Tuesday, February 19, 2013

Misplaced optimism? I don’t think so…

imageThis article was written by Dennis Wright, Chairman, Orange County SCORE

In a recent article in the Orange County Register my comments regarding the Orange County economy in the coming year seem to be pretty darn optimistic when compared to comments from others, but I find it hard to be pessimistic when I look beyond media headlines and editorial pontification.

In years gone by I learned that market research was essential to success, and it was done by both listening and observing; we live in a very consuming society and if as a seller I had the right products or services to meet specific demand I’d sell stuff.

Now fast forward to today; I recall Whirlpool recently saying they believe we’re entering the beginning of a (product) replacement cycle. Supporting that view of course is data illustrating existing home sales numbers are growing. On another front I heard that the average age of cars on the road now is close to 11 years. So there are reasons to believe.

To take advantage of this situation - this pent up demand - business owners need to understand who their prospective customers are, what those folks need or want, who they’re competing with and why that prospective customer should choose them over their competitors. Then they have to make the right presentation; in other words, get the appropriate message out to the right people.

Seems like a simple formula, right? Well, you’d be very surprised to know how many business owners aren’t doing that. In addition, their response to the last question is “we’ll give better service” or “we’ll be the low cost provider”. Fact is the former doesn’t work, everybody says that up front, and the latter is not a pathway to long term success and profits. Understanding who you are and what specific need or want you satisfy is, and having a well thought out, executable plan should enable you to sell stuff too.

I worked with a man years ago who had a plaque on his desk illustrating the following (author unknown) quote on it: “If it is to be it is up to me”. That sums things up pretty well.

Yes, I’m optimistic and no, I don’t think my optimism is misplaced… do you?

5 Overlooked Tax Breaks for Small Businesses

Commentary: Congress extended and expanded several key deductions

This article was written by Bill Bischoff, Marketwatch, February 6, 2013, reprinted by permission.

Last month’s fiscal-cliff legislation included lots of tax provisions. Media attention has focused heavily on changes that affect individuals. But the new law also provides some valuable tax-saving breaks for businesses. Here’s the most important stuff to know for your outfit’s 2013 tax year.

Generous Depreciation Deductions for New and Used Assets

The Section 179 depreciation deduction privilege allows eligible businesses to deduct 100% of the cost of qualifying new and used assets in Year 1. For qualifying assets placed in service (set up and ready for business use) in tax years beginning in 2013, the fiscal-cliff legislation set the maximum Section 179 deduction at $500,000 (same as for 2010-2012). Without this change, the Section 179 maximum deduction for 2013 would have been only $25,000.

Somewhat surprisingly, the new law also extended a temporary provision that allows up to $250,000 of Section 179 deductions for the cost of qualifying real property placed in service during tax years beginning in 2013. Eligible property includes designated leasehold improvements, certain restaurant buildings and improvements and certain retail space improvements. Note that the $250,000 allowance for qualifying real property is part of the overall $500,000 Section 179 deduction allowance; it is not in addition to the overall $500,000 allowance.

The $500,000 and $250,000 allowances are reduced if your business places in service over $2 million worth of assets that would otherwise qualify for Section 179 deductions. This phase-out rule usually only affects larger businesses.

Warning: Unlike 50% bonus depreciation deductions (explained below), Section 179 deductions cannot exceed the taxpayer’s business taxable income calculated before the Section 179 deductions. In other words, Section 179 deductions cannot create or increase an overall business tax loss for the year. Special rules apply to unincorporated businesses (sole proprietorships, partnerships, and LLCs) and S corporations. Consult your tax pro for details about how the Section 179 deduction rules work and whether your business can benefit.

50% First-Year Bonus Depreciation for New Assets

The new law extended 50% first-year bonus depreciation for an additional year to cover qualifying new (not used) business assets that are placed in service during calendar year 2013. The 50% bonus-depreciation write-off is on top of the first-year depreciation deduction allowed under the “regular” rules. Therefore your business can deduct over half the cost of qualifying new assets in Year 1 instead of writing them off over a number of years.

For many small businesses, the single most important element of the 50% bonus depreciation deal is the $8,000 increase in the maximum allowable first-year depreciation deduction for cars, light trucks, and light vans.

