Business Plans For Dummies, 3rd Edition

Business Plans For Dummies, 3rd Edition

by Paul Tiffany, Steven D. Peterson, Colin Barrow
     
 

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Whether you're just thinking about launching your own business, are in the process of launching it, or have had a business for a while and want to put it on a strong course, Business Plans For Dummies is the guide you've been waiting for. Authors and business experts Paul Tiffany and Steven Peterson help you think through the single most important document

Overview

Whether you're just thinking about launching your own business, are in the process of launching it, or have had a business for a while and want to put it on a strong course, Business Plans For Dummies is the guide you've been waiting for. Authors and business experts Paul Tiffany and Steven Peterson help you think through the single most important document for your business. They help you set goals and craft a meaningful mission statement to guide you into the future, and they also make sure that you have a handle on financial considerations that can ultimately make or break your enterprise. Thanks to the authors' thorough understanding of what makes businesses successful in the real world, you can avoid pitfalls and profit from opportunities you may not have considered. Best of all, if you've regarded business plans merely as a necessary formality on the way to getting funding, Business Plans For Dummies gives you a new appreciation for the process of creating a business plan. Business Plans For Dummies, and the time you spend reading it, are sure to give you a manifold returns on your investment.

Product Details

ISBN-13:
9781119943884
Publisher:
Wiley
Publication date:
05/08/2012
Sold by:
Barnes & Noble
Format:
NOOK Book
Pages:
384
File size:
6 MB

Read an Excerpt

Chapter 4

Checking Out the Business Environment

In This Chapter

  • Defining the business that you're really in
  • Analyzing your industry
  • Finding out where to turn to for data
  • Recognizing critical success factors
  • Preparing for opportunities and threats


    Some men go through a forest and see no firewood.

-- English proverb

One of the most important questions you can ask yourself as you prepare to create a business plan is "What business am I really in?" The question may sound simple -- even trivial. Maybe that's why it's too often ignored. But if you can answer this basic question correctly, you take the first giant step toward creating an effective business plan.

Remember when trains, with their elegant dining cars, two-level Pullman cars, and smoking lounges, crisscrossed the United States? Probably not. But you can still catch an old movie and become a bit nostalgic for a long-lost era. Railroad companies in the '30s, '40s, and '50s thought that they knew exactly what business they were in: the railroad business. The question was a no-brainer. As it turns out, however, passengers were looking for something a little more general: basic transportation. Railroads soon found that they had to compete with interstate highways, General Motors and Ford, Pan Am, Boeing, and international airports. The forces and players in the railroad business extended well beyond ties and rails. The railroads didn't see the big picture and never regained their former glory.

In this chapter, we help you capture your big picture by defining the business that you're really in. We analyze your industry, search for critical success factors, and then give you some pointers on preparing for the opportunities and threats that may appear on your horizon.

Defining the Business That You're In

Okay, so what business are you really in? Don't say that you're in the "widget business," if widgets are what you produce; you have to go beyond the easy answer based simply on what you do or what you make. You have to dig a bit deeper and ask yourself what makes your industry tick.

  • What basic needs do you fulfill?

  • What underlying forces are at work?

  • What role does your company play?

Eastman Kodak -- no longer picture-perfect

Founded way back in 1880 by the entrepreneur George Eastman, Eastman Kodak quickly established itself as the leader in amateur still photography, selling cameras, selling film, and developing the prints that we've long since stuffed into albums, drawers, boxes, and entire closets. Where did the company make its money? Cameras were only marginally profitable. But Kodak wanted people to have cameras so that it could make money on film and even more money on developing that film.

In fact, Kodak reaped huge profits from the processing of film. The company manufactured all its own photographic chemicals and coated papers, and it owned the processing labs. Eventually, Kodak came to think of itself as being in the "chemical imaging" business, and it said so to its stock analysts and anyone else who would listen. While Kodak's executives and managers were busy patting one another on the back, new competitors -- and new technologies -- were sneaking in the back door.

As it turned out, customers weren't exactly interested in chemical images for their own sake. Nobody had a hankering for chemically coated paper or clamored for the bulk photographic chemicals that Kodak produced so well. People really wanted memories, that's all. They wanted to capture special moments and save them forever. Kodak was really in the "memories" business. And new ways of saving memories were evolving.

