Sunday, March 2, 2014

Why Competitive Analysis Is Important For Small Businesses

image This article was written by John Rau, SCORE Orange County Business Mentor

Every business has competition. Unless a business has an absolute monopoly on a life-essential product or service, there will be competitors offering alternative and substitute products or services. In this regard, the different types of competitors your business can expect to face include the following:

  1. Direct competitors: These are businesses that currently offer identical or similar products or services as your business. These are companies that customers can easily buy from instead of from you. (Note: These are generally easy to identify.)
  2. Indirect competitors: These are businesses that are offering products or services that are close substitutes. A good way to characterize these competitors is that they are probably targeting your markets with a same or similar value proposition, but delivering a different product. You can expect that as soon as an indirect competitor sees you having success in their area with a different product or service, they may try to duplicate your offerings and, as a result, they become a direct competitor. (Note: These are generally a little harder to identify.)
  3. Future competitors: These are existing companies that are not yet in your marketplace, but could move there at any time, directly or indirectly. (Note: These potential competitors are much more difficult to identify.)
  4. Game Changer competitors: These are the companies with the ability to introduce products or services in your marketplace that effectively eliminate the need for your products or services. For example, if your business was focused on selling cathode ray tube televisions and parts only, the new plasma screen technology just put you out of business! One wonders how many companies may no longer be in business because of the introduction of the various mobile applications into smartphone technology. (Note: These competitors are probably the most difficult to identify without carefully tracking consumer needs and preferences as well as technology development trends.)

Identifying all existing and potential sources of competition is an impossible task, but here is what you can do with regard to existing competitors that you already know about and where competitive information is generally more readily available. Susan Ward in her article “6 Ways to Find Out What Your Competition Is Up To-How to Gather Competitive Intelligence on Your Competitors” (see http://sbinfocanad.about.com) suggests the following key steps:

(1) Pay attention to their ads—Your competitor’s ads can tell you a lot about the particular audience they’re trying to target and what particular products or services they’re trying to promote (Note: Useful information when you’re planning your own promotions or advertising campaigns.)

(2) Visit Regularly—If your competitors have brick-and-mortar stores, make it a point to make regular visits. Dropping by is a great way to keep your eye on what products or services are being promoted, check on prices, and even get display ideas. If they publish any newsletters, sign up. That’s another way to keep abreast of what they are doing. If your competition has a web site, visit it regularly also.

For competitive information about indirect competitors and potential future competitors, there are three key things you need to do, namely: (1) you must be able to define your industry as well as know it, (2) you must know who your current and potential customers are, and (3) you must know specifically what types of customers need your products and/or services. It is in this context that you will assess and evaluate your competition. Your first step then would be to look for companies that are in your industry area and that provide products and/or services to your types of customers. An obvious good starting point would be to use the Internet, go to Google (or any other search engine) and type in such simple phrases as “companies that manufacture products of type X” or “companies that provide services of type Y”. You can expect to get many “hits”, perhaps 100+ or even thousands. These results will get you started and going to their web sites you will be able to “drill down” to get more information. Keep in mind, the more specific your search criteria, the better the quality and likelihood of finding the information you are looking for.

The easy part is the Internet search, but you shouldn’t stop there. Other sources of competitor information include:

  • Trade association reports, magazines and other related publications for those associations related to your industry
  • Published market research reports that you can find on the Web or in your local library
  • Public records databases and government published information. Examples would include census data for various types of industries, statistical reports from various government agencies, and the Security Exchange Commission (SEC) filings relative to company business data and financial performance.
  • Subscribe to or fee based information services such as provided by Dun and Bradstreet and its Hoover’s subsidiary which collectively provide a global database that is the largest single source of business information anywhere in the world.

Generally speaking, you can expect to find many of the above-cited sources available to you at your local library--in many cases for free as part of the library service. Thus, start there before you spend money to buy reports and subscribe to information services. Think of your local library as “your best friend” when conducting any type of market research and competitive information gathering.

In business, you always need to know what your competitors are doing. To survive you must perform competitive intelligence activities and monitor the broader market for new developments that could affect your company, your products and brands, suppliers and distributors. Gathering information about the competition and analyzing it is an important part of working through your business plan, but competitive intelligence is also just as important to established businesses. New competitors may move into your marketplace and existing competitors may change their practices, thus altering the competitive landscape.

As pointed out by Wikipedia (see http://en.wikipedia.org/wiki/Competitor_analysis), the entrance of new competitors is likely when:

  • There are high profit margins in the industry
  • There is unmet demand (insufficient supply) in the industry
  • There are no major barriers to entry
  • There is future growth potential
  • Competitive rivalry is not intense
  • Gaining a competitive advantage over existing firms is feasible

In summary, as pointed out by intel.com (see www.primary-intel.com) “Business is like a game of chess where the #1 goal is to out-strategize and outmaneuver each of your competitors. You do this by knowing and anticipating your competitors’ moves. The more you understand about your competitors, the more often you win. Competitive analysis helps you gain comprehensive insight into all the facets of your competition.”

