Description
Within this criteria related to identifying your industry, the target sector in the industry, and type of business.
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chapter 1
Identifying
Your Industry,
the Target Sector
in the Industry, and
Type of Business
The Purpose of the Chapter
The biggest mistake a would-be entrepreneur can make is to follow blindly his or her passion
about a particular invention or technology without regard or knowledge about the industry
and applications to which that invention or technology will be applied. To be successful as an
entrepreneur, you must select an industry and market that can reward your hard work with
customers who need what you have to sell and will pay you for it. Select a strong industry—one
that is growing and hungry for innovation, new products, and services—and with proper execution, your innovative idea can be the basis of a wonderful company. This is a market-driven
approach to entrepreneurship as opposed to one where you simply create technology and pray
that it finds a good market and application to serve. Also, if you are going to raise money from
professional investors, you are going to have to defend the attractiveness of your target market
with data—with facts that prove size and growth.
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part 1??? DEFINING THE VENTURE CONCEPT
This chapter describes the first step in the market-driven venture process:
1. Identifying the industry you wish to enter based on your experience, education,
family connections, and personal interests
2. Selecting the sector of that industry where opportunity beckons
3. Determining the type of business (product, system, or service) with the greatest
potential
At a deeper level, the purpose of this chapter is to get you into the mindset of working diligently
to understand markets, customers, and business opportunities. Successful entrepreneurship rarely
happens by accident. Sure, timing is extremely important, but being in the position to take advantage
of fortuitous circumstances is what entrepreneurship is all about. Though “hunches” or intuition may
open your eyes to real commercial possibilities, they may also lead you into a trap, where even a
great idea is pulled down the drain by the overwhelming forces of a declining industry. Why bother
to seek opportunity in such an industry when others offer more possibilities and a brighter future?
This chapter also discusses the dynamic between your own personal experiences and interests, and the market realities needed to support a prosperous business. Entrepreneurs have passion for their new venture concepts. However, often we find a tension between an entrepreneur’s
own personal internal influences—such as work experience, education, and family background—
and external market factors that help set the stage for a promising new venture. Just because you
are wildly enthusiastic about a particular hobby or sport or industry does not mean that starting a
company based just on that personal interest will be worth the effort. This chapter will help you
think about these two sides of the entrepreneurial coin and, we hope, strike a balance.
Moreover, successful entrepreneurship requires that you be brutally honest and pragmatic
about the facts on the ground. You must do your utmost to gather the best information available
around any particular decision, and then take the information you gather seriously. You cannot
pretend that a “bad” market will suddenly turn around and become a fertile ground for a new
venture. And, if you come up empty, you can then check other parts of an industry for better
hunting. Entrepreneurship requires market knowledge as well as innovative thinking, plus a
determination to keep working through what might at first seem to be difficult barriers.
Learning Objectives
This chapter offers practical methods for:
• Gathering information on the attractiveness of a particular industry
• Identifying industry sectors and determining which are most appealing, including a method
called “industry ecosystem mapping.”
• Using industry analysis to define the scope and purpose of your venture
Selecting a Target Industry______________________
Most people who aim to start a business get their initial ideas from one or more of the following
“internal” sources:
•• Work experience: We watched as Cheryl moved up the ranks as a successful
salesperson for selling medical instrumentation for a market leader in eye surgery,
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
including cosmetic surgeries. She was determined to start her own business.
Fashionable, engaging, and market-focused, Cheryl saw the combination of increasing
skin cancer rates and the spending of disposable income on cosmetic products and
minor procedures (such as dermal abrasion and Botox injections) as creating an
opportunity to start a chain of skin health centers focused on upscale professional
women in urban areas.
•• Educational background: Matt, a business school student at our university,
took various entrepreneurship courses and believed that there must be a better way
to design customized business models and create financial statements than using his
professor’s spreadsheet templates or buying off-the-shelf packaged software sold for
creating business plans. He formed a team to create a Web-based software package
for business models and financial planning for new ventures—seeking to provide this
as a service to business school educators. Matt convinced his business professors and
their students to be the test users!
•• Family background and business experience: Walter was an old friend from
high school. It turns out that Walter’s father created a company that provides de-icing
services to major airlines at many airports across the United States and Europe. Walter
worked in the business and became the CEO after his father retired. Walter developed
great connections through the industry, and one of his customers was Federal Express
(having a large fleet of its own airplanes). Walter wanted to make his own mark on
the industry. He envisioned raising additional capital to start a small, feeder airline to
transport FedEx packages to small, local airports in the southeastern United States. And
that is precisely what Walter did.
Among student entrepreneurs, the fad seems to be to propose yet another social networking
idea, following in the footsteps of Twitter or Facebook. The vast majority of these fail to become
viable businesses because even though the idea is “cool,” there is no clear recipe for monetizing
the innovation, particularly if the Website is geared toward fellow students who are well trained
not to pay for anything on the Web. This is not to say that the social networking trend is a passing fad or that you can’t make money creating a social networking service. One of the teaching cases in this book (Generate) is about one of our students who developed a “LinkedIn on
steroids” combined with Hoover’s-style business information to empower business-to-business
(B2B) salespersons. This fellow, Tom, ended up selling his company for more than $50 million
within just four years of start up!
But we also encourage you to buck the trend of thinking about popular fads for new ventures. Consider mature markets that are in desperate need of innovation. Many mature industries
are in the process of business and consumer transformation. Just look at the energy utility sector,
once the most “boring” and today, one of the most exciting areas for new devices, software, and
systems.
Moreover, often the most successful entrepreneurs avoid highly competitive spaces where
lots of other entrepreneurs are trying to win. For example, we have a friend Jim who introduced a new approach to the tired, old workers’ compensation industry—preventing injuries
from occurring in the first place and sharing that benefit back with customers through reduced
premium rates. Within ten years, Jim had built himself a $200 million a year industry. And now
he is doing it again for outsourcing employee counseling services for major corporations. The
same type of innovation in mature segments can be found in health care, energy, and transportation. And the advantage is that cash is already flowing in these industries—money that could
be yours for the taking.
None of these factors—work, education, family experience, or the current trend—
function in isolation toward new venture creation. In fact, in many cases, these factors
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part 1??? DEFINING THE VENTURE CONCEPT
combine in a type of synergy that makes entrepreneurship its own special life form. Take
the case of Alvin, another former student. Alvin was born in China and immigrated to the
United States at a young age. Over the years, he earned an undergraduate degree in electrical engineering, a master’s degree in computer science, and an MBA. The family heritage
was a strong pull for Alvin. He also knew opportunity for new products and services for the
domestic Chinese market was virtually unlimited. On his journey to be an entrepreneur,
Alvin first took a job with Intel and then got himself an assignment in the Shanghai office to
explore mobile consumer applications and services for China. A few years later, he left Intel
to start what is now one of the leading mobile search and pull-based advertising companies in China. His new company was named the official mobile search provider to the 2008
Summer Olympics in Beijing. Alvin was on his way!
These are all wonderful stories, and they can happen for you as well. Each one of these
individuals was a “smart” but regular person—the type of individual with whom you would
enjoy having lunch or grabbing a beer: a good listener and a careful thinker, and highly attuned
to how to merge his or her own personal portfolio of skills and contacts with robust market
opportunities.
Figure 1.1 is designed to help you weigh how your own personal internal factors might
direct you toward a particular industry as well as the target sector or niche within that industry.
Take a look at it now and begin to think about filling in the boxes on the left side of that figure
and how the combination of your own work experience, education, family background, and
personal business goals point to an industry focus where your history and interests provide
insight and understanding needed for the road ahead.
Work Experience
• (Position, type, and
depth of experience gained)
• Etc. . . .
Education Experience
• (University, skills gained)
• (Other education, skills
gained)
Family Experience
• (Family business, experience
gained, source of finance,
access to channels and
suppliers)
Potential Venture Ideas
Characteristics
of the Target
Industry
And the sector or
niche within
the industry
• a product venture opportunity
• a systems venture
• a service venture opportunity
• combination/hybrid
Personal Business Goals
• Long-standing personal
goals as an innovator and
entrepreneur
Do this individually for the members of your venture team, then compare notes,
and share your ideas about the different business types of opportunities that might exist in the target industry.
Figure 1.1?? Balancing Internal and External Factors to Shape New Ventures
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
However, it is critically important to note that following any of these internal factors blindly
down the path to a venture concept may just as easily lead you into a lot of hard work with little
return. Internal factors are seldom sufficient in and of themselves for success. To capitalize on the
value they do contain, the entrepreneur must integrate them with favorable “external” factors such
as rising market demand, positive industry trends, unsatisfied customer needs, and so forth. The
best approach to do this is to find an industry or industry sector with those positive characteristics
and then build an enterprise that capitalizes on them and the entrepreneur’s internal factors.
The importance of finding the “right” industry cannot be overemphasized. Being in the right
industry is like bicycling with the wind at your back, making your journey easier. The key is
to identify a source of powerful market demand and let that demand drive the design of your
venture as well as the team that you build around the venture. And that market demand is itself
an unfolding story. In doing your research, you might go after a particular market niche and
find that an adjacent area actually offers even higher growth and the potential for higher profits.
Consider the experience of your authors.
As an undergrad at Harvard, one of your authors worked four nights each week as a
chef at a high-end restaurant just off the campus. Despite his expertise and passion for
the culinary arts, however, he never seriously considered starting a restaurant business
as an entrepreneur. There were already dozens of high-quality restaurants in the area,
and many of these seemed to have a shelf-life of only four or five years. The likelihood
of earning a decent financial return on invested capital and 12-hour work days six days
each week was slim.
Instead, technology—and in particular software—was the “hot thing” in the
Cambridge area during that time. To pay for graduate school at MIT, your
author took another three-day-a-week job working for a large commercial bank
running a software-based project management system for major back-office
information technology implementation. While he considered starting his own
project management software company, there were already very large software
players in that market space. He kept looking, thinking, and networking with
individuals like himself who were hungry to start a software company.
Over the coming months, your author was determined to either start or join
a fledgling software venture. It seemed a good idea to take an entrepreneurship
course. From this course, he banded with a team of MIT graduate students with
a vision of putting Unix on a PC and applying a “real-time” operating system
kernel that they had developed for science experiments to commercial applications. This venture was to be a classic university spin-off. The team developed
software products that became market leaders in real-time process control and
then expanded into fast, memory-resident database software. One of our favorite
applications was for factories for brewing beer! Customer visits were a “must!”
Medical equipment, robotics, and telecommunications all came next. It was an
excellent business that grew rapidly, forming partnerships with companies such
as Digital Equipment Corporation and Microsoft, and eventually, it was acquired
by Citrix as part of that company’s virtualization software play.
The important lesson is that your author saved his passion for cooking to please his future
wife as opposed to trying to make it his life’s work. And his expertise in project management
software was used to gain a general comfort with software technology but was not the focus of a
venture due to existing competition. That was a very good thing because Microsoft Project came
into existence a few years later and has “crushed” the market. Instead, your author looked for an
emerging niche and team of skilled peers who wanted to gang-tackle the opportunity.
If you want a business that will provide you with a modest income and the benefits of selfemployment—a lifestyle business—follow your passion and forget about external market and
industry factors. However, don’t be surprised if you fail to achieve financial independence and
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part 1??? DEFINING THE VENTURE CONCEPT
the sense of accomplishment and freedom that comes with it. And you may spoil your passion
by turning it into a job. Could you imagine running a commercial kitchen, day in and day out?
Or, if your passion is fishing (such as is the case with both of your authors), being a fishing
guide, rain or shine? Or, being within a family that owns a business that you are expected to take
over after getting your education, and you simply know that the family business lacks growth
potential and is barely making a profit? This, in fact, was the expectation of your second author.
The Crane family had been in the retail and wholesale food distribution business for
many years. As a family member with plenty of work experience in the enterprise, your
author could have stepped into this business in a leadership capacity. But he chose to
look elsewhere for an occupation. Why? His education and experience told him that
family-owned food businesses faced tough sledding in the years ahead. Huge national
food distributors were sweeping across North America, rolling over “Mom and Pop”
businesses like his as they went. The idea of running a small food business was appealing, and the idea of following in his parents’ and grandparents’ footsteps was compelling, but Fred’s business education and industry experience told him that going head to
head with well-financed competitors with enormous buying power would be nothing
but a series of exhausting and disheartening rear-guard actions. The profit margins of his
family business were already slim and would be under continuous downward pressure
as those larger competitors exercised their greater market power.
So, your author struck out in a different direction. He entered a field where
his grasp of market information, branding, and customer behavior was in high
demand, and where he would charge a premium price for his consulting services. By integrating external information with his internal capabilities, Fred
stepped away from the troubled food distribution industry and caught the rising
wave of market consulting.
Many others entrepreneurs, including many former students, have successfully adopted this
same winning formula: Find an industry or industry sector with favorable supply/demand and
competitive characteristics, and where one’s internal strengths can be profitably applied. This is
how we want you to approach your own venture.
The other important context-setting decision is whether you wish to start a new company from
scratch or create a venture within an established corporation. Our examples and teaching cases in
this book deliberately cover both types of situations, because each is a venture in its own right that
can bring you satisfaction as well as considerable personal wealth. We have already provided you
with lots of startup examples, so let’s take a quick look at a classic corporate venture.
Steve, a gifted electrical engineer and MBA student in one our weekend classes for working
professionals, was considering how to create a product line that would leverage his company’s
technology to an adjacent market application. The company made highly specialized chips
that were used to process 3D images in medical equipment—CT (computed tomography) and
MRI (magnetic resonance imaging) in particular. Steve searched and searched for other medical
applications but came up with nothing. Working with the professor, both came to the conclusion: Think outside the medical field.
Several weeks later, while returning from a business trip, Steve noted the poor quality of
the luggage scanning system deployed at the airport. He realized that the government would
demand far better solutions—if there were any. Steve now had a venture target. He developed
a plan for the course, which he took to the company’s head of R&D. With the support of this
executive, Steve received funding to lead a project to deliver improved scanning for airport
security. September 11 had not yet happened, but it would soon rear its ugly head. Steve’s
project could not have been better timed. In the years since, his company has become a major
supplier of imaging subsystems technology to manufacturers of explosive detections systems.
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
For the entrepreneur, startup or corporate, having a market mandated by a federal government
agency is perhaps as good as it gets.
Situations like Steve’s are not usual. Ventures often emerge from the frustrations that people
encounter. Thanks to their work experience and technical educations, midlevel corporate personnel like Steve often see problems or opportunities that their companies overlook, find too
small to pursue, or might view as a new growth opportunity if only a well-considered plan is
brought to management’s attention. You can do the same by looking at the problems and frustrations you experience as potential opportunities.
Taking Stock: Your Internal Factors_______________
What is your relevant business experience? What are the facets of your educational background that
might come into play in a venture? What connections do you have amongst your family and friends
that might be brought to bear in a venture? And at a deeper level, what are your personal interests for
business? In your heart of hearts, where might you want to commit yourself for a 24/7 effort for the
next five years?! What motivates you to commit a big chunk of your life to building a business?
Take some time to think about these internal factors as they apply to you personally, using
Figure 1.1. Like other frameworks in this book, Figure 1.1 is intended to stimulate your thinking,
searching for facts and planning of your own venture.
Work, education, and family experience are factual in nature—what have you done or what
exists in these three areas and the level of accomplishment in that area? Your skills and experiences might well “suggest” a fit toward a particular industry. Moreover, there will typically be
multiple sectors within an industry. We want you to note all of these. We will show you how to
do research on them in just a moment to identify which specific parts of an industry look best
from a business creation perspective. But before we do, consider the following two examples.
Starting From Ground Zero
Unlike the characters in our two previous examples, some people lack the industry or work
experience that would help them recognize and pursue an entrepreneurial opportunity. Many
graduating students fit this description. How about you? Are you at a point in life where you
have no real work experience? And you don’t come from an enterprise-owning family that discusses business around the dinner table every night. But the idea of working for someone else
leaves you cold. Don’t despair. You are starting at ground zero, but your passion and a bit of
good old-fashioned luck might open the door to something special.
We once had several students who, frankly, were not stellar students. School, books, and
classrooms were not their thing. However, they had other admirable qualities of mind and
spirit. As graduation drew near and their need to find employment became more tangible, they
approached their professor.
“Professor, can you help us find a job at a bank or something?”
“I don’t think you fellows are cut out for banking,” the professor said.
“Then what about consulting? That pays well, doesn’t it?”
“Yes, it pays well, but consulting firms only hire graduates with 4.0s,” he responded.
“Then, what should we do?”
“Well, you’ll soon have business degrees from a fine university, and you seem to have
plenty of energy and guts. Maybe you should start your own company. That way, you
can control your own destiny.”
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part 1??? DEFINING THE VENTURE CONCEPT
“Great,” they said, “what should we do?”
“Do something you really love, because you’re going to have to work harder than you
have ever worked in your life—and definitely harder than you’ve worked in my class!”
One of the young men laughed, “Well, we sure love beer. Maybe we should open a
bar!”
“Have you ever worked in a bar?” the professor cautioned. “Do you have any idea how
hard it is to run a bar? You never have a night off and the employee problems are
rampant.”
They looked puzzled. “My guess is that you guys are going out to a bar tonight, am I
right?” (Nods all around.) “Well, instead of being customers as usual, keep your eyes
on the bar owner. Watch everything he does. And think about what it would be like
being him six nights a week. Really think about it. Then come back and talk to me.”
