Weekly Assignment

Chapter 2 Developing and Screening Business Ideas

Introduction

This chapter focuses on how to identify business ideas and how to determine if a specific idea is a good business opportunity. As mentioned in  Chapter 1 , many new businesses fail, not because the founders didn’t work hard or weren’t committed, but because the idea wasn’t a good one to begin with. What’s often missing in the ideas that fail is a lack of simple old-fashioned detective work. Detectives find clues by being curious and alert, by following leads, and by subjecting their ideas and evidence to scrutiny before they form judgments. Similarly, the best new business ideas occur to entrepreneurs who are curious and alert, know where to look for ideas, and are willing to subject their ideas to scrutiny and inspection.

To describe how to develop and screen business ideas, this chapter is divided into two parts. The first part focuses on the three most common sources of new business ideas and the techniques that entrepreneurs use to explore these sources and generate ideas. The second part of the chapter introduces a tool called the First Screen, which allows an entrepreneur to quickly determine whether an idea represents a potentially viable business opportunity. It’s called the First Screen because after an idea is chosen, it should be subjected to a more thorough feasibility analysis ( Chapter 3 ) to see if writing a full business plan is warranted. As mentioned in  Chapter 1 , these preliminary steps are important because there is no reason to write a business plan if an idea has little merit. The First Screen also provides an entrepreneur the flexibility to consider multiple business ideas, rather than settling on a single idea from the outset. As will be explained later in the chapter, it shouldn’t take more than two to three hours to run an idea through the First Screen worksheet. Hopefully, the expedient nature of this process will encourage a lot of idea generation, so the best possible idea ultimately emerges.

A reminder of the comprehensive feasibility analysis/business planning process introduced in  Chapter 1  is provided in  Figure 2-1 . The highlighted areas show the stages of the process covered in this chapter. Recall that the comprehensive nature of this process is not meant to weigh it down or add extra work but instead to create a context in which only well-researched, well-thought-out, and ultimately realistic and feasible ideas enter the business plan process.

Figure 2-1 The Comprehensive Feasibility Analysis/Business Planning Process

Now let’s look at the three most common sources of new business ideas and the specific techniques that entrepreneurs use to explore these sources and generate ideas.

Three Most Common Sources of New Business Ideas

The first step in creating an effective business plan is selecting an idea that fills a need and provides unique value to the customer. If a new business provides a product or service that’s merely a different version of something that’s already available, it has a tough road ahead. It’s hard to get people to change their habits or behaviors and switch from a product that they’re currently using to a new one, even if the new product is better or less expensive. Instead, the most successful new business ideas add value in a unique or compelling way by capitalizing on one of the three sources of business ideas discussed here and shown in  Figure 2-2 .

Figure 2-2 Three Sources of New Business Ideas

Changing Environmental Trends

The first source of new business ideas is changing environmental trends. The most important trends to follow are economic trends, social trends, technological advances, and political action and regulatory changes. Changes in these areas often provide the impetus for new business ideas. When looking at environmental trends to discern new business ideas, keep two caveats in mind. First, it’s important to distinguish between trends and fads. Startups typically do not have the resources to ramp up quickly enough to take advantage of a fad. Second, even through we discuss each trend individually, they are interconnected and should be considered simultaneously when brainstorming new business ideas. For example, one reason that smartphones, like the Apple iPhone, are so popular is because they benefit from several trends converging at the same time, including teenagers and young adults with increased disposable income (economic trend), an increasingly mobile population (social trend), and the continual miniaturization of electronics (technological trend). If any of these trends weren’t present, smartphones wouldn’t be as successful as they are.

Table 2-1  provides examples of how changes in environmental trends have provided the impetus for new business ideas. The following is a discussion of each trend and how changes in the trend provide openings for new business and product ideas.

Table 2-1 Companies Started to Take Advantage of Changes in Environmental Trends

Changing Environmental Trend	Resulting New Business Opportunities	Resulting Companies
Economic Trends
Search for ways to use traditional sources of energy more efficiently	Developing technologies, products, and services that help businesses and consumers conserve energy	Noesis Energy, Effortless Energy, Sagewell, eMeter, Nest Labs
Aging of the population	In-home care, health-related products and services, financial services for older people, travel-related service for older people	Comfort Keepers, TenderTree, Adhere Tech, Elder Life Financial Services, Senior Travel Service, Inc.
Social Trends
Increased interest in different, tastier, and healthier food	Healthy-fare restaurants, food trucks and ethnic packaged foods, craft beer, functional beverages	Naked Pizza, Chobani, Lobsta Truck (Los Angeles), Brooklyn Brewery, Rescue Water
	Healthy-fare restaurants, food trucks and ethnic packaged foods, craft beer, functional beverages	Naked Pizza, Chobani, Lobsta Truck (Los Angeles), Brooklyn Brewery, Rescue Water
Heightened interest in wellness as Americans are increasingly seeking ways to become and stay healthy	Fitness centers, pilates and yoga studios, exercise apps, weight loss programs, and apps	24 Hour Fitness, Yogaview (Chicago), Runkeeper, Noom Weight Loss Coach
Technological Advances
Smartphones	Smartphone operating systems, smartphone apps, smartphone accessories	Android, Rivio Entertainment (Angry Birds), Instagram, Fitbit, ISkin,
Advances in biotechnology	Biotech-related pharmaceutical products, veterinary products, environmental and food testing	Amgen, Life Technologies, PathSensore, GrayBug
Political and Regulatory Changes
Increased EPA and OSHA standards	Consulting companies, software to monitor compliance	PrimaTech, Compliance Consulting Services, Inc., SafeSoft
Affordable Care Act (Obamacare)	Electronic medical records, doctor–patient matching services, physician social networks	CareCloud, One Touch EMR, ZocDoc, PracticeFusion, Sermo

Economic Trends

An understanding of economic trends is helpful in determining areas that are ripe for new business ideas and discerning areas to avoid. When the economy is strong, people are more willing to buy discretionary products and services that enhance their lives. Individual sectors of the economy have a direct impact on consumer buying patterns. For example, a drop in interest rates typically leads to an increase in new home construction, furniture sales, and appliance sales. Conversely, a string of corporate layoffs or a rapid decline in the stock market normally leads to a reduction in the demand for luxury goods.

