BIG questions is explained, the ways in which change creates new busi- ness opportunities are investigated and the rise of the solo business is examined. Identifying a viable market The first BIG question asks if you can identify evidence of a viable market. A viable market is one in which there are good prospects 4 discovering new business opportunities for potential demand, confirmation of market approval and a sound competitive position for your idea. Potential demand is one of the most important elements in evalu- ating an idea, and it is also one of the most difficult to assess because it requires some understanding of customer behaviour. It’s not about forecasting sales at this early stage; it’s about painting a picture of the factors that push demand. What can we learn about the relative size of the potential market? Is the potential market increasing or decreasing? Will the demand trend be stable or unstable? How long will demand for this idea last? What scope is there to extend this idea into other products or services? Chapter 3 focuses on key potential demand questions. Market approval is important in converting potential demand into sales. It affects the rate of adoption and the extent to which the market can be penetrated. There are a variety of reasons why custom- ers may accept or reject a new idea. Does it fulfil a genuine need? Can they easily understand the benefits? Is it compatible with their existing attitudes or patterns of use? Is it complicated for custom- ers to consume or use it? Will it be difficult or costly to organise a way to distribute it? Chapter 4 investigates important questions about market approval. Competitive strength is concerned with how an idea is likely to fare in the battle of the marketplace. How does it improve upon similar pro- ducts or services? How do customers value it compared with competing products or services? Is it vulnerable to the negotiating leverage of customers? Is it vulnerable to the negotiating leverage of suppliers? Is it susceptible to existing, potential, direct or indirect competitors? Chapter 5 examines key questions about competitive strength. Anticipating the risks The second BIG question asks if you can identify the risks associated with an idea by searching for its flaws. There are a number of critical risks in the early stages of commercialising a new idea and we distin- guish between boundary risks and establishment risks. Boundary risks are dangers that are generally beyond our control but nevertheless restrict the commercial potential of an idea. They what is a business opportunity? 5 come from a variety of sources such as government, supporters of various popular causes, existing and potential vested interests and the public. Does your idea meet the various legal, safety and other regulatory requirements? Is it vulnerable to changes in technology? Does it have an effect on the environment? Is it vulnerable to any of the dominant social or economic forces in our society? To what extent could sales be limited by dependence on external factors that we cannot control? Chapter 6 looks at important questions about boundary risks. Establishment risks represent obstacles that have the potential to affect a business opportunity during its start-up stage. The differ- ence between these and boundary risks is that you have more control over them. You need to recognise these risks and decide which ones can be resolved or avoided and whether or not you want to face the others. Is there a plan for making the transition from an initial idea to a successful enterprise? Do you really understand your market? Will you be able to produce and deliver the product or service in the way you intend? Will you have enough cash to see you through the start- up phase? Will you be able to withstand the pressure on your personal finances, your career, your family and friends, and your emotions? Chapter 7 examines important questions about establishment risks. Finding the right business model The third BIG question asks if you have a business model that makes sense. A business model is your strategy for combining the skills and resources that translate your idea into a genuine business. The objec- tive is to anticipate what skills and resources are needed, whether or not you have them or can get them and whether the financial results you expect confirm the commercial potential of the idea. A thriving business is the result of a successful marriage between an idea with commercial potential and the skills to exploit it. These include marketing, technical, financial, operational and managerial skills. The relative importance of these skills depends upon the sophis- tication of the idea and the nature of the market it faces. Chapter 8 is concerned with identifying the skills needed to launch your idea and whether you can realistically provide them. 6 discovering new business opportunities Taking advantage of a business opportunity not only depends on having the right skills but also having access to the right resources. Resources form the basic dimensions of a business plan and include financial resources, physical resources, human resources, intellectual resources and network resources. Chapter 9 focuses on identifying the resources you need to launch your idea and whether you can real- istically acquire them. In addition to the right skills and resources, an idea needs a business model that makes financial sense. A successful business model is built on a sensible forecast of sales revenue based on practical market research. It will have projected income statements that demonstrate your strategy for earning a profit. You also need to be aware of your cost structure and know how long it will take to break even. Your business model will have projected balance sheets indicating what assets you require and how they will be financed. You will also need a cash flow budget to help you manage your liquidity. Chapter 10 describes how to forecast the financial dimensions of transforming your idea into a business operation. How change creates business opportunities Change is nothing new and we adapt to it daily without much thought. If we stop to consider the changes taking place around us we will discover clues about emerging demand for new products and services. In the absence of change, existing businesses do well because they have proven products and services, smooth opera- tions, established business models and loyal customers. When conditions change, however, confusion and disruption create gaps in the marketplace that open up new business opportunities. Change produces an environment that is actually loaded in favour of new players because they tend to be more flexible and adaptive than existing businesses. Keeping abreast of these changes means being informed about shifts in demographic, lifestyle, social, tech- nological, political, regulatory and economic trends. The objective is to recognise how changes in these trends manifest themselves as new business opportunities. what is a business opportunity? 7 Demographic trends Demographic information is used to answer questions about popula- tion trends. For example, is the number of households in a particular area increasing or decreasing, is the population mix getting older or younger, or is household income rising or falling? The Australian Bureau of Statistics and other agencies provide demographic infor- mation on population size, age distribution, geographic distribution, family structure, employment, race and ethnicity, education, health and welfare, literacy and spending patterns. Population characteristics are closely linked to consumer purchasing behaviour. The number of people in each age group is reflected in different spending patterns including the tremendous influence children have over adult spending decisions. Gender demographics reveal the different preferences between men and women and have been used to uncover opportuni- ties in the sale of clothing, soft drinks, non-prescription medications, toiletries, magazines and even cigarettes. Race and ethnicity demo- graphics are used to discover opportunities in food, music, clothing and cosmetics. Population size and income levels across geographic areas are used to measure market density and to anticipate changes in spending power and the desire for certain lifestyles. Marital status and the presence and ages of children, together called the family life cycle, are used to reveal opportunities in housing, appli- ances, food and beverages, automobiles and recreational products. There has been a decline in the traditional family partly due to fewer marriages, higher divorce rates and couples having fewer children. There are now more one- or two-person households than ever before. The birth rate is declining in the 15–29 year age group and rising in the 30–39 year age group. The number of one-parent families is also rising. These demographic trends are reflected in shifting family spending patterns. The post-Second World War ‘baby boom’ and the progression of this generation through their lives have provided an abundant source of business opportunities. As they approach retirement, the baby boomers bring with them a strong desire to live well past the age of their parents and to maintain a healthy lifestyle in the process. Life expectancy has been increasing by about two and a half years per 8 discovering new business opportunities decade and the over-fifty population will more than double during the next thirty-five years. Seniors control 48 per cent of discretionary spending, so the combination of demographics and dollars suggests that many business opportunities will emerge in areas like home services, health services, travel, recreation and retirement counsel- ling. At the other end of the age spectrum are more than two million Australians aged six to thirteen. They represent increasing spending power because of the trend towards older parents with higher dispos- able incomes and smaller families who spend more per child. These children have sophisticated tastes, are avid consumers, are heavily influenced by the media and are technologically savvy. Lifestyle trends Thanks to globalisation and rising incomes, consumerism plays a big part in the lifestyle of many people. Australians who want a way of life that relies on consumer goods and services will continue to generate new business opportunities. Lifestyle trends are closely aligned with consumers’ motives for making purchases such as appearance, conve- nience, affiliation, status, safety or health. One consequence of the modern world is that most of us feel pressed for time so we use products and services that compensate for lack of time. Nearly one-third of lunches are eaten on the run and are supplied by the fast food industry. Speed dating is having a major impact on the dating scene. More and more people are condensing a holiday into a weekend or a short trip, resulting in more sponta- neous travel for shorter periods. Convenience is also an increasingly important feature of the goods and services we consume and the ways in which we buy them. Personal shoppers, home cleaning services and dog walkers are examples of businesses meeting the increased demand for convenience. Many consumers are willing to pay extra for convenience in order to save time for other pursuits. Understand- ing the effect of time compression on lifestyle is one of the keys to unlocking new business opportunities. Another interesting trend is consumers’ loss of trust in food author- ities who keep changing the ‘facts’ about nutrition. We no longer trust what we read on the labels. We do not want eating to be a stressful or what is a business opportunity? 