How Entrepreneurs Identify New Business Opportunities

A key question that all would-be entrepreneurs face is finding the business opportunity that is right for them. Should the new startup focus on introducing a new product or service based on an unmet need? Should the venture select an existing product or service from one market and offer it in another where it may not be available? Or should the firm bank on a tried and tested formula that has worked elsewhere, such as a franchise operation? In the first of a series of podcasts for the Wharton-CERT Business Plan Competition, Raffi Amit, a professor of management at Wharton, discusses these questions and more with Knowledge@Wharton. In the process, he offers insights into how entrepreneurs can identify new business opportunities and evaluate their potential and their risks.

An edited transcript of the conversation appears below:

Knowledge@Wharton: Our guest today is Raffi Amit, professor of Management at Wharton. We are going to be speaking with him about identifying new business opportunities. Professor Amit, thank you so much for joining us today.

Amit: My pleasure.

Knowledge@Wharton: The question that confronts anybody who is thinking of starting a new business or company is, how do you find the opportunity that’s right for you? Could you offer some guidance on that?

Amit: Sure. There are many sources for new venture opportunities for individuals. Clearly, when you see inefficiency in the market, and you have an idea of how to correct that inefficiency, and you have the resources and capability — or at least the ability to bring together the resources and capability needed to correct that inefficiency — that could be a very interesting business idea. In addition, if you see a product or service that is being consumed in one market, that product is not available in your market, you could perhaps import that product or service, and start that business in your home country.

Many sources of ideas come from existing businesses, such as franchises. You could license the right to provide a business idea. You could work on a concept with an employer who, for some reason, has no interest in developing that business. You could have an arrangement with that employer to leave the company and start that business. You can tap numerous sources for new ideas for businesses. Perhaps the most promising source of ideas for new business comes from customers — listening to customers. That is something we ought to do continuously, in order to understand what customers want, where they want it, how they want a product or service supplied, when they want it supplied, and at what price.

Obviously, if you work in a large company, employees might come up with ideas. Indeed, you might want to listen to what they have to say. You could pursue these ideas by asking yourself some key questions such as, “Is the market real? Is the product or service real? Can I win? What are the risks? And is it worth it?”

Knowledge@Wharton: Could you offer an example of a start-up that evaluated an opportunity and demonstrates some of the principles you just mentioned?

Amit: Well, obviously in the age of the Internet, there is no shortage of examples of entrepreneurs who started a company based on a perceived need. You could go back to the beginning of E-Bay, where they saw an opportunity to connect people through launching a virtual flea market. It offered a platform that connected buyers and sellers directly.

Other companies have found similar models. For instance, take PayPal, a company whose co-founder [Elon Musk] was a Penn and Wharton graduate. The company provided people the opportunity to pay online. Flycast is another company started by a former Wharton MBA student, [Rick Thompson]. It addressed issues of advertising on-line. All of these companies have one thing in common. They addressed an unmet need in the marketplace.

There is no substitute for understanding the unmet needs of customers. That will allow you to discover whether you are able to supply those needs, at the price customers want to pay, and if you can still make a profit.

Knowledge@Wharton: Let us suppose a would-be entrepreneur has identified what he or she thinks is a promising unmet need. Can you take us through the process of evaluating and identifying the risks that should be considered in deciding whether or not to pursue that business opportunity?

Amit: The first step that everyone should go through is to ask the question, is the market real? In order to do so, the first thing you want to do is conduct what we call a customer analysis. You can do that perhaps in a very technical way, by conducting surveys. Or perhaps, in a less technical way, you can attempt to answer the question, “Who is my customer?” What does the customer want to buy? When does the customer want to buy? What price is the customer willing to pay? So, asking the “W questions” — who, where, what, when — is the first step. At the end of the day, the one thing every entrepreneur is looking for is revenue, and the revenue will come from customers. That is why you need to ask yourself, is there a market here?

The second thing you want to ask yourself is, who else is supplying that particular market? That is what we call competitor analysis. Ask yourself who else is in this market, and what are they doing for the customers. Are they supplying a similar substitute product or service as you have in mind? That is the second thing you have to establish, and by doing that, you can understand better what need is not met at the moment. That will also give you the opportunity to zero in on the price points and feature points of where you can differentiate yourself from existing players in the market.

You also need to conduct a broader industry analysis to understand the attractiveness of the industry you’re going to enter. Is the industry growing or shrinking? What power do the suppliers have in this industry? How many buyers are there? Are there substitute products? Are there any barriers to entry? If so, what are they? That is very important for you to understand, because it will help you realize whether the industry you’re thinking of entering is attractive.

In addition, you may want to look at regulations that affect that industry. Are there any regulations that you would be subject to? This especially applies in the life sciences sector, where there are strict regulations that control the supply of products into the market. In the United States, the FDA, the Food and Drug Administration, is a significant regulator. Every country around the world has a regulator in the life science sector. So, these are the high level questions that you may want to ask yourself.