Social media tips for small businesses

Everyone's on social media, but not everyone knows how to make the most of it. Emily Maltby has tips for small businesses.

* For new cars, the maximum first-year depreciation deduction for 2013 will be about $11,300 (the IRS has yet to announce the exact figure). Without the new law, the maximum deduction would have been $8,000 less. To claim the maximum deduction, you must use the car 100% for business. The deduction is proportionately reduced if you use it over 50% for business but less than 100%.

* For new light trucks and light vans, the maximum first-year deduction for 2013 will be about $11,500. Without the new law, the maximum deduction would have been $8,000 less. To claim the maximum deduction, you must use the vehicle 100% for business. The deduction is proportionately reduced if you use it over 50% for business but less than 100%.

Key point: Unlike Section 179 deductions, your business can claim 50% bonus depreciation deductions even if it has little or no taxable income for the year. Therefore, bonus depreciation deductions can create or increase a so-called net operating loss (NOL) for the year. If your business has an NOL for the 2013 tax year, you can carry the NOL back to 2012 and/or 2011 and recover some or all of the income taxes paid for those years.

Special First-Year Depreciation Rules for “Heavy” Vehicles

If you buy a business vehicle with a gross vehicle weight rating (GVWR) above 6,000 pounds, it’s generally treated as a truck (as opposed to a passenger vehicle) for tax purposes. Truck treatment is much more favorable, because the maximum first-year depreciation deductions for cars, light trucks, and vans will only be a little over $11,000 this year (as explained earlier).

If the heavy vehicle is an SUV or short-bed pickup, you can claim a Section 179 deduction of up to $25,000. If the heavy vehicle is not an SUV or short-bed pickup, there is no $25,000 limit on the Section 179 deduction. Instead, the larger $500,000 Section 179 deduction limit applies. For example, the larger limit applies to heavy long-bed pickups and heavy shuttle vans and delivery vans.

If the heavy vehicle is new (not used), 50% first-year bonus depreciation is also allowed.

100% Gain Exclusion for Qualified Small Business Corporation Stock

The fiscal cliff legislation extended the temporary 100% federal income tax exclusion for gains from sales of qualified small business corporation (QSBC) stock issued in 2013. However, don’t get too excited just yet. QSBC shares must be held for more than five years to be eligible for the gain exclusion privilege, so we are talking about gains from stock sales that occur years from now. That said, the 100% gain exclusion is obviously a great deal if you qualify. If you’re thinking about injecting new capital into your business this year, consult your tax adviser to see if you can position yourself to take advantage of this tax-saving opportunity.

Tax-Free Transit and Parking Deals for Employees

For 2013, your company can provide employees with up to $245 per month in tax-free transit passes. In addition, you can give employees up to $245 per month tax-free for parking. The advantage of such a program for your employees is obvious. The advantage for your company is these amounts are exempt from federal employment taxes (unlike wage payments).

If you don’t want the company to pay for these fringes, you can offer employees a salary reduction arrangement instead. Under this alternative, each employee could set aside up to $245 per month for transit passes and up to $245 per month for parking. These amounts are subtracted from the employee’s taxable salary. On the employee side of the deal, this arrangement allows for most or all commuting costs to be covered with before-tax dollars. On the company’s side of the deal, you don’t have to pay federal employment taxes on the salary reduction amounts. It’s a win-win proposition.

Five Warning Signs That You’ve Cut a Bad Deal

This article was written by Scott Drobes, in CFO.com, January 16, 2013, reprinted by permission

Finance execs are always being told that their company has gotten the best price with the best terms. But how can you be sure? If you spot any of these five warning signs, chances are good that the deal isn’t.

As a finance executive responsible for signing off on large purchases for goods and services, you will inevitably ask, “Did we get a good deal?” And the response will usually be, “Yes.” But the follow-up question — “How do we know?” — may elicit a less confident reply.

In fast-growing companies, you are focused on recruiting employees who can help drive that growth. So, while most of your team will strive to be good stewards of the company checkbook, their negotiation expertise is not likely to be a key factor in your hiring decision. Here are five warning flags that can alert you that a deal may not be as good as you’re being told it is.

