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Chapter 2
Developing and Screening Business Ideas
Key Words
First screen—a mechanism for quickly assessing the merits of a business idea before subjecting it to full feasibility analysis and business planning
Brainstorming—a catch phrase that generally describes a session targeted to a specific topic about which a group is instructed to come up with ideas
Focus group—a gathering of 5 to 10 people who are selected because of heir relationship to the issues being discussed
College drop-ins—involves paying college students to host a party at their campus and providing them with a budget to buy food and snacks. During the party, the hosts interview and videotape other students about specific market issues or business ideas
Barrier to entry—a condition that creates a disincentive for another firm to enter a company’s niche market
Chapter Overview
This chapter walks students through the process of testing specific ideas to determine if a good business opportunity truly exists. The chapter is divided into two parts: (1) a focus on the three most common sources of new business ideas and (2) the introduction of a tool called the “First Screen.”
An explanation of the components of the First Screen is included, including resources that entrepreneurs may use to locate required information.
Chapter Summary
1. / The three most common sources of new business ideas include: changing environmental trends, unsolved problems, and gaps in the marketplace.2. / The most important environmental trends to follow, in the context of discovering new business ideas, are economic trends, social trends, technological advances, and political action and regulatory changes.
3. / Many companies have been started by people who have experienced a problem in their lives, and then realized that the solution to the problem represented a business opportunity.
4. / Gaps in the marketplace exist when there are products or services that consumers want but aren’t available through larger firms or aren’t available at all.
5. / Three techniques that entrepreneurs use to generate new business ideas include: brainstorming, focus groups, and library and Internet research.
6. / The most common way to identify business ideas quickly is through brainstorming. Technically, a brainstorming “session” is targeted to a specific topic about which a group of people are instructed to come up with ideas.
7. / A focus group is a gathering of 5 to 10 people who are selected because of their relationship to the issues being discussed. Although focus groups are used for a variety of purposes, they can be used to help generate new business ideas.
8. / Often, the best new business ideas emerge when the general notion of an idea is merged with extensive library and Internet research.
9. / Once a business idea, or several ideas, have been chosen, it is important to have a way to quickly assess the merits of the idea, before subjecting the idea to a full feasibility analysis. The First Screen provides a mechanism for quickly assessing the merits of a business idea.
10. / Although completing the First Screen does take some research and analysis, it is not meant to be a lengthy process. It contains 25 items and should be able to be completed in less than an hour.
Chapter Outline
I. Introduction
II. Three Most Common Sources of New Business Ideas
- Changing Environmental Trends
i. Economic Trends
ii. Social Trends
iii. Technological Advances
iv. Political Action and Regulatory Changes
- Unsolved Problems
- Gaps in the Marketplace
III. Techniques for Generating Ideas
- Brainstorming
- Focus Groups
- Library and Internet Research
IV. First Screen
- Part 1: Strength of the Business Idea
- Part 2: Industry-Related Issues
- Part 3: Market and Customer-Related Issues
- Part 4: Founder- (or Founders-) Related Issues
- Part 5: Financial Issues
Chapter Notes
I. Introduction
· Many businesses fail, not due to a deficit of commitment and hard work, but because the idea wasn’t a good one to begin with
· New business ideas require good detective work to determine if they are indeed viable
· There are techniques that entrepreneurs can use to explore the three most common sources for new business ideas
· The First Screen is a tool that provides entrepreneurs with the flexibility to consider multiple business ideas, rather than settling on a single idea from the outset
II. Three Most Common Sources of New Business Ideas
· The first step in creating an effective business plan is selecting an idea that fills a need and provides unique value to the customer
· It is difficult to get people to change habits and behaviors to try a new product even if the new product is better or less expensive
a. Changing Environmental Trends
o Changes in these areas often provide the impetus for new business ideas
o It is important to distinguish between trends and fads
o Trends are interconnected and should be considered simultaneously when brainstorming for new ideas
i. Economic Trends
· When the economy is strong, people are more willing to buy discretionary products and services
· It is important to evaluate who has money to spend and what they spend it on (i.e., the increase of women in the workforce fueled a number of boutique clothing stores targeting professional women)
· An understanding of economic trends can also help identify areas to avoid (i.e., the advent of online auction sites like eBay has made it easy for people to sell used musical instruments, making this a difficult time to start a company selling musical instruments)
ii. Social Trends
· Entrepreneurs must also understand the impact of social trends on the way people live their lives and the products and services they need
· Often products do more to satisfy a social need than the more transparent need the product fills
iii. Technological Advances
· Technological advances provide an ongoing source of new business ideas
· It is important to recognize how technologies can be used to help satisfy basic or changing human needs
· Once a technology is created products often emerge to advance it (i.e., the Apple iPod has created an entire industry that produces accessories)
iv. Political Action and Regulatory Changes
· New laws create opportunities for entrepreneurs to start firms to help companies and individuals comply with these laws
· Occasionally, changes in government regulations motivate entrepreneurs to start firms that differentiate themselves by “exceeding” the regulation (i.e., an “extra safe” crib)
· Political change can also create an environment for the emergence of new business ideas (i.e., threat of terrorism resulted in many firms becoming more security conscious and requiring products to meet their changing security needs)
b. Unsolved Problems
o Many companies have been started by people who have experienced a problem and, in the process of solving the problem, realized that they were on to a business idea
