The question that is asked of me as an entrepreneur more than any other question is; “Hey, I’ve got this really cool idea. What do you think? Is this viable? Will it get me to cash?” Coming up with an idea is the easy part. The harder part is figuring out what is a good idea and what is a bad idea. One of the first resources I use when I am vetting ideas is my modified version of a “Porter Model” based on Micheal E. Porter’s Five Forces Model. There is an excellent tool available on my website where you can use this tool hands-on! Check out the Zig Zag Principle Tools!
In my model there are six factors to look at. These are:
- Barrier To Entry
a. How difficult is it to enter this market space?
b. Do you have an advantage over the competition?
c. Once in, how do you keep others out of the space?
a. How much power do you have over the suppliers?
b. Are there multiple suppliers available?
c. Can you get a better price on your supplies than the competition?
a. Is there a feature of your product or service that would compel customers to buy your product over the competition?
b. Is there a substitute that will compete with your product?
a. What is the bargaining power of the buyers? Do your target buyers have the power to force the price of your product down?
b. Can you command a premium price for your product?
a. Who is competing for market share in your product? Is the market saturated?
b. Is there a rivalry among competitors in the industry? Not that competition can be a good thing unless is squashes your chances of entering the market.
a. Do you have access to a distribution channel? Channel is probably the most important of all the factors. If there is not a market need for your product and a way to get ti to the customer, then your business will fail. In the businesses I create, I will not move forward until I have fully figured out the channel. Most people thing they will build the product, then try to sell it. The correct order is to ensure the market will buy your product, then determine how you will deliver it to your customers, and only then go ahead and build it.
For each factor you will come up with several questions similar to what I have posed above. The answer to each question will receive a positive (+), a negative (-), or a neutral (o) result, ending in a final overall score for each factor. As you look at the positives and negatives of your business idea, you will be able to see rather clearly if it is a idea that works or just a pipe dream.
As you look for ideas, there are a couple of things you should remember to avoid. The first is what I refer to as “the rabbit syndrome.” Some people see ideas popping out everywhere they look. They’ll spot a great idea or concept and proclaim, “Look! A rabbit!” Then they see another and another and another (if you’ve spent anytime in rabbit country, you know they’re everywhere). They chase one rabbit after another and end up so busy chasing every rabbit that pops up that they never actually drive to profitability. At some point you have to settle on one rabbit and chase it as hard as your can—hopefully to the successful end.
Another mistake you want to avoid is falling in love with an idea to the point where you can’t see its deficiencies. In 1989 I contributed my fair share to making my first $2 million business mistake. So what was it?
Rich Christiansen $2MM Channel Lesson
We did what so many eager engineering types do—we built a way cool, exciting, leading-edge product (in this case, a digital power line transmission device), and then tried to sell it.
In our engineering minds, we just knew customers would buy these boxes by the truckloads. We had attended the trade shows and been mobbed by fellow engineers who thought our idea was awesome, which convinced us this product was going to be a barn-burner. Everyone told us we were so smart and this was the coooooolest technology ever.
Well, cool technology does not necessarily lead to actual customers, and in 1990 the company went belly up! Why? Because our product did exactly what a $20 power cable could do, only our box cost $995 apiece. And, in our zeal, we engineers never stopped to consider that, if given the choice, people would opt for the $20 cable, even though our technology was “better.”
And, lest you think engineers are the only ones who can’t see beyond their great ideas, I have an associate who is passionate about building ultra-modern cement homes. He has wanted to create a business around these buildings because he is passionate about the benefits they provide. The only problem is that he lives in a community where most homes are built using wood, bricks, stucco, and traditional architecture. In spite of all his passion, the people in his community have not caught on to the idea of building cement homes. You do not want to create a product in which consumers have no interest. If you don’t have a channel to sell your products, your business will fail.