The Business Book

CONTENTS

INTRODUCTION

START SMALL, THINK BIG • STARTING AND GROWING THE BUSINESS

If you can dream it, you can do it • Beating the odds at start-up

There’s a gap in the market, but is there a market in the gap? • Finding a profitable niche

You can learn all you need to know about the competition’s operation by looking in his garbage cans • Study the competition

The secret of business is to know something that nobody else knows • Stand out in the market

Be first or be better • Gaining an edge

Put all your eggs in one basket, and then watch that basket • Managing risk

Luck is a dividend of sweat. The more you sweat, the luckier you get • Luck (and how to get lucky)

Broaden your vision, and maintain stability while advancing forward • Take the second step

Nothing great is created suddenly • How fast to grow

The role of the CEO is to enable people to excel • From entrepreneur to leader

Chains of habit are too light to be felt until they are too heavy to be broken • Keep evolving business practice

A corporation is a living organism; it has to continue to shed its skin • Reinventing and adapting

Without continuous growth and progress, success has no meaning • The Greiner curve

If you believe in something, work nights and weekends—it won’t feel like work • The weightless start-up

LIGHTING THE FIRE • LEADERSHIP AND HUMAN RESOURCES

Managers do things right, leaders do the right thing • Leading well

None of us is as smart as all of us • The value of teams

Innovation must be invasive and perpetual: everyone, everywhere, all of the time • Creativity and invention

Dissent adds spice, spirit, and an invigorating quality • Beware the yes-men

No great manager or leader ever fell from heaven • Gods of management

A leader is one who knows the way, goes the way, and shows the way • Effective leadership

Teamwork is the fuel that allows common people to attain uncommon results • Organizing teams and talent

Leaders allow great people to do the work they were born to do • Make the most of your talent

The way forward may not be to go forward • Thinking outside the box

The more a person can do, the more you can motivate them • Is money the motivator?

Be an enzyme—a catalyst for change • Changing the game

The worst disease that afflicts executives is egotism • Hubris and nemesis

Culture is the way in which a group of people solves problems • Organizational culture

Emotional intelligence is the intersection of heart and head • Develop emotional intelligence

Management is a practice where art, science, and craft meet • Mintzberg’s management roles

A camel is a horse designed by committee • Avoid groupthink

The art of thinking independently, together • The value of diversity

MAKING MONEY WORK • MANAGING FINANCES

Do not let yourself be involved in a fraudulent business • Play by the rules

Executive officers must be free from avarice • Profit before perks

If wealth is placed where it bears interest, it comes back to you redoubled • Investment and dividends

Borrow short, lend long • Making money from money

The interests of the shareholders are our own • Accountability and governance

Make the best quality of goods at the lowest cost, paying the highest wages possible • Your workers are your customers

Utilize OPM—Other People’s Money • Who bears the risk?

Swim upstream. Go the other way. Ignore the conventional wisdom • Ignoring the herd

Debt is the worst poverty • Leverage and excess risk

Cash is king • Profit versus cash flow

Only when the tide goes out do you discover who’s been swimming naked • Off-balance-sheet risk

Return on equity is a financial goal that can become an own goal • Maximize return on equity

As the role of private equity has grown, so have the risks it poses • The private equity model

Assign costs according to the resources consumed • Activity-based costing

WORKING WITH A VISION • STRATEGY AND OPERATIONS

Turn every disaster into an opportunity • Learning from failure

If I had asked people what they wanted, they would have said faster horses • Leading the market

The main thing to remember is, the main thing is the main thing • Protect the core business

You don’t need a huge company, just a computer and a part-time person • Small is beautiful

Don’t get caught in the middle • Porter’s generic strategies

The essence of strategy is choosing what not to do • Good and bad strategy

Synergy and other lies • Why takeovers disappoint

The Chinese word crisis is composed of two characters: danger and opportunity • Crisis management

You can’t grow long-term if you can’t eat short-term • Balancing long- versus short-termism

Market Attractiveness, Business Attractiveness • The MABA matrix

Only the paranoid survive • Avoiding complacency

To excel, tap into people’s capacity to learn • The learning organization

The future of business is selling less of more • The long tail

To be an optimist … have a contingency plan for when all hell breaks loose • Contingency planning

Plans are useless, but planning is indispensable • Scenario planning

The strongest competitive forces determine the profitability of an industry • Porter’s five forces