The students were back the next day, this time with long faces. “Professor, we love
beer, and we like hanging out in bars, but after watching that owner for hours, we
would hate his job.”
“In that case, how about making beer to sell to bars? I had some microbrewery beer the
other day and it was great. Was expensive, too. I bet there is room for another specialty
beer label, as long as it’s premium quality and has a good story crafted behind the product. Think about it and come back to me next week,” the professor said.
Well, one of those students thought about it, and after graduation he created a plan: to enter
the premium segment of beer industry, with a great Boston “story” behind the brand. This student,
the professor discovered later, did not simply love to drink beer—he loved the craft and culture
of brewing and had gone to great lengths to learn about how great beers are made and about the
ingredients that go into them. Following his muse, he learned the lore of a unique industry. Ten
months after graduation, he and a partner started a specialty beer company that a few years later
won the “Best of Boston” award in its category. A dozen years later, the two partners sold that
company for millions to a large national specialty brewer. Those two guys made a lot of money!
Yes, passion and energy can take you a long way in your search for the right opportunity.
Investigating the External Dimension:
The Potential of the Target Industry_______________
Up to this point, the notion of selecting a target industry may seem to be largely a “gut” call,
using one’s work background, education, and family experience—plus personal passion—to
decide where to direct the entrepreneurial effort. But there is a difference between blind insight
and informed insight, between guessing and calculated risk-taking. From the gut, we must now
move to the head—to detailed research on the fundamental characteristics of the industries that
interest you.
Industries and Their Sectors
An industry is a group of firms that produce products or services that are close substitutes for
each other and which serve the same general set of customers. Industries are defined by the
markets served by their competing participants.
Most industries can be subdivided into specific sectors, which, in turn, include a set of competitors that address particular customer groups. For example, the financial services industry includes
many sectors: investment banking, commercial and retail banking, insurance, money management,
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
and so forth. Each of these sectors includes its own set (often overlapping) of competing firms, customer groups, products, and services. Some sectors may have low growth, low profitability, and little
innovation; others may exhibit dynamic growth and an abundance of opportunities to make money.
As entrepreneur, you probably cannot take on an entire industry, at least in the beginning. The path
to success is to develop a venture within a particular niche or area within a larger industry, to grow to
a leading if not dominant position within that niche, and expand from there. This lends focus to the
new enterprise, and focus is all important for any new venture. And the key to success is to focus on
a particular sector (or subsector) of an industry that is most promising for you in terms of a range of
critical factors such as growth rate and clear channels to customers. Thus, you need to understand the
industry in broad strokes and understand its sectors in detail.
As you study a particular industry and sectors of interest, look for positive indicators in the
following areas:
• The size, growth rates, and profitability of the customer markets served by the industry
• The concentration and intensity of competition
• The industry, or sector’s, life cycle stage
• Barriers to entry
Be as thorough as possible investigating these areas. The result should point the way to a
robust market opportunity, one that can support and reward all of the hard work that you will
have to do when actually launching a company based on a vision and a plan to act on that vision.
Size, Growth Rates, and Profitability
Starting a new venture in a flat or declining sector is usually a waste of time, so look for areas
where robust growth is anticipated for years to come. For example, if you were looking into
the imaging industry, you’d be wary of any sector that involved film-based imaging, which has
been in decline ever since digital imaging gained a market foothold. Further, rarely does an
entrepreneur take on an entire industry—at least in the beginning. Rather, he or she focuses on
a particular sector of that industry. Markets tend to be comprised of multiple sectors. Each sector
contains different types of customers and different uses for products and services. Some of these
sectors might have low growth and low profitability; others have dynamic growth and lots of
opportunities to make money. The entrepreneur therefore needs to know the size, growth, and
profitability of key sectors in a given market. “A rising tide,” as the saying goes, “lifts all boats.”
Likewise, determine the profitability of the companies battling for market share in sectors
of interest. If the firms that already have a foothold in a growing market cannot make a profit,
what’s the chance that you, a newcomer, will? If there is a publicly traded company participating
in your target industry, even if not the same exact sector of that industry that you wish to target,
the financial performance of that company might be indicative of what you can achieve should
your venture scale into a major business. A quick trip to Yahoo! Finance or Hoover’s can reveal
the margins enjoyed by successful players.
Concentration and Intensity of Competition
Some industries have one or two large leaders and half a dozen second-tier competitors, all
jockeying for incremental gains in market share by introducing a new product or service and,
just as often, lowering prices. It’s very tough for a startup to compete in such an environment.
A new corporate venture, on the other hand, stands a chance because it can often leverage the
corporation’s brands, distribution channels, manufacturing, and credibility to break into the market with a new solution.
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part 1??? DEFINING THE VENTURE CONCEPT
Most entrepreneurs should avoid areas of concentration and intense competition and seek
out fragmented markets in which there are many small competitors and no dominant leaders. In
fragmented markets, anyone with an attractive value proposition, a strong work ethic, adequate
capital, and imagination has a fair shot at success. A123 Systems of Watertown, Massachusetts,
for example, entered an industry with large, established battery manufacturers. In the highperformance sector of this mature industry, however, only a handful of other small startups were competing to create the rechargeable lithium-ion batteries needed to power large equipment and vehicles.
A123 raised more than $50 million of venture capital and received a U.S. government grant for $259
million to build manufacturing capacity. A month later, it raised another $400 million through an initial
public offering. Those had to be some pretty special high-performance rechargeable batteries!
Life Cycle Stage
In the strategy literature, technological and product/service innovation are important components of what is referred to as the industry life cycle. This life cycle has several stages: emergent,
growth, maturation, and decline. This cycle is sometimes expressed as an S-curve1 similar to
that shown in Figure 1.2.
S-Curves Unfolding Over Time
The Technological
Entrepreneur’s
Sweet Spot
Services and Efficiency
Focused Startups
A new S-curve
Mature
Product
Performance
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Decline
Achieve scale Maximize profits
Cut costs
Operational
control
Growth
Create new products
and build sales
R&D “Shops”
Emergent
Create disruptive
technologies
Time
Figure 1.2?? Industry Life Cycles
The emergent stage is an initial period of slow revenue growth and few if any direct competitors. Many entrepreneurs in this stage are still working out their product/service concepts. A
credible market may not yet exist. Nanotechnology (which is new material science working on
For a fuller explanation of S-curves, see Richard Foster, The Attacker’s Advantage (New York: Summit
Books, 1986), and James M. Utterback, Mastering the Dynamics of Innovation (Boston: Harvard Business
School Press, 1994).
1?
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
the scale of a billionth of a meter!) is in this emergent stage—although we already see it taking
hold in certain mainstream applications such as apparel, house paint, and drug delivery.
The next stage is characterized by rapid growth. This is when the product or service concept
really clicks with customers. The cell phone sector of the telecom industry entered this stage several years ago. Cell phone companies and service providers had finally worked out the technical
kinks, and more and more areas of the country were offering service to roaming users. Suddenly,
everyone wanted one of these handy devices. Today, the companies that are developing new
types of batteries and energy management systems are clearly in the growth stage. As growth
hurtles forward over time, more and more competitors and more capital are attracted to the sector.
Eventually, growing markets become saturated, the rocketing growth curve tapers off, and
competitors find themselves in the maturity stage of the cycle. The many companies now in the
field resort to price discounts and other mechanisms to generate revenues and poach customers
from their competitors. They enhance their products and services in an attempt to make them
stand out from the crowd. Gradually, the weaker firms exit the field, and a handful of firms are
left standing. The office productivity sector of the software industry is in the mature stage of its
cycle, with just a few players holding the majority of market share.
As you can see in Figure 1.2, the S-curve of an industry sector or product category (and companies)
may eventually enter a stage of decline. In most cases, industry decline occurs when a discontinuous
technology enters the market. The market for manual and electric typewriters, for example, tumbled
when computers with word processing software came along. The same happened to the photographic
film industry when digital camera technology became price competitive. Likewise, the incandescent
lighting industry that Thomas Edison pioneered at the end of the nineteenth century is now moving
from maturity to decline as energy-conscious users move to fluorescent and LED substitutes.
To fully appreciate the S-curve concept, look again at Figure 1.2. Notice the new S-curve on
the far right. Even as one industry sector or product category is in decline, a rival, usually armed
with a new and better technology, is increasing its product performance and entering a period
of buoyant growth—typically at the other’s expense.
Tip: Opportunity Alert!_______________________________
Many new business opportunities can be found in the turmoil created by disruptive
innovations. For example, the U.S. global positioning system (GPS) changed the
way ships, aircraft, and field armies navigate on the earth’s surface. Those were the
obvious and intended applications. Once the technology was made available for
civilian use, corporate and individual ventures quickly found new applications and
markets for that technology: smart bombs, handheld GPS devices for hikers,
dashboard-installed auto GPS devices, downloadable maps for national parks, and
“kid-track” units to name just a few.
So, when you see a new technology driving a mature industry into decline, think
of the opportunities that technology may create elsewhere.
Life Cycle Implications for New Ventures
The life cycle has important implications for ventures seeking to produce new products. At
the front of the life cycle, a nanotechnology entrepreneur simply has to find an application
that will show his or her technology not only working but also producing value for customers. At the back side of the life cycle, a brilliant engineer seeking to develop software,
systems, or services for oil or gas producers is going to surely face several cost and pricing pressures, as will the entrepreneur targeting automotive industry (original equipment
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part 1??? DEFINING THE VENTURE CONCEPT
manufacturers—OEMs). Costs are counted down to the pennies in mature industries.
Experience shows that technology-based ventures enjoy the greatest success when they
enter the field near the beginning of the growth stage. This is the entrepreneur’s sweet spot,
shown in Figure 1.2. A123 Systems, the battery company, was in this spot, using its proprietary technology (actually, nanotechnology) to create a high-energy discharging lithium-ion
battery for mainstream applications—such as cars or power tools. Apple was in the same
spot with iTunes. The early to midpoint of a growth stage of a broader market is where an
entrepreneur should ideally enter with a specialized application or solution. Anything much
earlier—technology that is nowhere close to prime time—can mean a long and painful journey for the entrepreneur. Because no markets currently exist for these pioneering concepts,
the entrepreneur starves for cash before paying customers appear. Instead, such technologies best belong in corporate R&D or in university laboratories until the technology matures
to the point where it can be effectively commercialized.
On the other hand, entering the industry or sector late in its cycle—in the mature or declining stages—is a hopeless errand for the entrepreneur unless he or she has a powerful concept
for reinvigorating the product or service and thereby regenerating solid growth. Lacking that, he
or she will fight against entrenched competitors for a dwindling number of customers.
Exceptions to the Rule
For startups that offer new systems or services (as opposed to products), opportunities can be
found at all stages of the life cycle, particularly for B2B plays. In these cases, industry participants are the venture’s customers. For instance, makers of home refrigerators in the U.S. market
are in a mature stage characterized by many competitors and modest profit margins. Demand
is growing very slowly. The predicament in which these manufacturers find themselves creates
healthy demand for entrepreneurs who can provide:
• Cost-saving production methods
• Operating efficiencies
• Imaginative marketing concepts
• Customer-pleasing product innovations
Thus, in B2B situations, identify areas in which companies are feeling pain and desperately seeking solutions. If you can relieve their pain or solve their problems, you will have
customers, no matter what stage of the life cycle your B2B customers are in. For example,
a new information system or data mining application that can substantially help a company
such as Staples improve customer knowledge and supply chain efficiencies is going to get a
good look, and if Staples decides to buy, it is world-class reference accounts with which to
sell other retailers. Or, large, mature utility companies are actively investing in new “smarter
planet” technologies in the form of software and sensors to more efficiently manage electrical grids and consumption. Even the most mature and static of industries can become
hotbeds for innovation. And when that happens, the entrepreneur often becomes pivotal in
business and industry transformation.
Barriers to Entry
A thorough investigation of a target industry must also consider (1) the presence of barriers
to entry, and (2) what, if anything, can be done to surmount them. A barrier to entry is any
requirement—capital, technical know-how, and so on—that makes industry or market entry
difficult or impossible. Of the many barriers faced by industry outsiders, three are particularly
important for new venture entrepreneurs: capital and time, manufacturing, and marketing.
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
Capital and Time
Entry to some industries/sectors requires huge amounts of capital—amounts that few entrepreneurs
can raise. In other industries/sectors, years of R&D are needed to develop marketable products. As
you can imagine, these two barriers usually go hand in hand. Consider, for example, the pharmaceutical industry where more than ten years and close to a billion dollars are typically needed from start
to launch for a single new drug! On the other hand, Web-based social networking presents minimal
time and capital barrier. Launching a new Web-based business can be fast and inexpensive.
Manufacturing
Certain manufacturing industries require particular types of machines to produce a given category of products. For building products, complex wood cutting, forming, and assembly
machines are needed; for certain plastics and food products, specially built extrusion machines
are required. And the list goes on. These machines can cost millions of dollars. An entrepreneur
who insists on entering a capital-intensive industry needs to consider external manufacturing
options—often called contract or comanufacturers—to source his or her products. An increasing variety of these options exists both here and abroad.
On the other hand, we have seen students create new data mining and analytical “production” for the institutional investment industry with nothing more than several affordable servers.
Marketing
Marketing is the third major barrier to entry that an entrepreneur needs to consider. Gaining
access to customers may be difficult and costly. Consider these examples:
• A new food venture with a natural fruit snack for kids faces a serious financial obstacle:
paying “slotting fees” to get its products on the shelves of major grocery and convenience
store retailers. Slotting fees can reach to several million dollars or more.
• A software company’s products need to be sold by knowledgeable sales people. It faces
a $300,000 annual price tag (compensation, benefits, and training) for each highly qualified salesperson. Half a dozen salespeople are typically needed in the second year of
business by companies in this field.
Situations such as these make entry challenging. But don’t give up too easily. An imaginative
entrepreneur can sometimes circumvent typical barriers by finding new and unconventional challenges to customers. This is how Dell Computer made its mark. Instead of selling through expensive
retail stores like everyone else, it marketed PCs directly to customers. eBay founder Pierre Omidyar
operated his new company from his rented apartment using a PC, a small server, and a second-hand
table until such time as he could easily afford more space, personnel, and equipment.
Additional Environmental Scanning Can Also
Uncover Rich Entrepreneurial Opportunities
Environmental scanning can uncover new venture opportunities, or at least help identify the
types of users you want to get to know. Successful entrepreneurs regularly scan their market,
technology, and competitive landscapes to look for opportunities, threats, and partners—to
understand the ecosystems in their dynamic marketplaces.2 As you scan the environment:
• Pay attention to trends and market changes, and how users are reacting to them; for
example: a consumer trend toward purchasing locally grown food.
Crane, F. G., & Sohl, J. (2004). Imperatives for venture success: Entrepreneurs speak. The International
Journal of Entrepreneurship and Innovation, 5(2), 99–106.
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part 1??? DEFINING THE VENTURE CONCEPT
• Closely look for structural changes in society and determine how those changes will
affect the needs of consumers; for example: an aging population of homeowners seeks
smaller, low-maintenance housing.
• Study the trajectory of new product introductions by leading competitors in your chosen
industry; for example: Manufacturer X launches a new product generation every four
years, each with more electronic systems, and each with analog features replaced by
digital features.
• Keep up to date on government actions that could affect your venture; for example: the
U.S. Environmental Protection Agency taking public testimony in advance of new regulations on disposable medical products.
What you learn from scanning will greatly inform your venture concept. And you may
uncover an opportunity that is even better than your initial concept. It is also important to keep
track of what you learn from environmental scanning and then see how it affects your choice of
target customers, products, and/or services.
Figure 1.3 shows a simple environmental scan in terms of key facts, constraints, and emerging trends driving the North American landscape. Each one can shape your venture concept.
While Figure 1.3 shows some over-arching trends that are affecting businesses on an aggregate
level, you will have to prepare an environmental scan specific to “your industry” and “your venture.” Revisit it from time to time to see if and how the external environment is changing.
Environmental scanning can hugely affect the design of a business. Here are some examples
from different industries:
Trends
Over-Arching Examples
Venture Opportunities
•
•
•
•
•
Social
•
•
•
•
•
Economic
• Growth in electronic commerce
• Shift toward experience economy
• Online businesses
• Businesses that “market” experiences like
ecotourism
Technological
• Diffusion of digital and mobile technologies
• Growth in biotechnology and nanotechnology
• Advances in medicine and medical treatments
• Social media companies
• Miniature medical devices
• Personalized medicine based on DNA
Competitive
• Increase in global competition
• Emergence of and as competitors
• Mergers and acquisitions
• Access to foreign markets; encroachment by
foreign competitors here
• Opportunities to partner with Chinese and Indian
firms
• Opportunities to merge with a partner or acquire
a partner
Regulatory
• Increased protection for intellectual property
• Increased emphasis on free trade
• Deregulation
• Leverage IP as competitive advantage
• Opening up of foreign markets for venture
expansion
• Reduction of entry barriers to allow new startups
Growing ethnic diversity
Aging
Time poverty
Value-consciousness
Eco-consciousness
Figure 1.3?? Environmental Scanning Matrix
Ethnic foods
Adult diapers, nursing homes
Personal services
Dollar Stores
Green-based businesses
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
• Security: September 11 created a whole new market for startups and corporate ventures
in the industry sector of Homeland Security. Many of these businesses deploy various
types of sensors, databases, and workflow software to monitor, alert, and respond to
terrorist threats.3 The choice of target customer went to new buying agencies in federal,
state, and local governments, as well as corporations needing protection from terrorist
threats (such as utilities).