When studying how economic forces affect opportunities, it is important to evaluate who has money to spend and what they spend it on. For example, an increase in the number of women in the workforce and their related increase in disposable income is largely responsible for the number of boutique clothing stores targeting professional women that have opened in the past several years. Some of the boutiques, such as Ellen Tracey ( http://www.ellentracy.com ) and Tory Burch ( http://www.toryburch.com ), compete on a national scale, whereas others, such as Cha ( http://shop-cha.com ), in St. Louis, are single-store boutiques that have been opened by one or more individual entrepreneurs. Similarly, as baby boomers reach retirement age, a sizable portion of their spending will be redirected to areas that facilitate their retirement. This trend will invariably spawn new businesses in many areas, largely because baby boomers have greater disposable income relative to previous generations. The most promising areas include health care, finance, travel, housing, and recreation. The high cost of energy, coupled with a desire to be socially responsible, has also spawned a growing number of startups that are developing products and service that help businesses and consumers become more energy efficient. An example is Nest Labs ( www.nest.com ), a 2010 startup. Nest makes the world’s first Learning Thermostat. The thermostat, which can be used in homes or businesses, learns from your temperature adjustments and programs itself to optimize a building’s comfort and energy efficiency. 1

An understanding of economic trends can also help identify areas to avoid. For example, this is not a good time to start a company that sells products or services to public schools. Public schools have been hard hit by local, state, and federal budget cuts. The cuts have significantly reduced their ability to purchase new products or services.

Social Trends

An understanding of the impact of social trends on the way people live their lives and the products and services they need provides fertile ground for new business ideas and opportunities. Often, the reason that a product or service exists has more to do with satisfying a social need than the more transparent need the product fills. For example, the proliferation of fast-food restaurants isn’t due primarily to people’s love for fast food but rather to the fact that people are busy and often don’t have time to cook their own meals. Similarly, social networking sites such as Facebook ( www.facebook.com ) and Twitter ( www.twitter.com ) aren’t popular because they can be used to post messages and pictures on a Web site. They’re popular because they allow people to connect and communicate with each other, which is a natural human tendency.

Changes in social trends alter how people and businesses behave and how they set their priorities. These changes affect how products and services are built and sold. The following list provides a sample of the social trends that are currently affecting how individuals behave and set their priorities:

· Aging of the population

· Growth in the use of mobile devices

· The increasing diversification of the workforce

· Increasing interest in healthy foods and “green” products

· The rise of personal and home entertainment

· Emphasis on alternative forms of energy

· Increasing need for devices that enhance the security of individuals, buildings, public gatherings, and transportation systems

· Continual migration of people from small towns and rural areas to cities

· Desire for personalization (which creates a need for products and services that people can tailor to their own tastes and needs)

Each of these trends in providing the impetus for new business ideas will continue to do so. For example, the aging of the population is spawning business ideas from home health care to devices that remind people to take their medicine on time to fashionable apparel for elderly people with limited mobility. One new company,  CareZone.com  ( www.carezone.com ), was started by Jonathan Schwartz, who was looking for ways to better managing the care of five aging parents and in-laws. CareZone is an app for smartphones, tablets, or computers that allows those involved in a person’s care to share and save information in a secure, online setting. Commenting on CareZone’s potential market, Time magazine reporter Harry McCracken wrote:

It’s not a given that CareZone will take off, but this much is clear: It’s potential market is enormous, since almost everyone will join its target audience—people responsible for tending to the medical care of someone else—sooner or later. 2

CareZone is realizing this potential. Launched in 2012, it has already attracted just under a million users in 100 countries.

Technological Advances

Technological advances provide an ongoing source of new business ideas. In most cases, the technology itself isn’t the key to recognizing business opportunities. Instead, the key is to recognize how technologies can be used and harnessed to help satisfy basic or changing human needs. For example, the creation of the smartphone is a technological achievement, but it was motivated by an increasingly mobile population that finds many advantages to having the ability to communicate with coworkers, customers, friends, and family from anywhere and everywhere.

Technological advancements also provide opportunities to help people perform everyday tasks in a better or more convenient way. For example,  OpenTable.com  is a Web site or mobile app that allows users to make restaurant reservations online and now covers most of the United States. If you’re planning a trip to Phoenix, for example, you can access  OpenTable.com , select the area of the city you’ll be visiting, and view descriptions, reviews, customer ratings, and, in most cases, the menus of the restaurants in the area. You can then make a reservation at the restaurant of your choice and print a map of directions to the restaurant. The basic tasks that  OpenTable.com  helps people perform have always been done—looking for a restaurant, comparing prices and menus, soliciting feedback from people who are familiar with competing restaurants, and getting directions. What  OpenTable.com  does is help people perform these takes in a more convenient and expedient manner.

Another aspect of technological advances is that after a technology is created, products often emerge to advance it. For example, the creation of the smartphone industry has created related industries that produce smartphone accessories and apps. In fact, according to ABIresearch, the average smartphone owner will spend $56.18 on accessories per device. 3  The value of the app industry is even more promising. The market for paid application downloads reached $8 billion in 2012, up 27% from 2011. 4  An example of a company launched to create apps is BenchPrep ( http://benchprep.com ), which was started in 2008 by Ashish Rangneikar, who at the time was an MBA student at the University of Chicago, and Ujjwal Gupta, who was working on his PhD at Penn State. BenchPrep creates apps that help students study for standardized tests, such as the GMAT or the GRE. The apps are “smart” in that they give students progress reports to show where they are excelling and were performance needs to improve. According to the company, BenchPrep students increase their scores by an average of 15% on standardized tests by using their apps. This boost in performance leads to high acceptance rates at colleges they are applying to. 5

Political Action and Regulatory Changes

Political and regulatory changes also provide the basis for new business ideas. For example, new laws often spur startups which are launched to take advantage of the consequences of the laws. This is currently happening as a result of the Affordable Care Act (Obamacare). The combination of new regulations, incentives for doctors and hospitals to shift to electronic records, and the releasing of massive amounts of data held by the Department of Health and Human Services (on topics such as hospital quality, nursing home patient satisfaction, and regional health care system performance) is motiving entrepreneurs to launch electronic medical records startups, apps to help patients find the best physician for their needs, and similar companies. 6

On some occasions, changes in government regulations motivate entrepreneurs to start firms that differentiate themselves by “exceeding” the regulation. For example, several years ago, the Federal Trade Commission (FTC) changed the regulation about how far apart the wood or metal bars in an infant crib can be. If the bars are too far apart, a baby can get an arm or leg caught between the bars, causing an injury. An obvious business idea that might be spawned by this type of change is to produce a crib that is advertised and positioned as “exceeding” the new standard for width between bars and is “extra safe” for babies and young children. The change in regulation brings attention to the issue and provides ideal timing for a new company to reassure parents by providing a product that not only meets but exceeds the new regulation.