Then a Japanese firm came along and introduced the video camera to the world. All of a sudden, memories were made of electrons, not chemicals. Sony was soon joined by Hitachi, Matsushita, and Sharp. Given that few railroads were still around, Kodak was left to wonder what kind of train had hit it. Although snapshots haven't gone away, Kodak's exclusive monopoly on "memories" is over. The company has yet to fully recover.

You can make sure that your company isn't like the railroads by understanding the underlying forces that shape your own business environment. Start by analyzing the industry that you're in. For a closer look at your customers, check out Chapters 5 and 6. The competition gets a once-over in Chapter 7. And we take a closer look at your own company in Chapters 8 and 9.

Analyzing Your Industry

No matter what kind of business you're in, the world around you is shaped by forces that you have to recognize, plan for, and deal with to be successful over the long haul. Ivory-tower types often call this process industry analysis. You may have the urge to run the other way when anything having to do with analysis pops up. We don't want to sugar-coat this step, but we try to make the process as painless as possible.

Just how much do you already know? Take a moment to complete the Industry Analysis Questionnaire (see Figure 4-1). If you're unsure about an answer, check the ? box.

Your answers provide a snapshot of what you think you know. The ?'s that you check highlight the areas that need a closer look. In any case, it's time to jump right in, roll up your sleeves, and make a serious stab at completing your industry analysis.

The good news is that many smart people have already worked hard at analyzing all sorts of industries. Although no two businesses are really the same, basic forces seem to be at work across many industries (see Figure 4-2).

The following sections describe the most important of these forces -- those that are likely to be factors in your own industry -- and provide some hints on how you can think about these forces in terms of your own business planning.

Structure

Every industry, from fresh-flower shops to antique stores, has its own shape and structure. Following are a few tips on what to look for.

The arrangement of rivals

The number of competitors, taken by itself, has a major impact on the shape of an industry. An industry can be a monopoly (one monster company with no competitors), an oligopoly (a small number of strong competitors), or a multiopoly (many viable competitors). Actually, we made up the word multiopoly because we figured that there should be a word to represent the vast majority of industries in this competitive world. In addition to the number of competitors, you want to check out how many of the companies are big and how many are small, as well as how they carved up the various markets that they compete in.

Make a list of all the major competitors in your industry. Find out their sizes, based on revenue, profits, or some other readily available measure, and estimate their relative market shares for the markets that you're most interested in.

New technologies

Many industries are driven by changing technology. Look both at how much and how fast things are changing in your own business. Although you don't need to become a rocket scientist, it's important that you feel comfortable with the underlying technological issues that fuel the change around you. You should also find out who controls the technologies and how easily the technologies can be obtained.

Identify obsolete technologies, current technology, and a future technology in your own industry. How long were old technologies around before they were replaced? Try to predict when new technology may become important to your business. At the same time, try to keep track of any copyrights, patent protection, or special expertise that could influence the adoption of a new technology.

Can anybody play?

The cover charges that make it more or less difficult for new competitors to join the party are referred to as entry barriers. Some of these barriers are obvious -- high capital costs (lots of money needed up-front), for example, or complex distribution systems that make it hard to reach customers. Other barriers are easy to miss. Economies of scale, in which the bigger you are, the more money you make, often discourage brand-new competitors. Strong customer loyalty or high customer costs associated with changing products can also create formidable barriers for new kids on the block.

As you think about your own business, list the entry barriers that you see as being obstacles to new competitors: capital costs, distribution, organization, raw materials, new technology, scale economies, regulation, patents, and customer-switching costs, for example. Then rank these barriers, based on how impenetrable they really are. On which side of each barrier do you stand?

Cashing out

Sometimes, it's hard to leave a party, even when you really want to. How difficult is it for companies in an industry to get out of the market if they want to? The ties and attachments that keep competitors around are called exit barriers. Exit barriers can include everything from expensive factories or specialized equipment that can't be easily sold to long-term labor contracts, extended customer leases, service agreements, and government regulations.

