Now that you have these power tools to use as you analyze your business ideas, Rich discusses three final questions to use as a stress test before you start a business.

Over the years I’ve created dozens of products and services. In the process, I’ve realized that it can be a chore to decide where to place your resources. I’ve learned to ask myself three basic questions:

·         What is mandatory to play?

·         What is necessary to compete?

·         What is required to win?

The exercise is wonderfully simple: identify the various functional pieces or features of your product or service and filter each one of them through these three questions. This short but powerful exercise puts you in a position to very specifically understand what you need to do to succeed—and when.

First things first, what actions do you need to take to get into the space? What is mandatory to play? You can’t win a game you’re not in. Once you’re playing, though, you can focus your remaining resources on the next steps. How do you stick around and compete? Finally, with your foot in the door and your feature set growing, what do you need to do to win? What differentiates you and your product from the competition? This line of questioning will help you stay focused and keep you from exerting energy on activities that don’t give you direct value.

Let’s look at GRB.

1)      What is mandatory to play?

Your brother-in-law is your channel connection, but it’s time to lock it down. Get the contract signed and ready to go. Where will you keep your inventory and make your product? And are you sure it tastes good?

2)      What is necessary to compete?

Look at what it will take to finalize your pricing, create inventory, get shelf space, and establish a sales force. And then, watch your timing.

3)      What is required to win?

Now it’s time to concentrate on the shape of the bottle, the colors on the label, personal endorsements, and value proposition (vitamins and minerals, remember?). Buy billboard space! Set up magazine ads! Get on Oprah!

Don’t let the simplicity of this test fool you. You really don’t need to overanalyze your idea or over-engineer your product. Stick with the essentials to play, compete, and win.

Porter’s Points – Play, Compete, Win

• Your resources are valuable to you and the success of your venture – at any stage of the game. Thoughtfully determine where you will expend them.
• First things first—ALWAYS!

That does it for Chapter 3: Power Tools.  Next we move to Chapter 4: Got Gas? 

As you evaluate your business ideas, it’s important to set rules for yourself about the kind of business you would like to be involved in.  Rich shares his four rules today.

The following is a list of questions I’ve developed to assess an opportunity. These questions have, as a result of my experience, taken on the form of rules; and in order for me to act on an idea, it must conform to all or most of my four fundamental rules. Over the last 20-some years and 27 startups, I’ve assimilated a lot of knowledge from colleagues and partnerships, and each of my rules has come as a result of trial and error. Stated another way, life works best when I don’t break my rules:

• Is the business opportunity transactional?
• Will I own the customer?
• Is the opportunity digital in nature?
• Does the opportunity ride a wave?

Let’s evaluate my GRB idea against this tool and see how it stacks up.

Is selling gourmet root beer transactional in nature?

GRB is not a transactional business. You will manufacture your product and sell it to a distributor.

Don’t confuse this idea of a transactional business with the traditional understanding of business transactions. Credit card companies are a great example of a transactional business. They sit between you and a vendor. You use the credit card to buy a product. The credit card company pays the vendor for the product. You pay the credit card company a premium to use its money. The credit card company carries no inventory. It collects interest and fees from all parties 24 hours a day, 7 days a week, 365 days a year.

Will you own the customer?

GRB can own the customer, if it chooses to. Owning the customer is paramount. It allows you to do the following:

1)      Create an enduring business opportunity.

2)      Fix problems that may arise.

3)      Market directly to your customer.

4)      Offer services and support to a customer that will greatly differentiate your product.

Your ability to get face-to-face with your customer and establish a bond beyond the merits of your product is critical. In keeping with our GRB example, you could potentially own the customer (retail stores) if you choose to bypass the distributor and sell directly to the end user. Is owning the customer important enough for your business to go direct?

Is the opportunity digital in nature?

No. Root beer is digestive in nature. Yes, that was an easy shot, but the fact is, root beer requires warehouse space. Root beer requires inventory. At this point in my entrepreneurial career, I’m not interested in running a store. I prefer digital assets, for example: software development, services (like web hosting and SEO work), and, my favorite, websites. But that’s my rule. What’s yours?

Is root beer at the front end of a wave?

No. Root beer and other soft drinks have been around for years. However, a healthful, all-natural gourmet root beer could ride the baby boomer health craze wave. Keep in mind, sometimes waves exist, and sometimes you make them.

It took me years to distill my experiences into four simple rules. They are by no means an-end all or catch-all. There have been times when I have broken my rules. Case in point, Cyclone Trading Co.—a golf equipment exporting company. While it wasn’t digital, Cyclone was incredibly transactional, I owned the customer, and I was riding a wave. The company was a success.

In the end, my rules cannot be your rules. You need to discover your own criteria for success. The important point is to make the rules yours, and make them work for you.