Political change also engenders new business and product opportunities. For example, global political instability and the threat of terrorism have resulted in individuals, businesses, and communities becoming more security conscious. Each of these groups needs unique new products and services to ensure their safety.

Unsolved Problems

The second approach to new business ideas is unsolved problems. Problems can be experienced or recognized by people through their jobs, hobbies, or everyday activities. Commenting on this issue and how noticing problems can lead to the recognition of business ideas, Philip Kotler, a marketing expert, said:

Look for problems. People complain about it being hard to sleep through the night, get rid of clutter in their homes, find an affordable vacation, trace their family origins, get rid of garden weeds, and so on. As the late John Gardner, founder of Common Cause, observed: “Every problem is a brilliantly disguised opportunity.” 7

Consistent with this observation, many companies have been started by people who have experienced a problem in their own lives, or observed others struggling with a problem, and created a business to solve the problem. For example after watching countless women walk home barefoot after a long night in heels, New York University finance students Katie Shea and Susie Levitt started a company named CitySlips ( www.cityslips.com ) to make easily portable comfortable shoes. They created a pair of flats that fold up to fit into a pocket-size zip pouch, which easily fits in most women’s purses. When a woman pops on the shoes, the pouch unfurls into a tote bag to carry the high heels. The two began selling CitySlips in 2009, and are now in over 500 stores. 8

Similarly, Laura Udall invented an alternative to traditional backpacks when her fourth-grade daughter complained daily that her back hurt from carrying her backpack. After conducting research, obtaining feedback from student focus groups, and building several prototypes, Udall invented the ZUCA, a backpack on rollers that strikes the ideal balance between functionality and “cool” for kids. ZUCA ( www.zuca.com ) is now a successful company, and its rolling backpacks can be purchased online or through a number of retailers. 9

Some business ideas are gleaned by recognizing problems that are associated with emerging environmental trends. For example, SafetyWeb ( www.safetyweb.com ) has created a Web site that helps parents protect their children’s online reputation, privacy, and safety. It also allows parents to monitor their children’s cell phone calls and text messages. The social trends toward more online activity by children and increased cell phone usage and texting have resulted in the need for this service. Similarly, several startups have launched recently to track whether people are taking their medicine as prescribed. AdhereTech ( www.adheretech.com ), for example, has developed a pill bottle that measures the exact amount of pills or liquid in a bottle in real time, and reminds patients to take their medication via phone calls or text messages. According to the company, simple real-time reminders increase pill taking compliance from 60% up to 90%. Taking medicine on time is particularly important for older patients, who often take multiple medications. The aging of the population is a social trend that has in part spurred the need for startups like AdhereTech.

If you’re having difficulty solving a particular problem, one technique that is useful is to find an instance where a similar problem was solved and then apply that solution to your problem. An example is provided by Susan Nichols, the founder of Yogitoes ( http://www.yogitoes.com ), a company that makes nonslip rugs for yoga enthusiasts. Several yoga positions require participants to strike poses where they balance their weight on their feet at an angle. In this position, it is easy to fall or slip when using a regular rug or mat. Nichols looked for a yoga mat that would prevent her from slipping but found that no one knew how to make one. So she started looking for an example of a product that was designed specifically to prevent it from slipping on a hard floor, to study how it functioned. Eventually, she stumbled upon a dog bowl with rubber nubs on the bottom to prevent it from sliding when a large dog ate or drank from it. Using the dog bowl (of all things) as a model, Nichols found a manufacturer who helped her develop a rug with small PVC nubs that prevents yoga participants from slipping when they perform yoga moves. Nichols started Yogitoes to sell the rugs, and has now been in business for just over 10 years. 10

Many other colorful examples of people who launched businesses to solve problems are included in  Table 2-2 . The Business Plan Insight boxed feature provides insight into a rapidly growing group of people starting businesses to solve problems: college students solving problems that college students encounter.

Gaps in the Marketplace

The third source of business ideas are gaps in the marketplace. There are many examples of products that consumers need or want that aren’t available in a particular location or aren’t available at all. Part of the problem is created by large retailers, such as Wal-Mart, Costco, and Kohl’s, which compete primarily on price and offer the most popular items targeted toward mainstream consumers. Although this approach allows the large retailers to achieve economies of scale, it leaves gaps in the marketplace. This is the reason that clothing boutiques, specialty shops, and many ecommerce Web sites exist. These businesses are willing to carry merchandise that doesn’t sell in large enough quantities for big-box retailers to carry.

Table 2-2 Companies Started to Solve a Problem

Product gaps in the marketplace represent potentially viable business opportunities. For example, Tish Ciravolo realized that there were no guitars on the market made specifically for women. To fill this gap, she started Daisy Rock ( www.daisyrock.com ), a company that makes guitars just for women and girls. Daisy Rock guitars are stylish, have feminine names (e.g., Powder Pink, Pink Sparkle, and Cosmic Purple), and incorporate design features that accommodate a woman’s smaller hands and build. A more common example of a company that filled a gap in the marketplace is provided by Songkick ( www.songkick.com ), an online company that has created a single place for music lovers to track their favorite bands and buy concert tickets. A gap the founders of Songkick saw is that too often people miss seeing their favorite bands because they didn’t realize that the band was in their area. Concert goers try to avoid this prospect by subscribing to venue mailing lists, checking band Web sites, and sifting through generic concert newsletters. This is a clumsy process that often doesn’t work. Songkick filled the gap by creating a Web site that allows users to track the bands they like and sends them a personalized concert alert when the bands they are following announce a tour date in their area.