Buying a Home Based Business Part 1: What Is a Home Based Business?

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

People are selling their home based businesses for a variety of reasons – lack of time, wanting to retire, health issues, or just to cash out. This provides many opportunities for the entrepreneur who wishes to leave the corporate world and be their own boss. The asking price for these businesses ranges from less than a few thousand dollars to over a million dollars.

The advantages of buying an existing business are operations can start from the first day; there are existing customers and vendors; immediate cash flow from receivables and easier financing opportunities. Disadvantages are a lack of knowledge transfer and a lack of trust by suppliers and customers given to the new owners. These can be remedied by having a well planned transition period with the existing owner.

There are many misconceptions to what defines a home based business. This article will address that question. Subsequent articles will address the following questions:

• What is the right business for me?

• Where can one find a home based business for sale?

• How does one set a value to a business?

• What are the sources for financing?

Information in this article is provided for general educational use only. No responsibility is assumed for any problems associated with the use of its content. One should seek the advice of their financial and legal counsel in every step of purchasing a business.

What is a Home Based Business?

A home-based business is any enterprise for which the principal administrative and managerial activities take place within an individual's personal residence. Only a portion of the residence has to be used as long as there is no other fixed location where one can conduct substantial administrative or management activities of your trade or business. The following are a few examples that meet the criteria of administrative or managerial activities:

• Billing customers, clients, or patients.

• Keeping books and records.

• Ordering supplies.

• Setting up appointments.

• Writing reports.

• Processing orders and managing inventory

In addition to location, home businesses are usually defined by having a very small number of employees. Home businesses generally lack street frontage, customer parking and advertising signs. Such activities are mostly prohibited by residential zoning regulations.

One does not need to meet customers or clients at their home in order to be classified as a home based business as illustrated by the following examples:

• A self-employed plumber spends most of the time at customers' homes and offices installing and repairing plumbing. There is a small office at home that is used regularly for the administrative or management activities of his business, such as phoning customers, ordering supplies, and keeping his books. This business meets the definition of a home based business.

• A second example is a of a home-based business is that of a self-employed anesthesiologist who spends the majority of time administering anesthesia and postoperative care in local hospitals. The doctor uses a room at home to conduct the following activities.

• Contacting patients, surgeons, and hospitals regarding scheduling.

• Preparing for treatments and presentations.

• Maintaining billing records and patient logs.

• Satisfying continuing medical education requirements.

• Reading medical journals and books.

This medical practice meets the definition of a home based business.

• A third example is a web based retailer that sells computer products from their online store. The products are sent to a local warehouse where it is distributed to buyers. The owner uses part of the home to:

• Process orders and billing customers.

• Tracking and ordering inventory

• Bookkeeping

This also meets the definition of a home based business.

The IRS has specific requirements that must be met in order to deduct part of your home's cost and expenses for tax purposes. It's important to understand the rules, compute the deductions correctly, and keep accurate records to substantiate those deductions. Contact your tax adviser or refer to IRS Publication 587 at http://irs.gov/ for guidance.

Having a home based business creates the personal satisfaction that comes from following your own vision, with income only limited by ones potential.

(Editor’s Note: Watch for Part 2 of Mr. Capsuto’s article in next month’s newsletter)

Why You Need to Think Twice About Seeking Venture Capital

This article was written by Brian Hamilton, December 26, 2013, reprinted by permission

Venture capital is unlike anything else I've seen in American commerce. People are vigorously seeking something that's often unattractive. It's extraordinary because markets are almost always efficient, but this one is not.

In order to back-solve to how we got here, let's start with history. As a professional market segment, the venture capital industry is only about 40 to 50 years old. In its infancy, it was probably a good invention in that it gave entrepreneurs the ability to seek out investors more easily. Before that, it was largely about networking, informal contacts and merchant banking, which meant seeking capital was unorganized. Now, it's organized: We can go to Google and search "venture capital firm in NYC" and instantly get a number to call. From that perspective, venture capital as a model helped because it gave us an identifiable supply of capital and, as such, has provided some value.

However, from a practical perspective, that of someone who is starting a business today, there are three important dynamics that must be considered before accepting capital from this particular pool.

1) It's very unlikely that you will receive funding from a VC firm when you start a business or even if you are running a small, high growth company. Fewer than 300 start-ups were funded by venture capital in 2012 throughout the entire United States. Given that between 500,000 and 600,000 businesses are started each year, even in the best-case scenario, only 0.06 percent of businesses will get funded through this channel. Remember that when you're first starting a business, you only have your brains and your time to sell, so you have to put your chips where they will pay off. While the odds of getting venture capital are better than the Lotto, they are not great.

When I first researched venture capital as an option, I looked at similar statistics and thought, "Why am I spending a lot of time on something when the odds are so low?" Simply put, there is not a good risk-reward quotient. Every minute of your time, every second counts, and if you're chasing a pot of gold that doesn't exist, you're losing your most valuable asset.

