Think of the value you create for customers vis-a-vis the competition
Working in venture capital / private equity, I come across a number of poorly presented business proposals.
The first thing I want to know about a business is whether it will be able to sustain growth and profitability by offering customers something of value that no-one else does – whether it be a product or service that noone else currently offers, a product or service of a higher quality or at a lower price than any competition is able to offer, or whether it maintains a monopoly/competitive edge thanks to the nature of the industry, its size or due to government regulation.
The following are frameworks I use to assess a business’ sustainable competitive edge.
– Strengths / Weaknesses assess how the business is positioned viz. other businesses within the sector
– Opportunities / Threats look at how attractive the industry is – is the industry growing?
A smart way of mapping how attractive a business and its industry are.
I remind myself of the S curve to understand that industries (even companies) first have high growth and then slow growth with respect to time. To continue with high growth, businesses need to continually access new markets or offer new products.
Porter’s five forces is useful for predicting how profitable an industry is. What is the negotiating power with suppliers, customers? How easy it is for new businesses to enter the industry – what are the barriers to entry? How easy it is for substitutes to take market share? What is the direct competition like?
The efficiency frontier dictates that a company either serves the low end market by having low costs or the high end market but then has high costs. If a company isn’t on the frontier, it’s performing sub-optimally. But a business can beat the efficiency curve and face no competition by creating a blue ocean strategy – accessing a market not yet served by anyone.
I bear in mind the concept of creative destruction, which makes high-tech undesirable, unless a firm has the best R&D and creative team, who are able not only to innovate to create new and desirable products, but are also able to lower costs of production. Without one or the other, innovations soon become displaced by some other disruptive technologies, or will become commodities as others learn to replicate it and at lower cost. Becoming a commodity means the business can no longer charge a premium and becomes a price-taker -> profitability plummets. The business has to continually innovate in order to beat competition, and cannabilise its own products.
Business models can also be disruptive in mature industries, as was easyJet in the airline industry. Sir Stelios of easyGroup likes to disrupt mature industries with complacent incumbents where prices are high, by coming up with low-cost ways of doing things and offering low prices. In a way, his is a blue ocean strategy because he accesses customers who wouldn’t have bought otherwise.
For tips on how to structure your business plan, see my next post.
Illustrations were borrowed from various sources online.