Ask yourself how many companies have left your industry over the past five years. Try to figure out why they got out of the market and what sort of difficulties they ran into as they made their way to the exits. How many of them left voluntarily, and how many were asked to leave, penniless and in tatters?

Markets

Competition comes down to customers, and customers create markets. Ideally, the customers whom you're going after represent a market that's ripe for new goods or services. The following tips help you judge for yourself.

Just how big is big?

The size of a market tells you a lot about what's likely to happen to it over time, especially when it comes to competition. Large markets, for example, are always big news and can't help but attract competitors. Smaller markets don't get the same attention, however, and because they're easily overlooked, they often represent business opportunities. You hit the real jackpot if you can turn a small market into a bigger market by discovering some sort of usage gap -- finding a use for your product or service that no one else has thought of before.

Try to work out some estimates of the overall size of your market, based on current usage patterns. Then, while you're on this subject, try your luck at coming up with novel approaches or applications that have the potential to redefine your market. Just for fun, make some market projections based on the new uses that you're thinking about.

Growing or shrinking?

If large markets are good news, rapidly growing markets are great news, and competitors will come crawling out of the woodwork. A growing market offers the best odds for new players to gain a foothold and unseat the existing competition. As for markets that are shrinking, you can bet that the old competitors will get leaner, meaner, and more fierce. So as markets change size in either direction, the competition is likely to heat up.

Identify changes in the size of your own market over the past five years, in terms of both units sold and revenue generated. If the market is changing rapidly in either direction, look for opportunities and predict the likely effect on both the numbers and the intensity of the competition.

Choices

A quick survey of the similarities and differences among products or services in a market measures something called product differentiation. If each product looks pretty much like every other product (think sugar or drywall), you can bet that price is important to customers in what is known as a commodities marketplace. On the other hand, if each product is different and offers customers something unique or special -- from laptop computers to hot little roadsters -- product features are likely to determine long-term success or failure in the market.

Take a hard look at the products or services offered by the top three competitors in your market. How similar are they? In what ways are they unique? Think about what you can do to differentiate your own product so that you can compete in ways beyond simply raising or lowering price.

Something altogether different

Every once in a while, a completely new type of product or service suddenly makes its debut in a market, crashing the party, so to speak. The product usually comes out of another industry and may even be based on a different technology. The new product becomes an overnight rival for the affections of existing customers -- the rise of fax machines and e-mail to challenge overnight delivery, for example, or the appearance of video cameras to challenge still photography. The threat of product substitution -- new products taking over existing ones -- is real, especially in fast-changing, highly competitive markets.

Think about what your customers did 5, 10, or even 20 years ago. Did they use your product or a similar one back then, or did a completely different kind of product serve their needs? What about 1, 5, or 10 years from now? What types of products or services may satisfy your customers' needs? Although you can't predict the future, you can envision the possibilities.

Relationships

Business is all about connections. Connections aren't just a matter of who you know -- they're about who supplies your raw materials and who distributes your product or touts your services. Connections are about who your customers are and what kind of relationships you have with them. A few tips can help you spot the key connections on which your business depends.

Supply and demand

One obvious way to think about products and services is how they're finally put together. Every company relies on outside suppliers at some stage of the assembly process, whether for basic supplies and raw materials or for entire finished components of the product itself. When outside suppliers enter the picture, the nature of what they supply -- the availability, complexity, and importance of that product or service to the company -- often determines how much control they have of the terms of their relationship with a company. That means everything from prices and credit terms to delivery schedules.

Think about your own suppliers. Are any of them in a position to limit your access to critical components or to raise prices on you? Can you form alliances with key suppliers or enter into long-term contracts? Can you turn to alternative sources? Are any of your suppliers capable of doing what you do, transforming themselves into competitors? How can you protect yourself?

Keeping customers happy

You've probably heard the expression "It's a buyers' market." As an industry becomes more competitive, the balance of power naturally tends to shift toward the customer. Because they have a growing number of products to choose among, customers can afford to be finicky. As they shop around, they make demands that often include pressure to lower prices, expand service, and develop new product features. A few large customers have even greater leverage as they negotiate favorable terms.

