New Business Road Test

Key Takeaways

1. Road Test Your Business Idea Before Writing a Plan

The path to every new business opportunity is marked with questions and uncertainties. You need to resolve these questions and eliminate these uncertainties before you spend time writing your business plan.

Avoid costly mistakes. Most new businesses fail, often due to flawed opportunities. Before investing time and money in a business plan, entrepreneurs should rigorously test their ideas. This "road test" helps identify fatal flaws early, allowing for adjustments or abandonment before significant resources are wasted.

Seven domains framework. The book introduces a seven-domain model to assess opportunities, encompassing market, industry, and team factors. This framework provides a structured approach to evaluating the viability of a new venture. It's not about writing a business plan, but about what to do before you write one.

Customer-driven approach. The road test emphasizes a customer-centric approach, focusing on understanding customer needs and pain points. This ensures that the business is built on a solid foundation of real demand, not just wishful thinking.

2. Markets and Industries Are Different: Assess Both

Markets consist of buyers – people or organizations and their needs – not products.

Buyers vs. Sellers. A market is defined by buyers and their needs, while an industry is defined by sellers and their products. This distinction is crucial because the attractiveness of a market can differ significantly from the attractiveness of the industry serving it.

Separate assessments. Entrepreneurs must assess both market and industry attractiveness independently. A large, growing market doesn't guarantee success if the industry is highly competitive or unprofitable. For example, the dot-com boom showed that while the market for internet services was huge, many industries within it were not attractive.

Macro and micro levels. Both markets and industries must be assessed at both macro (broad, market-wide) and micro (specific to a segment) levels. This dual perspective provides a more complete picture of the opportunity.

3. Micro-Level Market Analysis: Know Your Customer

Successful entrepreneurial ventures are about serving customers and their needs and resolving their pain.

Targeted approach. Instead of targeting the entire market, successful entrepreneurs identify a specific segment of customers with unmet needs. This allows for a more focused and effective approach.

Compelling benefits. The key is to offer clear and compelling benefits that are different from and superior to what's currently available. These benefits must address a real customer pain point and be worth the price. For example, Nike initially targeted distance runners with shoes designed for their specific needs.

Segment size and growth. Entrepreneurs must assess the size and growth rate of their target segment. They should also consider whether entry into this segment will provide a pathway to other segments in the future.

4. Macro-Level Market Analysis: Size and Trends Matter

We want to know the size and growth rate of the market, so that if the product catches on, we should have a substantial upside.

Market size and growth. A macro-level market assessment involves determining the overall size of the market and its growth rate. This helps entrepreneurs understand the potential scale of their opportunity.

Macro-environmental trends. Entrepreneurs must also assess broad trends (demographic, sociocultural, economic, technological, regulatory, and natural) to determine whether they favor or hinder the opportunity. For example, the health and fitness trend in the 1970s created a market for Miller Lite.

Substantial opportunity. The macro-level assessment helps entrepreneurs determine whether the opportunity is substantial enough to be worth the time and effort. It also helps them understand whether they will be swimming with or against the tide.

5. Industry Attractiveness: The Five Forces

All businesses aren’t created equal.

Porter's Five Forces. Industry attractiveness is determined by five forces: threat of entry, buyer power, supplier power, threat of substitutes, and competitive rivalry. These forces influence the overall profitability of an industry.

Assessing the forces. Entrepreneurs must assess each of the five forces to determine whether they are favorable or unfavorable. The more favorable the forces, the more attractive the industry. For example, the pharmaceutical industry in the 1980s was highly attractive due to high barriers to entry and weak buyer power.

Macro and micro levels. Industry attractiveness must be assessed at both macro (overall industry structure) and micro (sustainability of competitive advantage) levels. Even in attractive industries, not all new ventures succeed.

6. Sustainable Advantage: More Than Just a Good Idea

Favorable industry conditions at the macro-level are not a panacea.

Initial advantage is not enough. Even if customers like what you offer and the industry is attractive, a new venture is unlikely to grow if its initial advantage cannot be sustained.

Proprietary elements. Sustainable advantage often stems from proprietary elements like patents or trade secrets that are difficult for competitors to imitate. For example, Glaxo's Zantac had patent protection for many years.

Superior processes and resources. Sustainable advantage can also come from superior organizational processes, capabilities, or resources that are difficult to duplicate. Nokia's innovation processes are an example.

Economically viable business model. A sustainable business model must be economically viable, with adequate revenue, manageable customer acquisition costs, and positive cash flow. eBay's business model is a good example.

7. The Entrepreneurial Team: Mission, Skills, and Connections

We really dig into the management team. We want to be totally confident that this team can deliver on the promises they have made.

Mission, aspirations, and risk. The opportunity must fit the team's mission, personal aspirations, and risk propensity. Opportunities that don't align with these preferences will be seen as unattractive.

Ability to execute. The team must have the necessary skills and experience to execute on the critical success factors (CSFs) of the opportunity. Investors want to see a team that understands its industry and customers.

Connectedness. The team must be well-connected up, down, and across the value chain. This allows them to respond quickly to market changes and take advantage of new opportunities.

8. Evidence-Based Forecasting: Beyond Wishful Thinking

The biggest shortcoming of the business plans we see is the complete absence of market research.

Data-driven decisions. Business plans must be based on evidence, not just dreams. This includes market research, customer feedback, and realistic sales forecasts.

Secondary and primary data. Entrepreneurs should use both secondary data (existing data) and primary data (collected directly from customers) to support their forecasts. Primary data is especially important for understanding customer needs and preferences.

Multiple methods. Use multiple forecasting methods (statistical, observation, surveys, analogy, judgement, and market tests) to validate your assumptions and create a more robust forecast.

9. The Customer-Driven Feasibility Study: A Pre-Plan Check

Most business plans should have been abandoned before they were written.

A memo to yourself. Before writing a business plan, prepare a customer-driven feasibility study. This is a concise memo that documents your conclusions about the opportunity, based on the seven domains.

Customer-focused vision. The feasibility study provides a clear, customer-focused vision of why the proposed venture makes sense. It examines the opportunity from market, industry, and team perspectives.

Jump-starts the planning process. The feasibility study jump-starts the business planning process and ensures that the plan is based on a solid foundation of evidence and analysis.

10. The Power of Connections: Up, Down, and Across

I’ve made more money on plan B than I ever made on plan A.

Adaptability is key. The ability to change course is crucial for entrepreneurial success. This often requires a strong network of connections.

Up, down, and across. Entrepreneurs should be well-connected up the value chain (with suppliers), down the value chain (with customers), and across the value chain (with competitors and other industry players).

Leading-edge information. These connections provide access to leading-edge information, allowing entrepreneurs to respond quickly and effectively to market changes. For example, Virata's connections helped them pivot to DSL technology.

11. Learn What You Don't Know You Don't Know: The Long Interview

The success of iMode is because we adjust our site to Internet users.

Beyond what you know. It's crucial to learn what you don't know you don't know about your customers and their needs. This requires going beyond your own assumptions and biases.

The long interview. The long interview is a powerful technique for uncovering hidden customer needs. It involves asking open-ended questions and using prompts to encourage respondents to share their thoughts and experiences.

Customer-driven insights. The long interview helps entrepreneurs understand customer pain points and identify opportunities for innovation that they might otherwise have missed.

Last updated: January 23, 2025

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