Business Plan Insight Companies Started by College Students Solving Problems that College Students Encounter

Although it’s easy to image that most of the products and services designed specifically for college students were developed by established companies or experienced entrepreneurs, that’s not always the case. A growing number of products and services targeting college students or their parents were developed by college students themselves, first to solve their own problems and then to share the solutions with others.

In 2010, Michael Koetting, a student at the University of Texas, was up late one night trying to complete some calculus homework. He was in the type of class that has several sections and hundreds of students, and it occurred to him that at least 100 of his classmates must be on Facebook at that given moment in time, and if he could connect with them, he could form a study group to tackle the problems. That insight led Koetting, along with cofounders Gaurav Sanghani and Sid Upadhyay, to launch Hoot.me ( www.hoot.me ), a Facebook application which allows college students to connect with other students, teaching assistants, professors, and others to form study groups to work on homework assignments and class projects. A student can also schedule an appointment with a tutor to get more formalized instruction.

Similarly, as a college student at the University of Colorado, Sarah Schuup invited her parents to visit her a couple of times a year to see the campus and where she was living. Although she enjoyed seeing her parents, one challenge she always encountered was helping them plan their stay and making it enjoyable. As a dormitory resident, she didn’t know much about surrounding Boulder-area hotels and shops that were several miles from campus. After muddling through several visits, it occurred to Schuup that what parents needed was a magazine that would provide them a directory of hotels, motels, restaurants, and shops to help them plan their trips to see their kids at college. She felt parents might also be interested in information like how to help their kids apply for scholarships, when tuition payments are due, and where the nearest bank is to a particular location (the guides are now available online as well as in print form). University Parent was launched in 2003, and is now available at over 200 colleges and universities.

Gaps in the marketplace are commonly recognized when people become frustrated because they can’t find a product or service that they need, and they recognize that other people feel the same frustration. This scenario played out for Lorna Ketler and Barb Wilkins, who because frustrated when they couldn’t find stylish “plus-sized” clothing that fit. In response to their frustration, they started Bodacious ( http://www.bodacious.ca ), a store that sells fun and stylish clothing for hard-to-fit women. Ketler and Wilkins’ experience illustrates how compelling a business idea can be when it strikes just the right cord by filling a gap that deeply resonates with a specific clientele. Reflecting on the success of Bodacious, Wilkins said:

It’s so rewarding when you take a risk and it pays off for you and people are telling you every single day, “I’m so glad you’re here.” We’ve had people cry in our store. It happens a lot. They’re crying because they so happy (that they’re finding clothes that fit). One woman put on a pair of jeans that fit her, and she called me an hour later and said, “They still look good, even at home!” Sometimes people have a body change that happens, whether they have been ill or had a baby, and there’s lots of emotion involved in it. If you can go out and buy clothes that fit, that helps people feel good about themselves. 11

Gaps in the marketplace can also exist when a geographic area that needs a particular service but doesn’t have a large enough population to justify a traditional store or service provider, or the store or provider is not open at night or on weekends. Many rural communities do not have 24-hour pharmacies, for example. This makes it difficult for people who visit an emergency room or an urgent care center at night or on a weekend to quickly fill a prescription. To fill this gap, InstyMeds ( www.instymeds.com ) developed a vending machine for prescription drugs to be located in rural hospitals and urgent care centers. This is how it works. If you receive a prescription from a doctor in a hospital or urgent care center that has an InstyMeds machine nearby, the prescription will be accompanied by an InstyMeds private code. The code allows you to access the prescription from the machine. If you have insurance, the machine will determine your co-pay for the prescription, and you can pay by cash or credit card. If you don’t have insurance, you’ll be instructed to pay the full amount. InstyMeds doesn’t work for all prescriptions, like those that need to be refrigerated, but does include the 100 or so most common medicines prescribed by emergency and urgent care physicians.

Another approach to filling gaps is to look at existing businesses and determine if a different version of the business is needed as a result of changing environmental trends. This is currently happening in the fitness center industry. There is a growing preference for easily accessible small gyms that cater to a local market and are open 24 hours a day, opposed to large gyms that include swimming pools, racquetball courts, and other amenities. The trend has been motivated by less disposable income, more hectic schedules, and an increase in the number of shift workers in the United States that work odd hours and may not be able to make it to a fitness center that is only open during the morning, day, and evening. Several fitness franchises have launched to fill this gap including Anytime Fitness, Snap Fitness, and 24 Hour Fitness.

Other examples of companies that were launched to fill gaps in the marketplace are included in  Table 2-3 .

Table 2-3 Companies Started to Fill a Gap in the Marketplace

Gap in the Marketplace	Resulting New Business Opportunity	Companies That
No fitness centers open 24 hours per day	Fitness centers that appeal to shift workers, working mothers, and young people who prefer to work out at odd hours rather than during the hours that mainstream fitness centers are open	Anytime Fitness, Snap Fitness, 24 Hour Fitness
Lack of toys that focus on the intellectual development of a child	Toy stores, direct-sales organizations (such as Tupperware), and Web sites that sell educational toys	Modular Robotics, Ubooly, LaunchPad Toys, Kazoo & Company
Shortage in the availability and variety of ethnic food in many parts of the United States	Ethnic food stores, Web sites that sell ethnic food, ethnic food manufacturer, and ethnic restaurants in areas that are underserved	Ethnic Foods Company, International Food Market, Rice King, Senor Sisis
Shortage of clothing stores that sell fashionable clothing for hard-to-fit people	Boutiques and Web sites that sell fashionable clothing for hard-to-fit people, including plus-sized clothes, maternity clothes, or clothing for tall or short people	Casual Male, Fashion to Figure, Motherhood Maternity

Techniques for Generating Ideas

The three sources of new business ideas are used by people in both subtle and overt ways. Some people recognize new business ideas through casual observation, intuition, or even serendipity or luck. Other people are more overt and use the three sources of business ideas to deliberately try to generate new business ideas, whether they have an idea of the type of business they want to start or whether they are starting from scratch. This section of the chapter focuses on three techniques that people use to explicitly try to generate new business ideas.

While considering these techniques, remember that business ideas take time to develop, so it’s important to not become discouraged if an idea doesn’t come to you quickly. It’s also important to realize that the best ideas aren’t necessarily the most original. It normally exceeds the budget of a new firm to educate the public about a revolutionary or original idea. The following Business Plan Insight box illustrates the most realistic categories of business ideas for new firms.