The last time that you or your competitors adjusted prices, did you raise or lower them? If you lowered prices, competitive pressures will no doubt force you to lower them again at some point. So think about other ways in which you can compete. If you raised prices, how much resistance did you encounter? Given higher prices, how easy is it for customers to do what you do for themselves, eliminating the need for your product or service altogether?

Delivering the sale

No matter how excited customers are about a product or service, they can't buy it unless they can find it in a store, through a catalog, on the Internet, or at their front doors. Distribution systems see to it that products get where the customers are. A distribution channel refers to the particular path that a product takes -- including wholesalers and anyone else in the middle -- before it arrives in the hands of the final customer. The longer this chain, the more power the channel has when it comes to controlling prices and terms. The companies at the end of the chain have the greatest control because they have direct access to the customer.

Think about what alternatives you have in distributing your own product or service. What distribution channels seem to be most effective? Who has the power in these channels, and how is that power likely to shift? Are there ways in which you can get closer to your customers -- perhaps through direct-mail campaigns or marketing through the Internet?

Finance

Finally, successful business planning depends on making sense of dollars-and-cents issues. What are the costs of doing business? What is the potential for profit? A few tips can help get you started.

The cost side

With a little effort, you can break down the overall cost of doing business into the various stages of producing a product or service, from raw material and fabrication costs to product-assembly, distribution, marketing, and service expenses. This cost profile often is quite similar for companies that are in the same industry. You can get a handle on how one firm can gain a cost advantage by identifying where the bulk of the costs occur in the business and then looking at ways to reduce them.

Economies of scale come into play, for example, when major costs are fixed up-front; increasing the number of products sold automatically reduces the individual cost of each unit. (For more information on economies of scale, refer to the section "Can anybody play?" earlier in this chapter.) Experience curves refer to lower costs that result from the use of new technologies, methods, or materials somewhere during the production process. (For more information on experience curves, see Chapter 13.)

Separate your business into its various stages, and ask yourself where the bulk of the costs occur in your own company. Can you take any obvious actions to reduce these costs immediately or over time? How does the doubling of sales affect your unit costs? How are your competitors toying with new cost-saving ideas?

The profit motive

Industries traditionally have their own rules of thumb when it comes to expected profit margins -- how much money they expect to end up with after all the costs have been added up, divided by all the money that they take in. In certain industries, these profit margins remain fairly constant year after year. A look at the history of other industries, however, points to cycles of changing profitability. These cycles often reflect changing capacity levels -- how much of a product or service an industry can actually produce and deliver. A little insight into where an industry stands along the cycles of profit margin and capacity, as well as a little insight into the direction in which the industry is heading, says a lot about the competitive pressures that may lie ahead.

  • Is your own industry one that has well-known business cycles?

  • Traditionally, how long are the business cycles?

  • If you've been in business for a while, have your own profit margins changed significantly over the past one, two, or five years?

  • What direction do profits appear to be heading in?

  • Do you think that these changes in profitability will affect the number of your competitors or the intensity of the competition over the next one to five years?

Don't stop with our list here. No doubt we've missed one or two industry forces that are important and perhaps even unique to your own business situation. Spend a little extra time and creative effort on coming up with other forces as you work on your own industry analysis.

After giving some thought to your industry in terms of the many forces that are at work, put together a written portrait. If you're stuck, imagine that someone who has no experience in your industry has come to you for advice, asking whether you can recommend a substantial investment in your industry. How would you respond? Get those arguments down on paper, and you've made real progress in assembling a serious industry analysis.

Data

In many cases, you may need a little outside help as well as some hard data to support your take on how various industry forces are shaping your own business environment. Unfortunately, it's not always easy to get your hands on the right pieces of information to explain what makes your industry tick.

Sometimes, you just can't get the data. Maybe no one's bothered to collect and look at it, or perhaps companies aren't willing to part with it because they don't want outsiders (including potential competitors) to analyze the industry too carefully. Most of the time, however, too much data is available, and the problem becomes knowing where to turn for the information that you need.

The good news is that technology can help rescue you from information overload. You can control the recent explosion of business- and industry-related data by taking advantage of Internet-based services and online systems that are designed to search for information that you can actually use.