Porter’s Points –Rich’s Four Filter Rules List

• Create your own list of rules. They will evolve as you gain experience.
• Stick with these rules as closely as possible. You may need to revise them or ignore them along the way–but always do so with forethought and purpose.
• Tapping into the expertise and experience of others as you consider your rules is a valuable resource. But at the end of the day, they’ve got to be yours.

Tomorrow we’ll learn how to play, compete, and win when starting a business. 

Along with Porter’s Five Forces Model, Rich uses the Competitive Matrix to analyze business ideas. 

This tool is exceptionally helpful when it comes to determining the gaps your gourmet root beer can fill in the marketplace. Below I’ve shared a hypothetical example of GRB’s regional analysis for the U.S. market. The clouds are your competitors. Their placement on the chart corresponds with their geographic location and price point. The analysis indicates GRB has a great opportunity for product sales in the Southwest across the price spectrum and a solid opportunity for product sales in the Northwest at the lower end of the price spectrum. You can run this analysis for a number of different areas of interest, including but not restricted to:

·         Location

·         Demographic

·         Price

·         Distribution method

I typically run the model three or four times with relevant pairs; for example, distribution method and price or demographic and price. Do your research online or on foot–any way you can. Learn about your competitors, and then apply what you learn to the matrix.

After running your idea through this process, the answers will tell you if you need to tweak your product game plan. My strong recommendation is to fill a profitable niche or hole in the market and not go up against the big boys—at least not yet. If your goal is to be purchased by a larger competitor, try not to overlap with what they are doing. Rather, complement their products and services and give them a reason to purchase your company. (We flesh this idea out more completely in chapter 19, “No Exit Strategy?”.)

Porter’s Points – The Competitive Matrix

• Do not overlap your product or services with competitors if your target is a sale. Overlapping invites them to stomp you out; complementing invites them to buy you out.
• Depending on your product, conduct a regional, price range, distribution, or demographic analysis of your competitors. Find where you can fit in, map it, and plan on it.
• Run this model three or four times with different pairs of indicators. Go out and do research!

Today we finish analyzing Rich’s hypothetical root beer business with Porter’s Five Forces Model.  Yesterday we examined the impact of industry competitors, suppliers, and buyers. 

#4—Substitutes

This category deals with the threat of substitute products or services.

Q: Is there a feature of your root beer that will compel consumers to drink yours over other soft drinks?

                A: GRB includes vitamins and minerals, and tastes great! (+)

Q: Can your customers drink something other than root beer?

                A: Yes. There are gallons of other options. (-)

Although this seems to even out, it’s not quite as cut-and-dried as that. The truth is there are thousands of substitutes for your product: other root beer, other soda, juice, milk, water, or even nothing at all. Because of the weight of this negative aspect, the overall score for this force is negative as well. (-)

#5—Potential Entrants

How difficult is it to enter the space? Do you have an advantage over the competition? Once in, how do you plan to keep others out? Of all the factors to consider, this is the most important. I call it “Barriers to Entry.” Also, when I draw the model I include another box: “Channel.” I always pay particular attention to the power of the distribution channel, or lack thereof. The following questions will help you understand the concept more fully.

Q: Can anyone make root beer?

A: Yes.

Q: How expensive is it for someone else to enter the GRB space?

A: Not expensive at all. (-)

Q: Is it expensive for your buyers to switch from GRB to another brand?

A: No. The store just has to clear the shelf and replace my brand with my competitors’ product. (-)

Q: Do you have access to an established distribution channel?

A: Yes, I have an exclusive agreement with all distribution channels in my target region. In fact, my brother-in-law controls the beverage distribution for all the food chains in my area. (+)

The overall score for this force is a negative. (-) But you must take into consideration your exclusive channel agreement. The power of this positive may be enough to convince you to enter anyway.

On your whiteboard diagram, write a “+” next to Potential Entrants.

Tallying up the overall scores, we come up with a grand score of 2 positive, 3 negative. Do these results mean you should avoid the venture? Not necessarily. The information you’ve gained from this exercise is a valuable assessment of the competitive landscape–you know where you are vulnerable, where you need to apply focus, and what your strengths are. You now have a wide variety of things to consider. Perhaps your assessment ended up all negatives except for one area: but if that one area is powerful enough, your idea may still be worth the effort! 

I have colleagues who have made millions on a venture that scored all negatives. They had to work very hard and very long before they were able to make a profit, but they did it! If you look at your whiteboard and see a plethora of pluses scattered across the boxes, it’s indicative of a wave! It will be easier and faster to get the venture up and running. Conversely, the more negatives you have, the more time it will take to make a profit.