• Health: The aging of the population, as well as new government regulations, is creating
new growth opportunities in home health care. We will have a dedicated case on this in
a later chapter; but for the time being, imagine various noninvasive sensors deployed in
someone’s house that can monitor physiological conditions and well-being, and send
alerts in the case of medical emergencies.
• Energy: The cost of oil is driving the creation of a new generation of electric car manufacturers; by some estimates, there are dozens of startups and corporate ventures focused
on this opportunity. Energy costs are also creating opportunities not only for alternative
energy sources (solar and wind, for example) but also for widely distributed energy management systems that track and balance energy consumption.
• Government regulations for specific industries: Government regulation can also be a powerful external factor that can make or break a new venture. For example, in financial services, fraudulent company accounting led to Sarbanes-Oxley legislation and a host of new
software and service ventures to help companies become compliant. Publicly traded companies spend millions of dollars each and every year on software and services for accurate
financial reporting and consolidation across divisions and countries. There is no choice.
Three Steps to Industry Analysis_________________
If you’ve applied your thinking to Figure 1.1, you will have some notion of where in the universe of industries your internal factors (experience and passion) should direct you. You might
then say with some assurance that your future lies, for example, in the load management sector of the energy industry or social networking sector of Web commerce. It is now time to dig
deeper with three straightforward and relatively simple steps for analyzing a target industry or
sector. To illustrate these steps, put yourself in the shoes of a would-be entrepreneur, Jake, who
is attracted to the organic foods sector of the agriculture industry. Here is the situation:
Jake has some personal experience with the agriculture sector. He spent several
summer vacations working on his uncle and aunt’s family farm, and selling their
organic produce to city people each Saturday morning at an outdoor farmers market.
Jake has also read widely on agri-environmental issues and the subject of sustainability. He is passionate in his belief that the nation, environment, and individuals
would all be healthier, and small farmers would be more prosperous, if consumers
would shift more of their food spending to locally grown organic produce. Thinking
broadly, he has sketched out a rough idea for automated hydroponic greenhouses
capable of providing 10 to 20 times the yield of the field-grown operations. He has
gone so far as to test out a miniversion of this concept using grow lamps and other
equipment in one of his university’s science labs. The results are encouraging. Jake
wonders if he could create a viable business by marketing certified organic food to
upscale food stores and expensive restaurants.
Meyer, M. H., & Poza, H. (2009, May). Venturing adjacent to the core: From defense to homeland security.
Research Technology Management, 31–48.
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part 1??? DEFINING THE VENTURE CONCEPT
With Jake’s situation in mind, let’s move on to the steps an entrepreneur can use to analyze
a target industry. (Note: Jake and his business are based on an actual case. One of your authors
helped that business obtain angel financing, which it used to construct two dozen greenhouses.
The business became a supplier to upscale retail food companies and restaurants, generated
substantial cash, and within six years sold out to a large food grower.)
Step 1: Correctly Identify the Industry
The first job is to name and accurately describe the industry in which you intend to operate. The
North American Industry Classification System (NAICS) and accompanying U.S. Census Bureau
data linked to it is a good place to begin (http://www.census.gov/eos/www/naics). NAICS provides common industry definitions for the United States, Canada, and Mexico, and groups the
economic activities of specific companies into specific industries and industry subsectors. This
information can help you to evaluate industry size, customer demand, competitive market share,
and so on for many industries and their subsectors. Similar classification systems exist in Europe,
Japan, and the BRIC countries (Brazil, Russia, India, and China).
Let’s now revisit Jake’s organic greenhouse concept in terms of Step 1, putting you in his
shoes as entrepreneur.
Where would you start in defining this industry in a broad sense? Using NAICS, you will
find an “industry” defined as Sector 11 under NAICS—called Agricultural, Forestry, Fishing, and
Hunting. You will find “aggregate information” on the industry including value of production for
most recent years. That is your starting point. But, given that you want to play in the “agricultural
space” you do not want to analyze forestry, fishing, and hunting. Thus, you can drill down to Crop
Production—Subsector 111. In doing so, you have refined your industry space to a specific sector.
You can now start examining what is happening in this specific industry sector (see Step 2).
Step 2: Determine Market Size,
Growth, and Profitability in a Sector
Using Subsector 111—Crop Production—you can examine market size, growth, and profitability across a range of crops. But, given that you intend to operate in the “greenhouse” space,
you should define and identify your sector more narrowly, in this case by focusing on Subsector
1114—Greenhouse, Nursery, and Floriculture Production. Doing this will provide some more specific insight into your industry niche. But wait! It is even possible to drill further to Subsector 11141—
Food Crops Grown Under Cover (exactly what you will be doing). It is possible to drill down to
another level—Subsector 111419—and examine data on specific crops grown under cover. Using
this data, you discover that organic tomatoes are in greater demand and selling at significantly higher
margins than mushrooms! This industry data will help you to properly plan your product offerings.
Remember, you can gather growth rate and related data through NAICS and its direct links to U.S.
Census Bureau data (or visit the Census Bureau site directly athttp://census.gov/econ/census07). If the
U.S. Census Bureau doesn’t have the information you need, there are other sources of industry-level
data. For example, Fortune magazine reports profits and profit growth for single and for 5-year periods
for a variety of industries (see Figure 1.4 for 2008 and 2003–2008 data).4 This single table serves as a useful benchmark for assessing the relative attractiveness of your target industry. Notice that only five of
the ten industries listed for 2003–2008 are on the list for 2008. Yesterday’s profitable industries are not
necessarily the best ones for you to start a business today or in the future. That is what makes this type
of research so important to do. Never take the health of any particular industry for granted.
If you cannot find an aggregated report—or report supplement—the sales, profitability, and
balance sheet strength of publicly traded industry leaders can be readily obtained. Growth rates
4?
Industry Profit Potential, Fortune Survey, 2008, May 4, 2009.
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
Growth in Profits (2003–2008)
? 1.? Metals
? 2.? Internet Services
? 3.? Oil and Gas Equipment
? 4.? Wholesalers
? 5.? Engineering, Construction
? 6.? Construction/Farm Equip.
? 7.? Network Comm. Equip.
? 8.? Railroads
? 9.? Aerospace/Defense
10.? Pipelines
57.9%
58.5
48.9
36.9
29.5
26.5
24.2
23.6
23.2
22.6
Growth in Profits (2008)
? 1.? Food Service
? 2.? Engineering, Construction
? 3.? Health Care, Pharmacy
? 4.? Internet Services
? 5.? Pharmaceuticals
? 6.? Info Technology Services
? 7.? Oil and Gas Equipment
? 8.? Pipelines
? 9.? Railroads
10.? Medical Product Equip.
43.1%
38.0
36.9
35.5
24.5
24.2
18.5
18.0
16.4
15.4
Some of the worst performers
Motor Vehicles/Parts
Insurance
Entertainment
–11.8
–18.3
–35.1
Chemicals
Hotels/Casinos/Resorts
Airlines
–22.5
–101.0
–564.0
Figure 1.4? ? Industry Profit Potential, Fortune magazine Survey, 2008 Survey
Source: Fortune magazine, May 4, 2009.
can be calculated directly from those data. Go to Yahoo!Finance, type in the name of an industry
leader, and look at the “competitors” section. If the company has a lengthy history, you’ll find
a wealth of information. For example, if you know of publicly traded companies in the agricultural sector engaging in greenhouse farming, you can check them out at Yahoo!Finance.
Step 3: Assess Industry Dynamics
The final step in our process is to understand and assess the dynamics of the industry—the many forces
at work in the industry and that impinge on its fortunes. The purpose of this assessment is to shed light
on developments that make yours a favorable or unfavorable industry in which to start a new enterprise. Objectivity in this assessment is essential; without it, personal enthusiasm can cloud your judgment. People have a bad habit of seeking out data that confirms what they already believe to be true
while avoiding or discounting data that contradicts those preconceptions. Objective assessment is the
antidote to that human foible, which is why we offer you the following “screening factors.”
1. Market growth. Determine the rate of growth for the industry or sector you have
identified above. If you can’t find that information for the industry, try to find the growth
rate of the industry’s leaders and “hot companies.”
2. Industry profit potential. Again, use either an aggregate figure from a source
such as Fortune or research on publicly traded industry leaders and “hot companies.”
Yahoo!Finance and Hoover’s are sources for this information.
3. The industry’s rate of technological change and innovation. Opportunities are often
found in the turbulence created by technological change and innovation. Deregulation
can create a similar effect. News stories on company events, product announcements, and
customer applications can give you a sense of change and innovation. Look also to specialized
industry publications such as ComputerWorld (for hardware and software innovations) or
New Scientist (for chemistry and hard science breakthroughs). For environmental innovation,
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part 1??? DEFINING THE VENTURE CONCEPT
see Hot Topics onhttp://www.EarthPortal.com and online publications of the National
Council for Science and the Environment. Or, once again, go to Yahoo! Finance and read the
news stories on industry leaders. And, of course, a carefully constructed Google search may
turn up incredibly valuable information on industry dynamics.
4. The volume of venture financing to startups in the target industry or sector. The venture
capital (VC) industry employs thousands of highly trained professional analysts to do exactly
what you, an amateur, are trying to accomplish: Identify areas of commercial growth and
opportunity. When they find those areas, venturing financing quickly follows. So let these
professionals be your reconnaissance scouts and follow their money trail. Pricewaterhouse
Coopers’ MoneyTree Report (http://www.pwcmoneytree.com) tabulates recent quarter
venture capital investments by technology industry. While most startups do not attract VC
funding, VC behavior is a good indicator of where growth is anticipated and where other
venture financiers, such as angel investors, are placing their bets. At the time of this writing,
biotechnology, software (generally), and medical devices are the top three destinations for
venture capital, accounting for nearly 60% of all such investments in the second quarter
of 2009. MoneyTree Report will give you the most recent information and also indicate the
regional breakdown for investments by industry. Within these larger categories, certain niches
will be hot. For example, in mid-2009 the $60 billion storage management industry, the niche
of virtualization through software and/or hardware, was receiving much attention. Similarly,
certain natural resource plays were strong in the industry and energy category (wind energy,
solar energy, and biomass energy conversion), while others (oil and natural gas) were not.
5. Strong, clear channels to markets that are receptive to new product or service
innovations. The third-party software business development programs of Microsoft, IBM,
or any computer technology company are a path to their installed base. These and other
technology giants generally require that your technology uses or integrates with their own
tools and products, and often, undergoes some type of certification process for which you
might have to pay a fee. In return, your company and its offerings are listed in catalogs and
Websites, and sometimes, actually sold by their own sales forces as part of a larger enterprise
solution. Or, if you are doing a consumer products venture, understanding the willingness of
premium specialty retailers to try new products such as yours is an essential consideration.
Examples of highly receptive retailers that are always on the search for distinctive, premiumpriced innovations include Whole Foods Market, PETCO, and Trader Joe’s. If you are doing
a life sciences venture, today large pharmaceutical companies are desperate to fill their
depleting pipelines with new potential drugs. Each one of these represents channel as well
as development partners. New, small firms can prosper by aligning themselves with giants. It
can provide corporate investment, credibility with customers who do not want to take a risk
with a new startup, as well as broader access to markets.
6. The concentration and intensity of competition. An oligopolistic industry, with half a
dozen major players, could create a lock on channels and suppliers. Every venture will have
competitors; however, you strongly prefer that these competitors not be market leaders
who spend a lot of R&D money on your exact area of innovation and show prowess in
bringing it to market. Who wants to compete directly with an Apple or a Microsoft or a Dell
or an IBM? Some startups succeed, but typically it is far better to focus on a complementary
product or service. As part of this, you must also try to understand if there are offshore
players that are strongly affecting price and, therefore, profitability. Samsung, Lenovo, and
Acer are all highly effective cost competitors that are even giving Dell a run for its money.
7. Poor access to key supplies and suppliers. If you are thinking of manufacturing solar
energy panels, you should check the availability of key inputs, such as silicon. On the same
note, how eager to deal with small firms like yours are suppliers of key materials? You may
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
find, for example, that a major competitor has “locked up” those suppliers, thereby creating
a barrier to entry. You have to be proactive and actually ask whether or not suppliers are
open to cooperate with you. Suppliers will be honest if you ask. But, it is your responsibility
to determine this situation.
8. Concentrated customer power. Who has the power in your sector, customers or
producers? If your plan is to make and sell things through small, independent retailers
(which are fast disappearing these days), the power to set prices and dictate terms of
trade may be well balanced. If your customer is Walmart, Target, or Best Buy, you will be
a price taker and an acceptor of terms. Customers like these have the power to protect
their margins and drive yours down. How would a power imbalance like that affect
your intended business? Big firms (e.g., Walmart) can dictate terms and conditions. But,
those conditions will not be self-evident until negotiations begin. This is when you, as an
entrepreneur, must hold the line and decide whether or not you will accept terms and
conditions that are likely to be detrimental to the long-term success of your business.
Take a look at Figure 1.5. It shows how we can use these aspects of industry analysis to
assess a target industry, breaking them down into more specific dimensions. The sample shown
in that figure is for Jake’s business.
Facts / Data About Your Target Industry
Industry Score
Market growth
Double-digit growth, above 15%
?7
Profit potential for the sector (or)
Operating margin of sector leaders
Excellent margins by taking out the manual labor
10
High rate of technological change and new
products
Agronomics is steadily advancing the knowledge on
optimizing nutrients, seeds, and greenhouse technology
?7
Flow of venture financing
Bootstrap or angel financing, with some government
financing
?4
Presence of clear channels to customers
Whole Foods Market was a perfect channel to target
users
10
A lack of concentrated competition
Highly fragmented. Mid-sized Israeli, Dutch, and
Mexican suppliers. No ConAgra.
10
A lack of offshore entrants driving down prices
For standard grocery, yes.
For organics, no downward price pressure.
10
A lack of barriers to gain access to channels
Premium speciality retailers highly receptive to greater
supply of organics.
10
A lack of barriers to gain access to suppliers
No problem. Seed and nutrient suppliers available.
The automation technology readily available.
10
A lack of concentrated customer buying
power
Walmart was just getting into the organic food business.
(Today it is the No.1 seller of organic foods!)
?6
Total Score
Figure 1.5?? Understanding the Dynamics of Jake’s Target Industry
Scoring Key:1 to 10, where:
1 is “a tough barrier for a new venture,” 3 is “a challenge,” 5 is “neither a barrier nor supporting success,”
7 is “conducive to a new venture,” and 10 is “an ideal setup for venture success.”
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part 1??? DEFINING THE VENTURE CONCEPT
Each area of the assessment can be scored along a 1 to 10 scale using the key at the bottom
of the figure. If you feel that a particular factor is not relevant to your venture, it can be deleted
from the table. However, we strongly urge you to consider each and every item before dismissing anything. Any one of these areas can turn around and bite you in the back later on. When
these are totaled, you will have an overall score that can be used to either (1) assess industry/
sector attractiveness, or (2) compare alternative target industries or sectors. (Note: The last five
screening factors in the template are placed in the reverse—for example, using the words “A
lack of . . .” in front of barrier to entry.)
For the first two screening factors, market growth and potential profitability, we consider
data showing growth over 30% as outstanding, 20% to 30% as very good, 10% to 19% as tolerable, and 3% to 9% as poor. Anything below 3% is unacceptable. Profit potential can be considered between 5 and 10 percentage points lower than growth percentages. This is based on our
own personal experience in ventures. You need to see sufficient growth in an industry because
this shows that there are enough customers predisposed and having the cash to buy the products and services you wish to create in your new venture.
Jake is actually doing pretty well in his industry assessment. The only two dark spots on
the horizon are (a) that hydroponics is not a “hot” area for traditional venture capital and
(b) that Walmart is becoming a major player in organic foods, which means severe downward price pressure. The way Jake ended up dealing with these negatives was to raise
capital from angel investors and to work a good deal with Whole Foods Market and other
premium specialty retailers. That is how most entrepreneurs deal with difficult venture
finance and route-to-market issues.
Perhaps as important as anything else is that Jake modeled the benefit of his new automated system in terms of productivity in growing organic vegetables. In fact, that is how we
came to know about Jake. One of your authors helped him develop productivity calculations based on a single prototype greenhouse that Jake had used his own money to build.
They compared its growing rates to traditional commercial greenhouses. They realized that
a hydroponic, automated greenhouse could provide 10 to 20 times the yield of field-grown
methods and five times the yield of greenhouses that are not hydroponic or fully automated.
This became a key part of Jake’s ability to raise startup capital—he had designed a better
mousetrap.
An industry scoring over 75 in this template is very much worth consideration as a venue for
a venture. Any industry scoring below 25 should probably be avoided. If your industry scores
in the midrange on the scale, say 50, then you must think about how you will overcome industry problems and obstacles. We’ll return to this template in the Student Exercises section of the
chapter.
Mapping Out the Key Players
in an Industry Sector___________________________
With industry data and your assessments of the industry on hand, it is then important to focus
on a venture’s specific role in an industry. To do this in a powerful, simple way, we like to use a
technique called industry ecosystem mapping.
An industry ecosystem includes all the players within a given industry, from raw material
suppliers, to value-added suppliers, to assemblers and integrators, on through the distribution
and support channels and their respective players. Mapping the industry ecosystem as a network of interconnected players can help you to understand the industry at a deeper level and
suggest where your enterprise might fit in. Figure 1.6 is the industry ecosystem map for our
friend Jake, the automated, organic gardener!
