Evaluating Potential Businesses – 8 Critical Components of Your Business Viability Analysis
By: Yoshiko Choy
Yoshiko Choy is an entrepreneur and a management consultant in business & marketing with 17 years of experience in Locals & MNCs as well as an avid online marketer. She holds an Executive MBA from the California State University. Read about business & marketing management trends at http://businessfast4ward.com. Also get the latest reviews and updates on niche marketing, visit http://onlinenichemarketing.org
Indeed, Business Viability Analysis is a boring topic. But this is also the most critical component of your business & marketing plans which provides direction on the potential market environment, market demand and supply, and to extent, guides your potential market direction decisions. Note that financial modeling is beyond the scope of this article.
I have segregated the Business Viability Analysis into two major categories, namely Overview Evaluation models and Your Domain Business Evaluation models. The former includes Porter’s 5 Competitive Forces Model, P.E.S.T. Analysis. The latter includes SWOT Analysis Matrix, Target Segment Analysis, Product Life Cycle Analysis, Competitive Advantage Model, Product Growth Directions, BCG Matrix. Both set of models will help you to qualify if the business in question is viable from market demand supply as well as potential market perspectives.
1. Porter’s 5 Competitive Forces Model -
Porter’s 5 Competitive Forces model is developed by Michael E. Porter, an important strategic analysis from a broad market environment perspective. It explores the 5 major factors namely Bargaining Power of Supplier, Customer Power/Buyer Power, New Entry Threats, Substitution Threats & Competition Rivalry.
These 5 forces are interdependent, influencing and interplaying with each other at any given point in time. This is a model which needs to be revisited on a consistent basis, usually, over a half yearly time frame for re-evaluation of market trend.
2. P.E.S.T. Analysis -
Doing your “PEST control” ensures good health a strong pulse for your business. PEST analysis essentially means macro environmental evaluations such as Political & Legal, Economic, Social & Cultural, as well as Technological.
Economic environment could make or break your business. In 2008, the US sub-prime issue became a global financial crisis which not only affected the housing market but nearly every facet of the economy by virtue of its spillover effect. The interest rate at time of writing, is 2%, a far cry from 4% a year ago. Banks tighten their lending belts and business loan borrowing become more difficult to obtain. But if you manage to get that business loan, you should be incurring a much lower interest repayment.
One Social factor which is growing in importance is the environment. Every large corporation nowadays are involved in one way or another in reducing carbon emission to the ozone and in dealing with climate change.
3. SWOT Analysis Matrix -
SWOT Analysis, is the acronym for Strengths, Weaknesses, Opportunities & Threats affecting your business. Strengths component analyses internal capabilities throughout all business functions which could become unique propositions when mapping out business strategies. Weaknesses analyses the internal gaps in current state. Likewise, Opportunities & Threats analyse your business’s external environment which could give rise to opportunities or threats to your business. This is a fluid cheat sheet (not totally exhaustive & you should add on to it to cater to your own business type) which should be revisited annually as a reality business stop-check.
4. Target Segment Analysis -
This is a very critical section of the marketing plan which helps you with your market segmentation and defines your target markets. Define & segment your clientele-base into Primary & Secondary Target market groups using demographic and psychographic information. Demographic data includes age, income group, geographic location etc. Psychographic data includes life-stage needs, lifestyle, consumer purchasing behavior etc. Upon completion, you would have a better gauge on the potential size of your target segments. You may adjust the segments to match your products, thereby expanding your segments for greater potential.
5. Competitive Advantage Model -
The Competitive Advantage Model by Michael E. Porter suggests 4 approaches benchmarking against your competitors namely, Cost Leadership, differentiation or focus with 2 variants.
Cost Leadership strategy means leading in a low cost pricing strategy within your industry. This is achieved from economies of scale. You must almost solely dominate this competitive space otherwise more than one company in this space will cause a price war.
Differentiation strategy indicates unique value proposition, namely in areas such as the product, service, image, distribution, marketing etc or a combination of them.
Focus strategy aspires to be the best in a focused segment, with 2 variants of cost focus and differentiation focus
6. Product Life Cycle Analysis -
The Product Life Cycle Analysis helps you to identify the stage of your product. All products go through four stages, namely the Introduction, Growth, Maturity & Decline stage. Every product has a life cycle. You need to know each of your products’ life cycles thoroughly in order to plan to phase their life-stage across the horizon.
This analysis is a fluid document which needs to be revisited annually for planning purpose. If you believe that your product has other potential uses not maximized currently, you should pro-actively look to rejuvenating the life cycles of such products at their matured and declining stages.
7. Product Growth Directions -
Product Growth Directions shed light on the possible growth approaches you can adopt in driving your product sales. This is a matrix which maps your product growth strategies across new vs existing markets and products. Potentially, the four segments are Market penetration, Market development, Diversification as well as Product Development. Market penetration essentially denotes leveraging new markets with existing products. Market development means making inroads on existing markets & products. Diversification indicates leveraging on existing markets with new products. And of course, Product development is expansion into new markets with new products.
8. BCG Matrix -
Boston Consulting Group developed this BCG Matrix which helps you to determine what priorities should be given in your product portfolio of a product. It has essentially two dimensions - market share and market growth rate, with 4 categories fitting into these quadrants.
Stars = Leaders of the Business - Products with high growth rate & high market share. Generates high cashflow and requires high cash input. Usually, Net cashflow is flat.
Cash Cows = Foundation of the Business (stars of yester years) - Products with low growth rate & high market share. They generates high cashflow with low cash input requirements.
Dogs = Drags of the Business - Products with low growth rate & low market share. They must be avoided whenever possible. Liquidate as many as possible.
Question Marks = Ambiguity of the Business - Products with high growth rate & low market share. Have high cash demand and low returns. If keeping question marks, you must ensure increase in market share and deliver cash.
The identification of your products at the various categories will enlighten you to apply the correct growth & funding strategy. For instance, cash infusion could be provided to fund Question Marks &/or Stars to drive them towards the next level - Cash Cow positions.
True application of all the above mentioned viability analyses is a cumulative interplay of the different models, although they are developed separately by separate strategists. I advocate a broad yet conjugative approach to the application as therein lies great interdependence of each to the other.
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