9 difficult task. We want to buy food we know is ‘authentic’. Authentic means not made in a laboratory. It means safe, it means reliable and it means trustworthy. One result of this trend is that there are consum- ers who are willing to pay a premium for organic produce simply to obtain peace of mind. Another consequence is consumers seeking more information about the origin of their food such as where it was grown and how was it handled. The 1990s saw a huge change in the emphasis placed on physical fitness and healthy living. Since that time, many people have been taking responsibility for their own health by challenging the tradi- tional authority of the doctor and seeking more information and other options. The trend towards bottled water is also driven by increased concern for health and wellbeing. However, now it has taken on symbolic values as well so we have water bars, recipes for rainwater, regional waters, branded waters and spas based on pure water locations. New trends in shopping are emerging. The weekly shopping trip is on the decline as more people shop every day. More men are becoming grocery shoppers. Why are they are taking a greater interest in food? Is it because more men are living alone or is it a result of more women in the workforce with less time for shopping? At the same time, more women are becoming interested in renovation and shop at hardware stores. Why is this happening, what do they want, and how could these trends translate into new business opportunities? Social trends New business opportunities emerge from changes in our society. These include changes in value systems, accepted norms of behaviour, approaches to sexuality, religion and spirituality, the pursuit of wealth and possessions, and shifting aspirations, fears, desires and anxiet- ies. For example, how many parents no longer allow their child to ride a bicycle without supervision because they have a nagging fear of danger lurking outside the home? This trend may not be good for sales of children’s bikes, but the upside is new business opportunities for supervised play groups, structured extracurricular activities and organised sports events. 10 discovering new business opportunities Consumer interest in ‘green’ or environmentally friendly products has become pervasive. Together with growing environmental aware- ness comes a shift towards non-material factors that affect the ways in which consumers spend their money. Rather than focusing solely on price and quality, many buyers consider ethical, religious and other beliefs before making their spending decisions. For example, the use of sweatshop labour affects the decisions of some consumers when they buy clothing and footwear. Similarly, some consumers will only buy ‘fair trade’ coffee. Women continue to gain social, political and economic power, propelled by changing values and social attitudes. These gains have been accelerated by more women entering higher education and the growth in the number of couples where both are in paid employ- ment. Another reason for the increasing economic power of women is the decline in the manufacturing sector coupled with the rise of service industries. The qualities most often attributed to women are also those associated with the skills needed to succeed in customer- focused and service-oriented businesses. These changes have also led to opportunities for products and services that are ‘feminised’ or that assist women to balance the demands of career and family. Migration to Australia and migration between different regions in Australia show no sign of slowing. The movement to coastal areas for a sea change and to country areas for a tree change is driving urbani- sation in smaller communities. With shifting population comes increased demand for services and cultural change in regional areas. This is altering the lives of those who are relocating as well as the character of the regions that receive them. Migration affects language, social values, food, entertainment, housing and other spending patterns resulting in new business opportunities. Technology trends Technology is rapidly and comprehensively changing the world in which we live. Blogs, podcasting, YouTube and MySpace have created a whole new realm in which we can interact with each other. Social networks and data democracy based on user-generated content mean we are living more of our lives online and out of the reach of what is a business opportunity? 11 institutional gatekeepers and bureaucrats. Research suggests that Australians are early adopters of technology and willing to try new products and services. For example, the internet is now the most important booking tool for air travel, accommodation, car hire, tour operators, cruise ships, state travel centres and motoring clubs. Many new businesses such as Wotif have taken advantage of these technol- ogy trends to become Aussie icons. One reason for the exploding role of technology is that the cost of technology has dropped dramatically compared with disposable income. New technology has created powerful opportunities for home-based electronic leisure activities such as interactive television, online gaming services and home theatres. The equipment is getting easier to install and easier to use, and wireless devices will infiltrate our lives as more products roll out with access anywhere, any place and any time. A new form of online business called a mash-up illus- trates the business opportunities available on the internet. A mash-up uses online services and tools to combine data from several sources to create a new business. They are relatively easy to start and require fewer resources than traditional technology start-ups. For example, data from online real estate advertising has been combined with Google Maps to create a new type of real estate marketing service. The traditional media began to lose its grip on the Australian public when we started to use the internet. Over a million Australians now read newspapers and magazines less frequently. Over two million watch less television. These changes have important consequences for advertising. As we turn our backs on the traditional media, the internet and mobile phones have emerged as important new marketing channels. Even word-of-mouth recommendations are turbo-charged by the social networks spawned in these media. These new forms of media not only provide new business opportunities but also new ways of pursuing existing businesses. Retail businesses collect our mobile phone numbers and email addresses to advertise new stock arrivals and sales. Consulting and related services are benefiting from tech- nological changes in education and training, transport, health and medical services, and systems and hardware upgrades. The internet also provides business opportunities in network management, firewall 12 discovering new business opportunities security systems, e-commerce applications, website development, VoIP applications and business process outsourcing. Political and regulatory trends The role of politics in business can be pervasive. A single vote or a budget speech in parliament can change an entire industry. Regula- tions stem from local, state and Commonwealth governments as well as from a number of government-sanctioned authorities. Examples of political and regulatory trends include increased emphasis on the market economy, industrial relations reform, welfare reform, deregu- lation of the financial sector, changes to superannuation legislation and reforms in the telecommunications sector. There is growing political acceptance that global warming is resulting in climate change accompanied by an increased interest in environmental sustainability. Drought and acute water shortages have focused the government’s attention on a range of new environmental standards for home building and renovation. The resultant demand for domestic water tanks, grey water diversion systems, water-saving devices and specialised landscaping services has created new business opportunities. With increased environmental consciousness has come legislation that restricts our ability to do as we please, but it has also created new opportunities in the areas of renewable energy, air condi- tioning technology and building insulation products. Another trend over recent years has been for government to gradually withdraw from the direct provision of a range of services. This results in opportunities for new businesses to take over where government left off. There is a profit to be made by providing services in areas like ancillary healthcare, respite, day care, education and transportation. For example, governments prefer to house aged people in their own homes for as long as possible. Rising Common- wealth funding of community aged-care packages pays for personal and nursing care for older people and creates new business opportu- nities for the providers. Over the past two decades the world has been transformed by the growth of free trade, the advent of the internet and the deregula- tion of financial markets. Now business operators can think and act what is a business opportunity? 