Four areas you need to study before entering a new business

In this post I will review the 4 C’s analysis that goes to support the decision to enter a new business. Entering a new business is one of the main activities in strategic planning and implementation. Here we go:

  1. Context. We’ll start off with context. Your proposed business venture will live within a certain world. We need to define this world and clarify it and in doing that understand how the business may be affected by it. In analyzing context I use an acronym PESTEL that I like to use to break things down. Let’s examine this:
    1. Politics: The political environment could support or become an obstacle for your business. There are tax requirements, government incentives and export restrictions to contend with amongst other things. You need to make sure that the political climate supports your proposed business venture.
    2. Economics: How is the economy doing? Is it the right time to make a major investment if the economy is not doing well? Sometimes a weak economy can present new opportunities such as a lower priced version of a popular but more pricy product.
    3. Society and culture: There is a culture for instance that news is or should be free on the internet. This presented a challenge to some news organizations when they wanted to move into online versions of their print offerings. Alternatives: more advertising, specialist news and information that you don’t get in a normal paper.
    4. Technology: this can offer some big challenges or some new opportunities. All types of book publishers are emerging now because electronic books are way easier to produce than print books. Big online retailers like Amazon made it even easier to distribute these books with their online stores.
    5. Environment: are there any environmental considerations to take into account regarding your business? A few years ago pesticides for weeds were banned in some jurisdictions. This was devastating for those companies that used them but it opened up new opportunities for environmentally friendly products and services that removed the weeds just as effectively. Companies that saw that coming and prepared for it were able to cash in on the trend.
    6. Legal: some lines of business are heavily regulated such as the financial and food services businesses. There are permits, licenses, disclosure, health and safety and other potential requirements to consider. Make sure all are covered and specialist legal advice is obtained for the particular line of business you are considering.

 

  1. Competition. Here we try to paint a picture of the playing field for the line of business we are thinking of getting into. For this I lean on Porter’s five forces:
    1. Current Competitors: who are the current big players in this new line of business? How big do you have to be to compete with them? How can you compete with them? Do they have any weaknesses?
    2. Potential Competitors: Is it easy for new people to enter this business? If so then it is not just the current but also potential competitors that you have to worry about. If a new technology is emerging that will make it easier for you to get into this line of business, then perhaps others are thinking the same. Is it possible that this line of business will be overcrowded? Or are the barriers to entry really high?
    3. Power of Suppliers: If you are a diamond retailer, the suppliers basically decide what they will give you to sell (or so I’ve heard). That’s because mining for diamonds is controlled by a handful of suppliers and the product has strong demand. If on the other hand, your business requires a lot of printed material, there are many suppliers that provide this service and you have a lot of choice. This means that your business is unlikely to be interrupted if any supplier where to go bankrupt and no supplier can squeeze you for more money because there is lots of competition.
    4. Power of buyers: this is the other side of the coin. If you want to sell a commoditized product and there are many players like you in the market, then buyers have a lot of clout. They can shop around and it makes no difference to them whether they buy from you or someone else. If there is not much demand for the commodity then making a nice profit becomes even more difficult. The only way you can have steady business is if you add exceptional service to the equation. But is that possible and sustainable?
    5. Threat of substitutes: You may be thinking of providing a great product that no other company is offering but, are there substitutes for it? Allow me to illustrate. Let’s say that you are thinking of setting up a chain of mini-putt outlets for families in your city.  At this time on one else has this kind of business. However, your competition is not only other mini-putt centres. It is also other forms of family entertainment such as movie theatres, fun fares, arcades and so on.

 

  1. Customer. Now we turn our focus on the target market. Whom are we thinking of targeting with this new business that we’re thinking of getting into? Here we need to look at demographics and segmentation. For instance baby boomers, all those people who were born between 1946 and 1964 have started retiring (2014) and will continue to retire in large numbers for the next little while. There is a lot of demand for retirement financial planning, retirement homes and retirement entertainment. You may want to segment this group into different ones based on income. Higher income groups may provide demand for luxury holiday cruises. A lower income group may have demand for a well serviced condo complex of 500 square foot condos in a suburban area close to a hospital where development land is cheaper to obtain.

 

  1. Company. Ok, now that you have considered all things external to your company, you need to look inwards. Can you handle this new business? The best way to approach this is to do the time honoured SWOT analysis.
    1. Strengths: What are your company’s strengths? Do you have the money, the know how to get into this new business? Can you buy that knowledge?
    2. Weakness: Do you have any weaknesses that could potentially derail your plans? What can you do about those?
    3. Opportunities: does your company have something that presents it with unique opportunities?  For instance, you could be in the software business having focused on custom software for large clients for many years. After all these years you have developed a team of developers who have the skills to create an off-the-shelf killer app. This would be a new way of doing business and give you access to new clients who would buy this base app and lead to even more customized work.
    4. Threats: are there any major (or minor) threats looming on the horizon? This could come from different directions. It could be an economic or political threat. It could be a competitive threat. It could also be a threat from within if you have labour issues for instance.

So there it is in a nutshell – 4Cs – Context, Competition, Customer, Company. Hope you found this useful.

Muneer

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