1. The price is bundled.
There’s no way to know if you’ve gotten a good deal if a single price includes multiple products or services. You should push for line-item pricing, even if your negotiations have been based on the total expense. Among other benefits, a line-item approach allows you to compare and contrast and determine whether certain items could be more effectively procured from alternate vendors. In addition, if services are combined within recurring contracts, you may find it difficult to align the business’s changing requirements with the contract. You may want to replace or remove individual items from the agreement at a later date, but bundled pricing will make it difficult to get fair value for the removed items.

2. The discount looks too good.
Large discount percentages off an arbitrary list price can create the illusion of a good deal, but the discount is only meaningful if the underlying price is reasonable. And be careful not to focus solely on the primary product or service during negotiations: suppliers frequently offset competitively priced items with inferior pricing on ancillary products and services. As a result, higher-margin items may begin to constitute a greater percentage of your overall spend if your product mix changes over time.

3. Your commitments are based on volume.
Today’s good deal quickly can become tomorrow’s bad one. Your suppliers are negotiating based on the long-term value of the deal. Consequently, many contract terms are designed to improve vendor margins over time. Multiyear agreements, or the high cost of changing vendors, can limit your ability to bring in secondary suppliers, ensuring higher margins for your supplier if your business grows or its costs drop. On the other hand, if minimum volume commitments are part of the deal, you need to evaluate what the impact of a slowdown in your business would be. Might you find yourself paying for services you’re not receiving? During renegotiations of existing contracts, such commitments need special scrutiny. It’s not unheard of for a supplier to lower its per-unit cost while failing to address a corresponding drop in an annual commitment. When that happens, the write-down may become “sleeves off the vest” savings: an illusion.

4. The price began as a budget placeholder.
Long before negotiations begin, managers often call on vendors for “something to put in the budget.” The project has not yet been approved, and the vendor’s price will not be heavily discounted at this time. But as soon as that phone call asking for “something” occurs, your company has lost significant leverage. The vendor has established a starting point for the negotiations, and it will believe it knows how much you’ve budgeted for its product or service. Even if you subsequently bid the deal out, your expectations for what a good deal should look like may be based on that original quote, which was only intended to fill in a blank space. Contacting suppliers before negotiations begin should be avoided if possible or, if necessary, handled with care. Ideally, budget numbers should be based on third-party benchmarks because an early quote is effectively the beginning of a negotiation. The vendor’s sales organization will kick into gear as soon as you reach out, before you have the chance to define a bargaining strategy.

5. There’s too much or too little time to renew.
Many agreements have auto-renewals or evergreen provisions, often in conjunction with pre-negotiated price increases. Such contracts may require significant notice of your intent not to renew, thereby greatly reducing your negotiating leverage if the deadline passes. On the other hand, vendors that provide complex services will take the opposite approach. Recognizing that there are significant costs and bother associated with switching suppliers, they will strive to push negotiations back as close to contract-renewal time as possible. By the time you begin bargaining, you will have lost leverage in the negotiation simply because you don’t have enough time to evaluate or implement a plan for changing partners.

Are You a Bad Boss?

clip_image002[1]This article was written by Barry Mc Kinley, SCORE Orange County Business Mentor

The key to growing and building your business is hiring good employees, training them properly and giving them direction to help your business develop and prosper. But many business owners skip some of these steps. The most important stage is to train the employee and empower them. Hopefully your management style does not fall into some of these areas;

· Your Staff Is Afraid Of You – when you have instilled fear into your employees you do a number of things that will affect your business. The employees will never make a decision, they will constantly be looking for a new job, and they will never make you aware of any problems.

· You Micromanage – you staff will learn very quickly to allow you to do their job. The only way your business will grow is allowing your staff to grow.

· You Don’t Control Your Own Stress – just like the saying ‘Monkey See, Monkey Do’, your employees will end up copying your style. That is the ones that don’t find another job because they are afraid of your temper tantrums. That is also a good way to get sued.

· You Continue To Operate In The Past – the 70’s were great and I loved my bell bottoms, but this is a new era with better ways to do things. If you operate in the past the only employees you will keep will be dinosaurs just like you.