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
Channel A
Upscale
restaurants
Suppliers A
Framing, glass,
plumbing
Subassemblies
or
software components
Suppliers B
Growing
automation
Producer
(Jake’s
Greenhouses)
Flow of Product
Users
Environmentally
conscious
upscale professionals
Channel B
Specialty
food stores
Flow of Services
Flow of Money
Figure 1.6?? Jake’s Industry Ecosystem Map
You can see that we have placed the typical startup venture squarely in the middle in the
figure. Pay particular attention to the colored lines, which represent the flows of product (or
components or raw material), services, money, and information and referrals. We want you to
think about creating this type of diagram for your own target industry. Also note the four different types of lines connecting the actors in the chart:
• The flow of product (from raw materials to assembled products to shelf, or software
development tools to completed software applications to OEM or value-added reseller to
the customer or user)
• The flow of services (which may include consulting to integration to training to maintenance or repairs)
• The flow of money (often, but not always, a different colored arrow going the opposite
direction as product or services)
• The flow of information (one aspect of which may be marketing referrals)
The combination of the circles filled in with company or customer group names and the
lines connecting the various circles tells the story of the industry in which you wish to play.
In some cases, a major, dominant player—an IBM, Microsoft, Goldman Sachs, or Walmart—
sits squarely in the middle of the industry ecosystem. These are analogous to the sun in our
solar ecosystem. They are at the center and, like the planets, all other industry participants orbit
around them. It would be foolish to compete directly with these behemoths because of their
financial, marketing, and technological power.
It is then that you can use this mapping to identify niche opportunities within an industry. For example, if you were to draw out the ecosystem for Apple iTunes, there is clearly the
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part 1??? DEFINING THE VENTURE CONCEPT
opportunity to build new iPhone applications. Entrepreneurs building these “apps” and selling them through Apple are a major bubble in the ecosystem diagram. Even a small niche—as
a supplier, consultant, testing service, or distributor—may represent a good opportunity for a
small startup. And who knows what that could lead to? That same niche might be the beachhead
from which the startup will expand within the industry.
The spaces between the bubbles in the generic figure may also present outstanding opportunities. An enterprising venture might find a way to connect different industry players for more
seamless and more cost-effective operations. You need only go to IBM’s own Smarter Planet
Website pages to find case studies that show how IBM is using instrumentation, interconnectivity, and integration to link one end of a global value chain to another. Or you might be the next
iTunes, connecting music creators with music users through the Web.
Whatever you decide to do, make sure that your ecosystem map is current and forwardthinking. Remember, you are not planning for where things stand at the moment but where
they will be in the near future and beyond.
The Last Step Toward Defining Your
Venture Scope: Deciding Which Type
of Business You Want to Be Within
Your Target Industry____________________________
Figure 1.7 shows the first two steps of the venture scoping process: understanding the internal
strengths and experiences of the entrepreneur, and understanding the characteristics (we hope
positive) of the target industry for which personal strengths seem to fit and serve as the basis for
a successful enterprise. Think of this as balancing and blending personal and industry analysis.
We have also learned that since industries are enormous entities that the key to success is to
develop a venture within a particular niche or area within a larger industry. Every successful
company used to illustrate a point in this chapter is an example of this focus in one form or
another—the authors’ ventures included!
Work Experience
Industry screening factors
Education Experience
Type of Business
• A product venture
Target Industry
Pros
Sector/niche
within an industry
Cons
• A services venture
Challenges
• Combination/hybrid
• A systems venture
Family Experience
Do this individually for the members of your venture team, compare notes,
and share your ideas about the different business types of opportunities that might exist in the target industry.
Figure 1.7?? Defining the Venture Scope
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
Figure 1.7 also shows the third and last step of defining the scope of a venture: deciding
what type of business to be in terms of creating and providing products, systems, services, or a
hybrid combination thereof. There are usually many ways to “make a buck” in a given industry
or sector. In general, these fall within these three categories—or a hybrid of the three. It is also
important to appreciate the differences between these types of businesses in terms of how they
generate revenues. It is to the last step of venturing scoping that we now turn our attention.
Different Types of Business Possibilities
for the Same Target Industry Sector
It is not unusual to find customers in the same market being served by different companies
focused totally on products, focused totally on systems, or focused just on providing different
types of services. Suppose, for example, that we wanted to start a venture in the supply chain
management industry, with a focus on mass market retailers. Those retailers, led by Walmart,
want to track every product they sell from suppliers’ factories to their store shelves. Now, let’s
consider how different business “types” created by entrepreneurs could serve the needs of
Walmart and others in the supply chain management industry:
Products: Create radio-frequency identification (RFID) sensors and readers capable of
tracking products in transit by item and by pallet. The venture will obtain patents on its
sensor technology and find third-party manufacturers to produce its sensors and readers.
Systems: Create software-based systems to acquire sensor information in real
time, communicate those data to central servers armed with sophisticated workflow
management software, and use software applications to inform customers of the status
of products in production, in transit, and in stock. Customers will use these data to
optimize inventory planning and distribution center operations.
Services: Create any one of many service-based businesses; for example, provide
Walmart employees with access to tracking data through a simple, secure Web browser.
Alternatively, the venture will create a portal to facilitate competitive bidding by shippers
to manufacturers and mass market retailers such as Walmart, Target, Tesco, or Carrefour.
Making Money Is Different
Based on the Type of Business
The three business types not only differ in how they create value for customers, but they have, in
most cases, very different revenue, cost, and margin profiles. Consider first a product-type business. For every $100 in product sales revenues, $30 to $40 is spent on manufacturing; another
$25 to $40 is spent on selling, marketing, R&D, and administration, leaving a net operating profit
margin in the range of $15 to $25. The point of leverage in this business is to design a great set
of products and manufacture thousands if not millions of them at a low cost per unit. Such businesses often require huge capital outlays for production capacity. Using our example of A123
Systems again, this venture raised about half a billion dollars in 2009 to develop manufacturing
capacity, about ten times the amount raised for its research and development of the batteries.
Now consider the typical systems company. For every $100 of revenue, $20 to $30 might
be spent on R&D; another $10 to $20 is spent on sales, marketing, and administration, leaving a
net operating profit of $50 or more. At least, that is the goal! The point of leverage for a systems
company is to hire the smartest programmers, have them create fantastic software, and then ship
it electronically with virtually no cost of goods. The high profit margin enjoyed by this type of
business explains why software continues to draw heavy venture capital investments.
Services companies aim to be product and systems agnostic. They are consulting firms,
equipment service firms, transportation services providers, home health care providers, energy
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part 1??? DEFINING THE VENTURE CONCEPT
production and management firms, and so forth. Most are labor intensive. Thus, for every $100
of revenues, a typical services firm spends a third on labor; a third on technology, marketing,
and administration; and tries to walk away with $33 or more in operating profit. Its point of
leverage is the design of the service, the people who deliver the service, and the technology that
helps them deliver the service efficiently and effectively. Think of the UPS drivers in your area
and their handheld devices. UPS’s combination of people, trucks, and information technology is
its secret for profitably delivering more than 18 million packages a day!
In short, the three basic types of businesses—product-focused, systems-focused, and
services-focused—are completely different in terms of what they do and how they make money.
Their points of leverage are also entirely different. You can learn about the revenues, costs, and
margin profiles of companies operating in your target industry or sector through Yahoo! Finance
and similar sources. Look up the industry leaders and examine their income statements.
Making the Choice of the Business Type for Your Venture
And so, having selected an industry and screened various possible target sectors in that industry,
you must now decide, “What type of business do I want to have?” Apple’s decision in the mid2000s to shift some of its energy to a service business—iTunes—demonstrates the power of type
choice on earnings and company value.
Most entrepreneurs make the “type” decision by considering internal factors and the analysis
they used in screening industries:
• For which type of business do I have the experience and education needed to succeed?
• What am I really good at? This is not only in terms of creating a product or system or service but also in terms of selling the innovation.
• Do I want to create a new product or simply integrate different products together within
a system or service? Am I most comfortable with the idea of providing a service?
• Which type of business in my chosen industry sector is in greatest demand by customers?
• For which type of business is there the least direct competition?
Time is another issue to consider in making the choice of business type. The longer it takes
to generate revenues, the more difficult it will be to obtain financing—and the greater the risk
for the entrepreneur.
As a general rule, product companies seem to take the longest time to move from business idea
to first paying customer. A unique and appealing product must be designed, prototyped, customer
tested, and manufactured. Even a simple product can take 18 months or longer to move to market.
Medical products can take much, much longer! Systems companies tend to face a one- to two-year
run-up to workable product: lots of software development and iterative testing, a beta site with a few
lead users, and then it’s off to the races. Service companies, on the other hand, can start providing services right away if the team is right and be making money soon thereafter. Time to market is not the
only consideration, of course; make a great product and there is far more leverage on time and effort
and capital than all but the best of services businesses. Software can be even better.
*** *** ***
In this chapter, you learned the importance of gathering information on the attractiveness of
industries and the sectors within those industries. Successful entrepreneurs use information to
drive their venture decisions. It is critical that you use objective information to determine if the
innovative concept you have in mind also has the makings of being a good business, the foundation of which is to compete in a growing, attractive market space. Do not let your passion for
an idea get in the way of applying common business sense to find those areas where your experience and industry dynamics combine to make for a promising journey.
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
Reader Exercises
Now it is your turn to apply the venturing scoping ideas of this chapter to help shape your own entrepreneurial vision.
The following exercises should be done sequentially.
Also, a few words about student project teams. This type of work is often performed in teams to emulate the venture
team startup process. If you do recruit team members for a project, have a separate discussion off-line in terms of roles
and responsibilities. Do this early in the project so that everyone understands the amount of “skin in the game” that each
team member is willing to contribute. Then, have a process for reviewing each other’s work.
This commitment to getting the work on time is so important. You don’t want to have people join your team just
because they think your idea is “cool.” They must be willing to work because it is only through that work that your
venture idea will continue to improve. As a fledgling entrepreneur, you do not have the time nor should you have the
patience to carry noncontributors on your back.
Now on to the assignments for this chapter. It is time to define your venture scope!
Step 1: Each Team Member
Needs to Complete Figure 1.8
Put down your specific work and educational experience as well as family history events. After each team member does
this for themselves, you then need to assemble a composite list for all team members. Just as important as what is on that
list, note in a different color (such as red) those items in terms of skills and work experience that appear to be missing
for a successful venture. If you have gaps, don’t let these stop you. However, these will also help direct you in terms of
what new team members you need or which other professors or advisors you might seek out in the weeks and months
ahead.
•
•
•
•
Team Work
Experience
Team Education
•
•
•
•
•
•
•
Target Industry
Beneficial Family
Connections
Do this individually for the members of your venture team, compare notes,
and share your ideas about the different business types of opportunities that might exist in the target industry.
Figure 1.8?? Entrepreneurial Background Template
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part 1??? DEFINING THE VENTURE CONCEPT
Step 2: Conduct a Target Industry Analysis
This is a very important exercise. You need to search the Web and other data sources for information regarding your
target industry. This includes hard numbers of the profitability of current market leaders and some intensive research
on technology changes, channel changes, and competitors entering your target industry sector. You also need to search
sources such as MoneyTree Report (http://www.pwcmoneytree.com) to see the current flow of angel and venture
financing into that sector. Examples of industry sectors might be biotechnology, software, medical devices, energy,
media and entertainment, networking and equipment, or health care services.
Then, once you have gathered these data, we want you to score the attractiveness of each dimension in Figure 1.9
for your industry sector. Then, make an honest assessment of this data-driven analysis. Is the sector a good place to start
a venture? Does it have favorable industry dynamics or not?
Facts / Data About Your Target Industry
(Bullet-point facts)
Industry Score
(1–10)
Market growth
Profit potential for the sector (or) Operating
margin of sector leaders
High rate of technological change and new products
Flow of venture financing
Presence of clear channels to customers
A lack of concentrated competition
A lack of offshore entrants driving down prices
A lack of barriers to gain access to channels
A lack of barriers to gain access to suppliers
A lack of concentrated customer buying power
Total Score
Figure 1.9?? The Industry Dynamics Scorecard
Scoring Key: 1 to 10, where:
1 is “a tough barrier for a new venture,” 3 is “a challenge,” 5 is “neither a barrier nor supporting success,”
7 is “conducive to a new venture,” and 10 is “an ideal setup for venture success.”
If the assessment score is low, you might wish to consider strongly looking at a different industry or a different sector
of the industry that interests you. Otherwise, you need to have a serious discussion about how to overcome the negative
dynamics you have uncovered. When it comes time to raise money from professional investors, assume that they know
the potholes just as well as anyone else. What seasoned professionals try to find are “show stoppers,” defined as an
industry dynamic that makes even a well-managed venture hard to grow.
Step 3: Conduct an Environmental Scan for Your Target Industry
Figure 1.10 presents an environmental scanning to further enrich your target industry sector analysis. Pay particular attention to the five key dimensions of environmental scanning: changes and trends in the social, economic,
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
technological, competitive, and regulatory conditions surrounding your venture concept. Record these with references
to supporting data sources directly on the template. Then, try to identify venture opportunities that take advantage of or
respond to these trends. Remember, trends can be either positive or negative from the end-user’s point of view. A venture can be positioned within a larger trend—and from that “ride a wave” toward success. Ventures targeting the aging
population, environmental regulations on energy production and consumption, or obesity are examples of “matching
venture opportunities.”
Trends
Over-Arching Examples
Venture Opportunities
Social
• Look for aging, health, ethnic, and other
socio-demographic trends
• Make a list of matching venture opportunities
Economic
• Look for macro-economic trends such as
globalization and economic cycle
• Make a list of matching venture opportunities
Technological
• New, disruptive technologies
• Current and emerging “standards”
• Make a list of matching venture opportunities
Competitive
• Offshore competitors
• “Plays” by large corporations through
acquisitions
• Make a list of matching venture opportunities
Regulatory
• Regulation/deregulation
• “Green” regulations
• IP protection in emerging markets
• Make a list of matching venture opportunities
Figure 1.10?? The Environmental Scanning Template
This template will be useful when you get to the point of discussing the venture with your professor or advisors. It
will demonstrate that you have done your homework and that you recognize both opportunities and dangers on the
horizon. Revisit your venture concept statement with the environmental scanning template in hand. Does it still make
sense? Which if any of that statement’s four elements should be revised or otherwise improved?
Step 4: Draw the Ecosystem Map for Your Target Industry
Identify all key players within the ecosystem. If there is financial information on the Web about these key players, gather
it and look at their revenues, their revenue growth rates, their operating margins, and the even the number of employees. Begin to get smart about your competitors and potential partners such as OEMs, distributors, and complementary
innovators or service providers. As you are doing this, look at their Websites and see if there are management team
members who are alums of your university.
Step 5: Have Breakfast or Lunch With an Experienced Entrepreneur,
Investor, or Executive in Your Target Industry Sector
A term project is a great excuse to reach out to business people. Students are always amazed at how executives
are willing to help young aspiring entrepreneurs. Go to the Websites of local companies that are either members
of your target industry sector or investors in new companies in that sector. See if any are alums of your university. Usually there is contact information for high-level managers. Try to use your professor for an introduction.
Your assignment is simple: have breakfast or lunch with just one of these individuals. Armed with your industry
research, you should bounce ideas off your guest and then listen. This will provide a world of information about
your target industry sector.
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part 1??? DEFINING THE VENTURE CONCEPT
Channel A
Supplier A
Subassemblies
or
software components
Complementary
Products
Manufacturer/
Integrator
Replacements
Upgrades
Third-Party
Product
Suppliers
Users
Training
Integration
Supplier B
Third-Party
Service
Providers
Channel B
Flow of Product
Flow of Services
Flow of Money
Information and Referrals
Figure 1.11? ? The Target Industry Sector Ecosystem Template
Knowledge is power; your job is to get as smart as you can about an industry as quickly as you can. Time is your
enemy. Friendly alums can be powerful allies and, more often than not, are willing to help.
Don’t worry about how to design and produce these offerings yet; specific planning for that will come later in this
book. You don’t really know what users truly need at this point, so keep your type of business at a very high or general
level.
Step 6: Bring All of This Learning Together:
Create Your Venture Scope
Figure 1.12 integrates all of the prior work into a set of venture opportunities. Based on your personal work/education/
family network background, your target industry sector analysis, and your environmental scanning, you should now be
able to identify several or more venture ideas. At this point, you don’t need to get too specific about the products or services
in these venture ideas. Instead, focus on what they will do—or the value they will bring—to users in the industry sector.
With these venture ideas placed in the template, we then want you to circle that idea which is your favorite one. Be
prepared to explain why it is the favorite based on your industry analysis. The following chapters in this book will help
you refine and test that venture idea.
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
•
•
•
•
Team Work
Experience
Potential Venture Ideas
•
•
•
•
•
•
•
Team Education
Target Industry
•
•
•
•
Beneficial Family
Connections
Do this individually for the members of your venture team, compare notes,
and share your ideas about the different business types of opportunities that might exist in the target industry.
Figure 1.12? ? The Venture Scope Template
Great work! You have now created your “venture scope”—the definition and boundaries of the venture that you
want to create. Now it’s time to get feedback on your templates. Your professor will organize an in-class presentation
session where you can share your ideas with the rest of your classmates and benefit from their experiences and insights.