Porter’s Points – The Five Forces Model

• The Five Forces Model is fast. Use it during your idea stage to test what you plan.
• Just because an idea scores mostly negatives doesn’t make it a bad idea. Negatives mean you will have to work harder, smarter, and longer. Decide if you are up to it; if not, test some other ideas to find a wave.
• Use the Five Forces Model with the Competitive Matrix in the next section to really get a grip on your market and make plans for success.

Now that you know how powerful, yet simple, this model is, try using it to analyze your own business idea. 

Today we begin learning about Rich’s favorite power tool – Porter’s Five Forces Model.  We’ll walk through a hypothetical example to give you an idea of how the model is used in starting a business.

The Five Forces Model[1] is one of very few things I learned in MBA school that I still use frequently. Michael E. Porter is a professor at Harvard Business School, and is considered a leading authority on competitive strategy. His model can look a bit intimidating, but it is the first tool I use to do a quick evaluation of a business idea. It provides an overview of how viable and profitable the venture could be. Running this model should not be a laborious process. I will demonstrate how simple it is.

First, here’s a quick rating system that helps when using this tool. For each force, you will come up with several questions. The answer to each question will receive a positive (+), negative (-), or neutral (o) result, ending in a final, overall score for each force. To further clarify, I’ll create a fictional company, GRB—in honor of the gourmet root beer that I love!

Porter’s model include five forces:

·         Industry competitors

·         Suppliers

·         Buyers

·         Potential entrants

·         Substitutes 

#1—Industry Competitors

The first step is to ask some specific questions regarding the competition that occupy the space you want to enter. It’s important to remember that every venture will require different questions, but this will give you a good place to start.

        Q: Who is competing for market share in the Gourmet Root Beer space?

A: Four other companies, but they are all in geographies other than my target sales region. This results in a positive (+) score for this question. Place a plus on your diagram next to “Industry Competitors.”

Q: Is there a tenacious rivalry among competitors in the industry?

A: No. It seems to be a friendly and cooperative rivalry. No one is bristling at the mention of another company’s name, and the advertising hasn’t become intense. Place another + next to “Industry Competitors.”

As a side note, I find that too many people don’t really understand competition. At first glance, you might think two companies have a spiteful rivalry, but it’s actually friendly banter. Make sure you do your research here. Take a second look. Is the competition in your industry being fruitful or involving vicious catfights? Competition is good, as long as it isn’t so brutal as to squash your chances of entering the market. (See Chapter 18, “Dancing with the Devil” for more on quality competition.)

Q: How much will you need to spend on shelf space or advertising to differentiate your product?

A: Focused advertising within a target market will help the product take hold and gain popularity. (+)

Q: Is the market growing rapidly or is it dog-eat-dog?

A: A surge of interest in specialty drinks has provided more than enough market to go around. (+)

Four positive ratings result in an overall rating for this force of (+).

#2—Suppliers

In this category the model refers to the bargaining power of suppliers and how they will impact the cost of material required to develop your product. Put another way, how much power do I have over the suppliers?

Q: Are there multiple suppliers available?

A: Yes. (+)

Q: Can you exert influence over the sugar supplier to get a better price?

A: No. Sugar is a commodity: unless you are able to lock in a long-term contract for huge quantities, the price will remain the same. (-)

Q: Can you negotiate a better price than the competition for sugar?

A: No. You’re not going to buy enough product to get a better price. (-)

The overall score for this force is a (-).

#3—Buyers

Now analyze the bargaining power of the buyers. In this instance, the buyers are the stores and other vendors that will buy your root beer.

Q: Do your target buyers have the power to force the price of your product down?

A: Yes. If you don’t lower your price, they will likely buy a competitor’s product. (-)

                Q: Can you command a premium for your product?

                A: No. Buyers will take their business elsewhere.

The overall score for this force is a (-).

We’ll cover the remaining two forces tomorrow!

So now that we’ve talked about how to come up with great business ideas, Rich and Ron introduce us to some helpful tools that you’ll need as you begin to build a business.

In our offices we keep a drill brace manufactured in the 1950s like what Rich and I both used as kids. It’s one of those hand crank jobs you don’t see around very often nowadays. It’s a functional invention and eventually gets the job done – but it is painfully slow compared to today’s cordless power drills.

In this chapter, Rich will provide you with several power tools to help you build your business. Rich and I have used these tools over and over again. They are the basics, tried and true. And although they can be a little “academic,” the Five Forces Model and the Competitive Matrix are both effective when you are weighing the pros and cons of a new venture. In addition, Rich will provide some additional power tools—handy processes that have worked repeatedly for him. With all of his startups, Rich has used them as quick sanity checks to help determine the viability of an idea. They have become part of the way we think and act. Taking a practical approach to the models, Rich will walk you step-by-step through a hypothetical business in an effort to help you grasp how to use the tools to analyze the opportunity you’re considering.

We’ll start tomorrow with Rich’s hypothetical business and the Five Forces Model to give us an idea of the process.