· You Are Unavailable For Staff – when they come to you it is because they don’t understand how to do something. Being unavailable they will never learn and your business will continue to flounder, costing you money!

· You Do Not Support Your Staff With Customers – it is important for you to back your employees when there are customer disagreements. This does not mean when the employee is wrong that you side with them but it is very important that you don’t under mind them in front of a customer. You can always later discuss one-on-one other ways to have handled the situation.

· You Don’t Know Your Staff’s Dreams, Interests and Hobbies – If you show them you are not interested in them as “people” why should they be interested in you or your business. We all want to be appreciated, and respected. As a matter of fact, employees rate both of those ahead of money. So save on your payroll and take more interest.

· You Are Unable To Deliver Tough Messages – this is not the fun part of business but with the rain comes the rainbow. Employees respect Managers who have backbone and will do what is right no matter how hard it may be. Show them the vision.

If you don’t allow yourself to fall into the above categories you will find that your employees will stay longer, your business will grow and you and your customers are much happier.

Keeping Your Cash Flow Flowing

clip_image002This article was written by Mike Capsuto, SCORE Orange County Business Mentor

Obtaining payments from customers is a major problem for companies that rely heavily on accounts receivable. A customer may be experiencing a cash flow problem and purposely delaying payments. Cash is the heart of any business. Accelerating cash collections can help speed payments to your suppliers, which may lower or eliminate interest payments on your payables and increase your credit rating. A majority of businesses reported receiving late payments from their customers or no payments at all. In addition, some businesses in their early stages of development partially stock their inventory, but never open their doors. Fraud has been committed on unsuspecting businesses anxious to make a sale without minimally investigating the buyer. Here are some tips to keep your cash flow flowing.

Make sure you are not dealing with a ghost.

• If possible, visit your customer's place of business.

• Checkout the company with the local Better Business Bureau.

• Use the Ripoff Report website (www.ripoffreport.com) to determine if the company has committed fraud in the past.

• Use apps such as Google Maps or Google Earth to ensure that the maps conform to their address.

• Verify that the business is not a transient location such as an apartment building, motel or vacant lot especially if the “bill to” and “ship to” addresses are different.

Caution: Do not rely on a company having a web site. A web site does not ensure legitimacy. Anyone can put up a web site.

Obtain a credit report.

• Obtaining credit reports for potential customers can reduce nonpayments and increase your cash flow.

• Before entering into any agreement with a customer, verify their credit status to ensure that they have a track record of paying their bills.

• Use this insight to set appropriate credit limits.

• Contact one of the credit bureau agencies to sign up for their service. The three major bureaus are Equifax, Experian and TransUnion.

• Verify that you have a legal reason for obtaining credit reports from potential customers. If you are granting a customer any form of credit, you have a legitimate reason to screen customers for their credit worthiness.

Caution: Customers must sign a credit application before you obtain their credit report. Review the latest privacy and disclosure guidelines listed by the federal and state governments.

Accept credit cards or offer discounts to speed up cash collections.

• Businesses and government agencies use credit cards to make a wide variety of purchases.

• Instead of waiting 30 days, 60 days, or more to collect payment, you can get paid in 2 or 3 days.

• The burden of collecting shifts to the credit card company instead of you.

• When billing a customer, offer a cash discount for paying within a set date of the invoice. A 2% discount if paid within 10 days of the invoice date amounts to a $200 savings on a $10,000 purchase. State this savings clearly on the invoice.

Caution: You'll have to pay a percentage of each sale to the credit card company, and possibly a monthly fee, but those expenses may be negligible when you consider the time and money you'll save by not having to send out monthly statements or pursue payments..

Use informal sources of information.

• Read trade publications regularly. You can obtain much insight into the dynamic changes in your industry that might affect your customers.

• Use your personal and professional contacts for their insights into current or new customers.

• If you have outside salespeople, ask for their opinion and insights.

Caution: Verify any verbally obtained information.

Credit terms should be clearly stated.

• Set terms covering goods/services, invoicing and payment and obtain your customer's agreement prior to entering any transaction with them.

• Issue invoices as soon the merchandise is shipped.