Be prepared for some people wanting to join your team or you wanting them to join.
35
doc_920351981.pdf
Within this criteria related to identifying your industry, the target sector in the industry, and type of business.
1
chapter 1
Identifying
Your Industry,
the Target Sector
in the Industry, and
Type of Business
The Purpose of the Chapter
The biggest mistake a would-be entrepreneur can make is to follow blindly his or her passion
about a particular invention or technology without regard or knowledge about the industry
and applications to which that invention or technology will be applied. To be successful as an
entrepreneur, you must select an industry and market that can reward your hard work with
customers who need what you have to sell and will pay you for it. Select a strong industry—one
that is growing and hungry for innovation, new products, and services—and with proper execution, your innovative idea can be the basis of a wonderful company. This is a market-driven
approach to entrepreneurship as opposed to one where you simply create technology and pray
that it finds a good market and application to serve. Also, if you are going to raise money from
professional investors, you are going to have to defend the attractiveness of your target market
with data—with facts that prove size and growth.
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part 1??? DEFINING THE VENTURE CONCEPT
This chapter describes the first step in the market-driven venture process:
1. Identifying the industry you wish to enter based on your experience, education,
family connections, and personal interests
2. Selecting the sector of that industry where opportunity beckons
3. Determining the type of business (product, system, or service) with the greatest
potential
At a deeper level, the purpose of this chapter is to get you into the mindset of working diligently
to understand markets, customers, and business opportunities. Successful entrepreneurship rarely
happens by accident. Sure, timing is extremely important, but being in the position to take advantage
of fortuitous circumstances is what entrepreneurship is all about. Though “hunches” or intuition may
open your eyes to real commercial possibilities, they may also lead you into a trap, where even a
great idea is pulled down the drain by the overwhelming forces of a declining industry. Why bother
to seek opportunity in such an industry when others offer more possibilities and a brighter future?
This chapter also discusses the dynamic between your own personal experiences and interests, and the market realities needed to support a prosperous business. Entrepreneurs have passion for their new venture concepts. However, often we find a tension between an entrepreneur’s
own personal internal influences—such as work experience, education, and family background—
and external market factors that help set the stage for a promising new venture. Just because you
are wildly enthusiastic about a particular hobby or sport or industry does not mean that starting a
company based just on that personal interest will be worth the effort. This chapter will help you
think about these two sides of the entrepreneurial coin and, we hope, strike a balance.
Moreover, successful entrepreneurship requires that you be brutally honest and pragmatic
about the facts on the ground. You must do your utmost to gather the best information available
around any particular decision, and then take the information you gather seriously. You cannot
pretend that a “bad” market will suddenly turn around and become a fertile ground for a new
venture. And, if you come up empty, you can then check other parts of an industry for better
hunting. Entrepreneurship requires market knowledge as well as innovative thinking, plus a
determination to keep working through what might at first seem to be difficult barriers.
Learning Objectives
This chapter offers practical methods for:
• Gathering information on the attractiveness of a particular industry
• Identifying industry sectors and determining which are most appealing, including a method
called “industry ecosystem mapping.”
• Using industry analysis to define the scope and purpose of your venture
Selecting a Target Industry______________________
Most people who aim to start a business get their initial ideas from one or more of the following
“internal” sources:
•• Work experience: We watched as Cheryl moved up the ranks as a successful
salesperson for selling medical instrumentation for a market leader in eye surgery,
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
including cosmetic surgeries. She was determined to start her own business.
Fashionable, engaging, and market-focused, Cheryl saw the combination of increasing
skin cancer rates and the spending of disposable income on cosmetic products and
minor procedures (such as dermal abrasion and Botox injections) as creating an
opportunity to start a chain of skin health centers focused on upscale professional
women in urban areas.
•• Educational background: Matt, a business school student at our university,
took various entrepreneurship courses and believed that there must be a better way
to design customized business models and create financial statements than using his
professor’s spreadsheet templates or buying off-the-shelf packaged software sold for
creating business plans. He formed a team to create a Web-based software package
for business models and financial planning for new ventures—seeking to provide this
as a service to business school educators. Matt convinced his business professors and
their students to be the test users!
•• Family background and business experience: Walter was an old friend from
high school. It turns out that Walter’s father created a company that provides de-icing
services to major airlines at many airports across the United States and Europe. Walter
worked in the business and became the CEO after his father retired. Walter developed
great connections through the industry, and one of his customers was Federal Express
(having a large fleet of its own airplanes). Walter wanted to make his own mark on
the industry. He envisioned raising additional capital to start a small, feeder airline to
transport FedEx packages to small, local airports in the southeastern United States. And
that is precisely what Walter did.
Among student entrepreneurs, the fad seems to be to propose yet another social networking
idea, following in the footsteps of Twitter or Facebook. The vast majority of these fail to become
viable businesses because even though the idea is “cool,” there is no clear recipe for monetizing
the innovation, particularly if the Website is geared toward fellow students who are well trained
not to pay for anything on the Web. This is not to say that the social networking trend is a passing fad or that you can’t make money creating a social networking service. One of the teaching cases in this book (Generate) is about one of our students who developed a “LinkedIn on
steroids” combined with Hoover’s-style business information to empower business-to-business
(B2B) salespersons. This fellow, Tom, ended up selling his company for more than $50 million
within just four years of start up!
But we also encourage you to buck the trend of thinking about popular fads for new ventures. Consider mature markets that are in desperate need of innovation. Many mature industries
are in the process of business and consumer transformation. Just look at the energy utility sector,
once the most “boring” and today, one of the most exciting areas for new devices, software, and
systems.
Moreover, often the most successful entrepreneurs avoid highly competitive spaces where
lots of other entrepreneurs are trying to win. For example, we have a friend Jim who introduced a new approach to the tired, old workers’ compensation industry—preventing injuries
from occurring in the first place and sharing that benefit back with customers through reduced
premium rates. Within ten years, Jim had built himself a $200 million a year industry. And now
he is doing it again for outsourcing employee counseling services for major corporations. The
same type of innovation in mature segments can be found in health care, energy, and transportation. And the advantage is that cash is already flowing in these industries—money that could
be yours for the taking.
None of these factors—work, education, family experience, or the current trend—
function in isolation toward new venture creation. In fact, in many cases, these factors
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part 1??? DEFINING THE VENTURE CONCEPT
combine in a type of synergy that makes entrepreneurship its own special life form. Take
the case of Alvin, another former student. Alvin was born in China and immigrated to the
United States at a young age. Over the years, he earned an undergraduate degree in electrical engineering, a master’s degree in computer science, and an MBA. The family heritage
was a strong pull for Alvin. He also knew opportunity for new products and services for the
domestic Chinese market was virtually unlimited. On his journey to be an entrepreneur,
Alvin first took a job with Intel and then got himself an assignment in the Shanghai office to
explore mobile consumer applications and services for China. A few years later, he left Intel
to start what is now one of the leading mobile search and pull-based advertising companies in China. His new company was named the official mobile search provider to the 2008
Summer Olympics in Beijing. Alvin was on his way!
These are all wonderful stories, and they can happen for you as well. Each one of these
individuals was a “smart” but regular person—the type of individual with whom you would
enjoy having lunch or grabbing a beer: a good listener and a careful thinker, and highly attuned
to how to merge his or her own personal portfolio of skills and contacts with robust market
opportunities.
Figure 1.1 is designed to help you weigh how your own personal internal factors might
direct you toward a particular industry as well as the target sector or niche within that industry.
Take a look at it now and begin to think about filling in the boxes on the left side of that figure
and how the combination of your own work experience, education, family background, and
personal business goals point to an industry focus where your history and interests provide
insight and understanding needed for the road ahead.
Work Experience
• (Position, type, and
depth of experience gained)
• Etc. . . .
Education Experience
• (University, skills gained)
• (Other education, skills
gained)
Family Experience
• (Family business, experience
gained, source of finance,
access to channels and
suppliers)
Potential Venture Ideas
Characteristics
of the Target
Industry
And the sector or
niche within
the industry
• a product venture opportunity
• a systems venture
• a service venture opportunity
• combination/hybrid
Personal Business Goals
• Long-standing personal
goals as an innovator and
entrepreneur
Do this individually for the members of your venture team, then compare notes,
and share your ideas about the different business types of opportunities that might exist in the target industry.
Figure 1.1?? Balancing Internal and External Factors to Shape New Ventures
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
However, it is critically important to note that following any of these internal factors blindly
down the path to a venture concept may just as easily lead you into a lot of hard work with little
return. Internal factors are seldom sufficient in and of themselves for success. To capitalize on the
value they do contain, the entrepreneur must integrate them with favorable “external” factors such
as rising market demand, positive industry trends, unsatisfied customer needs, and so forth. The
best approach to do this is to find an industry or industry sector with those positive characteristics
and then build an enterprise that capitalizes on them and the entrepreneur’s internal factors.
The importance of finding the “right” industry cannot be overemphasized. Being in the right
industry is like bicycling with the wind at your back, making your journey easier. The key is
to identify a source of powerful market demand and let that demand drive the design of your
venture as well as the team that you build around the venture. And that market demand is itself
an unfolding story. In doing your research, you might go after a particular market niche and
find that an adjacent area actually offers even higher growth and the potential for higher profits.
Consider the experience of your authors.
As an undergrad at Harvard, one of your authors worked four nights each week as a
chef at a high-end restaurant just off the campus. Despite his expertise and passion for
the culinary arts, however, he never seriously considered starting a restaurant business
as an entrepreneur. There were already dozens of high-quality restaurants in the area,
and many of these seemed to have a shelf-life of only four or five years. The likelihood
of earning a decent financial return on invested capital and 12-hour work days six days
each week was slim.
Instead, technology—and in particular software—was the “hot thing” in the
Cambridge area during that time. To pay for graduate school at MIT, your
author took another three-day-a-week job working for a large commercial bank
running a software-based project management system for major back-office
information technology implementation. While he considered starting his own
project management software company, there were already very large software
players in that market space. He kept looking, thinking, and networking with
individuals like himself who were hungry to start a software company.
Over the coming months, your author was determined to either start or join
a fledgling software venture. It seemed a good idea to take an entrepreneurship
course. From this course, he banded with a team of MIT graduate students with
a vision of putting Unix on a PC and applying a “real-time” operating system
kernel that they had developed for science experiments to commercial applications. This venture was to be a classic university spin-off. The team developed
software products that became market leaders in real-time process control and
then expanded into fast, memory-resident database software. One of our favorite
applications was for factories for brewing beer! Customer visits were a “must!”
Medical equipment, robotics, and telecommunications all came next. It was an
excellent business that grew rapidly, forming partnerships with companies such
as Digital Equipment Corporation and Microsoft, and eventually, it was acquired
by Citrix as part of that company’s virtualization software play.
The important lesson is that your author saved his passion for cooking to please his future
wife as opposed to trying to make it his life’s work. And his expertise in project management
software was used to gain a general comfort with software technology but was not the focus of a
venture due to existing competition. That was a very good thing because Microsoft Project came
into existence a few years later and has “crushed” the market. Instead, your author looked for an
emerging niche and team of skilled peers who wanted to gang-tackle the opportunity.
If you want a business that will provide you with a modest income and the benefits of selfemployment—a lifestyle business—follow your passion and forget about external market and
industry factors. However, don’t be surprised if you fail to achieve financial independence and
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the sense of accomplishment and freedom that comes with it. And you may spoil your passion
by turning it into a job. Could you imagine running a commercial kitchen, day in and day out?
Or, if your passion is fishing (such as is the case with both of your authors), being a fishing
guide, rain or shine? Or, being within a family that owns a business that you are expected to take
over after getting your education, and you simply know that the family business lacks growth
potential and is barely making a profit? This, in fact, was the expectation of your second author.
The Crane family had been in the retail and wholesale food distribution business for
many years. As a family member with plenty of work experience in the enterprise, your
author could have stepped into this business in a leadership capacity. But he chose to
look elsewhere for an occupation. Why? His education and experience told him that
family-owned food businesses faced tough sledding in the years ahead. Huge national
food distributors were sweeping across North America, rolling over “Mom and Pop”
businesses like his as they went. The idea of running a small food business was appealing, and the idea of following in his parents’ and grandparents’ footsteps was compelling, but Fred’s business education and industry experience told him that going head to
head with well-financed competitors with enormous buying power would be nothing
but a series of exhausting and disheartening rear-guard actions. The profit margins of his
family business were already slim and would be under continuous downward pressure
as those larger competitors exercised their greater market power.
So, your author struck out in a different direction. He entered a field where
his grasp of market information, branding, and customer behavior was in high
demand, and where he would charge a premium price for his consulting services. By integrating external information with his internal capabilities, Fred
stepped away from the troubled food distribution industry and caught the rising
wave of market consulting.
Many others entrepreneurs, including many former students, have successfully adopted this
same winning formula: Find an industry or industry sector with favorable supply/demand and
competitive characteristics, and where one’s internal strengths can be profitably applied. This is
how we want you to approach your own venture.
The other important context-setting decision is whether you wish to start a new company from
scratch or create a venture within an established corporation. Our examples and teaching cases in
this book deliberately cover both types of situations, because each is a venture in its own right that
can bring you satisfaction as well as considerable personal wealth. We have already provided you
with lots of startup examples, so let’s take a quick look at a classic corporate venture.
Steve, a gifted electrical engineer and MBA student in one our weekend classes for working
professionals, was considering how to create a product line that would leverage his company’s
technology to an adjacent market application. The company made highly specialized chips
that were used to process 3D images in medical equipment—CT (computed tomography) and
MRI (magnetic resonance imaging) in particular. Steve searched and searched for other medical
applications but came up with nothing. Working with the professor, both came to the conclusion: Think outside the medical field.
Several weeks later, while returning from a business trip, Steve noted the poor quality of
the luggage scanning system deployed at the airport. He realized that the government would
demand far better solutions—if there were any. Steve now had a venture target. He developed
a plan for the course, which he took to the company’s head of R&D. With the support of this
executive, Steve received funding to lead a project to deliver improved scanning for airport
security. September 11 had not yet happened, but it would soon rear its ugly head. Steve’s
project could not have been better timed. In the years since, his company has become a major
supplier of imaging subsystems technology to manufacturers of explosive detections systems.
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
For the entrepreneur, startup or corporate, having a market mandated by a federal government
agency is perhaps as good as it gets.
Situations like Steve’s are not usual. Ventures often emerge from the frustrations that people
encounter. Thanks to their work experience and technical educations, midlevel corporate personnel like Steve often see problems or opportunities that their companies overlook, find too
small to pursue, or might view as a new growth opportunity if only a well-considered plan is
brought to management’s attention. You can do the same by looking at the problems and frustrations you experience as potential opportunities.
Taking Stock: Your Internal Factors_______________
What is your relevant business experience? What are the facets of your educational background that
might come into play in a venture? What connections do you have amongst your family and friends
that might be brought to bear in a venture? And at a deeper level, what are your personal interests for
business? In your heart of hearts, where might you want to commit yourself for a 24/7 effort for the
next five years?! What motivates you to commit a big chunk of your life to building a business?
Take some time to think about these internal factors as they apply to you personally, using
Figure 1.1. Like other frameworks in this book, Figure 1.1 is intended to stimulate your thinking,
searching for facts and planning of your own venture.
Work, education, and family experience are factual in nature—what have you done or what
exists in these three areas and the level of accomplishment in that area? Your skills and experiences might well “suggest” a fit toward a particular industry. Moreover, there will typically be
multiple sectors within an industry. We want you to note all of these. We will show you how to
do research on them in just a moment to identify which specific parts of an industry look best
from a business creation perspective. But before we do, consider the following two examples.
Starting From Ground Zero
Unlike the characters in our two previous examples, some people lack the industry or work
experience that would help them recognize and pursue an entrepreneurial opportunity. Many
graduating students fit this description. How about you? Are you at a point in life where you
have no real work experience? And you don’t come from an enterprise-owning family that discusses business around the dinner table every night. But the idea of working for someone else
leaves you cold. Don’t despair. You are starting at ground zero, but your passion and a bit of
good old-fashioned luck might open the door to something special.
We once had several students who, frankly, were not stellar students. School, books, and
classrooms were not their thing. However, they had other admirable qualities of mind and
spirit. As graduation drew near and their need to find employment became more tangible, they
approached their professor.
“Professor, can you help us find a job at a bank or something?”
“I don’t think you fellows are cut out for banking,” the professor said.
“Then what about consulting? That pays well, doesn’t it?”
“Yes, it pays well, but consulting firms only hire graduates with 4.0s,” he responded.
“Then, what should we do?”
“Well, you’ll soon have business degrees from a fine university, and you seem to have
plenty of energy and guts. Maybe you should start your own company. That way, you
can control your own destiny.”
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“Great,” they said, “what should we do?”
“Do something you really love, because you’re going to have to work harder than you
have ever worked in your life—and definitely harder than you’ve worked in my class!”
One of the young men laughed, “Well, we sure love beer. Maybe we should open a
bar!”
“Have you ever worked in a bar?” the professor cautioned. “Do you have any idea how
hard it is to run a bar? You never have a night off and the employee problems are
rampant.”
They looked puzzled. “My guess is that you guys are going out to a bar tonight, am I
right?” (Nods all around.) “Well, instead of being customers as usual, keep your eyes
on the bar owner. Watch everything he does. And think about what it would be like
being him six nights a week. Really think about it. Then come back and talk to me.”