Brainstorming

The most common way to generate business ideas is through brainstorming. The term brainstorming is a catch phrase that means different things to different people. Technically, a brainstorming “session” is targeted to a specific topic about which a group is instructed to come up with ideas. The leader of the group asks the participants to share their ideas. One person shares an idea, another person reacts to it, another person reacts to the reaction, and so on. A flip chart or whiteboard is typically used to record the ideas. A productive brainstorming session is freewheeling and lively. The session is not used for analysis or decision making—the ideas during a brainstorming session need to be filtered and analyzed, but this is done later.

Brainstorming sessions dedicated to generating new business ideas are often less formal. For example, some business school professors use a tool called the “bug report” to help their students brainstorm business ideas. They instruct their students to list 50–75 things that “bug” them in their everyday lives. A high number is required because if forces students to go beyond thinking about obvious things that bug them (campus parking, roommates, scooping snow in the winter) and think more deeply. On occasion, students actually hold focus groups with their friends to brainstorm ideas and fill out their lists. Another particularly effective approach to brainstorming is to use the three sources for new business ideas as a way of organizing the discussion. Imagine you are part of a small group that is trying to brainstorm ideas for a new type of fitness center. You know the market is too crowded to support another generic center, so you’re looking for novel ideas. You create three columns on a whiteboard labeled Changing Environmental Trends, Unsolved Problems, and Gaps in the Marketplace. You then start brainstorming specific ideas, looking at each category individually and then looking at how the categories interact with each other. After brainstorming dozens of ideas in each category, you start grouping the ideas into themes or patterns to create more solid ideas. One pattern jumps out at you: the population is aging, older people are increasingly interested in fitness, many of the exercise machines and classes taught in traditional fitness centers aren’t suitable for older people, and there are no fitness centers designed specifically for the 50+ demographic. Based on this pattern, your first solid idea is to create a fitness center designed specifically for people 50 years old and older.

Focus Groups

A focus group is a gathering of 5 to 10 people who are selected because of their relationship to the issues being discussed. Although focus groups are used for a variety of purposes, they can be used to help generate new business ideas.

Focus groups typically involve a group of people familiar with a topic, who are brought together to respond to questions and shed light on an issue through the give-and-take nature of a group discussion. Focus groups usually work best as a follow-up to brainstorming, when the general idea for a business has been formulated, such as opening a fitness center for the 50+ demographic, but further refinement of the idea is needed. Usually, focus groups are conducted by trained moderators. The moderator’s primary goals are to keep the group “focused” and to generate lively discussion. Much of the effectiveness of a focus group session depends on the moderator’s ability to ask questions and keep the discussion on track. For example, to further explore the idea of opening a fitness center designed specifically for older people, a focus group might be assembled that consists of 10 people who are 50 years old or older and are members of generic fitness centers. The moderator might ask, “What is it that you don’t like about your fitness center?” A 71-year-old man might say, “I don’t like the classes that are offered. They include various types of aerobics and spinning, which I don’t mind, but the music is too loud, the pace is too quick, and they are always taught by guys and gals in their twenties who have no idea of what I’m going through in life.” The moderator may then ask the group, “How many of you would feel more comfortable if the classes in your fitness center were taught by people your own age?” If 7 out of the 10 hands shot up, you might have just discovered one refinement for your business idea.

Library and Internet Research

A third approach to generate new business ideas is to conduct library and Internet research. A natural tendency is to think that an idea should be chosen, and the process of researching the idea should then begin. This approach is too linear. Often, the best ideas emerge when the general notion of an idea, like opening an innovative type of fitness center, is merged with extensive library and Internet research, which may provide insights into the best type of innovative fitness center to pursue.

Libraries are often underused as a source of information for generating business ideas. The best approach to using a library is to discuss your general area of interest with a reference librarian, who can point you to useful resources, such as industry-specific magazines, trade journals, and industry reports. Simply browsing through several issues of a trade journal on a topic can spark new ideas. Very powerful search engines, databases, and industry reports are also available through university libraries, which would cost hundreds or thousands of dollars to access on your own. An example is IBISWorld ( www.ibisworld.com ), a company that publishes full industry reports on all major industries and subcategories within industries. IBISWorld is a fee-based site but is normally free if accessed through a university or large city library. For example, if you wanted to study the fitness industry, IBISWorld has a current, comprehensive report titled “Gym, Health & Fitness Clubs in the United States.” Spending time reading through the report could spark new ideas for fitness centers or help affirm an existing idea. Spending just a few minutes reading IBISWorld’s report bodes well for the idea of opening a fitness center for the 50+ demographic. According to the report, fitness center memberships have increased considerably over the past 10 years, rising from 46.4 million in 2003 to more than 52.6 million in 2013. Households with higher incomes and more leisure time are more likely to belong to fitness clubs, which fits the 50+ demographic. A full 20% of people who belong to fitness centers are now 55 years or older. Particularly encouraging is a statement contained in the “Industry Outlook” portion of the report. According to the report:

Over the next five years and beyond, population growth and demographic change will significantly influence industry revenue. It is estimated that the mature market (people aged 55 and older) will maintain a more active lifestyle and continue to focus on physical appearance and weight. By 2014, the retiring baby boomer generation will likely create strong opportunities for gyms and health and fitness clubs to focus on this massive potential market segment. 12

This analysis bodes extremely well for the idea of a fitness center focused exclusively on people 50 years old and older.

Internet research is also important. If you’re starting from scratch, simply typing “new business ideas” into Google or Bing will produce links to newspaper and magazine articles about the “hottest” and “latest” new business ideas. Although these types of articles are general in nature, they represent a starting point if you’re trying to generate new business ideas from scratch. If you have a specific idea in mind, like the fitness center concept we’ve been discussing, a useful technique is to set up a Google or Yahoo! “alert” using keywords that pertain to your topic of interest. Google and Yahoo! alerts are e-mail updates of the latest Google or Yahoo! results (i.e., Web site updates, press releases, news articles, blog postings) based on your topic. This technique, which is available free, will feed you a daily stream of news article and blog postings about a specific topic.