• Ensure the invoices are sent to the correct address and department, the purchase order number is listed and include the accounts payable person's name if known.

Caution: Invoice via email wherever possible, using a PDF. It is cheaper, quicker and more effective than regular mail. Email can help you to prove the invoice has been sent and received. Reminder letters can also be sent electronically. Make sure that all communication has the correct email address of the individual responsible for authorizing payment. Otherwise, it may end up as junk mail or be deleted by the wrong individual receiving it.

Follow up quickly.

• Don't leave more than five to seven days to follow up an invoice. Your customer may be disorganized in terms of paying their bills.

• Make certain the invoice has been received and verify that there are no billing problems.

Caution: If you wait until the invoice becomes due, then you may find that they did not receive the invoice or that they have been sitting on a question that delayed payment.

Address customer credit issues early.

• Verify your customers' credit status periodically.

• Age your accounts receivable. Keep a spreadsheet of all customers that comprise accounts receivable. The list should be arranged by due date, and should be updated at least weekly. This list can be used to identify slow payers and non-payers.

• If a business starts to show signs of a deteriorating financial position you may have to reduce the level of credit, shorten payment terms or sell to them on a cash basis only.

Caution: Take detail records of all conversations and any promised payment. Mail or email monthly reminder statements and keep calling until you get an answer. There is a small percentage of past dues that represents a real potential for bad debt loss (about 1%, according to the Indiana University study). Identify this small percent early. These are the ones that have long-term financial problems and/or are being uncooperative. They are the ones who don't take or return your phone calls or break payment arrangements Stop selling to them until payment is received and be cautious about renewing credit.

You can factor (sell) your accounts receivable.

Factoring involves selling or assigning your accounts receivables, usually to banks or finance companies, in order to obtain immediate cash or working capital.

• It results in a cash inflow without creating any debt or transferring the business ownership.

• It is also a method to increase sales without having tensions for any loan repayment.

• The amount of cash you receive is conditional on the customer's creditworthiness and is not based on your credit

• Accounts receivable factoring generates immediate cash which can be used to fund payroll, taxes, inventory or buy new equipment and tools to expand your business

Caution: You will not receive the face amount of the invoice. There are several variations of factoring. The amount of cash is typically 80% of the invoice value. Once the invoice is paid, the remaining 20% is paid to you after the factor deducts their service fee which can be substantial. You should weigh the service fee against the cost of having to borrow money to fund your business operations.

Communication builds trust.

• Keep informal communication lines open.

• By speaking to your customers regularly you can avoid many payment problems and encourage healthy communication.

• The more personal a relationship you develop, the further up on the payable list you get moved.

• Communicating with your customers can also highlight opportunities. There could be the potential to increase sales or offer more credit to organizations whose financial health improves.

Caution: Don't get on the phone and beat up customers just to get a payment. That's the easiest way to lose customers forever. It takes more money and effort to find a new customer than to keep an existing one even if they are slow paying.

Selling on account is an excellent method of increasing sales. However, each dollar of accounts receivable represents a dollar not collected in cash. Managing your accounts receivable and maintaining communication with your customers can help keep your cash flow flowing.

BizBen Index Reports Gain In Orange County Small Business For Sale Transactions Last Month

Dublin, CA (February 4, 2013)—The count of 129 small and mid-sized business for sale offerings that were sold in Orange County last month was about 10% higher than the 117 transactions completed in the same month last year, it was reported by the BizBen Index. The county’s improvement was not matched by the statewide sales performance which shows a decline to 1,179 completed deals last month, compared to the 1,223 transactions that closed in January 2012.

"In some parts of the state there was quite a rush to complete sales during the last few days of December because sellers were concerned their capital gains taxes could go up starting in 2013. It would leave them with a lower net sale price for their companies," said Peter Siegel, MBA, Founder and President of BizBen.com, parent of the BizBen Index. "A transaction-heavy month like December 2012, often results in a drop in sales the following month."

