There’s apparently only about seven movie themes, and every movie is a mash up of these, with a few variations thrown in. There’s the underdog coming out on top (any Rocky movie), impending doom and the lessons it teaches us about ourselves (Titanic or any disaster movie), love lost, revenge, love won… In fact, there is a point at which if a movie doesn’t fit one of these classic themes, it will either 1. Flop incredibly, 2. Be a major success and create a new genre. (Hint: there’s more flops than genre creation going on).
It’s not unlike cooking… there’s only so many ingredients. What matters is how you put them together.
One of the implications of this is that originality is overrated. You are far better taking a slightly worn business idea and apply it to a new product, then try and come up with something truly unique.
Business is the same. There are a limited number of paths to follow to grow.
Here is a list of “drivers” that can change a business or an industry. Where does your idea fit?
Reconstruction of the value chain and distribution model: This usually happens when a step is dropped from a distribution channel . Examples: a store (Bunnings) becomes an importer and avoids middlemen creating unbeatable value (extreme case – some brands are manufacturers and retailers ie Ikea): Technology makes manufacturers or services more accessible such as publishing (self publishing is easy, and avoids having to be “chosen” by a publisher, as well as putting a higher percentage of profista nd control in the hands of the writer): Virtually anything sold on the internet: Remote delivery of services (guru.com). A decade ago, just getting bigger –and creating a superstore was a paradigm shift – now it takes more to be unique. How does your business jump over a previously imperfect delivery system?
Changes in sales strategy or payment terms: Some companies exist because they have taken an idea from one industry, given it a slight twist, and applied it to a new industry. Rentsmart and its competitors are an example of this. Going back 40 years, everyone paid cash for purchases. Credit enabled access to machinery for production or recreation (cars and boats for example…) that would have been otherwise out of reach. The simplicity of the financial products drives the sales process. Taking this concept and applying it to what was normally a smaller business purchase anyway (desktop computers at $1000-3000) and converting this to a weekly $10-30 ongoing payment makes the products so much easier to buy.. therefore making money for the financiers as well as the product suppliers.
Creating economies of scale: Many industries are populated with small inefficient firms. An example would be the printing industry where the investment in machinery is significant compared to the size of the business. Competitive advantage can be created by combining many inefficient companies. Fixed costs as a proportion of sales go down, and this way be sufficient to create a new advantage of lower costs – continuing with the print example, there are several large companies in Australia which have acquired dozens of smaller firms, and as a result of the combined strengths of these plus new practices (such as running three separate shifts per day on the same machinery) can drive down costs of production.
Changes in technology: Improvements and inventions cause change… wireless technologies, biotech, mobile phones. You have a new thing. This is a clear reason for creating a new business. This category refers to revolutionary change.
Evolutionary change: Moore’s Law states that in some areas (speed of computer chips for example) speed will double every eighteen months. Where this law applies, there will always be room for new players and new applications. Costs are driven down as well as potential lifted. How can an existing range of products use these benefits?
Imperfect information: A business can be driven by finding deals and maximising their value. Examples include licensing, mining and exploration, art, private equity, antiques. In other words, what makes insider trading illegal can be a good thing in other industries. Your business might be built on one such deal and then the company is there to exploit it (buying rights to a technology because you believe it will become a new standard) or it might be an ongoing source of knowledge (such as a property developer whose advantage comes from researching and buying land that is expected to be rezoned, and thus take advantage in changes in value).
Accessing undervalued assets and resources: This might be in the form of turning around another company and breathing life into it. A customer base may be neglected. New management, new strategy, new ideas and new marketing might make this type of turnaround a viable proposition.
Changes in regulation: This can create or wipe out industries overnight. Consider the implications of changes in security to the airline industry, and the supporting services which then became necessary. Consider the boost to the home insulation industry when the government decided to subsidise installation worth up to $1600 per household. Hundreds of companies were created overnight to take advantage of this free money. Consider also the vulnerability of these companies to further changes… when the subsidy was dropped to $1200 per household half of these companies closed. Similar artificial (but profitable) niches exist in dozens of areas – including energy (solar hot water). Deregulation can also provide a pathway for companies to enter an industry, as has happened in airlines, telecoms and TV. It is believed that financial services changes will also create and destroy various companies in the years to come – changes are afoot (end 2009) that will change the way funds deal wih and renumerate fund managers which will have a major impact in financial services. This will mean both creation of new services and companies, and perhaps the demise of others.
As a business owner, one of the ways you need to sell yourself to an investor is as an agent of change. To do this credibly, you need to put forward a case about what you are doing it, why, and what the driver for the change is. If your business is merely hoping to grab a share of an existing market, and not really make a difference, it is unlikely to really excite an investor. This is not to say that the business won’t work, just that it may not be revolutionary enough to get funded.
Investors are generally looking for something which is a catalyst, and to be there when the change is clear, but has not yet occurred, and sometimes to be part of the energy which creates this change. Every investor (individual or firm) is different and will have varying criteria, but most will want a massive upside potential.
