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Before you start investing resources in that new product idea or breaking into a new customer segment, you need to ask 3 questions. I first began using these 3 questions about 15 years ago at the recommendation of a former colleague. I don’t know the origination of them, so I can’t give credit. And, after searching online for these questions or some close combination, I also found no specific reference. It is likely the blend of several better known methods of evaluating strategic opportunities.
Regardless of the origin, I have to share them as they have proved very useful over the years in helping to put perspective on strategic decisions. And, since there are only 3, they are easy to remember.
Question 1 – Is It Real?
For example, when looking at a new product idea, ask if the opportunity is real. By “real”, you need to determine if the opportunity exists in your market (or another market) to sell this new product.
This is where you look at whether or not there is a demand by examining the potential customer base and determining if the new product fills a need.
If the new product idea is cool, but doesn’t solve a problem or help a business customer gain a competitive advantage, you should pass.
This can be difficult sometimes, especially if the idea is yours, but you have to be honest with yourself and seek counsel from your most trusted business advisors, coaches and mentors.
Question 2 – Can We Do It?
Once you’ve decided that the opportunity is real, now you need to figure out if your small business can do it.
By “do it”, I mean, specifically, figure out if your business has the necessary skills and resources to take on the new initiative, and if not can you acquire them.
There are a lot of ideas that you might have which will make it through the first screen of being “real”, but when present circumstances are considered (i.e., current state of technology or your access to capital), you may determine your business can’t do it.
It’s often harder to say pass at this point because you have now invested time to come up with the idea, performed competitor and market analyses and vetted your business’s capabilities to execute on the idea.
It’s at this point that a lot of businesses will try to tweak the original idea to make it “doable”. Be careful that in doing your tweaking, you aren’t making the “real” opportunity identified in the first question become not real anymore. Substantial changes require you go back to question one.
Question 3 – Is It Worth It?
Once you:
1) Know an opportunity is real (as in the new product example, you determine there is a real demand for that product) and,
2) You determine your business can do it (you have the resources and skills required to develop and deliver it), now you need to
3) Determine the opportunity’s worth (do the potential benefits from the opportunity outweigh the potential costs).
Developing a financial model for the opportunity is imperative. If the bottom line of the opportunity meets your criteria for profit over the time frame you desire, you can map out the steps needed to get you there and get going.
However, if the opportunity doesn’t prove profitable, or would take too long to provide the desired return, you should pass.
Again, being honest about your tolerance for risk, is of utmost importance, as is seeking a second look from your trusted advisors. You’ve spent time and precious resources getting to this point and may have a great idea that you think will prove valuable to your business, getting a second set of eyes will never hurt.
If you need help evaluating an idea or creating financial model for the opportunity, Barba CFO can help. Fill out or contact form here, or call us at (401) 384-0298.