Siegel said, "That’s what happened in Orange County, where sellers closed 171 transactions during the last month of last year, more market activity than last month." But, he said, the county didn’t experience the kind of month-to-month drop in deal volume from December that was seen in other counties such as Riverside (down 42.5%), Santa Barbara (40.9%) and San Francisco, (36.7%).
Among Orange County’s busiest markets last month were the city of Anaheim with 13 sales, Costa Mesa and Huntington Beach with 12 each, and 10 deals each in Fullerton, Irvine and Santa Ana.
Here is Orange County’s 2013 business sales statistics, reported by city (found at http://www.bizben.com/stats/orange-county.php):

Anaheim: 13, Brea: 3, Buena Park: 4, Costa Mesa: 12, Dana Point: 1, Fullerton: 10, Garden Grove: 9, Huntington Beach: 12, Irvine: 10, La Habra: 4, Laguna Beach: 3, Lake Forest: 6, Mission Viejo: 3, Newport Beach: 1, Orange: 7, Placentia: 3, San Clemente: 6, Santa Ana: 10, Tustin: 6, Westminster: 6

"Although California is off to a slightly slower start in business transactions compared to last year, we remain optimistic that we’ll see more activity in the market this year than in 2012," said Siegel.

"Easier access to funds from financial institutions will be an important factor in a busier business for sale marketplace throughout the state. And we’re noticing more innovative strategies being used by smart California entrepreneurs. Fresh approaches are needed to overcome some of the deal killers we’ve had to cope with in the past few years. This is a New Economy for participants in the small business for sale market in California. It comes with some new imperatives. People who know how to navigate in this environment are at an advantage.

"The long term picture for the California small business transfer market looks very promising," said Siegel. "More businesses are starting to become available for sale because the members of the large population of baby boomer business owners are starting to retire. And simultaneously, the demand curve is rising as more Californians are disenchanted with the chances of continuous and high paying employment. They’re deciding to purchase fast food franchises, auto service shops, retail stores and other small companies so they can control their financial futures."

Siegel said a small business is a company that sells for $2 million or less.
The California business sales totals for January 2013, by county, are noted below and available at: http://www.bizben.com/stats/stats-monthly-jan.php.

Alameda: 32, Amador: 7, Butte: 4, Contra Costa: 36, El Dorado: 3, Fresno: 43, Glenn: 1, Imperial: 3, Kern: 27, Los Angeles: 289, Madera: 2, Marin: 4, Mariposa: 1, Merced: 6, Monterey: 14, Nevada: 5, Orange: 129, Placer: 11, Riverside: 50, Sacramento: 36, San Bernardino: 55, San Diego: 132, San Francisco: 31, San Joaquin: 16, San Luis Obispo: 24, San Mateo: 25, Santa Barbara: 13, Santa Clara: 47, Santa Cruz: 9, Solano: 7, Sonoma: 28, Stanislaus: 27, Sutter: 4, Tehama: 7, Trinity: 1, Tulare: 11, Tuolumne: 4, Ventura: 23, Yolo: 7

The BizBen Index figures, showing the sales rates by city and county throughout the state for the past four years are accessed http://www.bizben.com/stats/stats-total.php.

The BizBen.com website features more than 8,000 California businesses for sale and businesses wanted postings, along with offerings of new franchises and business opportunities. Since 1994 this niche online network and service has proved a valuable tool for thousands of California business buyers, small business owners/sellers, intermediaries, and advisors. The site also includes articles, resources, news and tips, and a daily blog. For the past 16 years, its BizBen Index has collected and reported on business sales statistics, by county and city, throughout the state.

With Your Idea, Are You Trying to Navigate the Red Ocean or the Blue Ocean?

clip_image002This article was written by John G. Rau, SCORE Orange County Business Mentor

According to the U.S. Patent and Trademark Office (USPTO), there were approximately 225,000 utility patents and 21,000 design patents granted in calendar year 2011, thus implying that over 200,000 new product ideas could potentially enter the marketplace. And this doesn’t even include non-patented new product introductions! However, historically, only a small percentage of granted patents ever reach commercialization—specifically, the USPTO estimates that only 2 to 3 percent of patented ideas ever make it to the market. Of those that do, it is estimated that 90-95% of all new products entering the marketplace fail. There are many potential reasons as to why this happens. One key reason might be that no real market existed in the first place and another might be that there was no thorough research conducted relative to the competition. In order to be successful, you need to have a realistic picture of the competition. Many times inventors believe that their product idea is so unique that no competition exists. This is rarely, if ever, true. All of these types of activities are key to “doing your homework” in the sense of performing detailed market research to see where you product idea “fits”.