13 globally, with more access to information, goods and services, and other cultures than at any time in history. Globalisation is affect- ing domestic politics, international relations, business activities and consumer behaviour. It is opening up many new business opportuni- ties for speciality and high value products in niche markets. Economic trends Economic trends that are commonly tracked and reported in the mainstream media include business investment, unemployment statistics, and changes in consumer confidence and retail spending. Other measures of economic activity include average wages, infla- tion, interest rates, building approvals, productivity and the value of the Australian dollar. When the economy is expanding, new business opportunities are more likely to emerge. When the economy is contracting, business opportunities tend to dry up as well. Consumer confidence is the key that triggers decisions to take a holiday, buy a car or renovate the house. If the economy is healthy and interest rates are low, consumers will feel confident about their future and be more likely to open their wallets. Economic trends outside Australia are also important. Asian countries are strengthening their economic clout and boosting their participation in world trade. Whether measured by GDP growth, new technology or new goods and services, there are huge changes occurring in places like Bangalore, Shanghai and Bangkok with enormous implications for new business opportunities in Australia for importing and exporting. Trend-watching websites The Australian Bureau of Statistics (www.abs.gov.au) is the official statistical organisation for the Commonwealth and state governments. Its main function is to collect statistical information on a wide variety of social and economic activities and to disseminate it to government and the community generally. Examples of ABS reports that can be useful for trend watchers include: census of population and housing demographic statistics and trends 14 discovering new business opportunities household expenditure survey census of retail establishments and selected service establishments tourist accommodation wholesale establishments manufacturing establishments. Springwise (www.springwise.com) scans the globe for the most promising business ventures, ideas and concepts ready for adaptation, expansion, partnering, investments or cooperation. Springwise tracks more than 400 global offline and online resources as well as taking to the streets with its digital camera to capture images of new trends as they occur. The World Future Society (www.wfs.org) is a non-profit scien- tific and educational association of people interested in how social and technological developments are shaping the future. It serves as a clearinghouse for ideas about the future. Trendwatching.com (www.trendwatching.com) is an independent research firm that scans the globe for the most promising consumer trends, insights and business ideas. It claims to have a network of more than 8000 spotters on the ground in more than seventy countries. MarketResearch.com (www.marketresearch.com) is the world’s largest and continuously updated collection of market research offering more than 110 000 market research reports from over 550 leading global publishers. Trendcentral (www.trendcentral.com) is a free daily email news- letter covering lifestyle, technology, style and entertainment, particu- larly for Gens X and Y. Emerging Trend Advisor published by Find/SVP (www.guideline. com) is an American monthly email newsletter written by industry experts covering business trends. The newsletter is free to all Find/SVP clients, but non-clients can sign up for the latest newsletter online. Gizmodo (www.gizmodo.com.au) is a technology weblog dedi- cated to everything related to gadgets, gizmos and cutting-edge consumer electronics. The Australian edition delivers the best of Gizmodo from the United States while adding a huge array of Austra- lian content as well. what is a business opportunity? 15 IBISWorld (www.ibisworld.com) is one of Australia’s richest sources of business information. It provides independent, accurate, compre- hensive and up-to-date research on over 500 industries, including statistics, analysis and forecasts. It also has reports on Australia’s top 2000 companies and risk-rating reports on every industry. The objective of the Copenhagen Institute for Futures Studies (www.cifs.dk/en) is to strengthen the basis for decision making in public and private organisations by creating an awareness of the future and highlighting its importance to the present. Its work ranges from statistically based analysis and the identification of global trends to analysing more subjective factors that will affect the future. The Institute for the Future (www.iftf.org) is an independent, non- profit research group with nearly forty years of forecasting experience. The core of its work is identifying emerging trends and disconti- nuities that will transform global society and the global marketplace. It provides insights into business strategy, design processes, inno- vation and social dilemmas. INNOVIC (www.innovic.com.au) is a not-for-profit organisation in Victoria assisting over 1800 innovators each year to turn their new ideas, inventions and innovations into viable products and new busi- nesses. It offers a wide range of services, free seminars and innovation resources to help you take your idea or invention through all stages of the commercialisation process. The rise of the solo business A solo business consists of a single operator with no employees. Solo businesses are an emerging phenomenon with an important role to play in the development of new business opportunities. The Austra- lian Bureau of Statistics reports that out of 1 269 000 small businesses in Australia over half, or 715 000 businesses, have no employees. The contribution of solo businesses to employment and economic activity, as well as quality of life, represents a powerful new strategy for creating wealth and independence. The rise of the solo business stems from a variety of economic, social and technological changes. A shift away from traditional employment and the notion of a job for life have loosened workers’ 16 discovering new business opportunities ties to large employers. Downsizing and retrenchments have driven those affected to try new ways to sustain themselves. With work and family pressure rising, many families are seeking new ways to earn a living while balancing childcare or care for aging parents. At the same time the internet has opened enormous opportunities for new solo businesses by providing an environment in which a significant presence can be established by a single individual. Solo businesses have a number of distinguishing characteristics. They are under the direct control of the owner and are generally inde- pendent of outside influence. Since a solo business has no employees, it relies on the resourcefulness and energy of one individual. The money to finance a solo business is usually modest and comes out of the owner’s pocket together with whatever they are able to borrow. The rewards and the risks of operating a solo business belong entirely to the owner. Many solo businesses operate part time. This quiet revolution in the way many Australians go to work has led to an enormous increase in the number of solo businesses. Examples include bookkeeping services, mail-order marketing, desk- top publishing, translation services, tutoring, computer program- ming, graphic art, freelance writing and multi-level marketing. The big growth in solo businesses has been the Small Office Home Office, or SOHO. As a result of changes in the labour market, lifestyle choices and office technology, garages and spare bedrooms all around the country are being transformed into the new workplace. Some people are attracted to a solo business by family and lifestyle considerations. The hours lost commuting, the long days at work and the cost and limited availability of childcare have prompted many people to review their career aspirations and what they want out of life. With an office at home they can have no overheads, they can be close at hand for the family and their working hours can be as flexible as they like. Technology is perhaps the most powerful force behind the growth in solo businesses. Relatively inexpensive and powerful computers, voicemail systems, mobile phones, fax machines, the internet and email have made the solo business functionally feasible and financially realistic. Most solo businesses have been started by people who left a job what is a business opportunity? 17 in order to pursue their own business. The business may be related to what they did in their former job or it may not. Some people have decided to set up a solo business as a way of balancing the demands of their home life and the need to earn a living. Others have started a solo business as a result of unemployment. In some cases it was volun- tary and in others it was not. Some retired and decided, by choice or necessity, that they wanted to start a business, some quit because they were dissatisfied and some were dismissed or retrenched. An unprece- dented number of people have been cast adrift in mid-career as a result of corporate and public sector restructuring. Some have been lucky enough to exit with a redundancy package. Many of these individuals are using their talents, skills and experience to set up solo businesses. It is not unusual to find retrenched individuals providing the same services to their former employer, except now it is called outsourcing. Do you have an idea for a solo business? If so, how will you decide if you want to go through with it? Do you know why you want to go into business? Do you know if a particular kind of business will suit you? Do you know if your idea is commercially feasible? Do you know what you will need to get started and do you have a plan for making it all happen? The type of business you choose to undertake is a highly personal matter. Factors to consider include your skills, your experi- ence, your talents and your interests. Experience plays a big part in understanding the market and avoiding costly mistakes. If you have a particular talent then you may want a business that capitalises on it. A strong interest in a particular type of business is important because it will help to sustain you through long hours and hard work. Solo businesses are in a perfect position to exploit the power of being small. Big businesses are usually the ones who deliver the worst customer service. They are the ones that you cannot reach on the phone and, if you do get through, they transfer you from department to department because they are not sure who is supposed to handle your query. Big businesses and their poor customer service are what makes being small so powerful. That is why there are some distinct and impressive commercial advantages to going solo. Have you noticed that the bigger the business the slower it handles customer inquiries and complaints? Their elaborate policies, 18 discovering new business opportunities complicated procedures and layers of managerial hierarchy mean that it simply takes too long. A solo business can handle customer ques- tions and concerns immediately. You have the power to focus on your customers’ needs as soon as they occur and consequently to provide a better service than larger competitors. Have you noticed how ‘policies’ prevent large organisations from being flexible? If a customer isn’t happy, explaining the company’s policy doesn’t carry much weight. A customer who is forced to deal with a policy instead of an under- standing person will leave. A solo business can make policy changes immediately. If a policy is doing your customers and your business more harm than good, you can change it. Have you noticed how difficult it can be to get personal attention from a large organisation? They leave you feeling like they don’t care whether you do business with them or not. Their idea of personal attention is to send you a form letter with your name on it. Solo busi- nesses can provide genuine individual attention because they actually know their customers personally. This is a powerful advantage because a solo business can show its customers that it cares by offering them the attention they want. The power of being small lies in the unique ability to eliminate the gap between yourself and your customer. Starting a solo business can also be a lonely and difficult task. Some people miss the social contact that the traditional workplace provides. There is also a need for the business amenities that we often take for granted as an employee. This is why shared work spaces where like- minded people can work together are becoming increasingly popular. They help to combat the isolation and make it possible to share offices, meeting rooms, internet access, secretarial assistance and equipment like computers, fax machines, printers and copiers. The social support and business services provided by these shared work spaces are parti- cularly important for people who are new to business. The evaluation in the Appendix at the end of this book will help you gain an insight into self-employment as a potential career choice. If you are not clear about your strengths or what direction to pursue, then using this tool will help you to take a fresh look at your natural capabilities and how these can be used to start a solo business. 