The students were back the next day, this time with long faces. “Professor, we love
beer, and we like hanging out in bars, but after watching that owner for hours, we
would hate his job.”
“In that case, how about making beer to sell to bars? I had some microbrewery beer the
other day and it was great. Was expensive, too. I bet there is room for another specialty
beer label, as long as it’s premium quality and has a good story crafted behind the product. Think about it and come back to me next week,” the professor said.
Well, one of those students thought about it, and after graduation he created a plan: to enter
the premium segment of beer industry, with a great Boston “story” behind the brand. This student,
the professor discovered later, did not simply love to drink beer—he loved the craft and culture
of brewing and had gone to great lengths to learn about how great beers are made and about the
ingredients that go into them. Following his muse, he learned the lore of a unique industry. Ten
months after graduation, he and a partner started a specialty beer company that a few years later
won the “Best of Boston” award in its category. A dozen years later, the two partners sold that
company for millions to a large national specialty brewer. Those two guys made a lot of money!
Yes, passion and energy can take you a long way in your search for the right opportunity.
Investigating the External Dimension:
The Potential of the Target Industry_______________
Up to this point, the notion of selecting a target industry may seem to be largely a “gut” call,
using one’s work background, education, and family experience—plus personal passion—to
decide where to direct the entrepreneurial effort. But there is a difference between blind insight
and informed insight, between guessing and calculated risk-taking. From the gut, we must now
move to the head—to detailed research on the fundamental characteristics of the industries that
interest you.
Industries and Their Sectors
An industry is a group of firms that produce products or services that are close substitutes for
each other and which serve the same general set of customers. Industries are defined by the
markets served by their competing participants.
Most industries can be subdivided into specific sectors, which, in turn, include a set of competitors that address particular customer groups. For example, the financial services industry includes
many sectors: investment banking, commercial and retail banking, insurance, money management,
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
and so forth. Each of these sectors includes its own set (often overlapping) of competing firms, customer groups, products, and services. Some sectors may have low growth, low profitability, and little
innovation; others may exhibit dynamic growth and an abundance of opportunities to make money.
As entrepreneur, you probably cannot take on an entire industry, at least in the beginning. The path
to success is to develop a venture within a particular niche or area within a larger industry, to grow to
a leading if not dominant position within that niche, and expand from there. This lends focus to the
new enterprise, and focus is all important for any new venture. And the key to success is to focus on
a particular sector (or subsector) of an industry that is most promising for you in terms of a range of
critical factors such as growth rate and clear channels to customers. Thus, you need to understand the
industry in broad strokes and understand its sectors in detail.
As you study a particular industry and sectors of interest, look for positive indicators in the
following areas:
• The size, growth rates, and profitability of the customer markets served by the industry
• The concentration and intensity of competition
• The industry, or sector’s, life cycle stage
• Barriers to entry
Be as thorough as possible investigating these areas. The result should point the way to a
robust market opportunity, one that can support and reward all of the hard work that you will
have to do when actually launching a company based on a vision and a plan to act on that vision.
Size, Growth Rates, and Profitability
Starting a new venture in a flat or declining sector is usually a waste of time, so look for areas
where robust growth is anticipated for years to come. For example, if you were looking into
the imaging industry, you’d be wary of any sector that involved film-based imaging, which has
been in decline ever since digital imaging gained a market foothold. Further, rarely does an
entrepreneur take on an entire industry—at least in the beginning. Rather, he or she focuses on
a particular sector of that industry. Markets tend to be comprised of multiple sectors. Each sector
contains different types of customers and different uses for products and services. Some of these
sectors might have low growth and low profitability; others have dynamic growth and lots of
opportunities to make money. The entrepreneur therefore needs to know the size, growth, and
profitability of key sectors in a given market. “A rising tide,” as the saying goes, “lifts all boats.”
Likewise, determine the profitability of the companies battling for market share in sectors
of interest. If the firms that already have a foothold in a growing market cannot make a profit,
what’s the chance that you, a newcomer, will? If there is a publicly traded company participating
in your target industry, even if not the same exact sector of that industry that you wish to target,
the financial performance of that company might be indicative of what you can achieve should
your venture scale into a major business. A quick trip to Yahoo! Finance or Hoover’s can reveal
the margins enjoyed by successful players.
Concentration and Intensity of Competition
Some industries have one or two large leaders and half a dozen second-tier competitors, all
jockeying for incremental gains in market share by introducing a new product or service and,
just as often, lowering prices. It’s very tough for a startup to compete in such an environment.
A new corporate venture, on the other hand, stands a chance because it can often leverage the
corporation’s brands, distribution channels, manufacturing, and credibility to break into the market with a new solution.
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part 1??? DEFINING THE VENTURE CONCEPT
Most entrepreneurs should avoid areas of concentration and intense competition and seek
out fragmented markets in which there are many small competitors and no dominant leaders. In
fragmented markets, anyone with an attractive value proposition, a strong work ethic, adequate
capital, and imagination has a fair shot at success. A123 Systems of Watertown, Massachusetts,
for example, entered an industry with large, established battery manufacturers. In the highperformance sector of this mature industry, however, only a handful of other small startups were competing to create the rechargeable lithium-ion batteries needed to power large equipment and vehicles.
A123 raised more than $50 million of venture capital and received a U.S. government grant for $259
million to build manufacturing capacity. A month later, it raised another $400 million through an initial
public offering. Those had to be some pretty special high-performance rechargeable batteries!
Life Cycle Stage
In the strategy literature, technological and product/service innovation are important components of what is referred to as the industry life cycle. This life cycle has several stages: emergent,
growth, maturation, and decline. This cycle is sometimes expressed as an S-curve1 similar to
that shown in Figure 1.2.
S-Curves Unfolding Over Time
The Technological
Entrepreneur’s
Sweet Spot
Services and Efficiency
Focused Startups
A new S-curve
Mature
Product
Performance
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Decline
Achieve scale Maximize profits
Cut costs
Operational
control
Growth
Create new products
and build sales
R&D “Shops”
Emergent
Create disruptive
technologies
Time
Figure 1.2?? Industry Life Cycles
The emergent stage is an initial period of slow revenue growth and few if any direct competitors. Many entrepreneurs in this stage are still working out their product/service concepts. A
credible market may not yet exist. Nanotechnology (which is new material science working on
For a fuller explanation of S-curves, see Richard Foster, The Attacker’s Advantage (New York: Summit
Books, 1986), and James M. Utterback, Mastering the Dynamics of Innovation (Boston: Harvard Business
School Press, 1994).
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chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
the scale of a billionth of a meter!) is in this emergent stage—although we already see it taking
hold in certain mainstream applications such as apparel, house paint, and drug delivery.
The next stage is characterized by rapid growth. This is when the product or service concept
really clicks with customers. The cell phone sector of the telecom industry entered this stage several years ago. Cell phone companies and service providers had finally worked out the technical
kinks, and more and more areas of the country were offering service to roaming users. Suddenly,
everyone wanted one of these handy devices. Today, the companies that are developing new
types of batteries and energy management systems are clearly in the growth stage. As growth
hurtles forward over time, more and more competitors and more capital are attracted to the sector.
Eventually, growing markets become saturated, the rocketing growth curve tapers off, and
competitors find themselves in the maturity stage of the cycle. The many companies now in the
field resort to price discounts and other mechanisms to generate revenues and poach customers
from their competitors. They enhance their products and services in an attempt to make them
stand out from the crowd. Gradually, the weaker firms exit the field, and a handful of firms are
left standing. The office productivity sector of the software industry is in the mature stage of its
cycle, with just a few players holding the majority of market share.
As you can see in Figure 1.2, the S-curve of an industry sector or product category (and companies)
may eventually enter a stage of decline. In most cases, industry decline occurs when a discontinuous
technology enters the market. The market for manual and electric typewriters, for example, tumbled
when computers with word processing software came along. The same happened to the photographic
film industry when digital camera technology became price competitive. Likewise, the incandescent
lighting industry that Thomas Edison pioneered at the end of the nineteenth century is now moving
from maturity to decline as energy-conscious users move to fluorescent and LED substitutes.
To fully appreciate the S-curve concept, look again at Figure 1.2. Notice the new S-curve on
the far right. Even as one industry sector or product category is in decline, a rival, usually armed
with a new and better technology, is increasing its product performance and entering a period
of buoyant growth—typically at the other’s expense.
Tip: Opportunity Alert!_______________________________
Many new business opportunities can be found in the turmoil created by disruptive
innovations. For example, the U.S. global positioning system (GPS) changed the
way ships, aircraft, and field armies navigate on the earth’s surface. Those were the
obvious and intended applications. Once the technology was made available for
civilian use, corporate and individual ventures quickly found new applications and
markets for that technology: smart bombs, handheld GPS devices for hikers,
dashboard-installed auto GPS devices, downloadable maps for national parks, and
“kid-track” units to name just a few.
So, when you see a new technology driving a mature industry into decline, think
of the opportunities that technology may create elsewhere.
Life Cycle Implications for New Ventures
The life cycle has important implications for ventures seeking to produce new products. At
the front of the life cycle, a nanotechnology entrepreneur simply has to find an application
that will show his or her technology not only working but also producing value for customers. At the back side of the life cycle, a brilliant engineer seeking to develop software,
systems, or services for oil or gas producers is going to surely face several cost and pricing pressures, as will the entrepreneur targeting automotive industry (original equipment
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manufacturers—OEMs). Costs are counted down to the pennies in mature industries.
Experience shows that technology-based ventures enjoy the greatest success when they
enter the field near the beginning of the growth stage. This is the entrepreneur’s sweet spot,
shown in Figure 1.2. A123 Systems, the battery company, was in this spot, using its proprietary technology (actually, nanotechnology) to create a high-energy discharging lithium-ion
battery for mainstream applications—such as cars or power tools. Apple was in the same
spot with iTunes. The early to midpoint of a growth stage of a broader market is where an
entrepreneur should ideally enter with a specialized application or solution. Anything much
earlier—technology that is nowhere close to prime time—can mean a long and painful journey for the entrepreneur. Because no markets currently exist for these pioneering concepts,
the entrepreneur starves for cash before paying customers appear. Instead, such technologies best belong in corporate R&D or in university laboratories until the technology matures
to the point where it can be effectively commercialized.
On the other hand, entering the industry or sector late in its cycle—in the mature or declining stages—is a hopeless errand for the entrepreneur unless he or she has a powerful concept
for reinvigorating the product or service and thereby regenerating solid growth. Lacking that, he
or she will fight against entrenched competitors for a dwindling number of customers.
Exceptions to the Rule
For startups that offer new systems or services (as opposed to products), opportunities can be
found at all stages of the life cycle, particularly for B2B plays. In these cases, industry participants are the venture’s customers. For instance, makers of home refrigerators in the U.S. market
are in a mature stage characterized by many competitors and modest profit margins. Demand
is growing very slowly. The predicament in which these manufacturers find themselves creates
healthy demand for entrepreneurs who can provide:
• Cost-saving production methods
• Operating efficiencies
• Imaginative marketing concepts
• Customer-pleasing product innovations
Thus, in B2B situations, identify areas in which companies are feeling pain and desperately seeking solutions. If you can relieve their pain or solve their problems, you will have
customers, no matter what stage of the life cycle your B2B customers are in. For example,
a new information system or data mining application that can substantially help a company
such as Staples improve customer knowledge and supply chain efficiencies is going to get a
good look, and if Staples decides to buy, it is world-class reference accounts with which to
sell other retailers. Or, large, mature utility companies are actively investing in new “smarter
planet” technologies in the form of software and sensors to more efficiently manage electrical grids and consumption. Even the most mature and static of industries can become
hotbeds for innovation. And when that happens, the entrepreneur often becomes pivotal in
business and industry transformation.
Barriers to Entry
A thorough investigation of a target industry must also consider (1) the presence of barriers
to entry, and (2) what, if anything, can be done to surmount them. A barrier to entry is any
requirement—capital, technical know-how, and so on—that makes industry or market entry
difficult or impossible. Of the many barriers faced by industry outsiders, three are particularly
important for new venture entrepreneurs: capital and time, manufacturing, and marketing.
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
Capital and Time
Entry to some industries/sectors requires huge amounts of capital—amounts that few entrepreneurs
can raise. In other industries/sectors, years of R&D are needed to develop marketable products. As
you can imagine, these two barriers usually go hand in hand. Consider, for example, the pharmaceutical industry where more than ten years and close to a billion dollars are typically needed from start
to launch for a single new drug! On the other hand, Web-based social networking presents minimal
time and capital barrier. Launching a new Web-based business can be fast and inexpensive.
Manufacturing
Certain manufacturing industries require particular types of machines to produce a given category of products. For building products, complex wood cutting, forming, and assembly
machines are needed; for certain plastics and food products, specially built extrusion machines
are required. And the list goes on. These machines can cost millions of dollars. An entrepreneur
who insists on entering a capital-intensive industry needs to consider external manufacturing
options—often called contract or comanufacturers—to source his or her products. An increasing variety of these options exists both here and abroad.
On the other hand, we have seen students create new data mining and analytical “production” for the institutional investment industry with nothing more than several affordable servers.
Marketing
Marketing is the third major barrier to entry that an entrepreneur needs to consider. Gaining
access to customers may be difficult and costly. Consider these examples:
• A new food venture with a natural fruit snack for kids faces a serious financial obstacle:
paying “slotting fees” to get its products on the shelves of major grocery and convenience
store retailers. Slotting fees can reach to several million dollars or more.
• A software company’s products need to be sold by knowledgeable sales people. It faces
a $300,000 annual price tag (compensation, benefits, and training) for each highly qualified salesperson. Half a dozen salespeople are typically needed in the second year of
business by companies in this field.
Situations such as these make entry challenging. But don’t give up too easily. An imaginative
entrepreneur can sometimes circumvent typical barriers by finding new and unconventional challenges to customers. This is how Dell Computer made its mark. Instead of selling through expensive
retail stores like everyone else, it marketed PCs directly to customers. eBay founder Pierre Omidyar
operated his new company from his rented apartment using a PC, a small server, and a second-hand
table until such time as he could easily afford more space, personnel, and equipment.
Additional Environmental Scanning Can Also
Uncover Rich Entrepreneurial Opportunities
Environmental scanning can uncover new venture opportunities, or at least help identify the
types of users you want to get to know. Successful entrepreneurs regularly scan their market,
technology, and competitive landscapes to look for opportunities, threats, and partners—to
understand the ecosystems in their dynamic marketplaces.2 As you scan the environment:
• Pay attention to trends and market changes, and how users are reacting to them; for
example: a consumer trend toward purchasing locally grown food.
Crane, F. G., & Sohl, J. (2004). Imperatives for venture success: Entrepreneurs speak. The International
Journal of Entrepreneurship and Innovation, 5(2), 99–106.
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• Closely look for structural changes in society and determine how those changes will
affect the needs of consumers; for example: an aging population of homeowners seeks
smaller, low-maintenance housing.
• Study the trajectory of new product introductions by leading competitors in your chosen
industry; for example: Manufacturer X launches a new product generation every four
years, each with more electronic systems, and each with analog features replaced by
digital features.
• Keep up to date on government actions that could affect your venture; for example: the
U.S. Environmental Protection Agency taking public testimony in advance of new regulations on disposable medical products.
What you learn from scanning will greatly inform your venture concept. And you may
uncover an opportunity that is even better than your initial concept. It is also important to keep
track of what you learn from environmental scanning and then see how it affects your choice of
target customers, products, and/or services.
Figure 1.3 shows a simple environmental scan in terms of key facts, constraints, and emerging trends driving the North American landscape. Each one can shape your venture concept.
While Figure 1.3 shows some over-arching trends that are affecting businesses on an aggregate
level, you will have to prepare an environmental scan specific to “your industry” and “your venture.” Revisit it from time to time to see if and how the external environment is changing.
Environmental scanning can hugely affect the design of a business. Here are some examples
from different industries:
Trends
Over-Arching Examples
Venture Opportunities
•
•
•
•
•
Social
•
•
•
•
•
Economic
• Growth in electronic commerce
• Shift toward experience economy
• Online businesses
• Businesses that “market” experiences like
ecotourism
Technological
• Diffusion of digital and mobile technologies
• Growth in biotechnology and nanotechnology
• Advances in medicine and medical treatments
• Social media companies
• Miniature medical devices
• Personalized medicine based on DNA
Competitive
• Increase in global competition
• Emergence of and as competitors
• Mergers and acquisitions
• Access to foreign markets; encroachment by
foreign competitors here
• Opportunities to partner with Chinese and Indian
firms
• Opportunities to merge with a partner or acquire
a partner
Regulatory
• Increased protection for intellectual property
• Increased emphasis on free trade
• Deregulation
• Leverage IP as competitive advantage
• Opening up of foreign markets for venture
expansion
• Reduction of entry barriers to allow new startups
Growing ethnic diversity
Aging
Time poverty
Value-consciousness
Eco-consciousness
Figure 1.3?? Environmental Scanning Matrix
Ethnic foods
Adult diapers, nursing homes
Personal services
Dollar Stores
Green-based businesses
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• Security: September 11 created a whole new market for startups and corporate ventures
in the industry sector of Homeland Security. Many of these businesses deploy various
types of sensors, databases, and workflow software to monitor, alert, and respond to
terrorist threats.3 The choice of target customer went to new buying agencies in federal,
state, and local governments, as well as corporations needing protection from terrorist
threats (such as utilities).