A very insightful characterization of the nature of the product market environment that an inventor will encounter first appeared in the article entitled “Blue Ocean Strategy” in the October 2004 issue of the Harvard Business Review, by W. Chan Kim and Renee Mauborgne. (Note: This subsequently became the foundation for a world’s best selling book by the same name that was published in 2005 by the Harvard Business School Press.) The authors defined the business universe as consisting of two distinct kinds of space, referred to as red and blue oceans.

According to Kim and Mauborgne, “red oceans represent all the industries in existence today”.  Furthermore,

“In red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are well understood. Here, companies try to outperform their rivals in order to grab a greater share of existing demand. As the space gets more and more crowded, prospects for profits and growth are reduced. Products turn into commodities, and increasing competition turns the water bloody”.

If you have an idea for an invention that will compete with existing products and a well-defined market space, then you’re navigating the red ocean where it will be more difficult and challenging to be successful. Examples would include inventions that are marginal or incremental improvements to already existing products.

When you’re in the red ocean, the “infrastructure” already exists for products like yours in the sense that there are already established distribution channels, the market space is generally well-defined and understood, the customers/users are known, the suppliers and developers of like products are known, patents and claims are already documented, like or similar products are available for analysis and comparison, the value (sales and orders) of the market space is well documented, and licensing candidates are generally more easier to find.

If like or similar products are already being produced by one or two companies that dominate the market space, then you’re in the red ocean. Someone is already there. They’ve beat you to the market! They now “own it”!

If the total market value (sales and orders) for products like yours is relatively small and/or there are

already numerous companies providing products in this market area, then you’re in the red ocean.

If you have the “mine is better” mindset and the market space, i.e. the users of like products don’t really care or need a better way of doing it, then you’re in the red ocean.

On the other hand, according to Kim and Mauborgne:

“Blue oceans denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans,

demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid.”

Depending on the nature of your invention idea, you may have the opportunity to be more successful and reap greater profits if you’re navigating the blue ocean.

When you’re in the blue ocean, you are in potentially uncharted territory. The market “niche” is not necessarily totally understood and/or well defined. You’re not sure who the potential competitors may be and how these entities might react to the introduction of your product idea. It is, however, a great opportunity for “first to market entry”, but, as a consequence, it may be more difficult and/or challenging to find licensing candidates.

To “navigate the blue ocean” may require “thinking outside the box”. Come up with an idea that isn’t

necessarily a better way to do something that is already being done and where you must compete in a defined

and limited market space. A number of years ago in an issue of Business Start-Ups, Nick D’Alto suggested:

· “Imagine a restaurant with no waiters, no tables and no silverware. (You just described the first McDonalds.)

· Imagine a bookstore with no books. (You just created Amazon.com.)

· Imagine a glue that hardly sticks at all. (You just invented Post-its.)”

The difference is that in the red ocean your invention will be competing in existing market space and exploiting existing demand whereas in the blue ocean you are creating an uncontested market space and creating and capturing new demand. You really need to know whether you are in the red ocean or the blue ocean as you “chart the course” for your new idea or invention.

If you believe you’re in the blue ocean when in reality you’re in the red ocean, then you’re in for a real surprise! That’s why market research is so critical in the invention development process. You need to know where you are (that is the “color of the water” you are trying to navigate) and what you need to do in order to be successful as there is a different set of challenges in each ocean.

If you’re conservative and not a “risk taker” then follow the advice of Jo-Anne Hayes-Rines in her “Editor’s Voice” article in the July/August/September 2006 issue of Inventors’ Digest in which she says “Invent in an industry you know and understand; that is advice all inventors should heed”. On the other hand, if you are truly looking for that idea that no one has ever really thought of and you sincerely believe that you could create a need for it, then move forward. Think outside the box! But be careful as a “need” is not synonymous with “someone will buy it”! Bon voyage!