o Advances in technology often result in problems for people who can’t use the technology in the way it is sold to the masses—entrepreneurs who can develop modified products and services can often capitalize on this opportunity
o One technique that entrepreneurs use in solving a difficult problem is to find an instance where a similar problem was solved and then apply that solution to their problem
c. Gaps in the Marketplace
o There are many examples of products that consumers need or want that aren’t available in a particular location or aren’t available at all
o Key large retailers compete on price and target the mainstream customer, leaving gaps in the marketplace that boutiques and specialty shops can fill
o A related technique for generating new business ideas is to take an existing product or service and create a new category by targeting a completely different target market or geographic area
III. Techniques for Generating Ideas
· Some people recognize new business ideas through casual observation, intuition, or even serendipity or luck
· Some people use the three sources of business ideas to deliberately try to generate new business ideas
· This section focuses on three techniques that people utilize to explicitly try to generate new business ideas
a. Brainstorming
o Brainstorming is the most common way to generate business ideas
o A brainstorming “session” is targeted to a specific topic about which a group of people are instructed to come up with ideas
o In brainstorming, the leader asks participants to share their ideas and react to the ideas of other participants in a lively, freewheeling manner
o A flip chart or whiteboard is often used to record ideas
o One particularly effective approach to brainstorming is to utilize the three sources for new business ideas as a way of organizing the discussion
b. Focus Groups
o A focus group is a gathering of 5 to 10 people who are selected because of their relationship to the issues being discussed
o Focus groups usually work best as a follow-up to brainstorming, when the general idea for a business has been formulated
o Focus groups are usually conducted by trained moderators who know how to keep the group “focused” and generate lively discussion
o One hybrid type of focus group is the “College Drop-In,” where college students are provided with a food and snack budget in exchange for the opportunity to hold brief videotaped interviews with partygoers about specific market issues or business ideas
c. Library and Internet Research
o Entrepreneurs would be making the mistake of overly linear thinking to assume that the process of researching does not begin until after the business idea has been chosen
o Often the best ideas emerge when the general notion of the idea is merged with extensive library and Internet research
o The best approach to using the library, an often underutilized source of information, is to discuss your general area of interest with a reference librarian
o Internet research is also important, including the use of search engines and “alerts” using keywords that pertain to your topic of interest
IV. First Screen
· Once a business idea has been chosen, it is important to have a way to quickly assess the merits of the idea before subjecting it to full feasibility and business plan
· The “First Screen” is an entrepreneur’s first pass at assessing the feasibility of a business idea
· Completing the First Screen is not intended to be either a lengthy process or a shot in the dark
· The First Screen contains 25 items and should be able to be completed in less than an hour (the five items per topic are highlighted below and in the text)
a. Part 1: Strength of the Business Idea (five criteria)
o (1) High potential ideas are typically drawn from one of the three sources of business ideas and are timely in terms of market introduction
o (2) For an entrepreneur to capitalize on an opportunity, its window of opportunity must be open
o (3) A new idea must “add value” for its buyer or end user in some appreciable way
o (4) New business ventures aimed at replacing products that people are reasonably satisfied with may have a difficult time succeeding
o (5) Investors are typically skeptical of business ideas that require people to make meaningful changes in behavior
b. Part 2: Industry-Related Issues (five criteria)
o Researchers have found that 8 to 30 percent of the variation in firm profitability is directly attributable to industry factors such as
§ (1) The number of competitors
§ (2) Current lifecycle stage of industry
§ (3) The growth rate of industry
§ (4) The relative importance of the industry’s products or services to its customers
§ (5) Average operating margins for the firms in an industry are also important
c. Part 3: Market- and Customer-Related Issues (five criteria)
o (1) Identification of the target market in which the firm competes is extremely important.
o A target market is a place within a larger industry or market segment that represents a narrower group of customers with similar interests
o (2) The ability to create barriers to entry, a condition that creates a disincentive for another firm to enter the company’s niche market, is an important aspect of any firm’s potential competitive advantage
§ Economies of scale
§ Product differentiation
§ Unique access to distribution channels
§ Intellectual property protection such as patents
o (3) Entrepreneurs should also consider the purchasing power of potential customers
o (4) The ease of making customers aware of the new product or service is also important
o (5) Another important issue is the growth potential of a firm’s target market
d. Part 4: Founder- (or Founders-) Related Issues (five criteria)
o The potential founder should also complete a self-assessment that is forthright and fair, understanding that few firms will score high on each of the five dimensions
o The attributes that make for a strong founding team include
(1) Experience in the industry the new venture is entering
(2) Skills as they relate to the new venture’s product or service
(3) Social and professional networks in the industry the firm will be entering
(4) Personal goals and aspirations that are consistent with the firm
(5) Likelihood that a team can be put together to launch and grow the new venture
e. Part 5: Financial Issues (five criteria)
o (1) The initial capital investment needed to start a firm is important
§ At this point, the entrepreneur should have a sense of the magnitude of the investment; exact estimates will be developed later if the idea is indeed viable
§ The average small business is started for about $10,000 with the majority coming from the owners’ personal savings
o (2) The number of revenue drivers that a business has is also important
§ Start-ups don’t want to lose focus by creating multiple revenue drivers, but the financial potential of a firm is greater if it has several ways of generating sales
o (3) The time it takes a firm to break even or recoup its initial investment is also important
o (4) The next issue to consider is to assess the financial performance of businesses similar to the one you are contemplating