Following are a few suggestions on places where you can turn for help on industry analysis. Many of the sources listed are accessible through your computer; new ones come online every day. If you have access to the Internet, start your search there.

Government sources. U.S. government agencies at all levels provide a wealth of data free for the asking. Check out the Securities & Exchange Commission (SEC), the Department of Commerce, the Federal Trade Commission (FTC), the Justice Department, and other regulatory agencies.

Trade associations. Many industries support trade groups that keep track of what's going on in their world. General business organizations, such as the chamber of commerce in your area, can also be quite useful in providing relevant information.

Libraries. Business-school libraries are best, but public libraries also house numerous business periodicals and books, as well as hard-to-find academic references, industry newsletters, and even the annual reports of large corporations.

Securities firms. Whether it's Morgan Stanley/Dean Witter, Merrill Lynch, or Smith Barney, every major securities company has a research arm devoted to watching various industries and their players. The trick is to get your hands on the information. You may have to become a client and an investor on the side.

Colleges and universities. In addition to offering library resources, business schools often offer flesh-and-blood business experts. These people are paid to analyze things, and every once in a while they come up with a valuable insight or a really good idea. If you run across an expert in your own industry, paying him or her a visit may be worthwhile.

Online data providers. A growing number of companies specialize in providing business- and industry-related data at your fingertips. Meade Data Central, Knight-Ridder Information, Dow Jones & Company, and Standard & Poor's have all been in this business for some time, and growth of the Internet has expanded their ranks. The information usually isn't free, but it can be worth the investment. Look for first-time user offers or special promotions.

Direct industry contacts. Go right to the source, if you can. Useful information can come from anywhere, including companies' public relations departments, industry suppliers, distributors, and salespeople. You can also find information at industry conventions, trade shows, and even factory tours.

  • Your business plan must take into account the major forces that are at work in your industry.

  • The number and size of your competitors shape the structure of your industry.

  • How big your market is and how fast it's growing determine how fierce your competition will be.

  • How well your business works depends on your relationships with suppliers, customers, and distributors.

  • If you want your company to be successful, you have to keep costs down and profits up.

  • You can find loads of good industry data on the Internet.

Recognizing Critical Success Factors

If you spend some quality time working on an industry analysis, the time spent should reward you with a fairly complete picture of the major forces that are at work in your business: the basic structure of your industry; your core markets; key relationships with suppliers, customers, and distributors; costs and changing profit margins. The analysis can also point out trends in your industry and show you where your company is in terms of general industry and business cycles.

This is all well and good. But how do you go about interpreting this industry landscape so that you can use it to improve your own business planning? Just for fun, take a moment to think about your industry as a great whitewater river. Imagine the many forces that you've listed as being the swift currents, dangerous rapids, haystacks, and even whirlpools in that river. You're in the company canoe. You have to do more than just point out these features and paddle merrily along; it's your job to navigate the hazards. As any whitewater expert will tell you, this means figuring out what needs to be done at every turn -- what special skills, resources, and lines of communication need to be in place for you to survive and conquer each stretch of river.

Back on dry land, take a fresh look at your industry analysis. Ask yourself what your company must do to succeed in the face of each powerful force that you identify. Again, what special skills, organization, and resources need to be in place for you to survive and conquer? In the business world, these assets are known as critical success factors (CSFs). Critical success factors are the fundamental conditions that absolutely, positively have to be satisfied if a company's going to win in the marketplace. These factors are different for every industry because they depend so directly on the particular forces that are at work in each industry.

The critical success factors for your company are going to be rather specific -- a one-of-a-kind set of conditions based on your industry analysis and the forces that you see shaping your business. You probably don't want to juggle more than three or four CSFs at any one time. But no matter how many factors you identify as being important, odds are that your CSFs fall into several general categories that you can identify ahead of time. Below, we provide a starting point for creating your own CSF list.

Technology

When jet engines became available in the late 1950s, it quickly became apparent that commercial airlines had to adopt this technology if they were to remain competitive. Jet-engine technology became a CSF for players in the industry. If you (or your kids) fly jets by using computer simulators, you already know that the adoption of faster processors and speedier algorithms is just as important for success in the game-software industry. Small businesses can also leverage a new technology such as the Internet as a CSF by creating jazzy home pages.