• Health: The aging of the population, as well as new government regulations, is creating
new growth opportunities in home health care. We will have a dedicated case on this in
a later chapter; but for the time being, imagine various noninvasive sensors deployed in
someone’s house that can monitor physiological conditions and well-being, and send
alerts in the case of medical emergencies.
• Energy: The cost of oil is driving the creation of a new generation of electric car manufacturers; by some estimates, there are dozens of startups and corporate ventures focused
on this opportunity. Energy costs are also creating opportunities not only for alternative
energy sources (solar and wind, for example) but also for widely distributed energy management systems that track and balance energy consumption.
• Government regulations for specific industries: Government regulation can also be a powerful external factor that can make or break a new venture. For example, in financial services, fraudulent company accounting led to Sarbanes-Oxley legislation and a host of new
software and service ventures to help companies become compliant. Publicly traded companies spend millions of dollars each and every year on software and services for accurate
financial reporting and consolidation across divisions and countries. There is no choice.
Three Steps to Industry Analysis_________________
If you’ve applied your thinking to Figure 1.1, you will have some notion of where in the universe of industries your internal factors (experience and passion) should direct you. You might
then say with some assurance that your future lies, for example, in the load management sector of the energy industry or social networking sector of Web commerce. It is now time to dig
deeper with three straightforward and relatively simple steps for analyzing a target industry or
sector. To illustrate these steps, put yourself in the shoes of a would-be entrepreneur, Jake, who
is attracted to the organic foods sector of the agriculture industry. Here is the situation:
Jake has some personal experience with the agriculture sector. He spent several
summer vacations working on his uncle and aunt’s family farm, and selling their
organic produce to city people each Saturday morning at an outdoor farmers market.
Jake has also read widely on agri-environmental issues and the subject of sustainability. He is passionate in his belief that the nation, environment, and individuals
would all be healthier, and small farmers would be more prosperous, if consumers
would shift more of their food spending to locally grown organic produce. Thinking
broadly, he has sketched out a rough idea for automated hydroponic greenhouses
capable of providing 10 to 20 times the yield of the field-grown operations. He has
gone so far as to test out a miniversion of this concept using grow lamps and other
equipment in one of his university’s science labs. The results are encouraging. Jake
wonders if he could create a viable business by marketing certified organic food to
upscale food stores and expensive restaurants.
Meyer, M. H., & Poza, H. (2009, May). Venturing adjacent to the core: From defense to homeland security.
Research Technology Management, 31–48.
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With Jake’s situation in mind, let’s move on to the steps an entrepreneur can use to analyze
a target industry. (Note: Jake and his business are based on an actual case. One of your authors
helped that business obtain angel financing, which it used to construct two dozen greenhouses.
The business became a supplier to upscale retail food companies and restaurants, generated
substantial cash, and within six years sold out to a large food grower.)
Step 1: Correctly Identify the Industry
The first job is to name and accurately describe the industry in which you intend to operate. The
North American Industry Classification System (NAICS) and accompanying U.S. Census Bureau
data linked to it is a good place to begin (http://www.census.gov/eos/www/naics). NAICS provides common industry definitions for the United States, Canada, and Mexico, and groups the
economic activities of specific companies into specific industries and industry subsectors. This
information can help you to evaluate industry size, customer demand, competitive market share,
and so on for many industries and their subsectors. Similar classification systems exist in Europe,
Japan, and the BRIC countries (Brazil, Russia, India, and China).
Let’s now revisit Jake’s organic greenhouse concept in terms of Step 1, putting you in his
shoes as entrepreneur.
Where would you start in defining this industry in a broad sense? Using NAICS, you will
find an “industry” defined as Sector 11 under NAICS—called Agricultural, Forestry, Fishing, and
Hunting. You will find “aggregate information” on the industry including value of production for
most recent years. That is your starting point. But, given that you want to play in the “agricultural
space” you do not want to analyze forestry, fishing, and hunting. Thus, you can drill down to Crop
Production—Subsector 111. In doing so, you have refined your industry space to a specific sector.
You can now start examining what is happening in this specific industry sector (see Step 2).
Step 2: Determine Market Size,
Growth, and Profitability in a Sector
Using Subsector 111—Crop Production—you can examine market size, growth, and profitability across a range of crops. But, given that you intend to operate in the “greenhouse” space,
you should define and identify your sector more narrowly, in this case by focusing on Subsector
1114—Greenhouse, Nursery, and Floriculture Production. Doing this will provide some more specific insight into your industry niche. But wait! It is even possible to drill further to Subsector 11141—
Food Crops Grown Under Cover (exactly what you will be doing). It is possible to drill down to
another level—Subsector 111419—and examine data on specific crops grown under cover. Using
this data, you discover that organic tomatoes are in greater demand and selling at significantly higher
margins than mushrooms! This industry data will help you to properly plan your product offerings.
Remember, you can gather growth rate and related data through NAICS and its direct links to U.S.
Census Bureau data (or visit the Census Bureau site directly athttp://census.gov/econ/census07). If the
U.S. Census Bureau doesn’t have the information you need, there are other sources of industry-level
data. For example, Fortune magazine reports profits and profit growth for single and for 5-year periods
for a variety of industries (see Figure 1.4 for 2008 and 2003–2008 data).4 This single table serves as a useful benchmark for assessing the relative attractiveness of your target industry. Notice that only five of
the ten industries listed for 2003–2008 are on the list for 2008. Yesterday’s profitable industries are not
necessarily the best ones for you to start a business today or in the future. That is what makes this type
of research so important to do. Never take the health of any particular industry for granted.
If you cannot find an aggregated report—or report supplement—the sales, profitability, and
balance sheet strength of publicly traded industry leaders can be readily obtained. Growth rates
4?
Industry Profit Potential, Fortune Survey, 2008, May 4, 2009.
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
Growth in Profits (2003–2008)
? 1.? Metals
? 2.? Internet Services
? 3.? Oil and Gas Equipment
? 4.? Wholesalers
? 5.? Engineering, Construction
? 6.? Construction/Farm Equip.
? 7.? Network Comm. Equip.
? 8.? Railroads
? 9.? Aerospace/Defense
10.? Pipelines
57.9%
58.5
48.9
36.9
29.5
26.5
24.2
23.6
23.2
22.6
Growth in Profits (2008)
? 1.? Food Service
? 2.? Engineering, Construction
? 3.? Health Care, Pharmacy
? 4.? Internet Services
? 5.? Pharmaceuticals
? 6.? Info Technology Services
? 7.? Oil and Gas Equipment
? 8.? Pipelines
? 9.? Railroads
10.? Medical Product Equip.
43.1%
38.0
36.9
35.5
24.5
24.2
18.5
18.0
16.4
15.4
Some of the worst performers
Motor Vehicles/Parts
Insurance
Entertainment
–11.8
–18.3
–35.1
Chemicals
Hotels/Casinos/Resorts
Airlines
–22.5
–101.0
–564.0
Figure 1.4? ? Industry Profit Potential, Fortune magazine Survey, 2008 Survey
Source: Fortune magazine, May 4, 2009.
can be calculated directly from those data. Go to Yahoo!Finance, type in the name of an industry
leader, and look at the “competitors” section. If the company has a lengthy history, you’ll find
a wealth of information. For example, if you know of publicly traded companies in the agricultural sector engaging in greenhouse farming, you can check them out at Yahoo!Finance.
Step 3: Assess Industry Dynamics
The final step in our process is to understand and assess the dynamics of the industry—the many forces
at work in the industry and that impinge on its fortunes. The purpose of this assessment is to shed light
on developments that make yours a favorable or unfavorable industry in which to start a new enterprise. Objectivity in this assessment is essential; without it, personal enthusiasm can cloud your judgment. People have a bad habit of seeking out data that confirms what they already believe to be true
while avoiding or discounting data that contradicts those preconceptions. Objective assessment is the
antidote to that human foible, which is why we offer you the following “screening factors.”
1. Market growth. Determine the rate of growth for the industry or sector you have
identified above. If you can’t find that information for the industry, try to find the growth
rate of the industry’s leaders and “hot companies.”
2. Industry profit potential. Again, use either an aggregate figure from a source
such as Fortune or research on publicly traded industry leaders and “hot companies.”
Yahoo!Finance and Hoover’s are sources for this information.
3. The industry’s rate of technological change and innovation. Opportunities are often
found in the turbulence created by technological change and innovation. Deregulation
can create a similar effect. News stories on company events, product announcements, and
customer applications can give you a sense of change and innovation. Look also to specialized
industry publications such as ComputerWorld (for hardware and software innovations) or
New Scientist (for chemistry and hard science breakthroughs). For environmental innovation,
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part 1??? DEFINING THE VENTURE CONCEPT
see Hot Topics onhttp://www.EarthPortal.com and online publications of the National
Council for Science and the Environment. Or, once again, go to Yahoo! Finance and read the
news stories on industry leaders. And, of course, a carefully constructed Google search may
turn up incredibly valuable information on industry dynamics.
4. The volume of venture financing to startups in the target industry or sector. The venture
capital (VC) industry employs thousands of highly trained professional analysts to do exactly
what you, an amateur, are trying to accomplish: Identify areas of commercial growth and
opportunity. When they find those areas, venturing financing quickly follows. So let these
professionals be your reconnaissance scouts and follow their money trail. Pricewaterhouse
Coopers’ MoneyTree Report (http://www.pwcmoneytree.com) tabulates recent quarter
venture capital investments by technology industry. While most startups do not attract VC
funding, VC behavior is a good indicator of where growth is anticipated and where other
venture financiers, such as angel investors, are placing their bets. At the time of this writing,
biotechnology, software (generally), and medical devices are the top three destinations for
venture capital, accounting for nearly 60% of all such investments in the second quarter
of 2009. MoneyTree Report will give you the most recent information and also indicate the
regional breakdown for investments by industry. Within these larger categories, certain niches
will be hot. For example, in mid-2009 the $60 billion storage management industry, the niche
of virtualization through software and/or hardware, was receiving much attention. Similarly,
certain natural resource plays were strong in the industry and energy category (wind energy,
solar energy, and biomass energy conversion), while others (oil and natural gas) were not.
5. Strong, clear channels to markets that are receptive to new product or service
innovations. The third-party software business development programs of Microsoft, IBM,
or any computer technology company are a path to their installed base. These and other
technology giants generally require that your technology uses or integrates with their own
tools and products, and often, undergoes some type of certification process for which you
might have to pay a fee. In return, your company and its offerings are listed in catalogs and
Websites, and sometimes, actually sold by their own sales forces as part of a larger enterprise
solution. Or, if you are doing a consumer products venture, understanding the willingness of
premium specialty retailers to try new products such as yours is an essential consideration.
Examples of highly receptive retailers that are always on the search for distinctive, premiumpriced innovations include Whole Foods Market, PETCO, and Trader Joe’s. If you are doing
a life sciences venture, today large pharmaceutical companies are desperate to fill their
depleting pipelines with new potential drugs. Each one of these represents channel as well
as development partners. New, small firms can prosper by aligning themselves with giants. It
can provide corporate investment, credibility with customers who do not want to take a risk
with a new startup, as well as broader access to markets.
6. The concentration and intensity of competition. An oligopolistic industry, with half a
dozen major players, could create a lock on channels and suppliers. Every venture will have
competitors; however, you strongly prefer that these competitors not be market leaders
who spend a lot of R&D money on your exact area of innovation and show prowess in
bringing it to market. Who wants to compete directly with an Apple or a Microsoft or a Dell
or an IBM? Some startups succeed, but typically it is far better to focus on a complementary
product or service. As part of this, you must also try to understand if there are offshore
players that are strongly affecting price and, therefore, profitability. Samsung, Lenovo, and
Acer are all highly effective cost competitors that are even giving Dell a run for its money.
7. Poor access to key supplies and suppliers. If you are thinking of manufacturing solar
energy panels, you should check the availability of key inputs, such as silicon. On the same
note, how eager to deal with small firms like yours are suppliers of key materials? You may
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
find, for example, that a major competitor has “locked up” those suppliers, thereby creating
a barrier to entry. You have to be proactive and actually ask whether or not suppliers are
open to cooperate with you. Suppliers will be honest if you ask. But, it is your responsibility
to determine this situation.
8. Concentrated customer power. Who has the power in your sector, customers or
producers? If your plan is to make and sell things through small, independent retailers
(which are fast disappearing these days), the power to set prices and dictate terms of
trade may be well balanced. If your customer is Walmart, Target, or Best Buy, you will be
a price taker and an acceptor of terms. Customers like these have the power to protect
their margins and drive yours down. How would a power imbalance like that affect
your intended business? Big firms (e.g., Walmart) can dictate terms and conditions. But,
those conditions will not be self-evident until negotiations begin. This is when you, as an
entrepreneur, must hold the line and decide whether or not you will accept terms and
conditions that are likely to be detrimental to the long-term success of your business.
Take a look at Figure 1.5. It shows how we can use these aspects of industry analysis to
assess a target industry, breaking them down into more specific dimensions. The sample shown
in that figure is for Jake’s business.
Facts / Data About Your Target Industry
Industry Score
Market growth
Double-digit growth, above 15%
?7
Profit potential for the sector (or)
Operating margin of sector leaders
Excellent margins by taking out the manual labor
10
High rate of technological change and new
products
Agronomics is steadily advancing the knowledge on
optimizing nutrients, seeds, and greenhouse technology
?7
Flow of venture financing
Bootstrap or angel financing, with some government
financing
?4
Presence of clear channels to customers
Whole Foods Market was a perfect channel to target
users
10
A lack of concentrated competition
Highly fragmented. Mid-sized Israeli, Dutch, and
Mexican suppliers. No ConAgra.
10
A lack of offshore entrants driving down prices
For standard grocery, yes.
For organics, no downward price pressure.
10
A lack of barriers to gain access to channels
Premium speciality retailers highly receptive to greater
supply of organics.
10
A lack of barriers to gain access to suppliers
No problem. Seed and nutrient suppliers available.
The automation technology readily available.
10
A lack of concentrated customer buying
power
Walmart was just getting into the organic food business.
(Today it is the No.1 seller of organic foods!)
?6
Total Score
Figure 1.5?? Understanding the Dynamics of Jake’s Target Industry
Scoring Key:1 to 10, where:
1 is “a tough barrier for a new venture,” 3 is “a challenge,” 5 is “neither a barrier nor supporting success,”
7 is “conducive to a new venture,” and 10 is “an ideal setup for venture success.”
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part 1??? DEFINING THE VENTURE CONCEPT
Each area of the assessment can be scored along a 1 to 10 scale using the key at the bottom
of the figure. If you feel that a particular factor is not relevant to your venture, it can be deleted
from the table. However, we strongly urge you to consider each and every item before dismissing anything. Any one of these areas can turn around and bite you in the back later on. When
these are totaled, you will have an overall score that can be used to either (1) assess industry/
sector attractiveness, or (2) compare alternative target industries or sectors. (Note: The last five
screening factors in the template are placed in the reverse—for example, using the words “A
lack of . . .” in front of barrier to entry.)
For the first two screening factors, market growth and potential profitability, we consider
data showing growth over 30% as outstanding, 20% to 30% as very good, 10% to 19% as tolerable, and 3% to 9% as poor. Anything below 3% is unacceptable. Profit potential can be considered between 5 and 10 percentage points lower than growth percentages. This is based on our
own personal experience in ventures. You need to see sufficient growth in an industry because
this shows that there are enough customers predisposed and having the cash to buy the products and services you wish to create in your new venture.
Jake is actually doing pretty well in his industry assessment. The only two dark spots on
the horizon are (a) that hydroponics is not a “hot” area for traditional venture capital and
(b) that Walmart is becoming a major player in organic foods, which means severe downward price pressure. The way Jake ended up dealing with these negatives was to raise
capital from angel investors and to work a good deal with Whole Foods Market and other
premium specialty retailers. That is how most entrepreneurs deal with difficult venture
finance and route-to-market issues.
Perhaps as important as anything else is that Jake modeled the benefit of his new automated system in terms of productivity in growing organic vegetables. In fact, that is how we
came to know about Jake. One of your authors helped him develop productivity calculations based on a single prototype greenhouse that Jake had used his own money to build.
They compared its growing rates to traditional commercial greenhouses. They realized that
a hydroponic, automated greenhouse could provide 10 to 20 times the yield of field-grown
methods and five times the yield of greenhouses that are not hydroponic or fully automated.
This became a key part of Jake’s ability to raise startup capital—he had designed a better
mousetrap.
An industry scoring over 75 in this template is very much worth consideration as a venue for
a venture. Any industry scoring below 25 should probably be avoided. If your industry scores
in the midrange on the scale, say 50, then you must think about how you will overcome industry problems and obstacles. We’ll return to this template in the Student Exercises section of the
chapter.
Mapping Out the Key Players
in an Industry Sector___________________________
With industry data and your assessments of the industry on hand, it is then important to focus
on a venture’s specific role in an industry. To do this in a powerful, simple way, we like to use a
technique called industry ecosystem mapping.
An industry ecosystem includes all the players within a given industry, from raw material
suppliers, to value-added suppliers, to assemblers and integrators, on through the distribution
and support channels and their respective players. Mapping the industry ecosystem as a network of interconnected players can help you to understand the industry at a deeper level and
suggest where your enterprise might fit in. Figure 1.6 is the industry ecosystem map for our
friend Jake, the automated, organic gardener!
