Shortcuts In Predicting Business Success
Doing a full blown feasibility study is a very expensive and time – consuming process. Because of this , herein the Philippines, it is rare that entrepreneurs go through the process. Most business persons here seem to think that feasibility studies are only for large companies. The majority prefer to bypass the feasibility study and to just go directly to making the business plan.
The variety of shortcuts used in assessing a business prospect is numerous and its effectiveness varies widely. Some techniques are quite scientific and offer a good chance of success. Unfortunately, there are techniques that have doubtful value and so are unlikely to be of help. Below are just a few of the common shortcuts and my opinion on their effectivity:
Most Reliable Shortcuts
Knowing upcoming developments that would increase demand. This is one of the most common reasons for starting a business—the expectation of forthcoming strong demand. It may be due to a road that is about to be built, or a large company that is due to open beside the site.
Checking if margins are high. In the final analysis though, it is the net profit that should determine how you may do a preliminary analysis by checking out the gross profit margin. This is easier to estimate and an unusually high gross profit margin is a good sign of the business’ bright potential.
Having a truly unique and needed product that cannot be duplicated. This is probably the safest shortcut, but also the rarest. You can see hundreds of entrepreneurs claiming to have discovered a great and unique product, but upon closer look, it is usually just a poor imitation of a current popular item or with just minor unnoticeable improvements. This is not what I am referring to. The product should be truly different and with a strong demand. If you will be developing this kind of product, then it is not a shortcut since it would almost certainly take a long time to do this. But if it was developed by another party and it was offered to you, then it can be the surest deal if it is affordable. This kind of situation rarely happens since the inventor is unlikely to sell at a low price.
Seeing perennially unserved customers. I f you have been patronizing the establishment regularly for a long period of time, and you always see that it has more customers than it can handle, then you can have a high degree of confidence about the potential of the market.
Assessing based on personal experience in the industry. If you had long and broad experience working in the industry, you will be better at spotting opportunities within that market. Note that I also included “broad experience” as part of the criteria since your experience may be too specialized to give you a good grasp of how the business is actually operated.
Studying the trash of the targeted business. I have read that there are some who examine the trash of a company to see how large the demand is. After all, the volume of garbage is an excellent indicator of how many customers there are in some industries like restaurants.
Most Unreliable Shortcuts
The previous owner was doing great. This might indeed be a big opportunity, but you must make sure first that the customers would not leave once the former owner goes. You must also make sure you would be able to operate the business well. It may be that the vendor has skills that are difficult to match at an affordable price.
Seeing a lot of customers in a short period. Jumping to conclusions after only a short observation has been a blunder of many entrepreneurs. A few days’ sales do not mean that such is always the case year-round. Be extra careful if the product is seasonal. As a tip, for many products and services, during Christmas season, sales are extraordinarily strong for a large variety of products and services; do not assume this would be the same for the other months.
Relying on a new unproven technology. This is one case where a complete feasibility study should normally be undertaken. There are many potential problems when dealing with a new unproven technology. Being new, almost every aspect is uncertain. Production may be a problem besides the usual business challenges. Having a prototype is very much different from mass producing the item. Costs and quality defects may spiral out of control.
Joining the bandwagon. Do not venture just because you think everyone is making money in the business. This is the oldest blunder, but despite this, it is still the biggest blunder today. It seems that the herd mentality is programmed in our genes. Just because many people are now earning big in that business does not mean you should expect the same results. In all likelihood, by the time you enter the business, it would already be saturated by competition.
Relying on unverified secondhand information. Whenever you hear of upcoming developments that promise to bring wonderful opportunities, you must take the time to verify its accuracy. Rumors have brought financial ruin to many who relied on the information without making sure of its truth.
Even after choosing the best shortcuts in checking if a business would prosper, it must be said that a true feasibility study is still more reliable because it is more thorough and scientific in its methods. It is very easy to miss a critical problem if you rely on just shortcuts. Still, if time is of the essence or you do not have sufficient funds to do a feasibility study, then it would be useful to know what shortcuts have a better track record.
*Originally published by the Manila Bulletin. D-4, Sunday, August 25, 2013. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.