Manufacturing

For commodity products such as steel or oil, large-scale mills or refineries are often the critical factors that lead to low-cost production and the capability to compete on price. In high-tech industries, on the other hand, automation and efficient "clean rooms" may be the critical ingredients that allow the production of competitively priced consumer electronics products: CD players, video cameras, cellular phones, and so on.

Human resources

Consulting firms usually recruit only at the top business schools, because what they are selling is the expertise of their consultants, and clients often equate skill with educational background. In the same way, software companies really are nothing more than the total of the creativity and expertise of their programmers. In each case, people themselves are the CSF.

Organization

The long-term success of film companies that consistently produce hits and make money often hinges on logistics -- the capability to evaluate, organize, and manage independent writers, actors, site scouts, and production companies, as well as the media and distribution outlets. In the health care industry, health maintenance organizations (HMOs) are often successful because they are good at record-keeping, efficiently steering doctors, patients, medical supplies, drugs, and insurance claims through the system. Even a mom-and-pop video-rental store can gain an advantage by offering a quick, easy-to-use inventory of what's available and a system for reserving the hottest new movies.

Services

Businesses that offer services of one kind or another sell rather abstract products which can't be held or touched and are difficult to copyright or patent. Success often goes to those service companies that are first in the market and work hard to cultivate a following of loyal customers. CPAs and accounting firms, for example, build impeccable reputations one step at a time. A major reason why clients come to them for financial advice in the first place is simply that they are known to be trustworthy.

Location

It's no coincidence that profitable mills tend to be located in agricultural areas and that brick works crop up near rock quarries because transportation of the raw materials is so costly. But transportation costs are not the only reason why location matters. At the other end of the spectrum, fast-food restaurants and gas stations also live or die based on their locations. By far the most important success factor for these businesses is nabbing just the right spot along a heavily traveled route.

Marketing

Manufacturers of cosmetics, clothing, perfume, and certainly sneakers all sell hype as much as they do the physical products themselves. In these cases, critical success factors have most to do with the capability of companies to create and maintain strong brand images. Their customers are buying the name, the logo, or the label first and only then the lipstick, jeans, or sneakers that are attached.

Distribution

Packaged foods, household products, snacks, and beverages often sink or swim depending on how much shelf space they're allotted at the supermarket or local grocery store. A successful packaged-goods company works hard to create incentives for everyone in the delivery chain, from the driver to the grocer, to make sure that the shelves have plenty of room for its own brands, even squeezing out competing products. Speed of delivery can also be a critical success factor sometimes, especially when freshness matters.

Government regulation

Companies that contract directly with public agencies, such as waste-management firms and construction companies, often succeed because of their unique capability to deal directly with bureaucrats and elected officials. But government regulation plays a role in many industries, and the capability to navigate a regulatory sea is often the critical factor in a company's success. Pharmaceutical companies, for example, invest huge amounts of money in developing new drugs, and they stake all their potential profits and success on their skill in shepherding those drugs through the Food and Drug Administration's complex regulatory approval process.

One last thing before you start preparing your own CSF list: Critical success factors determine which companies are likely to succeed over the long haul in a given industry and marketplace. Unfortunately, CSFs are not always the same as your company's current capabilities. Chapter 8 talks more about your company's specific capabilities and how you can make sure that they reflect the CSFs that you come up with.

  • Critical success factors (CSFs) are the skills and resources that you absolutely, positively must have to win.

  • CSFs may include the coolest technology, the friendliest service, dynamite marketing, or location, location, location.

  • Keep your own list of CSFs manageable; shoot for no more than four.

Preparing for Opportunities and Threats

When you have a handle on the major forces that shape your industry and can point out the critical success factors that really determine what kind of company has the best shot at coming out on top, you can look ahead. Using everything that you've discovered about how your industry works, what possibilities do you see for your company, and where do the obstacles lie?

These kinds of questions often fall under the umbrella of something called situation analysis. When you think about it, your company's situation depends partly on things that are inside your organization (call them your strengths and weaknesses) and partly on things that happen outside (opportunities and threats).

