There are a lot of reasons why businesses fail and we're all aware of the most commons ones like insufficient capital, poorly designed business models, lack of research and planning, etc. So for an executive in charge of business planning or an investor that is thinking of writing a check the questions is: How do we systematically evaluate a potential new business idea and improve our chances of acquiring customers and capital?
John Mullins of London Business School lore teaches there are three points of confusion that even experienced entrepreneurs and executives experience that leads to a new venture for a fundamentally flawed opportunity:
"Market" and "Industry" are often misused interchangeable and in the wrong context. A market is a group of current or potential customers that are willing and able to purchase. An industry consists of sellers (and the rest of the value chain) that bring products and services to the market. It's critical to understand the difference because thoughts on the attractiveness of a market one seeks to serve and the industry one should compete in are very different.
Sometimes people use the terms "sector" or "space" casting obscurity over the opportunity. What does the person mean by using those terms? For example in the late 1990s, entrepreneurs and investors wanted to "get into the dot.com space." Did they mean the market of consumers and customers that would use the internet for shopping, information, and communicating? Or did they mean the industry of ISPs, eCommerce companies, online publishing, etc? Looking back we now know that some of these industries were and still are unattractive because barriers to entry are low, differentiation is difficult, and business models aren't sustainable. A good business needs a large and growing market and a structurally attractive industry.
When evaluating a market an assessment must be made on the macro- (broad, market-wide) and micro-(particular to a specific segment) levels. Similarly, is the macro-industry attractive(think Porter's Five Forces) and is the micro-industry feasible (does a sustainable competitive advantage exist and is the business model economically viable?) Both levels must be examined and both require different questions and research.
Statements like "they have chemistry" or "the president of the business unit has the entrepreneurial drive" lead companies down an ill-fated path. Evaluating management should go beyond character and resumes. Do the individual players'(including investors) mission, aspirations, and risk propensity align? Does the team have the ability to execute the Critical Success Factors? Is the team connected up, down, and across the value chain?
Don't get fooled (or fired) by just a large and attractive market or a team that has been successful before, but doesn't have the right connections in the value chain. Go back to the fundamentals(all of them) and feel confident that the business you're building is based on a winning concept. Take a customer focused, fact based approach that considers the market, the industry, and the team domains on both the micro and macro levels. In the worst case scenario you realize it's a bad idea and you've just saved hundreds of thousands of dollars, years of wasted time, and a well crafted reputation. In the best case scenario you're really on to something and you're half way done with a fundamentally sound business plan!
- Nick Urbani, Managing Director of Business Development, eBoost Consulting
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