First Screen

After a business idea, or several ideas, have been chosen, it is important to have a way to quickly assess the merits of the idea, before subjecting it to full feasibility and business planning. The First Screen provides a mechanism for quickly assessing the merits of a business idea. *  As mentioned earlier, it is called the First Screen because it is an entrepreneur’s (or group of entrepreneurs’) first pass at assessing the feasibility of a business idea. If a business idea cuts muster at this stage, and the decision is made to pursue it, it will be subjected to a full feasibility analysis ( Chapter 3 ), which includes talking to potential customers, before a full business plan is written. Recall, these early steps are necessary to make sure that only ideas with sufficient potential enter the full business planning process. The First Screen template is provided in  Appendix 2.1  at the end of this chapter.

*  Copies of the First Screen worksheet, in both MS Word and PDF format, can be obtained from the author’s Web site at  www.prenhall.com/entrepreneurship .

Although completing the First Screen does take some research and analysis, it is not meant to be a lengthy process. It is also not meant to be a shot in the dark. The best ideas are the ones that emerge from analysis that is based on facts and good information, rather than speculation and guesses.  Appendix 2.2 , at the end of this chapter, contains an Internet Resource Table that may be particularly helpful in completing a First Screen analysis. Several of the most valuable resources, such as IBISWorld, Factiva, LexisNexis Academic, and ProQuest, are fee based but are typically free if accessed through a university or major public library. It is well worth your time to learn how to use these resources—they are rich in terms of their content and analysis.

The First Screen contains 25 items and should be able to be completed in two to three hours. A mental transition needs to be made when completing the First Screen from thinking of a business idea as just an idea to thinking of it as a business. The First Screen is an assessment of a business idea rather than strictly a product or service idea. The mechanics of filling out the First Screen Worksheet are straightforward. The final section of the worksheet, “Overall Potential,” includes a section that allows for suggested revisions to a business idea to improve its potential or feasibility. For example, a business might start out planning to manufacture its own product, but through the process of completing the worksheet, learn that the capital needed to set up a manufacturing facility is prohibitive in terms of both the money that would need to be raised and the extended time to break even for the business. As a result, two of the five items in  Part 5 , “Initial Capital Investment” and “Time to Break Even,” might be rated “low potential.” This doesn’t need to be the end of the story, however. In the column labeled “Suggestions for Improving the Potential,” the founders of the business might write, “Consider contract manufacturing or outsourcing as an alternative to manufacturing the product ourselves.” The value of the First Screen worksheet is that it draws attention to issues like this one and forces the founders to think about alternatives. If this particular suggestion is realistic and is determined to be a better way to proceed, a revised version of the First Screen might rate the two factors referred to previously, “Initial Capital Requirements” and “Time to Break Even,” as “high potential” rather than “low potential” because of the change in the business concept that was made. Business ideas should always be seen as fluid and subject to change. Little is lost if several versions of the First Screen are completed for the same business idea, however, there is much more to be lost if a startup gets halfway through writing a business plan and concludes that the business isn’t feasible, or actually launches a business without having all the kinks worked out.

A brief explanation of each section of the First Screen Worksheet follows.

Part 1: Strength of the Business Idea

High-potential ideas are typically drawn from one of the three sources of business ideas discussed in this chapter and are timely in terms of market introduction. In regard to timeliness, for an entrepreneur to capitalize on an idea, its window of opportunity must be open. 13  The term window of opportunity is a metaphor describing the time period in which a firm can realistically enter a new market. Once the market for a new product is established, its window of opportunity opens. As the market grows, firms enter and try to establish a profitable position. At some point, the market matures, and the window of opportunity closes. An important judgment call is whether the window of opportunity for a particular business idea is open or closed.

A new idea must “add value” for its buyer or end user in some appreciable way, like the ZUCA (backpack on rollers) adds value by allowing school kids to pull rather than carry their backpacks and InstyMeds’ vending machines add value by providing people in rural areas access to prescription medications at night or on holidays when local pharmacies are closed. Value refers to worth, importance, or utility. A related topic is the extent to which consumers are already reasonably satisfied. If consumers, in general, are satisfied with the products or services that are similar to the ones you’re thinking about producing, your job will be much harder than if people are ambivalent or dissatisfied. In addition, investors and others tend to be skeptical of ideas that require meaningful changes in behavior, and they shy away from them as a result.

Several online resources, such as the Bizminer, Mintel, and IBISWorld, provide information on industry trends. These discussions provide data on the most promising trends in an industry, which often helps affirm or refute the attractiveness of a potential business idea. Two particularly powerful search engines, ProQuest (sometimes listed under ABI/Inform) and LexisNexis Academic, are useful for gathering more general information about a product or service idea. Often, simply querying a product or service idea via one of these search engines produces magazine and newspaper articles that provide important insight.

Part 2: Industry-Related Issues

The industry that a company enters is extremely important. In various studies, researchers have found that 8 to 30 percent of the variation in firm profitability is directly attributable to industry factors. Among the most important factors for an industry are the number of competitors, the stage it’s at in its life cycle, and its growth rate. Industries that are growing, are not crowded, and are in the emergence or growth stages of their life cycles are more receptive to new entrants than industries with the opposite characteristics. An important caveat to this set of heuristics is the target market that a new firm selects. There are markets within older, crowded, slow-growth industries that defy the industry’s norms and provide attractive opportunities for new firms.

The average net profit for the firms in an industry is also important.  Table 2-4  shows the average net profits for firms organized as subchapter-S Corporations for several industries. If you’re looking for net profit estimates for an industry you’re interested in, BizStats, Bizminer, and IBISWorld are the best bets. BizStats is more limited than Bizminer and IBISWorld in terms of the number of industries that it follows, but narrows it’s reporting to firms that are organized as C-corporations, subchapter-S corporations, or sole proprietorships.

Table 2-4 Average Net Profit for Firms in Certain Industries

Industry	Average Net Income
Agriculture, Forestry, Fishing	0.77 (%)
Accommodation, Food  Service	5.95 (%)
Construction	6.32 (%)
Professional, Scientific,  Technical Services	11.36 (%)
Arts, Entertainment,  Recreation	11.67 (%)
Health, Social Services	12.66 (%)
Source: BizStats,  www.bizstats.com , June 7, 2013.