2) Even if you're one of the very few people who do get VC funding, the average cost of capital from a VC firm is extraordinarily high, usually well in excess of 25 percent a year. Now, the VC guys will say, "If you're growing at 50 or 60 percent a year, then you still make money." But not many businesses know if they can sustain that rate of growth, so it's an extremely high cost of capital in most cases. If you borrow at X percent, you need to create value well ahead of that. Without getting into the financial complexities, I don't see venture capital as equity at all. It is high-cost debt from any rational perspective.

When we start businesses, most of us entrepreneurs are so desperate to get money that we don't even think about these costs, but believe me, if your business does eventually become successful, you will understand the cost of capital. And, it will be very painful.

In most venture capital deals, the firm requires in exchange for their investment something called preferred stock, which is dangerous if you're running a small company. Simply put, preferred stock gets paid out first from any liquidity event and therefore locks in a rate of return for the VC firm. It also gives the firm the option to convert to common stock and take advantage of the company's value if it has grown, so it's very expensive. I don't know if entrepreneurs truly look at the terms in the documents they sign when considering one of these deals. All money received is not good money.

3) You might not want the venture capital firm as a partner, but it definitely will be. Evaluate the venture capital firm you're considering very carefully because most entrepreneurs don't inherently get along with venture capitalists. Frankly, most VC guys give me the creeps. You have to think, "This is someone who will be at our board meetings." And, "I'm going to get a weekly call from this person."

Do I really want to hear from him? Because you will hear from him.

Venture capitalists are typically from good business schools, highly analytical and very professional. Alas, unfortunately, a lot of them haven't run businesses and don't really know what it requires, no matter what they may say. I realize these are blanket statements, but I'm writing for the benefit of entrepreneurs, and I'm sharing what I've found. I haven't found many venture capital firms to be very insightful in running a business.

So, venture capital has this weird dynamic where you might not get any money; if you do get it, it's at a very high cost, and, even still, there is a new person involved in the business who you might not want involved. Wow.

So, what do you do instead?

Start really small in a room by yourself, building a product. Get a partner. If you have to get money, get the minimum needed to go to market -- the very minimum. Typically, this is less capital than you may initially think. The truth is, almost all businesses in this country are started by bootstrapping, a family and friends round and then organic growth. The data supporting this is overwhelming.

Are Entrepreneurs Born or Made?

An interview with Mark LeBlanc, John Assaraf, and Nancy Michaels, reprinted from Entrepreneur Magazine by permission

Q: Do you think entrepreneurs are made or born? I say born, my partner says made. What do you say? John Assaraf: I actually think it’s a combination of both. We know that 50 percent of our thoughts and actions are genetically based due to our heritage. The other 50 percent we learn from our environment and conditioning as children. What I think determines success in entrepreneurs is whether someone has a burning passion in their belly to make something of their lives regardless of genetics, education or training. There are examples all over the world of both types who come from great business genetics but who don’t do anything grand in business, and then there are those who come up the ranks of poverty to create masterpieces. Give me a hungry-hunter type of personality willing do whatever it takes to create their masterpiece, and I’ll show you a successful businessperson. Nancy Michaels: I’d have to say there are innate qualities that entrepreneurs are born with—self-discipline, ambition, risk takers, etc. That’s not to say people can’t learn some of these skills, but I think the basic attributes of an entrepreneur are within us. I have to say I was heavily influenced by my dad, who had his own accounting business that he initially ran from our home. Home offices were not in vogue back in the 1960s as they are today, and I made an assumption when I was young that everyone owned their own business. In fact, I commented to my parents about how lucky I thought Julia Sullivan was because her dad, the town’s librarian, “owned the library.” When I was 3 I wrapped my dad’s tie around my neck and when my Mom asked me where I was going, I said, “to work.” Although I worked at two companies as an employee before starting my business in 1990, I knew that I would not want to work for someone else for long and always felt I would start my own business. Mark LeBlanc: I think you are both right. Some people seem to have the entrepreneurial DNA in their makeup, while others adopt and adapt to their environments. These people are often encouraged by their parents and family members who might be in business for themselves. Let’s remember that not all business owners are entrepreneurs. Entrepreneurs tend to be highly creative, ambitious, risk-takers and often better at starting something versus growing it and running it well. If he or she surrounds themselves with good people, the likelihood of success is greater. Many small-business owners and independent professionals start a business or practice, grow it to a certain level and create a lifestyle that supports their dreams. They may not have the ambition or goal to grow it larger than life and sell it, but they maintain it until retirement or pass it on to a second generation or simply shut it down when the time is right. Most people have the dream of starting a business whether it is full-time or part-time. If you have a good idea, product or service, believe in yourself and surround yourself with the right resources, you can achieve the level of success you desire without necessarily possessing the creative and ambitious traits of an entrepreneur. There is no right or wrong answer, but an understanding of what it will take to succeed. Anything is possible when you put your mind to it.