2 The diversity of business opportunities Parallel opportunities 21 New market opportunities 27 New product or service opportunities 31 Radical opportunities 35 There are several myths about the ways in which an initial idea for a new business unfolds. One myth is that there is some procedure by which you can reliably search for and discover all the good business ideas. It simply doesn’t happen that way. Good ideas tend to emerge unexpectedly or you stumble upon them inadvertently. What is important is that you are able to recognise a good idea when you see it. Another myth is that a good idea will ensure success. There have been thousands of businesses, based on good ideas, that have gone broke. New ventures take a great deal of time and much effort to succeed. A good idea needs to be supported by a thoroughly researched feasibility study followed by a carefully developed business strategy before it stands a reasonable chance of becoming a successful business operation. The most popular myth is that you must discover a unique idea or come up with a new invention involving some enormous leap of the imagination. However, there is simply no correlation between commercial success and the creative or technological brilliance on which an idea is based. In fact, the vast majority of new business ideas are no more than excellent copies of other successful operations. The purpose of this chapter is to examine the business opportu- nity matrix and how you can use it to distinguish between the diverse forms of new business opportunities. The business opportunity matrix represents four different approaches to identifying new business opportunities. It distinguishes between recognising opportunities to 20 discovering new business opportunities sell existing products and services as opposed to creating opportu- nities with new products and services. It also distinguishes between contested markets in which there are already competitors as opposed to uncontested markets in which there are no current competitors. Figure 2.1 The business opportunity matrix Contested Uncontested market market Opportunity Parallel New market recognition opportunities opportunities Opportunity New product Radical creation or service opportunities opportunities Opportunities in contested markets are exploited by entering an existing market space, utilising existing demand and beating the competition by using either a differentiation strategy or a low-cost strategy. Opportunities in uncontested markets are exploited by a new market space, creating new demand and capturing it before potential competitors can get a foothold. Each approach in the business oppor- tunity matrix represents a different proposition in terms of the nature of the opportunity, the risks involved and the business model you might adopt. Parallel opportunities consist of recognising the potential for existing products or services to be sold into an already contested market in competition with one or more existing businesses. A new hairdress- ing salon in an area that already has a salon is a parallel opportunity. New market opportunities consist of recognising the potential for existing products or services to be sold into a new or uncontested market in which no competitors are currently operating. A new dom- estic application for an existing industrial product is a new market opportunity. New product or service opportunities consist of creating a new or modified product or service aimed at an existing contested market. Organic and environmentally friendly versions of well-known products are new product opportunities. the diversity of business opportunities 21 Radical opportunities consist of creating an entirely new product or service aimed at a completely new uncontested market. Nanny software aimed at protecting children from inappropriate internet content is a radical opportunity—a new product providing a solution to a new problem. Parallel opportunities The biggest myth of all is that successful businesses come from new ideas that never existed before. In fact, the majority of new busi- nesses compete in parallel with other businesses by selling similar products and services to the same sorts of customers. Parallel oppor- tunities are the most straightforward types of business opportunities because the number of known factors is greatest. However they also run the greatest risk of being exposed to severe competition from the other businesses that sell the same services or products to the same customers. Parallel start-ups make sense when existing firms are unable to meet demand or when you realise that you can offer better value to customers. You might be able to capture existing customers by offering a product in a different size, changing the distribution system to improve delivery, finding other uses for the product or offering bulk discounts. You might be able to attract customers away from competitors by repositioning your product or service, changing the promotional strategy or offering price concessions. In some cases, existing businesses have had it too good for too long and have grown complacent. In other cases, existing operators with poor quality products, high prices or poor service allow you to gain a foothold because you are more competent and determined. There are plenty of parallel opportunities in the services sector. Every doctor, accountant or lawyer who enters practice is pursuing a parallel opportunity. The same is true for other service businesses such as house painters, hair- dressers or gardening services. Parallel opportunities in the services sector are easy to exploit when the capital required is low and special- ist know-how is not too important. New entrants usually compete using lower prices and longer hours and gradually shift toward greater dependability and closer customer relationships. The key to success 22 discovering new business opportunities is to position your business in a way that easily distinguishes it from the others. Let’s look at some examples of parallel business opportunities. Buying an existing business When you buy an existing business, you get what someone else has put together. You are buying the location, premises, equipment, stock, customers, staff and goodwill that have been established by the seller. This can make it much easier to get started but you could be buying a big mistake if the seller’s original decision to start the business was wrong. You should be particularly concerned with the capacity of the business to earn profits. If you choose to buy one that is not doing so well, then you need to be sure that you have the knowledge and skills to turn it around. To find businesses for sale look for newspaper advertisements, commercial real estate agents and people in the trade. You can also talk with your accountant and solicitor to see if they know of any businesses for sale. Keep an eye out for owners who may want to retire or sell for reasons like loss of interest, partnership disagreements, divorce or bad health. Buying a going concern has the advantage that not only will you earn income immediately but you will also save the time and effort it takes to equip and stock the business yourself. A successful business will have a proven location, established relationships with suppliers and creditors, and existing employees. Buying a going concern as a package may turn out to be cheaper than trying to assemble all the bits and pieces yourself. It is also much simpler to finance a single purchase transaction and a proven track record makes it easier to persuade a lender. When you purchase an existing business, the risk of failure is significantly less than if you tried to start the same business from scratch. There are also potential disadvantages of buying an existing business. Initially, you are stuck with any bad decisions made by the previous owner. For example, the existing stock may be unsaleable, the choice of equipment and fixtures may be outdated, some of the staff may not be suitable, or the location may prove to be poor. You the diversity of business opportunities 23 could pay too much for the business if you misjudge its value and there could be unexpected expenses if the business turns out to be run-down. If the previous owner had a bad reputation, then you are likely to inherit some of the ill will felt by customers and poor staff morale. Copying another business Copying another business makes sense if the market has expanded and is not adequately served or if the existing operators are clearly failing to meet the needs of customers. There are a number of advan- tages of starting a new business over buying an existing one. It is easier to innovate when you have the flexibility to choose your target market, select the right mix of products and services, design your own competitive strategy, and decide on your own location and facilities. You can plan the business around the policies and procedures that are best for your business and you can train the staff your own way. You also avoid the expense of buying the goodwill of an existing business along with the possibility of unknown or contingent liabilities an existing operation might have. Moreover, you will not inherit any pre-existing ill will from disgruntled customers, suppliers, creditors or staff. Copying an existing business also has some disadvantages. It