If you don’t have a competitive advantage, don’t compete • The value chain

If you don’t know where you are, a map won’t help • The capability maturity model

Chaos brings uneasiness, but it also allows for creativity and growth • Coping with chaos

Always do what is right. It will gratify half of mankind and astonish the other • Morality in business

There is no such thing as a minor lapse in integrity • Collusion

Make it easier to do the right thing and much harder to do the wrong thing • Creating an ethical culture

SUCCESSFUL SELLING • MARKETING MANAGEMENT

Marketing is far too important to leave to the marketing department • The marketing model

Know the customer so well that the product fits them and sells itself • Understanding the market

Attention, Interest, Desire, Action • The AIDA model

Marketing myopia • Focus on the future market

The cash cow is the beating heart of the organization • Product portfolio

Expanding away from your core has risks; diversification doubles them • Ansoff’s matrix

If you’re different, you will stand out • Creating a brand

There is only one boss: the customer • Make your customers love you

Whitewashing, but with a green brush • Greenwash

People want companies to believe in something beyond maximizing profits • The appeal of ethics

Everybody likes something extra for nothing • Promotions and incentives

In good times people want to advertise; in bad times they have to • Why advertise?

Make your thinking as funny as possible • Generating buzz

E-commerce is becoming mobile commerce • M-commerce

Trying to predict the future is like driving with no lights looking out of the back window • Forecasting

Product, Place, Price, Promotion • Marketing mix

DELIVERING THE GOODS • PRODUCTION AND POSTPRODUCTION

See how much, not how little, you can give for a dollar • Maximize customer benefits

Costs do not exist to be calculated. Costs exist to be reduced • Lean production

If the pie’s not big enough, make a bigger pie • Fulfilling demand

Eliminate unnecessary steps • Simplify processes

Every gain through the elimination of waste is gold in the mine • Juran’s production ideal

Machines, facilities, and people should work together to add value • Kaizen

Learning and innovation go hand in hand • Applying and testing ideas

Your most unhappy customers are your greatest source of learning • Feedback and innovation

Technology is the great growling engine of change • The right technology

Without big data, you are blind and deaf and in the middle of a highway • Benefitting from big data

Put the product into the customer’s hands—it will speak for itself • Quality sells

The desire to own something a little better, a little sooner than necessary • Planned obsolescence

Time is money • Time-based management

A project without a critical path is like a ship without a rudder • Critical path analysis

Taking the best from the best • Benchmarking

DIRECTORY

GLOSSARY

CONTRIBUTORS

ACKNOWLEDGMENTS

COPYRIGHT

INTRODUCTION

From the time that goods and services began to be traded in early civilizations, people have been thinking about business. The emergence of specialized producers and the use of money as a means of exchange were methods by which individuals and societies could, in modern terms, gain a business edge. The ancient Egyptians, the Mayans, the Greeks, and the Romans all knew that wealth creation through the mechanism of commerce was fundamental to the acquisition of power, and formed the base on which civilization could prosper.

The lessons of the early traders resonate even today. Specialism revealed the benefits of economies of scale—that production costs fall as more items are produced. Money gave rise to the concept of value added—selling an item for more than it cost to produce. Even when barter was the norm, producers still knew it was advantageous to lower costs and raise the value of goods. Today’s companies may use different technologies and trade on a global scale, but the essence of business has changed little in millennia.

The art of administration is as old as the human race.

Edward D. Jones

US investment banker (1893–1982)

An era of change

However, the study of business as an activity in its own right emerged relatively recently. The terms manager and management did not appear in the English language until the late 16th century. In his 1977 text The Visible Hand, Dr. Alfred Chandler divided business history into two periods: pre-1850 and post-1850. Before 1850 local, family-owned firms dominated the business environment. With commerce operating on a relatively small scale, little thought was given to the wider disciplines of business.

  The growth of the railroads in the mid-1800s, followed by the Industrial Revolution, enabled businesses to grow beyond the immediate gaze of friends or family, and outside the immediate locale. To prosper in this new—and increasingly international—environment businesses needed different, and more rigorous, processes and structures. The geographic scope and ever-growing size of these evolving businesses required new levels of coordination and communication—in short, businesses needed management.

