You can't pursue every idea-- so how do you identify the right ones? Some indicators are better predictors of success than others.
We all face new business opportunities on a regular basis. Some sound like great ideas that could be the next big thing. Many ideas may have great value to customers but are far from profitable business opportunities. How can you tell the difference?
Pursuing every opportunity is a recipe for disaster. Spending time and resources on the wrong opportunities will suck your organization's time and resources, with little or no payback. But the best ideas can be the next billion-dollar opportunity.
A client who runs a $2 billion company recently approached us with a business opportunity. (We've disguised the specifics to preserve confidentiality.) This company must buy natural materials to supply the ingredients for its core business. But, despite the need to produce their product with only high-quality materials, the natural materials they buy are a mix of high and low quality. They are forced to sift out the bad stuff before producing their product, which leaves them with a lot of essentially worthless materials.
They asked us if we thought they could build a new business by selling the low-quality materials or using them to produce a new product?
When faced with a question like this, there are a number of signs that can tell you whether the opportunity is valuable or not. Here are six of the most important indicators:
Is there an existing market for this product or an opportunity to create a new product that customers would demand?
Can you easily enter this market by leveraging your existing competencies or strategic assets?
Can you justify charging a higher price than other players selling this product/service?
Do you believe you can produce a new product/service at a significantly lower cost than any other existing player?
Does entering this business create more value than your alternative strategic options--i.e., could you do something else instead, and make more money?
Will you receive a high return on your investment of capital, time and resources?
Generally, to build a successful business you need to be able to say yes to all six of these questions. In our client's case, we determined the answer to most of them was no.
While there would be an existing market for the company's low-value materials, it was clear that our client could not sell the product at a higher price, produce at a lower cost, nor bring any strategic assets to the table. Plus, it would be a significant distraction from their core business. Their best bet was to sell off the low-quality materials at market or even below-market price. This so-called "opportunity" was actually just a cost of doing business within their core product, and the best bet was to minimize that cost as much as possible.
Looking for some simple signs can help you determine whether you may have an opportunity to build a big business.
KARL STARK AND BILL STEWART are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree. @karlstark