The 20 Most Important Questions In Business
Companies fail for a host of reasons. Bad luck plays a role, sure, but disaster usually strikes because of a more fundamental flaw–in the original idea, the strategy, the execution or all of the above.
When it comes to building a business, even Warren Buffett would agree that no one can spot every opportunity or anticipate every threat. There are simply too many variables. And in an increasingly competitive global economy, those variables are changing faster than ever before.
What entrepreneurs can do is ask the core set of tough questions that govern the fate of any enterprise. Armed with those answers, they stand the best chance of beating some fairly dire odds: Studies estimate that just two-thirds of all start-ups survive the first two years, and less than half make it to the fourth.
Make no mistake: Digging for those answers is a grueling exercise–one that takes serious intellectual and emotional honesty. With any hope, the process begins long before money’s been spent, products are built and customers are lost.
The real challenge, though, is to keep digging as the business grows. New opportunities and threats emerge, and yesterday’s answers may not–and probably won’t–suffice. Relentlessly asking the tough questions is how behemoths like Wal-Mart , Microsoft and General Electric stay on top.
With that in mind, we present the 20 most important questions entrepreneurs need to answer–and keep answering–to build their businesses. Some highlights:
What is your value proposition?
If you can’t explain–in three, jargon-free sentences or less–why customers need your product, you do not have a value proposition, and thus, you do not have a business. Period.
Does your product address a viable market?
Seinfeld’s Kramer was convinced that the Mansierre (a bra for men) was his ticket to riches. Not that he did any research to confirm that there was a viable market, let alone one large enough to attract investment capital. Never assume you can create demand where it hasn’t already been expressed. Don’t hawk the next Mansierre.
What differentiates your product from the competition?
It’s true that Starbucks made people believe they wanted $4 caffeinated concoctions, and Louis Vuitton lulled people into shelling out $1,500 for denim handbags. But marketing alone won’t cut it. If you want to win in business, you need to deliver tangible value where other companies don’t. Examples: rock-bottom prices (Wal-Mart); ingenious product design (Apple); extreme convenience (FedEx). Find your edge and hammer on it.
Does the business scale?
The difference between modest wealth and obscene riches is “scale.” Scalable businesses are those that can produce the next widget at a fraction of the cost. Think software: Once Microsoft shelled out to develop the code for its Windows operating system, the incremental cost of printing each additional copy was next to nothing. What models don’t scale? Think service businesses, where the need for people grows with revenue.
How committed are you to making this happen?
You have a family and two kids. Are you ready to burn 100 hours a week for the next two years to get your start-up off the ground? Fair warning: If you want to run the show, get ready to give everything–and then some.
What are your strengths?
Google writes powerful search algorithms; Steinway works wonders with wood; Cisco sniffs out promising new technologies and buys them. Figure out what you’re good at and stick to it. An obvious notion, perhaps, but plenty of zealous entrepreneurs lose their way–especially when the world seems so full of possibilities.
What are your weaknesses?
Know what you do well, and know what you don’t. Example: Apple doesn’t make the cameras in its iPhone; it buys them from somebody else. Countless online merchants farm out the design of their websites and back-office payment systems. Wasting resources just to be mediocre is suicide: Stick to what you know and find trusted partners to handle the rest.
What price will your customers pay?
Why will people pay twice as much for Clorox as they will for generic bleach? Who knows, but nailing the upper limits of what customers will pay, be it for an iPhone or a bottle of bleach, is one of the biggest levers in any business model. Consultants get paid handsomely to help companies arrive at the right price. For more affordable advice, check out “The Six-Step Guide To Pricing Your Product.” Wannabe consultants should read “How To Price Your Consulting Services.”
How much power do your buyers have?
No business wants to sell squeegees to the only window washing company in town. If that customer demands big price cuts, walks away or folds, the business is done. Spread your risk by diversifying your customer base.
How much power do your suppliers have?
The fewer number of suppliers, the more sway they have. A knotty-pine grandfather-clock business may sound great, but what if there’s only one source of knotty pine? Answer: You’re going to pay. (On the flipside, beware getting hooked on hungry, low-cost providers who don’t keep an eye on quality.)
How should you sell your product?
Dell Computer bypassed retailers and sold directly to customers, with limited tech support. General Motors and Coca Cola rely on distributors to move their cars and cans. Clothing companies like Ralph Lauren work both internal and external channels. And Apple keeps adding more of its own airy and fashionable outposts, complete with live product tutorials and throngs of geeky customer-service agents. Whatever sales method you choose, make sure it aligns with your overall business strategy.
How should you market your product?
Getting the word out about your company–without going broke–is no mean feat. In the mid ’90s, America Online spent so much money flooding the planet with free trial software that it tried to mask the bleeding by capitalizing those expenses on its balance sheet. (Regulators later nixed that accounting treatment, wiping out millions in accounting profits.) For a host of innovative and affordable marketing techniques, check out “16 Must-Try Marketing Maneuvers.”
How big is the threat of new entrants?
If there’s money to be made, the competition will come. If not a direct rival (think what Microsoft did to Netscape in Internet browsers), then a substitute technology might take out your legs (look at what digital film did to Kodak). Construct barriers to entry–by filing a patent, securing an enviable lease, building a loyal following–long before that happens.
How do you protect your intellectual property?
A quick follow-on to the previous slide: Say you invented a car that can go 150 mph on solar power alone. A few months later five savvy rivals have reverse-engineered it and are now bringing their versions to market. Before you crank out prototypes for the public, file for a provisional patent. It protects your idea for a year while you work out the kinks. For more on intellectual-property protection, check out “Protect Your Prototype” and “The Patented Path To Profits.”
How much start-up capital do you need?
Any early-stage investor or small business consultant will tell you that most businesses fail because they were undercapitalized. While there are no absolute rules here, “you probably want to double your initial estimate,” says Jim Pack, chief executive of Curve Dental, an Orem, Utah, maker of dental office software.
How will you finance the business?
You have a few choices, including Aunt Sally, credit cards (dangerous), angel investors, venture capital (if you’re really onto something), bank loans (good luck finding them) and the most expensive route, equity. Beware, though: Selling shares to the public comes with a host of headaches, including dilution of ownership, loss of control and regulatory hurdles. Bottom line: Bootstrap the business if you can. Finally, always remember to match the timing of cash inflows from your assets and the outflows to cover liabilities. A mismatch can sting.
How much cash do you need to survive the early years?
For those who slept through the previous slide: Again, mind your cash. Plenty of entrepreneurs boast hockey-stick-shaped financial projections but turn out their pockets before the good times have a chance to kick in. (Remember all those busted dot-com companies from the tech boom?) Hold back on the Aeron chairs and mongo Mac computers until more cash is flowing in than out–and then add plenty of extra cushion.
What are your financial projections?
You can’t lead if you don’t have a destination. Two critical milestones: 1) the point where more cash is coming into the business than going out in a given period, and 2) the point at which you finally recuperate your cumulative initial investment (including an adjustment for the time value of money). Financial projections should be reasonable. Paint too rosy a picture and seasoned investors will run; more to the point, you might run out of cash.
How do you keep the help happy?
What is American Idol without Simon Cowell? We’ll all find out soon, but many people think the show won’t have nearly the same draw. If you’re lucky enough to find great talent, do your best to encourage them–and pay checks are just part of the equation.
What is your end game?
Looking to flip your business to the first guerrilla that comes along? MySpace did, Facebook hasn’t. Different end games require different strategies. Always be mindful of yours. Not sure whether you want to build the next great empire or just make a decent buck? Ask yourself the following 13 questions.