Part 3: Market- and Customer-Related Issues

The identification of the target market in which the firm will compete is extremely important. A target market is a place within a larger industry or market segment that represents a narrower group of customers with similar interests. Most new firms do not start by selling to broad markets. Instead, most start by identifying an emerging or underserved niche within a larger market. The ability to create “barriers to entry” is an important aspect of any firm’s potential competitive advantage. A barrier to entry is a condition that creates a disincentive for another firm to enter a company’s niche market. Barriers to entry can be created through a number of means, such as economies of scale, product differentiation, unique access to distribution channels, and intellectual property protection, such as patents and trademarks.

Mintel publishes periodic reports that describe the purchasing power of various age and demographic groups, along with their spending patterns. In terms of the purchasing power of people in a specific geographic area, American Factfinder, drawing on census data, provides access to the medium household income for any city, county, or zip code in the United States. Similar, and often more current, information is provided by  City-Data.com . The ease of making customers aware of a new product or service is another important consideration. A new firm typically does not have the resources to educate the public about a revolutionary new product or service, unless the firm is particularly savvy at using the blogosphere and other means to get the word out for free.

Another important issue is the growth potential of a firm’s target market. Because a startup’s target market is normally a small slice of a larger market, it’s usually harder to get a feel for the growth potential of a target market than it is for a broader industry. For example, if you were interested in the growth rate of the pet food and supplies industry, that number would be fairly easy to get from IBISWorld, Mintel, or Standard and Poor’s NetAdvantage. But if you planned to produce high-end organic pet food, the growth rate for that slice (or segment) of the industry isn’t as easy to find. The best approach in this type of circumstance is to first read through the applicable industry reports through the sources mentioned previously to see if organic pet food is mentioned and discussed. The next step is to search articles on “organic pet food” through LexisNexis Academic, ProQuest, Google, and other search services you are familiar with. Another excellent potential source of information is an industry trade association. This pursuit is somewhat of a scavenger hunt. For instance, in the organic pet food example just discussed, there are pet food trade associations, such as the American Pet Products Association ( www.americanpetproducts.org ) and organic products trade associations, such as the Organic Trade Association ( www.ota.com ). Both associations may have useful information on the growth rate of organic pet food sales, either on their Web sites or by contacting them directly. Industry trade journals are another potential source of information.

If you’re thinking about producing a product or service that doesn’t exist, such as AdhereTech’s automated pill bottle, your task is harder. The ability to produce the AdhereTech bottle has only recently become possible due to advances in sensor technology, which enables the bottle to discern how many pills or how much liquid remains is in the bottle at any given point in time. In this instance, you have to be somewhat creative. Markets do exist for pill bottles and for less sophisticated products that help people remember when to take their medication. Using the approaches suggested earlier, you would try to learn as much as you could about the market for pill bottles and the market for medication compliance products, and then make an informed judgment.

Part 4: Founder- (or Founders-) Related Issues

This portion of the First Screen requires the potential founder or founders of the business to complete a self-assessment, so it is important to be honest and fair. Few firms, particularly if they are being started by younger people, will score high on each of the five dimensions. Still, the strength of the founding team is extremely important. An often-repeated phrase among investors is that they would rather invest in a strong founding team with a weak product idea than a weak founding team with a strong product idea. The attributes that make for a strong founder (or founding team) is experience in the industry the new venture is entering, skills as they relate to the new venture’s product or service, and broad social and professional networks in the industry the firm will be entering. It is also important that the new firm is consistent with the founder’s (or founding team’s) personal goals and aspirations.

A particularly important issue is the likelihood that a firm will be able to put together a team to launch and grow the new venture. As one expert has put it, “People are the one factor in product…that animates all the others.” 14  A good start is for a firm to assemble an advisory board, which will assist in future recruitment and selection efforts.

Part 5: Financial Issues

The initial capital investment needed to start a firm is important. Although an exact estimate is not needed at this point, it is important to have a sense of the magnitude of the investment. For a retail or service business, it is fairly easy to put together a good-faith estimate of the capital that will be needed. For a business that is developing a new product, it is much harder to estimate the development costs that will be incurred and the costs associated with securing distribution for the product. The best way to approach this task is to talk to industry experts, read industry-specific blogs and trade journals, and read through industry-specific reports available through the resources mentioned earlier. A directory of trade magazines, sorted by industry, is available by typing “trade show directory” into any major search engine.

If you’re unsure of the capital requirements necessary to enter an industry, IBISWorld provides a discussion of the overall “cost structure” associated with owning firms in the industries that it follows. Other reporting services provide similar information. The information contained in these reports is often quite insightful. For example, IBISWorld reports that many firms in the fitness industry rent rather than own their facilities and often lease rather than purchase the exercise equipment they feature, such as treadmills and rowing machines. These factors lower the capital requirements necessary to enter the fitness club industry, which in part explains the large number of participants in the industry.

The number of revenue drivers that a business has is also important. For example, most electronics stores have several revenue drivers, which include selling electronics products, selling extended warranties, servicing and repairing electronic products, and installing products, such as car stereos. Some of the revenue drivers may be loss leaders, such as a $699 52-inch TV to get people in the store. Other items, like car stereos, may make very little money, but large margins might be available through an installation service. Startups don’t want to lose focus by creating multiple revenue drivers, but typically the financial potential of a firm is greater if it has several ways of generating sales.

The time it takes a firm to break even or recoup its initial investment is also important. Businesses that have a fairly low initial investment break even fairly quickly, as the income generated by the business pays back the initial investment. The time to break even is lengthier and the risk is higher for businesses with high capital investments or lengthy product development cycles.

The next issue to consider for this part of the First Screen is to assess the financial performance of businesses similar to the one you are contemplating to get a feel for the type of sales and financial returns to anticipate. Both ReferenceUSA and the “Build a List” feature in Hoover’s premium service provide estimates of the sales of privately owned firms, which are more likely to be similar to your startup than publicly traded firms. Of course, you’ll need to make adjustments based on the initial size of your firm compared to firms you’re looking at and on other factors. Another approach is to search for newspaper and magazine articles on firms that are similar to the one you’re thinking about starting. Often, the articles will comment on the sales and profitability of the firms they are focusing on.

