Opportunities can present themselves in numerous ways. An unmet customer need, a product or service not yet available in an untapped market, a proven idea and model available via licensing, are all common ways that entrepreneurs can capture business opportunities. Regardless of the means, a lot of questions need to be addressed in order to understand whether an opportunity is indeed real or illusory, achievable or out-of-reach, properly timed or too early or late. Below we list some key questions meant to serve as a basis for moving forward in the opportunity assessment process
The 5 Cs
Who is the customer? Why do they buy? When do they buy? How sensitive are they to prices? How loyal are they?
These are just a few of the first questions we need to answer when examining whether an opportunity is real – after all, any real business opportunity will have real customers, who can be defined along these lines. Typical demographic info (age, gender, income, etc.) are a good start and are often publicly available; however, understanding the psychographics (personalities, values, interests, opinions, attitudes, and lifestyles) are often just as important. Without properly defining the customer, an opportunity cannot begin to be weighed.
Who is the competition (or could be)? What are they offering (and what are its advantages and disadvantages)? Do we know what their market shares are (and for that matter the size of the market)? Is their offering a direct substitute of ours? How do they differentiate themselves (from each other and from us)? How is their offering priced? What are their costs?
How are goods and services brought to market? Are direct to customer models possible? Are intermediaries (e.g., agents, wholesalers, retailers) currently utilized? What are the pros and cons of each channel? Will these change over time and will we have options as we grow?
What is the breakdown of costs (cost of goods sold, rent, labor, marketing)? What is our cost structure (fixed v. variable)? What technology solutions exist that can reduce costs? What forces can influence our costs (raw material prices; regulation/taxes; interest rates; labor unions)?
Does our company have the right product/service line and/or technical expertise to meet the unmet customer demand? What are out strengths, weaknesses, opportunities, and threats (have we performed a thoughtful SWOT analysis)?
While there are many versions of “the Cs,” (some versions add Collaborators and Climate), the idea is to have a basic framework for understanding and assessing a potential opportunity. The Cs framework is one of the most fundamental ones taught in all business school curriculums. Thoroughly addressing these questions will provide some sense as to the realness and tangibility of a potential business opportunity.
The 5 Forces
Porter’s Five Forces is another enduring framework taught in business schools around the world. This particular one addresses industry analysis, and is critical to assessing opportunities that involve any industry new to an entrepreneur, or segment of an industry that is relatively foreign. The five forces refer to the five distinct elements of any industry, and specifically the threat that any one of them could pose on a new entrant. These elements are: potential entrants, suppliers, buyers, substitutes, and rivalry. It is important to understand that the first four of these help to define what the level of intensity of rivalry amongst competitors is. A high level of intensity of rivalry is actually indicative of an attractive industry. This is important to remember!
1) Threat of potential entrants
Fairly self-explanatory, but some things to consider when assessing this threat are: is there even room in the market for more entrants (this is a market sizing/growth question at its heart); what are the barriers to entry (e.g., what investments and capabilities are intrinsically necessary to even begin participating in any meaningful manner). The typical R&D costs for synthesizing a new pharmaceutical, for example, vastly outweighs the typical cost to procure and outfit a food truck. Very different barriers to entry…
2) Supplier Power
How much bargaining power and/or influence do suppliers wield in this industry, particularly when it comes to pricing, supply chain reliability/ability to cause holdup, flexibility, quality, etc. How is the supplier market itself divided (e.g., are there many different competing suppliers or just a handful that control much of the market)? How customized/differentiated is your product (as this will influence terms)? All of these aspects determine a supplier’s power over an industry and can impact profitability of the other constituents.
3) Buyer Power
Similar in vein to supplier power issues, your end buyers/customers can wield a certain degree of influence that may impact your company’s profitability. How easily can customers switch who they get the product or service from (e.g., what are the switching costs (if any) for buyers)? How much influence do they have through social media? What demands can they make over quality? How price sensitive are they?
4) Threat of Substitutes
MP3 players replaced CDs, Cars replaced buggies, and Netflix has replaced VCRs. All are examples of substitute products/services from one industry replacing those from another industry. Understanding which substitutes exist and pose a threat to your product/service is an ongoing challenge regardless of what stage your business is at. In analyzing this concept, the customers’ perceptions of your product and similar products is an inevitable area that one must get to know. ¬Ò
5) Intensity of Rivalry of Competitors
The fifth and final force that shapes an industry’s attractiveness is really a culmination of all of the previous four forces described. The extent of profits to be reaped and potential growth of profitability within the industry will drive the number of competitors in an industry and the extent to which they compete with one another. It’s important to realize therefore, that a more attractive industry will tend to exhibit higher intensity of rivalry.
In summary, the 5 Cs and the 5 Forces are well-known analysis frameworks taught in major business school curriculums. Volumes of literature have been written on both, as they both have profoundly impacted how we assess opportunity. Hopefully, this will provide a step in the right direction for you as you progress through your journey as a new entrepreneur.