takes time and energy to create an image, build patronage and work the bugs out of new systems and procedures. Meanwhile, staff must be found, contacts developed with suppliers and a marketing strategy implemented. All the while the bills have to be paid and it could be some time before you reach a break-even level of sales. Then there are the risks that unexpected competition may emerge from existing operators trying to protect their market share or that customers may be more difficult to attract than you anticipate. Look for a successful product or service to copy. What do you see that is currently doing well and has continuing prospects for the future? Are there potential customers who would be prepared to buy something similar from you? Can you identify the key factors respon- sible for the success of the product or service and can you reproduce them? What are the worst features and can you improve on them? 24 discovering new business opportunities Can you deliver the same thing for a lower cost? Make sure you do not infringe anyone’s patent, copyright or licence. Ask potential custom- ers if they would buy the product or service if you offered it. Filling a shortage Shortages occur when a product or service becomes unavailable or when demand significantly outstrips supply. Are you aware of any supply shortages? Can you provide a product or service that will fill the gap? Have any potential customers indicated there is a genuine shortage and they would be prepared to buy from you? You can search for shortages by asking distributors, agents and retailers what they have trouble obtaining. Similarly, ask which products and services take the longest to be delivered. Listen to potential customers when they complain about products or services they cannot conveniently source. You can also look for supply shortages caused by businesses closing down or changing their priorities by reading the business news and trade publications and by investigating businesses that are in receivership. It is important to understand the causes of a shortage to ensure that you don’t get caught in the same way. Having alternative suppliers in other countries may enable you to overcome a seasonal shortage or more efficient distribution channels may enable you to solve supplier issues. Reintroducing a product or service It is not uncommon for a good product or service to fail because of shortcomings in marketing, production methods, logistics or some other area. Some ideas could have been ahead of their time. If you can identify the problem and eliminate it, then the potential may exist to successfully reintroduce a product or service that has disappeared. Do you know of any interesting products or services that are no longer available? Sometimes you can discover old ideas by looking through old magazines and catalogues. Or ask around to find out about any worthwhile products or services that have disappeared and why they are no longer available. Ask potential customers what they were previously able to buy and whether they would like to buy these again. the diversity of business opportunities 25 Do these products and services have the potential to become successful with changes to the marketing mix, management methods or business strategy? What kind of changes would it take and can you make them? Ask similar questions about businesses that have failed. Make sure you test the idea thoroughly because some products will have failed for very good reasons and no amount of effort will resur- rect them. Assembling a product By setting up an assembly operation you can save customers time, effort or money. One example is assembling kits such as first aid kits or bushwalking survival kits. Another example is assembling furni- ture for people who are willing and happy to pay for the convenience of not having to deal with a ‘flat pack’. What could you assemble that would save someone time, money or effort? Is there a market for it? Look for products for which the assembly process is cumbersome and expensive or the parts come from different locations and you are centrally located to become a convenient assembly point. Also look for products that are sold unassembled but the average person is not willing or able to follow the instructions. Subcontracting A subcontractor supplies a product or service that is used by another business as part of a larger offering. With the rise in outsourcing, subcontracting for services is now common. Businesses subcontract services ranging from complex technical support to routine activities such as parcel delivery and rubbish disposal. Sometimes there is an opportunity to become a secondary supplier when a large company does not want to rely on a single source of supply. What could you supply to other businesses? Contact purchasing agents in large busi- nesses and ask them about their supply needs. What items are hard to locate, too expensive or are not delivered reliably? Check the news- papers for ‘request for tender’ advertisements and ‘expression of interest’ advertisements from organisations looking for subcontrac- tors. Get on the mailing lists of government purchasing agencies that are required to advertise for tenders. Look through trade journals for 26 discovering new business opportunities information about supply problems in particular industries. Your goal is to identify a product or service that you can supply to other businesses as part of their overall offering. Replacing imports Import replacement means producing a product or service in Australia that is currently being imported from overseas. We are surrounded by all sorts of imported products that could be produced locally. Do you know of an imported item that you could produce locally? Can you match its quality and price? Can you get a cost advantage by eliminat- ing shipping costs or tariffs? To find out what is imported into Australia subscribe to import publications and importers’ catalogues. Contact purchasing agents and ask them what they are importing. Examine the products where you shop to find out where they are made. Visit the AusIndustry website (www.ausindustry.gov.au) for information about import replacement opportunities in Australia. What are your areas of expertise and how do they match up with the import replacement opportunities you have discovered? Talk to potential customers and ask them if they would be prepared to switch to a locally made item. Exploiting abandoned markets Exploiting abandoned markets means entering a market that has been left behind by another business. This sometimes happens because the business does not want to handle smaller orders any longer, or may be at the leading edge of technology and no longer wants to service older equipment or stock the same range of products. Other businesses may be expanding into new markets and find themselves unable to properly service their existing customers. One example of a business opportunity arising from an abandoned market is a repair service for appliances that are no longer produced. What industries or companies have made big changes as a result of new technology, new products or new ways of doing business? Have any of these changes resulted in some customers being abandoned? Are there enough customers who would continue to buy the product or service if you offered it? Make sure you know why the market was abandoned because there may have been some very good reasons for pulling out. the diversity of business opportunities 27 Becoming an agent or distributor Agents and distributors sell the products and services of other busi- nesses. Some businesses do not have the resources to develop and manage their own distribution channels and they look for other organisations that can fulfil this role. Other businesses simply prefer to concentrate on what they do best and outsource distribution. An agent contracts with producers to sell their products or services for a fee or a commission. A distributor buys the producers’ products or services and resells them directly to consumers or wholesales them to other businesses. Can you find producers that need the services of an agent or a distributor in your area? Can you identify a product or service that you believe you can sell directly to consumers or wholesale to other businesses? For example, have any retailers or consumers indicated the need for a product or service that you can distribute? Ask the producers of this product or service if they need someone to handle direct sales or wholesale sales. Look for new businesses that have not established their own marketing department and need marketing services. Look for producers who cannot afford to market to rural areas or specialised niche markets. Look for a producer who only wants to handle large orders but the product requires distribution in small lots. Find a group of customers or retailers who have to wait too long for delivery and will buy from you if you will carry stock for immediate delivery. Look for advertisements for agents and distributors under ‘Business Opportunities’ in the classified section of the newspaper. New market opportunities New market opportunities occur where there is the potential to sell existing products or services to new customers. The new customers may be in new geographical areas or it may be possible to service them by new distribution channels or new merchandising methods, or reach them through new or different advertising media. Since you can benefit from your own or other businesses’ experience with existing products or services, new market opportunities usually involve only medium risk. Let’s look at some examples of new market opportunities. 