The final item in  Part 5  refers to your ability to fund the initial product (or service) development and initial startup expenses for your venture from personal funds or via bootstrapping. The salience of this item depends on how far along a firm is at the time it is preparing its business plan. If all a company has is an idea, it will be tough to get financing or funding. Normally, investors and lenders like to see a working prototype of an idea with customer feedback and preferably initial sales before they invest. As a result, a firm is much better off if it can self-fund and/or bootstrap its initial product development and startup costs before it tries to raise investment capital or borrow money.

Chapter Summary

1. The three most common sources of new business ideas include changing environmental trends, unsolved problems, and gaps in the marketplace.

2. The most important environmental trends to follow, in the context of discovering new business ideas, are economic trends, social trends, technological advances, and political action and regulatory changes.

3. Many companies have been started by people who have experienced a problem in their lives and then realized that the solution to the problem represented a business opportunity.

4. Gaps in the marketplace exist when there are products or services that consumers want but that aren’t available through larger firms or aren’t available at all.

5. Three techniques that entrepreneurs use to generate new business ideas include brainstorming, focus groups, and library and Internet research.

6. The most common way to identify business ideas quickly is through brainstorming. Technically, a brainstorming “session” is targeted to a specific topic about which a group is instructed to come up with ideas.

7. A focus group is a gathering of 5 to 10 people who are selected because of their relationship to the issues being discussed. Although focus groups are used for a variety of purposes, they can be used to help generate new business ideas.

8. Often, the best new business ideas emerge when the general notion of an idea is merged with extensive library and Internet research.

9. Once a business idea, or several ideas, have been chosen, it is important to have a way to quickly assess the merits of the idea before subjecting the idea to a full feasibility analysis. The First Screen provides a mechanism for quickly assessing the merits of a business idea.

10. Although completing the First Screen does take some research and analysis, it is not meant to be a lengthy process. It contains 25 items and should be able to be complete in two to three hours.

Review Questions

1. What are the three most common sources of new business ideas? Briefly describe how each of the sources spawns potential business ideas.

2. What four environmental trends provide the richest sources of new business ideas? List each environmental trend and provide an example of the type of business idea that it might create.

3. Explain how “unsolved problems” can create a business idea. Provide an example that was not mentioned in the chapter of a business that was created by solving an unsolved problem.

4. Explain how finding a gap in the marketplace can lead to new business ideas.

5. Describe the four categories of new business ideas and the most realistic categories for new firms.

6. Describe the brainstorming process. How can brainstorming be used to generate new business ideas?

7. Describe how a focus group is set up and how it can be used to generate new business ideas?

8. Explain how library and Internet research can be used to generate new business ideas?

9. Why is it necessary to quickly assess the merits of a business idea before conducting a feasibility analysis and writing a business plan?

10. Describe the makeup and the purpose of the First Screen.

Application Questions

1. Study the Web site of InstyMeds ( www.instymeds.com ), one of the startups mentioned in the chapter. Imagine you were part of InstyMeds’ founding team, and in meetings with investors it was your job to #1 describe the problem that InstyMeds had identified and #2 describe how the InstyMeds service solves the problem. Write out what you would have said to address points #1 and #2 above.

2. Calab Holms just finished reading this chapter and was struck by the idea of developing products to help older people remember to take their medicine on time. He has an idea for an iPhone app that will not only remind people to take their medicine on time, but will require the user to verify when the medicine has been taken and will send a text alert to a caregiver if the medicine isn’t being taken on time. Calab is ready to run with the idea, but first wants to make sure that it is consistent with changing economic trends, social trends, and technological advances. Make a table that lists these three environmental trends and the changes in these trends that work for and work against this idea.

3. Think about the problems that you encounter in your everyday life. Select one problem, and describe how solving the problem might represent the basis for a new business idea.

4. Identify three startups, other than those mentioned in the Chapter or included in  Table 2-3 , that were started to fill a gap in the marketplace. Identify the gap and how the startup is filling the gap in the marketplace.

5. Complete the First Screen for the business idea you selected to answer Question #3. Which areas of the First Screen were the easiest to complete and which areas were the most difficult? Was the result the one you expected?

Endnotes

1. Nest Labs Homepage,  www.nest.com  (June 4, 2013).

2. H. McCracken, “CareZone, a Private Service for People Who Take Care of People,” Time, February 15, 2012, p. 39.

3. ABIresearch, “Smartphone Accessory Revenues Valued at $20 Billion in 2012,” AIBresearch, June 18, 2012,  www.abiresearch.com/press/smartphone-accessory-revenues-valued-at-20-billion  (accessed June 6, 2013).

4. R. Empson, “Report: Market for Paid Apps Hits $8B in 2012, While Average Revenue Per App Drops 27%,” Techcrunch, Techcrunch Homepage,  www.techcrunch.com  (accessed June 6, 2013).

5. BenchPrep Homepage,  www.benchprep.com , June 6, 2013.

6. T. Friedman, “Obamacare’s Other Surprise,” The New York Times, May 25, 2013, p. 45.

7. P. Kotler, Marketing Insights from A to Z (New York: John Wiley & Sons, 2003), 128.

8. CitySlips Homepage, www.cityslipe.com, June 6, 2013.

9. Zuca Homepage,  www.zuca.com , June 7, 2013.

10. Yogitoes Homepage,  http://yogitoes.com , June 7, 2013.

11. Lorna Ketler, “Lorna Ketler and Barb Wilkins,” Women Who Launch, April 15, 2006.

12. D. Schmidt, IBIS World Industry Report 71394 Gym. Health & Fitness Clubs in the US, May 2013.

13. D. N. Snull, “The Three Windows of Opportunity,” Harvard Business Review Working Knowledge, June 6, 2005.

14. C. Read and others, eCFO (Chichester, UK: John Wiley & Sons), 117.

Appendix 2.1 First Screen

Part 1: Strength of Business Idea

For each item, circle the most appropriate answer and make note of the (−1), (0), or (+1) score.

Part 2: Industry-Related Issues

Part 3: Target Market and Customer-Related Issues

Part 4: Founder- (or Founders-) Related Issues

Part 5: Financial Issues

Overall Potential

Each part has five items. Scores will range from −5 to +5 for each part. The score is a guide—there is no established rule of thumb for the numerical score that equates to high potential, moderate potential, or low potential for each part. The ranking is a judgment call.

Summary—briefly summarize your justification for your overall assessment:

Appendix 2.2 Internet Resource Table

Resource to Help Complete the First Screen