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
Channel A
Upscale
restaurants
Suppliers A
Framing, glass,
plumbing
Subassemblies
or
software components
Suppliers B
Growing
automation
Producer
(Jake’s
Greenhouses)
Flow of Product
Users
Environmentally
conscious
upscale professionals
Channel B
Specialty
food stores
Flow of Services
Flow of Money
Figure 1.6?? Jake’s Industry Ecosystem Map
You can see that we have placed the typical startup venture squarely in the middle in the
figure. Pay particular attention to the colored lines, which represent the flows of product (or
components or raw material), services, money, and information and referrals. We want you to
think about creating this type of diagram for your own target industry. Also note the four different types of lines connecting the actors in the chart:
• The flow of product (from raw materials to assembled products to shelf, or software
development tools to completed software applications to OEM or value-added reseller to
the customer or user)
• The flow of services (which may include consulting to integration to training to maintenance or repairs)
• The flow of money (often, but not always, a different colored arrow going the opposite
direction as product or services)
• The flow of information (one aspect of which may be marketing referrals)
The combination of the circles filled in with company or customer group names and the
lines connecting the various circles tells the story of the industry in which you wish to play.
In some cases, a major, dominant player—an IBM, Microsoft, Goldman Sachs, or Walmart—
sits squarely in the middle of the industry ecosystem. These are analogous to the sun in our
solar ecosystem. They are at the center and, like the planets, all other industry participants orbit
around them. It would be foolish to compete directly with these behemoths because of their
financial, marketing, and technological power.
It is then that you can use this mapping to identify niche opportunities within an industry. For example, if you were to draw out the ecosystem for Apple iTunes, there is clearly the
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part 1??? DEFINING THE VENTURE CONCEPT
opportunity to build new iPhone applications. Entrepreneurs building these “apps” and selling them through Apple are a major bubble in the ecosystem diagram. Even a small niche—as
a supplier, consultant, testing service, or distributor—may represent a good opportunity for a
small startup. And who knows what that could lead to? That same niche might be the beachhead
from which the startup will expand within the industry.
The spaces between the bubbles in the generic figure may also present outstanding opportunities. An enterprising venture might find a way to connect different industry players for more
seamless and more cost-effective operations. You need only go to IBM’s own Smarter Planet
Website pages to find case studies that show how IBM is using instrumentation, interconnectivity, and integration to link one end of a global value chain to another. Or you might be the next
iTunes, connecting music creators with music users through the Web.
Whatever you decide to do, make sure that your ecosystem map is current and forwardthinking. Remember, you are not planning for where things stand at the moment but where
they will be in the near future and beyond.
The Last Step Toward Defining Your
Venture Scope: Deciding Which Type
of Business You Want to Be Within
Your Target Industry____________________________
Figure 1.7 shows the first two steps of the venture scoping process: understanding the internal
strengths and experiences of the entrepreneur, and understanding the characteristics (we hope
positive) of the target industry for which personal strengths seem to fit and serve as the basis for
a successful enterprise. Think of this as balancing and blending personal and industry analysis.
We have also learned that since industries are enormous entities that the key to success is to
develop a venture within a particular niche or area within a larger industry. Every successful
company used to illustrate a point in this chapter is an example of this focus in one form or
another—the authors’ ventures included!
Work Experience
Industry screening factors
Education Experience
Type of Business
• A product venture
Target Industry
Pros
Sector/niche
within an industry
Cons
• A services venture
Challenges
• Combination/hybrid
• A systems venture
Family Experience
Do this individually for the members of your venture team, compare notes,
and share your ideas about the different business types of opportunities that might exist in the target industry.
Figure 1.7?? Defining the Venture Scope
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
Figure 1.7 also shows the third and last step of defining the scope of a venture: deciding
what type of business to be in terms of creating and providing products, systems, services, or a
hybrid combination thereof. There are usually many ways to “make a buck” in a given industry
or sector. In general, these fall within these three categories—or a hybrid of the three. It is also
important to appreciate the differences between these types of businesses in terms of how they
generate revenues. It is to the last step of venturing scoping that we now turn our attention.
Different Types of Business Possibilities
for the Same Target Industry Sector
It is not unusual to find customers in the same market being served by different companies
focused totally on products, focused totally on systems, or focused just on providing different
types of services. Suppose, for example, that we wanted to start a venture in the supply chain
management industry, with a focus on mass market retailers. Those retailers, led by Walmart,
want to track every product they sell from suppliers’ factories to their store shelves. Now, let’s
consider how different business “types” created by entrepreneurs could serve the needs of
Walmart and others in the supply chain management industry:
Products: Create radio-frequency identification (RFID) sensors and readers capable of
tracking products in transit by item and by pallet. The venture will obtain patents on its
sensor technology and find third-party manufacturers to produce its sensors and readers.
Systems: Create software-based systems to acquire sensor information in real
time, communicate those data to central servers armed with sophisticated workflow
management software, and use software applications to inform customers of the status
of products in production, in transit, and in stock. Customers will use these data to
optimize inventory planning and distribution center operations.
Services: Create any one of many service-based businesses; for example, provide
Walmart employees with access to tracking data through a simple, secure Web browser.
Alternatively, the venture will create a portal to facilitate competitive bidding by shippers
to manufacturers and mass market retailers such as Walmart, Target, Tesco, or Carrefour.
Making Money Is Different
Based on the Type of Business
The three business types not only differ in how they create value for customers, but they have, in
most cases, very different revenue, cost, and margin profiles. Consider first a product-type business. For every $100 in product sales revenues, $30 to $40 is spent on manufacturing; another
$25 to $40 is spent on selling, marketing, R&D, and administration, leaving a net operating profit
margin in the range of $15 to $25. The point of leverage in this business is to design a great set
of products and manufacture thousands if not millions of them at a low cost per unit. Such businesses often require huge capital outlays for production capacity. Using our example of A123
Systems again, this venture raised about half a billion dollars in 2009 to develop manufacturing
capacity, about ten times the amount raised for its research and development of the batteries.
Now consider the typical systems company. For every $100 of revenue, $20 to $30 might
be spent on R&D; another $10 to $20 is spent on sales, marketing, and administration, leaving a
net operating profit of $50 or more. At least, that is the goal! The point of leverage for a systems
company is to hire the smartest programmers, have them create fantastic software, and then ship
it electronically with virtually no cost of goods. The high profit margin enjoyed by this type of
business explains why software continues to draw heavy venture capital investments.
Services companies aim to be product and systems agnostic. They are consulting firms,
equipment service firms, transportation services providers, home health care providers, energy
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part 1??? DEFINING THE VENTURE CONCEPT
production and management firms, and so forth. Most are labor intensive. Thus, for every $100
of revenues, a typical services firm spends a third on labor; a third on technology, marketing,
and administration; and tries to walk away with $33 or more in operating profit. Its point of
leverage is the design of the service, the people who deliver the service, and the technology that
helps them deliver the service efficiently and effectively. Think of the UPS drivers in your area
and their handheld devices. UPS’s combination of people, trucks, and information technology is
its secret for profitably delivering more than 18 million packages a day!
In short, the three basic types of businesses—product-focused, systems-focused, and
services-focused—are completely different in terms of what they do and how they make money.
Their points of leverage are also entirely different. You can learn about the revenues, costs, and
margin profiles of companies operating in your target industry or sector through Yahoo! Finance
and similar sources. Look up the industry leaders and examine their income statements.
Making the Choice of the Business Type for Your Venture
And so, having selected an industry and screened various possible target sectors in that industry,
you must now decide, “What type of business do I want to have?” Apple’s decision in the mid2000s to shift some of its energy to a service business—iTunes—demonstrates the power of type
choice on earnings and company value.
Most entrepreneurs make the “type” decision by considering internal factors and the analysis
they used in screening industries:
• For which type of business do I have the experience and education needed to succeed?
• What am I really good at? This is not only in terms of creating a product or system or service but also in terms of selling the innovation.
• Do I want to create a new product or simply integrate different products together within
a system or service? Am I most comfortable with the idea of providing a service?
• Which type of business in my chosen industry sector is in greatest demand by customers?
• For which type of business is there the least direct competition?
Time is another issue to consider in making the choice of business type. The longer it takes
to generate revenues, the more difficult it will be to obtain financing—and the greater the risk
for the entrepreneur.
As a general rule, product companies seem to take the longest time to move from business idea
to first paying customer. A unique and appealing product must be designed, prototyped, customer
tested, and manufactured. Even a simple product can take 18 months or longer to move to market.
Medical products can take much, much longer! Systems companies tend to face a one- to two-year
run-up to workable product: lots of software development and iterative testing, a beta site with a few
lead users, and then it’s off to the races. Service companies, on the other hand, can start providing services right away if the team is right and be making money soon thereafter. Time to market is not the
only consideration, of course; make a great product and there is far more leverage on time and effort
and capital than all but the best of services businesses. Software can be even better.
*** *** ***
In this chapter, you learned the importance of gathering information on the attractiveness of
industries and the sectors within those industries. Successful entrepreneurs use information to
drive their venture decisions. It is critical that you use objective information to determine if the
innovative concept you have in mind also has the makings of being a good business, the foundation of which is to compete in a growing, attractive market space. Do not let your passion for
an idea get in the way of applying common business sense to find those areas where your experience and industry dynamics combine to make for a promising journey.
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
Reader Exercises
Now it is your turn to apply the venturing scoping ideas of this chapter to help shape your own entrepreneurial vision.
The following exercises should be done sequentially.
Also, a few words about student project teams. This type of work is often performed in teams to emulate the venture
team startup process. If you do recruit team members for a project, have a separate discussion off-line in terms of roles
and responsibilities. Do this early in the project so that everyone understands the amount of “skin in the game” that each
team member is willing to contribute. Then, have a process for reviewing each other’s work.
This commitment to getting the work on time is so important. You don’t want to have people join your team just
because they think your idea is “cool.” They must be willing to work because it is only through that work that your
venture idea will continue to improve. As a fledgling entrepreneur, you do not have the time nor should you have the
patience to carry noncontributors on your back.
Now on to the assignments for this chapter. It is time to define your venture scope!
Step 1: Each Team Member
Needs to Complete Figure 1.8
Put down your specific work and educational experience as well as family history events. After each team member does
this for themselves, you then need to assemble a composite list for all team members. Just as important as what is on that
list, note in a different color (such as red) those items in terms of skills and work experience that appear to be missing
for a successful venture. If you have gaps, don’t let these stop you. However, these will also help direct you in terms of
what new team members you need or which other professors or advisors you might seek out in the weeks and months
ahead.
•
•
•
•
Team Work
Experience
Team Education
•
•
•
•
•
•
•
Target Industry
Beneficial Family
Connections
Do this individually for the members of your venture team, compare notes,
and share your ideas about the different business types of opportunities that might exist in the target industry.
Figure 1.8?? Entrepreneurial Background Template
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part 1??? DEFINING THE VENTURE CONCEPT
Step 2: Conduct a Target Industry Analysis
This is a very important exercise. You need to search the Web and other data sources for information regarding your
target industry. This includes hard numbers of the profitability of current market leaders and some intensive research
on technology changes, channel changes, and competitors entering your target industry sector. You also need to search
sources such as MoneyTree Report (http://www.pwcmoneytree.com) to see the current flow of angel and venture
financing into that sector. Examples of industry sectors might be biotechnology, software, medical devices, energy,
media and entertainment, networking and equipment, or health care services.
Then, once you have gathered these data, we want you to score the attractiveness of each dimension in Figure 1.9
for your industry sector. Then, make an honest assessment of this data-driven analysis. Is the sector a good place to start
a venture? Does it have favorable industry dynamics or not?
Facts / Data About Your Target Industry
(Bullet-point facts)
Industry Score
(1–10)
Market growth
Profit potential for the sector (or) Operating
margin of sector leaders
High rate of technological change and new products
Flow of venture financing
Presence of clear channels to customers
A lack of concentrated competition
A lack of offshore entrants driving down prices
A lack of barriers to gain access to channels
A lack of barriers to gain access to suppliers
A lack of concentrated customer buying power
Total Score
Figure 1.9?? The Industry Dynamics Scorecard
Scoring Key: 1 to 10, where:
1 is “a tough barrier for a new venture,” 3 is “a challenge,” 5 is “neither a barrier nor supporting success,”
7 is “conducive to a new venture,” and 10 is “an ideal setup for venture success.”
If the assessment score is low, you might wish to consider strongly looking at a different industry or a different sector
of the industry that interests you. Otherwise, you need to have a serious discussion about how to overcome the negative
dynamics you have uncovered. When it comes time to raise money from professional investors, assume that they know
the potholes just as well as anyone else. What seasoned professionals try to find are “show stoppers,” defined as an
industry dynamic that makes even a well-managed venture hard to grow.
Step 3: Conduct an Environmental Scan for Your Target Industry
Figure 1.10 presents an environmental scanning to further enrich your target industry sector analysis. Pay particular attention to the five key dimensions of environmental scanning: changes and trends in the social, economic,
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
technological, competitive, and regulatory conditions surrounding your venture concept. Record these with references
to supporting data sources directly on the template. Then, try to identify venture opportunities that take advantage of or
respond to these trends. Remember, trends can be either positive or negative from the end-user’s point of view. A venture can be positioned within a larger trend—and from that “ride a wave” toward success. Ventures targeting the aging
population, environmental regulations on energy production and consumption, or obesity are examples of “matching
venture opportunities.”
Trends
Over-Arching Examples
Venture Opportunities
Social
• Look for aging, health, ethnic, and other
socio-demographic trends
• Make a list of matching venture opportunities
Economic
• Look for macro-economic trends such as
globalization and economic cycle
• Make a list of matching venture opportunities
Technological
• New, disruptive technologies
• Current and emerging “standards”
• Make a list of matching venture opportunities
Competitive
• Offshore competitors
• “Plays” by large corporations through
acquisitions
• Make a list of matching venture opportunities
Regulatory
• Regulation/deregulation
• “Green” regulations
• IP protection in emerging markets
• Make a list of matching venture opportunities
Figure 1.10?? The Environmental Scanning Template
This template will be useful when you get to the point of discussing the venture with your professor or advisors. It
will demonstrate that you have done your homework and that you recognize both opportunities and dangers on the
horizon. Revisit your venture concept statement with the environmental scanning template in hand. Does it still make
sense? Which if any of that statement’s four elements should be revised or otherwise improved?
Step 4: Draw the Ecosystem Map for Your Target Industry
Identify all key players within the ecosystem. If there is financial information on the Web about these key players, gather
it and look at their revenues, their revenue growth rates, their operating margins, and the even the number of employees. Begin to get smart about your competitors and potential partners such as OEMs, distributors, and complementary
innovators or service providers. As you are doing this, look at their Websites and see if there are management team
members who are alums of your university.
Step 5: Have Breakfast or Lunch With an Experienced Entrepreneur,
Investor, or Executive in Your Target Industry Sector
A term project is a great excuse to reach out to business people. Students are always amazed at how executives
are willing to help young aspiring entrepreneurs. Go to the Websites of local companies that are either members
of your target industry sector or investors in new companies in that sector. See if any are alums of your university. Usually there is contact information for high-level managers. Try to use your professor for an introduction.
Your assignment is simple: have breakfast or lunch with just one of these individuals. Armed with your industry
research, you should bounce ideas off your guest and then listen. This will provide a world of information about
your target industry sector.
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part 1??? DEFINING THE VENTURE CONCEPT
Channel A
Supplier A
Subassemblies
or
software components
Complementary
Products
Manufacturer/
Integrator
Replacements
Upgrades
Third-Party
Product
Suppliers
Users
Training
Integration
Supplier B
Third-Party
Service
Providers
Channel B
Flow of Product
Flow of Services
Flow of Money
Information and Referrals
Figure 1.11? ? The Target Industry Sector Ecosystem Template
Knowledge is power; your job is to get as smart as you can about an industry as quickly as you can. Time is your
enemy. Friendly alums can be powerful allies and, more often than not, are willing to help.
Don’t worry about how to design and produce these offerings yet; specific planning for that will come later in this
book. You don’t really know what users truly need at this point, so keep your type of business at a very high or general
level.
Step 6: Bring All of This Learning Together:
Create Your Venture Scope
Figure 1.12 integrates all of the prior work into a set of venture opportunities. Based on your personal work/education/
family network background, your target industry sector analysis, and your environmental scanning, you should now be
able to identify several or more venture ideas. At this point, you don’t need to get too specific about the products or services
in these venture ideas. Instead, focus on what they will do—or the value they will bring—to users in the industry sector.
With these venture ideas placed in the template, we then want you to circle that idea which is your favorite one. Be
prepared to explain why it is the favorite based on your industry analysis. The following chapters in this book will help
you refine and test that venture idea.
chapter 1??? Identifying Your Industry, the Target Sector, and Type of Business
•
•
•
•
Team Work
Experience
Potential Venture Ideas
•
•
•
•
•
•
•
Team Education
Target Industry
•
•
•
•
Beneficial Family
Connections
Do this individually for the members of your venture team, compare notes,
and share your ideas about the different business types of opportunities that might exist in the target industry.
Figure 1.12? ? The Venture Scope Template
Great work! You have now created your “venture scope”—the definition and boundaries of the venture that you
want to create. Now it’s time to get feedback on your templates. Your professor will organize an in-class presentation
session where you can share your ideas with the rest of your classmates and benefit from their experiences and insights.
Be prepared for some people wanting to join your team or you wanting them to join.
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