28 discovering new business opportunities Imitating other businesses When you observe a successful business concept consider the possi- bility of imitating the same idea in another place. What businesses have you seen on your travels that might work well in your own market? Have you seen any successful products or services that are not available where you live? Keep your eyes and ears open for products or services in other locations that you can introduce into your area. Talk to purchasing agents. Buy a few foreign and interstate newspapers and read the advertisements and the stories about local businesses. Check out the local Yellow Pages when you travel and visit some of the businesses that look interesting. Buying a franchise Franchising has been responsible for the spectacular growth in new market opportunities; there are now hundreds of franchise organisa- tions and thousands of franchisees in Australia. A franchise system usually begins with a successful business at one location that is packaged so it can be duplicated in other locations. The franchisor not only provides the product or service and trademark, but also the entire business format consisting of a marketing plan and support, operating methods and manuals, training, quality control, and ongoing back-up services. In the retail sector the franchisor gener- ally determines the inventory mix, pricing and promotional policies. Examples of products sold by franchises include auto parts, apparel, paint and hardware, electrical appliances and fast food. Franchis- ing can also be found in such diverse service industries as motels, income tax services, business and professional services, and real estate agencies. The franchisee buys the use of the company name, the stan- dardised operating system and sometimes a distinctive shopfront or building design. See How to Organise and Operate a Small Business in Australia by John English for a detailed explanation of franchising. What kind of business could you operate as a franchisee? Have you talked with potential customers to see if they would buy the product or service? Can you buy a franchise for your area? Do your skills and experience lend themselves to this kind of franchise? You can find out about franchise systems by reading newspapers, the diversity of business opportunities 29 magazines and trade journals. You can also contact franchisors directly. Visit the Franchise Council of Australia website (www.franchise.org. au) and consider attending its trade show. Keep a sharp eye out for successful franchise operations in other locations that are likely to be successful in your area. Talk to some of the franchisees and ask them what they think about the franchise system they are operating. Importing and exporting Importing is a source of new market opportunities in Australia. An importer brings products and services into Australia from other coun- tries for resale to wholesalers or directly to customers. Many foreign producers are looking for local agents or distributors. The embassies of foreign countries are an excellent source of information about agency and distribution opportunities. Another source of informa- tion is the World Trade Centers Association website (www.wtca.org) or you can visit its offices in Sydney, Melbourne or Brisbane. Export- ing is a source of new market opportunities in other countries. Most Australian exporters concentrate their efforts on the countries that make up the APEC region, the United States and the European Economic Community. Do you have contacts in other countries that may become distributors? Do you know of any Australian producers who need help to export their products and services? Importing and exporting are highly specialised activities. You need to be aware of your legal obligations in both the country of origin and the destination including quarantine laws, tariffs, quotas, duties and other restrictions. You can get important information and assistance by visiting the Austrade website (www.austrade.gov.au), the AusIndustry website (www.ausindustry.gov.au) and the Austra- lian Customs Service website (www.customs.gov.au). See How to Organise and Operate a Small Business in Australia by John English for more details. Special interest groups Adapting or tailoring a product or service to meet the needs of a special interest group can uncover a new market opportunity. A special interest group may have needs that are related to their physical 30 discovering new business opportunities characteristics such as mobility limitations or left-handedness, to their occupation or leisure pursuits, to their ethnicity such as special food requirements, or to a variety of other things. Can you find a group of people with special needs that are not being met by the marketplace? Good sources of information can be found in newspapers, magazines and research reports produced for special interest groups. Analyse the special needs of a group by studying the unique characteristics of the people involved and asking what they look for and what they have difficulty buying. Look for products and services that are either not available to the group or are not very well adapted to their needs. Look at other special interest groups with similar needs for ideas about products or services that you could adapt for your target group. Talk to members of your target group and ask them what they need and if they would buy from you. Packaging Packaging, repackaging or unpackaging products can be the basis for a business opportunity. For example, commodities sold in bulk may be repackaged into smaller units for individual consumers. Food sold in family-sized packages may find a new market as single serves aimed at one-person households. New regulations affecting air trav- ellers may create a new market for mini packs of hair care and skin care products in clear containers. Alternatively, look for products that are individually packaged in small units and consider packaging them in larger units to lower the price; for example, packaging individual energy efficient light globes into house lots. Some items can be repackaged in order to make them more attrac- tive, more convenient, reusable or easier to store; for example, some foods are placed in resealable packaging to extend their shelf life. Other examples include bottling cleanskin wines under custom labels for restaurants or putting washing powder in dispenser packs that deliver a measured quantity and prevent waste. Look for products that are poorly packaged and think about how the packaging could be improved. Look for products that are sold without packaging and design a package that would increase sales. Look for two or more products that people generally buy or use at the same time and the diversity of business opportunities 31 consider packaging them together as a single unit. Consider how unpacking or repacking might be able to address environmental concerns. What products do you think could be packaged, repack- aged or unpackaged to make them more marketable? What new markets could you open up by changing the packaging for an existing product? Ask potential customers what they think about your pack- aging ideas. Internet marketing The internet is a tremendous source of new market opportunities. An internet site gives you access to markets all over the world. Some- times the internet is more cost-effective than other marketing tools. For example, commercial artists can put their portfolio on a website and direct potential clients to it without incurring the expense of sending out an entire portfolio every time they bid for a job. The role of a website in creating new market opportunities can vary. Some businesses have a website that is designed simply to create a marketing presence as part of an overall advertising and promotion strategy. Other businesses have a website that goes one step further by offering an online catalogue and product specifications and contact details for handling orders and customer inquiries. A complete website goes beyond general marketing and customer support to online ordering and credit card approval while the customer is online. Fully featured websites are also capable of tracking a customer’s preferences and transaction history as part of a strategy for cross promotion and on-selling. New product or service opportunities New product or service opportunities occur when a new product or service is developed, acquired or produced for an existing market. These may be genuine new products and services or only modest improvements. To the extent that you or others have little previous experience with a particular product or service, the risks become greater. Products and services that are totally new are very rare indeed. Instead, look for products and services that are already working in the marketplace that you can improve or expand by: 32 discovering new business opportunities improving quality or service broadening or narrowing the range of products or services offered improving usability, performance or safety changing the delivery method, packaging or unit size adding new features, accessories or extensions introducing simplifications or convenience simplifying repair, maintenance, replacement or cleaning increasing mobility, access, portability or disposability changing colour, material or shape altering size, weight or speed. Spending a little time observing customers to see how a product or service is used may reveal opportunities for complementary services or products that can be bundled with the existing ones. Similarly, a product that is bought for its functional benefits can be trans- formed into a product that is sold for its aesthetic qualities in the way that budget watches were transformed from simple timepieces into fashion accessories. Let’s look at some examples of product and service business opportunities. Take advantage of switching When customers switch from one product or service to another, additional business opportunities may also be created. For example, the switch from fixed telephone handsets to mobile phones has created a flood of add-on services and accessories such as personal- ised ring tones and phone covers. Can you think of any recent consumer switches that you take advantage of? Have potential customers expressed a need that is based on a market switch? You might be able to discover changes in consumer buying habits by looking at market research reports and trade association studies. You can also look for fads that are turning into permanent changes or new products that are rapidly growing in popularity. Think about changes in your own buying habits. If you think a switch has definitely occurred, look for related products or services that will complement it. the diversity of business opportunities 33 Piggybacking on growth When the number of customers for a product or service grows, some businesses piggyback on this growth by offering additional related products or services. For example, there is a long-term trend toward personal fitness and health. Businesses offering fitness monitoring equipment, health foods and exercise apparel are piggybacking on this trend. What current trends can you identify? What products or services could you provide that fit into these trends? Have any poten- tial customers indicated a desire to buy these products or services? You can look for growth trends by surfing the internet and reading books, magazines and research reports on social and economic trends. Run a Google search for ‘trend spotters’ and see what you find. Make a list of growth trends and consider how your skills, knowledge and experience could be applied to produce a product or service that would fit into these trends. Talk to potential customers and ask them if they would purchase such a product or service. Adding value You add value when you buy an existing product or service and then add materials, components, processing or services. There are a number of ways to add value including putting a product through another process, combining a product with other products, offering a product as part of a package of services such as installation and main- tenance, or increasing the