For the moment, we're going to concentrate on the opportunities and threats that you face. (Turn to Chapter 8 to work on your own strengths and weaknesses.) Opportunities and threats come from the forces, issues, trends, and events that are beyond your control as a manager. But they represent the challenges that your company has to tackle if you want to beat the competition.

It's a beautiful morning

Opportunities don't always knock; sometimes, you have to find the door yourself and know when to open it. Consider the following situations. They can all lead to opportunities, so see whether any of them generate new possibilities in your own industry.

Major shifts in technology. When technologies change, companies are often slow to pick up on what's new because they have so much invested in what's old. From better software products based on new operating systems to more efficient steel production using new blast-furnace technology, business opportunities present themselves.

Availability of new materials. New-materials science can lead to innovative products and expanded market opportunities. The DuPont Corporation, for example, developed a chemical treatment that protects fibers from discoloration; then it created a new kind of carpet and its own StainMaster line.

New customer categories. New market opportunities are born when you identify groups of customers who aren't satisfied with what's available. Chrysler Corporation discovered that young families want something bigger and more comfortable than a station wagon, and the minivan market was born. In the agriculture industry, small, innovative growers around the country are rushing to fill the growing demand for organic produce.

Sudden spurts in market growth. When a market suddenly takes off, opportunity passes to the companies that are first to ramp up production to satisfy the growing demand. Nike, for example, has been able to sprint out in front by meeting the phenomenal jump in demand for every type of athletic shoe imaginable.

New uses for old products. Growth markets also spring up when new uses are found for old products. Pagers used to be for emergency purposes only; now they're accessories for teenagers. Teenagers can't afford cellular phones but can't bear to be out of touch, so they page one another by the minute, thereby representing a major pager market.

Access to highly skilled people. In many industries, skills are scarce and valuable resources. Business opportunities often arise when skilled workers become available. From aerospace engineers in Southern California to programmers in India and scientists in Russia, companies take advantage of any sudden expansion of the talent pool.

Additional locations. Location means business. Once shunned by shopping malls, movie theaters are being sought out as important magnets to attract additional shoppers to the mall. Theater complexes in shopping centers now represent a major percentage of the movie screens across the country.

Fresh organization models. New ways of doing business represent business opportunities in themselves. The urge to downsize, for example, has led to the outsourcing of all sorts of functions to other companies that now do nothing but manage computer systems, supply training programs, or produce corporate newsletters for their clients.

New distribution channels. There's really nothing more exciting in the business world than finding a new way to get to customers. Distribution creates a market, whether it's a mega-discount store or a direct telephone marketing campaign. The phenomenal growth of the Internet is based on its promise of being an efficient, effective way to reach customers with all sorts of products and services.

Changing laws or regulations. The U.S. government (surprise, surprise) has had a great deal to do with the way that U.S. companies operate and make money in all sorts of industries. In particular, deregulation has provided tremendous opportunities for banks, airlines, telephone companies, HMOs, and television and radio stations.

Dark clouds on the horizon

Business is risk. We can't take credit for recognizing that fact, but it's certainly worth repeating. For every big opportunity in an industry, there's an equally powerful threat to challenge the way in which things are currently done. Consider the following examples, all of which resulted in major problems for companies that either didn't see the threat or didn't heed the warning signs. See whether any of these lessons apply to your own industry.

Market slowdowns. A shrinking market, either predicted or unforeseen, takes its toll. Excess capacity can bring a company to its knees, whether the cause is a sudden slowdown in the sales of home computers or a projected decrease in the number of passenger jets ordered by international carriers. Often, the trick is to reduce near-term production without losing the capability to react quickly when markets finally turn around.

Costly legislation. Government programs, rules, and regulations often affect the bottom line. U.S. businesses, large and small, must plan to comply with all sorts of agency demands, from the Environmental Protection Agency (EPA) and the Occupational Safety and Health Administration (OSHA) to the Federal Trade Commission (FTC) and the Internal Revenue Service (IRS). As the saying goes, ignorance of the law is no excuse, and failure to comply can be extremely expensive in terms of both time and money.