Once you answer these questions, and you identify the need, given the competition and all the regulatory constraints that exist in that market, that will provide you with the opportunity to tailor your service or product — or combination of the service and product — to that marketplace. The logic we are suggesting here is to understand the need, and tailor the product and/or service to that need, as opposed to saying, “Well, I have an idea. And now let me think how I can shove it down the distribution channel.” More often than not, the latter doesn’t work. More often than not, the former approach works. This is the approach where you identify the need, do a rigorous analysis of understanding who else is out there, and what constraints exist, and how you could differentiate yourself in a meaningful way. When you approach a new opportunity this way, when you introduce your product and/or service, you can expect to have substantial sales and growth for your company.

Knowledge@Wharton: In addition to conducting market analysis and competitive analysis, and also looking at the industry and government, are there any financial risks that entrepreneurs should take into account? What would those be?

Amit: When starting a business, there are many risks that need to be considered. One way to think about the various risks an entrepreneur is faced with — or, for that matter, an investor in an entrepreneurial venture is faced with — is to break them down into several buckets. Let’s start with the first bucket, the company bucket. Well, here, the biggest sources of risk are the founders. Do they have the wherewithal not just to start the company, but also grow the company? Experience has shown that the prevalence of individuals such as Bill Gates or Michael Dell, Steve Jobs, that can not only start companies, but also manage its growth — the prevalence of such individuals is relatively limited.

A second source of risk is technology risk. To the extent that your company employs technology, there are obviously issues of, how long will this technology be the leading edge? Secondly, are there any intellectual property issues that need to be addressed? Lastly, there exists the product risk. If you haven’t developed a product yet, can you manufacture it? Will it work? All these issues are under the bucket of company risk.

A second bucket for the sources of risk is the market for the product. You need to be aware of two big uncertainties. First, what is the customer’s willingness to buy? And second, what is the pace, if you’re successful, at which competitors will be able to imitate you? One of the things you have to think about when you enter that market is how you can create barriers to imitation, so that if you’re successful, the competition won’t be able to imitate you very quickly.

A third bucket consists of risks associated with the industry. Are there any factors in that industry that relate to availability of supply? In some cases, you need to have certain raw materials that are in limited supply, and that some suppliers might be able to take advantage of that. Barriers to entry might change. Regulations might change, and adversely or positively affect your business.

Lastly, there are financial risks. And here, the question is, will you be able to raise the money early on? At what valuation will you be able to do it? Will you be able to raise follow-up money? And then, from the investor’s standpoint, obviously there’s a risk that if the company is very successful — and I can tell you that most early stage companies don’t work out, but for the few that do, when it is time for, say, a public offering, will the public market be open? We have just gone through a substantial period of almost two years where IPOs were few and far between. At the time you make the investment, you don’t know what the state of the capital market will be in five to seven years from the date you make the investment. That’s a big risk the investor is assuming. Obviously, it’s a big risk for the entrepreneur to be able to have some liquidity, and perhaps realize the fruits of her investment, of her time, talent, and in some cases some of the money she puts into that venture.

Knowledge@Wharton: Professor Amit, you have been studying new ventures and entrepreneurship for many years. What are the biggest mistakes you have found entrepreneurs make at the initial stage of identifying business opportunities, in your experience?

Amit: The most frequent mistake that people tend to make is to think everybody in the market is like them. If they like the product, everybody else will. Sometimes — too often — entrepreneurs, and especially entrepreneurs with an engineering background, are too focused on the engineering features or technology features of the particular product, rather than on the need that they are trying to fulfill. Customers don’t buy technology. Customers buy products that add value. Customers buy products that they need, in order to satisfy some issue that they wish to satisfy. But not the technology, per se; it is the services of the technology that matter.

Very often, entrepreneurs — particularly smart entrepreneurs — are overwhelmed by the technological aspect, and they pay too little attention to what the customers want. If you ask me, this is the most frequent issue at the early stage that entrepreneurs are faced with.

Knowledge@Wharton: One last question. What advice would you give potential entrepreneurs in the Middle East who are thinking about starting their own companies?

Amit: My experience, having visited the Middle East numerous times, is that people are hesitant to start new businesses, because they think they don’t have the characteristics of what would make for a successful entrepreneur. Also, it’s too risky to be an entrepreneur. Research that I have done, research that my colleagues around the world have done, has shown that there are no unique characteristics, or traits, if you will, that distinguish entrepreneurs from non-entrepreneurs, and successful entrepreneurs from unsuccessful entrepreneurs.

My main message to entrepreneurs in the Middle East is that you have what it takes to be exceptionally successful. It is no more risky to start your own business than working for General Motors. As you recall, General Motors filed for bankruptcy not so long ago. So, the perception that working for a large company is somehow safer, is not, of course, borne out by the reality. My message is, you have what it takes; it is time to get started.

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