level of service. Can you identify an existing product or service that would benefit from an additional process, more material or increased service? It may be a product or service that does not work properly or it may be unsuitable for some other reason. Locate the new elements and develop a method of adding them. Ask the target customers if they would purchase the product or service with these changes. Improving a product or service Improving a product or service is different from adding value. When you improve a product or service, you are creating a new product or service. The ergonomic tools designed for the building trade that help prevent repetitive strain injuries are an example. An existing 34 discovering new business opportunities product or service can be improved in different ways. For example, a product might be made bigger, smaller or more durable. Its design might be simplified so it is easier to clean. Select a product or service that interests you and analyse its strengths and weaknesses. Can you identify ways in which it could be improved? How would you make these improvements? How would it make the product or service more marketable? Can you actually produce a better product or service? Is there a market for it? Sometimes a product can be improved by altering the material with which it is made so it becomes lighter, stronger, more flexible or cheaper to make. For example, producing fishing lures out of plastic instead of metal made them less expensive and more versatile. Products with new characteristics may appeal to a different target market. Can you think of any products that could be made with different materi- als? Can you think of any inferior products that could be improved with better materials? Examine existing products to determine if they might appeal to a different market by substituting materials. Alter- natively, consider materials that you have in good supply and think about products that might be improved using these materials. Look for products that suffer because the materials used are too expensive or prone to big price fluctuations, difficult to use, unsafe, in short supply or produce lots of waste. Look for substitute materials that eliminate these problems. Making new combinations Sometimes it is possible to combine existing products or services to create a new business opportunity. One example is combining a beauty salon with a medical centre in order to offer an expanded range of beauty and cosmetic treatment services. Another example is combin- ing the skills of several tradespeople to offer a comprehensive home maintenance and repair service. The objective is to create a combina- tion of products or services that is more powerful than its separate parts. What combinations can you envisage? Which ones suit your skills and experience? Start with a business concept, idea, product or service that interests you. Ask yourself what could be combined with it to create something significantly better. Look for consumer the diversity of business opportunities 35 groups with similar needs that could be served by combining existing products or services. Make a list of different types of businesses from the Yellow Pages and play with various combinations. Ask potential customers what combinations they would like to see. Information services One of the consequences of living in the modern world is that people are expected to process and manage an enormous amount of infor- mation. In a survey by Reuters, 49 per cent of the respondents felt they were unable to keep up with the flow of information, 43 per cent were having trouble making important decisions because of information overload, 38 per cent said they wasted valuable time trying to locate important information and 33 per cent suffered from stress-related health problems brought on by having to deal with too much information. Managing information for other people provides a huge opportunity for new businesses. Can you offer an information service providing advice, services or information in a subject area you know well? Do you have experience, knowledge or skills that you can sell to others? Do you know of potential clients that need your expertise? Look for information service ideas in business newspapers and trade magazines, company reports and by talking directly with poten- tial clients. Other ideas may come from the popular press, radio and television shows and community activities. The key is to identify up- to-date sources of information to which you can add value by offering a service. Examples of areas in which business customers could bene- fit from information services include production problems, business planning, marketing strategies, staffing issues, computer services, financial management, training, political lobbying and public rela- tions. Examples for consumers include building and renovation planning approval processes, interior decorating, personal budgeting, purchasing major appliances, landscaping or career planning. Radical opportunities A radical opportunity occurs with the creation of a new product or service that is targeted at an uncontested market. It is radical because 36 discovering new business opportunities the idea is novel and it has the potential to upset the position of established products and services in the marketplace. Typically, new inventions take a long time to develop and are costly to bring to the market. The risks are extremely high but if you get it right so are the rewards. Radical opportunities require a combination of fore- sight and chance. Success depends on an ability to see where a new product or service might fit into a future market environment. Some radical opportunities are pushed by technological developments but the majority are pulled into existence by a market that is seeking something new. Let’s look at some examples of radical business opportunities. Inventing a new product or service Inventing a new product or service can be the basis for an excel- lent business opportunity. What products or services are needed but don’t exist? What customer needs could be met by a new invention? Are you familiar with any processes that you could improve by invent- ing a new procedure, product or service? Do you already have an idea that you could develop into an invention? Is there a market for it? First, concentrate on products or services with which you are familiar and try to think of ideas for radical improvements. Can you think of new ways to make an existing product or service more effi- cient in terms of saving time, effort or money? What products and services are people asking for that do not exist? Look through maga- zines and research reports devoted to consumer topics and search the IPAustralia website (www.ipaustralia.gov.au) and the Google Patent Search website (www.google.com/patents) to see what has already been registered. IPAustralia can also provide you with information about how to apply for a patent for your own invention. Once a patent is granted, you have the exclusive right to produce and sell it includ- ing the right to sell a licence to someone else who wants to produce and sell it. Buying a licence The flip side of selling patent rights is to buy a licence to produce and market an invention patented by someone else. Is there a patent for the diversity of business opportunities 37 an interesting product or service with genuine market potential that has never been produced, or has been produced but was not success- fully exploited? Some patents are available under licence and there are many old patents that have expired and can be produced without a licence. A licence may be exclusive and unrestricted or it may only grant rights for a particular geographic area, a particular market or a limited period of time. Buying a licence requires specialised profes- sional financial and legal advice. Do a search of IPAustralia and Google Patent Search to see what you can find. Look through magazines and trade journals for articles about new product ideas and attend trade shows that feature products and services that interest you. You may also want to approach compa- nies that hold patents on products they are not currently producing as well as venture capital organisations that know about potential opportunities. Even very old patents may have been ahead of their time and represent ideas that are marketable today. Transferring an idea Sometimes you can take an idea that was developed for a particu- lar purpose and transfer it into an unrelated field. Many of the ideas that were developed for NASA’s space program have been transferred into commercial products for industrial and domestic applications. There are many medical products developed for humans that have been adapted for use in veterinary practice. What successful ideas or concepts can you identify that might be transferred into another type of business, market or activity? Make a list of successful ideas that you can imagine being applied in a different setting. Alternatively, look for problems in one line of business and try to identify potential solu- tions from other types of businesses. Ask potential customers if they would buy a product or service resulting from the transferred idea. Special situations Demand for a product or service may arise spontaneously as a result of a special situation. Examples include the goods and services that were suddenly in demand as a result of the Y2K fears in the late 1990s. More recently the focus on climate change and global warming has 38 discovering new business opportunities driven the development of products such as energy-efficient light globes. What current situations might spawn a new business opportu- nity? What goods and services could you provide to address a market created by these situations? Pay attention to what you see and hear in the media and look for sudden changes in society, the economy, legislation, politics, the environment and business activity that leave people in unfamiliar circumstances. Part B IDENTIFYING A VIABLE MARKET 3 Potential demand 4 Market approval 5 Competitive strength This page intentionally left blank 3 Potential demand Market size 42 Market growth 45 Market stability 47 Sustainability 49 Extensions 51 When you first have a new idea, you will probably be very optimistic about how it will be received in the marketplace. However, it is impor- tant that the marketplace shares your enthusiasm, so this chapter is devoted to probing potential demand. Questions about potential demand are easier to ask than to answer because you need to find out how the marketplace operates. There is always a certain amount of judgement involved when there is little in the way of objective infor- mation about the factors that are important in influencing potential demand. Nevertheless, potential demand can be examined in the early stages by looking into the general behaviour of the marketplace and how related