Changing trends. General population trends can have profound effects on certain marketplaces. The inevitable aging of the Baby Boomers, for example, was bound to put a damper on the growth of go-go tropical resorts and the swinging-singles lifestyle popularized by Club Med. Club Med responded with new family resorts to compete with Disney World as a wholesome destination.

New and aggressive competition. Although new competitors usually have an uphill battle on their hands, they almost always come into a market with the advantages of energy, fresh talent, and a burning desire to win. After the oil shortages of the 1970s, Japanese car companies came into the U.S. market with small, fuel-efficient cars, a serious marketing strategy, and a commitment to succeed over the long haul. The rest is history.

Substitute products. What happens when a gizmo comes along to replace a widget? Often, the widget company is in big trouble. The danger with substitute products is that they often seem to come out of nowhere. Videotapes have given vacation snapshots a run for their money, CDs have turned phonograph records into collector's items, and the new Digital Video Discs (DVDs) are most likely going to make videocassettes seem quaint one day.

Exchange-rate volatility. Today, even a local business can be affected by global economic forces, including exchange rates. When the U.S. dollar was rising against all major currencies, for example, American companies were almost drowned in a flood of cheaper foreign imports. The recent weakness in the dollar has been a boon for exports in certain industries, but for others, the costs of materials and components have risen.

Shortages of raw materials. From an oil crisis to the shortage of memory chips, supply problems can threaten a business. Companies often enter into long-term contracts with their suppliers to minimize these kinds of disruptions, but extended agreements pose their own set of risks and must be carefully managed.

Loss of patent protection. Creativity and intellectual property are usually protected by copyrights and patents. But patents expire, and companies have to prepare for the competition that inevitably follows. Pharmaceuticals firms, for example, have had to learn to compete with the cheaper generic drugs that become available soon after successful prescription brands lose their patent protection.

Labor agreements. Unions have a significant impact on the cost of doing business, and companies in various industries have learned how to factor in their particular relationships with organized labor. Although union activity in general has been on the wane for many years, companies that have no union histories may have to come to terms with organized workers in the future -- especially in service industries, in which long hours and few benefits are becoming the norm.

Laziness and complacency. It's easy to get lazy when the money starts rolling in, and the list of companies that have fallen into the complacency trap is much too long for comfort. General Motors, Ford, and Chrysler fell into the trap, of course, and were beaten up by Honda, Toyota, and Nissan. Likewise, Sears, Montgomery Ward, and Kmart were trapped by Wal-Mart when they failed to respond to Wal-Mart's aggressive discounting strategy.

There's no end to the number of potential opportunities and threats in an industry. A winning business plan should include a situation analysis that points out both the biggest opportunities and the clearest threats to your company, so that you can anticipate ways to deal with both as part of your planning process.

  • Good business planners keep a sharp eye out for opportunities and threats.

  • Big leaps in technology, new uses for old products, and innovative ways to reach customers open opportunities for your company.

  • Changing lifestyles, shrinking markets, and new competitors can threaten your business.

  • You can turn threats into opportunities.

Meet the Author

Paul Tiffany is the managing director of Paul Tiffany & Associates, a Santa Rosa, California-based firm that has offered management training and consulting services to organizations throughout the world for the past fifteen years. In addition, he has taught business planning courses at some of the top business schools in the country, including Stanford, Wharton, and The Haas School of Business at the University of California, Berkeley, where he currently serves as adjunct professor. He holds an MBA from Harvard University and a Ph.D. from Berkeley. He can be reached by e-mail at tiffany@haas.berkeley.edu.

Steven Peterson is a senior partner and founder of Home Planet Technologies, a management training company specializing in hands-on software tools designed to enhance business strategy, business planning, and general management skills. He is the creator and designer of "The Protean Strategist," a state of the art computer-based business simulation. The simulation creates a dynamic business environment where participants run companies and compete against each other in a fast-changing marketplace. Each management team in the simulation is responsible for developing its own strategy, business plan, and program to make the plan work. Steven has used The Protean Strategist to add excitement, hands-on experience, teamwork, and a competitive challenge to corporate training programs around the world. He has worked with both large and small companies on products and services in industries ranging from telecommunications to financial services and from high technology to consumer goods and industrial equipment. He can be reached by e-mail at peterson@HomePlanetTech.com.

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