products and services are selling. The topics in this chapter are designed to help you explore the following key questions about the potential demand for your idea: What is the relative size of the potential market? Is the potential market increasing or decreasing? Will the pattern of demand be stable or unstable? What will be the commercial sustainability of this idea? What possibilities exist for extending this idea into related products or services? An objective analysis of potential demand is crucial for assess- ing commercial feasibility. It is easy to overestimate market size and misjudge market growth and stability. These mistakes can be 42 discovering new business opportunities commercially critical, even for a good idea. An evaluation of your idea’s commercial sustainability and its potential for further exten- sions enables you to explore potential demand even further. We will never know how many ideas have failed because their backers did not anticipate the significance and interrelationships of the potential demand factors outlined in this chapter. Market size Market size is the expected annual sales to all potential customers in a target market area. The target market area might be a neighbour- hood or a suburb, a town or city, a region, a state, a country or the whole world. The term market size is sometimes misunderstood—it is not a sales forecast. Forecasting sales requires more information than is likely to be available at this early stage. What we are looking for is information about the overall size of the market even though not every customer is going to buy from us. Unfortunately, assessing market size is too often ignored. One argument is that trying to assess market size is futile because markets are too fickle. The proponents of this approach usually rely on their ‘gut feel’ or assume that other people will be similarly enraptured by their idea. Another argument is that the market is so large that esti- mating its size doesn’t matter. Typically the rationale goes something like this: ‘This market is so huge that if we get only 1 per cent of it we will make a fortune’. Even if this is true, large markets also attract large established competitors with deep pockets. It is easy to overestimate the size of the market for a new idea. While top line indicators such as population are important guides, they do not reflect market-specific issues such as regulatory or social barriers. A good first step is to review the trends discussed in Chapter 1 with a view to anticipating their impact on the market size for your idea. Consider the information you can access: Demographic trends tell you how many people there are in the categories that might be interested in your product. Lifestyle trends may provide information about consumers’ motives for purchasing your product or service. potential demand 43 Social or cultural trends may also help you understand con- sumers’ motives for purchasing your product or service. Technology trends foreshadow the demand for certain kinds of goods and services. Political and regulatory trends suggest the degree of government control involved in your idea and the effect of this on demand for it. Economic trends affect the demand for goods and services in general and may have a specific impact on your idea in particular. Sales can be measured in different ways including the number of units sold per customer, the number of transactions per customer or the dollar sales per customer. The number of customers can be measured in terms of individuals, household units, business units or some other customer unit. Market size is assessed by estimating how much a typical customer would purchase in a year and multiplying it by the number of potential customers in the target market area. Here is an example of how it is done: Step 1: What is the customer unit for this idea? Let’s say households. Step 2: How many households are in the target market area and what are their demographics? This information is available from the Australian Bureau of Statistics. Let’s say 10 000 households. Step 3: What is the average annual household consumption for this type of product? Consult the Australian Bureau of Statistics’ House- hold Expenditure Survey. Let’s say 10 units per year. Step 4: What is the average price that customers are willing to pay for this product? Let’s say $30 per unit. Step 5: What is the market size for this product in this target market area? 10 000 households × 10 units per household per year × $30 per unit = $3 000 000 per year. So we have worked out that the potential market for all customers is $3 000 000 per year. If you can find information about actual sales 44 discovering new business opportunities in the target market area, then there are two more steps to help you determine if there is unexploited market potential. Step 6: What are the actual sales for this product or service in the target market area? To determine how much of the market is currently held by competitors, try consulting the Australian Bureau of Statistics’ Census of Retail Establishments and Selected Service Establishments. Let’s say $1 600 000 per year. Step 7: What is the unexploited market potential? To determine this deduct Step 6 from Step 5: $3 000 000 – $1 600 000 = $1 400 000 per year. This tells us there is $1 400 000 of unexploited market potential annually in the target market area. Whether or not this turns out to be enough market potential to warrant a start-up depends on how well the business model stacks up. Another way to estimate market size is to use an equivalent or similar substitute. Look for information about a comparable product in the same market. Alternatively, look for information about the same product in a different market. Estimating market size by making comparisons like this works well for parallel opportunities and new market opportunities. For example, the introduction of a new idea in the UK can provide clues about market size for the same idea in Australia. Similarly, sales turnover for a franchise in Newcastle can be adjusted for differences in demographics to estimate market size in Hobart. Estimating market size for a completely new product or service is especially difficult because there is no information about similar products in comparable locations. For a new idea to succeed, you need enough customers willing to spend enough money to provide sufficient revenue to cover expenses and make a profit. Therefore, determining how many potential customers exist and their propen- sity to make a purchase is an essential part of discovering if your idea is commercially feasible. There is generally information about how many customers there are but very little information available about their propensity to make a purchase. Think about what customers need, the way they will use your product or service to fill this need, the number of potential customers in the target market area and how potential demand 45 much they are prepared to pay for it. You are looking for clear-cut answers to the following questions: What is the need that your product or service will satisfy? Why is this need important? Who will buy your product or service if you can satisfy this need? What price would customers be prepared to pay? This will depend on the importance of the need to them and how well your idea satisfies it. How many potential customers are reachable and receptive in the target market area? What are their likely annual purchases in units and dollars? Evaluating the size of the market is an essential part of evalu- ating potential demand. Will your idea appeal to just about every- body resulting in a very large market? Perhaps it will appeal to one person in every household or business resulting in a somewhat smaller market. Or is your idea targeted at a highly specialised or limited market segment such as households with children under two years of age who do not attend regular daycare? A limited market involves more risk than a larger one because small or local markets cannot sustain high development costs or complex market research making it more difficult to launch and exploit an idea. Similarly, high promotion, distribution or service costs are not usually compatible with ideas of limited market size because higher costs and fewer potential customers make for limited profits. Never- theless, niche business opportunities are possible in small markets. Ideas in which flexibility and innovation are at a premium, close supervision and exacting quality are essential, or custom or person- alised service is required, can be fertile ground for niche business opportunities. Market growth Whereas market size refers to the relative potential of the current market, market growth refers to how market size is expected to 46 discovering new business opportunities change over the next few years. It is important to be clear about market growth because one of the biggest mistakes that new business operators make is to forecast unrealistic market growth rates. Even if substantial growth in market size is likely it does not automatically follow that you will be able to capture it. The figure below illustrates five ways in which market growth can be characterised. The top line represents a rapidly expanding market. It is not only expanding, but the rate of growth is accelerating. This is a typical growth pattern for many technology products aimed at the domestic market such as mobile phones and DVD players. The next line also represents an expanding market, but it is taking place more slowly and the rate of growth is constant. The flat line represents a market that remains steady. It is neither increasing nor decreasing. The next line represents a slow steady decline in market size and the last line represents a market that is shrinking rapidly like the market for cassette players following the introduction of compact discs. Over the next three to five years, do you think the market size for your idea is going to increase, remain constant or decline? An expand- ing market clearly implies more opportunities for new businesses and the possibility of greater financial returns. A declining market usually means the opposite. A constant market size would appear to be of low or modest risk for a new player. However, if competitors are Figure 3.1 Market growth 250 200 Market size 150 100 50 0 1 2 3 4 5 Years potential demand 47 a serious threat, you might struggle to capture market share unless your idea has significant competitive strength. In order to reach its fullest potential, an idea that enjoys a very large and rapidly expand- ing market needs to be in the hands of someone who has the expertise and the resources to fully exploit such an opportunity. It is very chal- lenging to launch a new business in the first place and more so if you find yourself trying to keep up with a fast-growing market.

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