Managing production

The initial focus of the new breed of manager was on production. As manufacturing moved from individual craftsmen to machinery, and as ever-greater scale was required, theorists such as Henri Fayol examined ever-more-efficient ways of operating. The theories of Scientific Management, chiefly formulated by Frederick Taylor, suggested that there was one best way to perform a task. Businesses were organized by precise routines, and the role of the worker was simply to supervise and feed machinery, as though they were part of it. With the advent of production lines in the early 1900s, business was characterized by standardization and mass production.

  While Henry Ford’s Model T car is seen as a major accomplishment of industrialization, Ford also remarked why is it every time I ask for a pair of hands, they come with a brain attached? Output may have increased, but so too did conflict between management and staff. Working conditions were poor and businesses ignored the sociological context of work—productivity mattered more than people.

Studying people

In the 1920s a new influence on business thinking emerged—the Human Relations Movement of behavioral studies. Through the work of psychologists Elton Mayo and Abraham Maslow, businesses began to recognize the value of human relations. Workers were no longer seen as simply cogs in the machine, but as individuals with unique needs. Managers still focused on efficiency, but realized that workers were more productive when their social and emotional needs were taken care of. For the first time, job design, workplace environments, teamwork, remuneration, and nonfinancial benefits were all considered important to staff motivation.

  In the period following World War II, business practice shifted again. Wartime innovation had yielded significant technological advances that could be applied to commerce. Managers began to utilize quantitative analysis, and were able to make use of computers to help solve operational problems. Human relations were not forgotten, but in management thinking, measurability returned to the fore.

Global brands

The postwar period saw the growth of multinationals and conglomerates—businesses with multiple and diverse interests across the globe. The war had made the world seem smaller, and had paved the way for the global brand. These newly emerging global brands grew as a result of a media revolution—television, magazines, and newspapers gave businesses the means to reach a mass audience. Businesses had always used advertising to inform customers about products and to persuade them to buy, but mass media provided the platform for a new, and much broader, field—marketing. In the 1940s US advertising executive Rosser Reeves promoted the value of a Unique Selling Proposition. By the 1960s, marketing methods had shifted from simply telling customers about products to listening to what customers wanted, and adapting products and services to suit that.

  Initially, marketing had its critics. In the early 1960s hype about the product became more important than quality, and customers grew dissatisfied with empty claims. This, and competition from Japanese manufacturers, had Western companies embracing a new form of business thinking: Total Quality Management (TQM) and Zero Defects management. Guided by management theorists, such as W. Edwards Demming and Philip B. Crosby, quality was seen as the responsibility of the entire company, not just those on the production line. Combining Human Relations thinking and the customer-focused approach of marketing, many companies adopted the Japanese philosophy of kaizen: continuous improvement of everything, by everyone. Staff at all levels was tasked with improving processes and products through quality circles. While TQM is no longer the buzzword it once was, quality remains important. The modern iteration of TQM is Six Sigma, an approach to process improvement that was developed by Motorola in 1986 and adapted by Jack Welch during his time as CEO of General Electric.

Entrepreneurship is about survival, which nurtures creative thinking. Business is not financial science, it’s about trading—buying and selling.

Anita Roddick

UK entrepreneur (1942–2007)

Gurus and thinkers

Business history itself emerged as a topic of study in the 1970s. Dr. Alfred Chandler progressed the study of business history from the purely descriptive to the analytical—his course at Harvard Business School stressed the importance of organizational capabilities, technological innovation, and continuous learning. Taking their cue from Chandler, in the 1980s and 1990s management experts—such as Michael Porter, Igor Ansoff, Rosabeth Moss Kanter, Henry Mintzberg, and Peter Drucker—encouraged businesses to consider their environments, to consider the needs of people, and to remain adaptable to change. Maintaining the conditions for business growth, and the correct positioning of products within their market, were considered key to business strategy. Moreover, what distinguished these gurus from their predecessors—who had tended to focus on operational issues—was a focus on leadership itself. For example, Charles Handy’s The Empty Raincoat revealed the paradoxes of leadership, and acknowledged the vulnerabilities and fragilities of the managers themselves. Leadership in the context of business, these writers recognized, is no easy undertaking.

Digital pioneering

Just as television and mass media had done before, the growth of the Internet in the 1990s and early 2000s heralded a new era for business. While early hype led to the failure of many online start-ups in the dot-com bubble of 1997 to 2000, the successful e-commerce pioneers laid the foundations for a business landscape that would be dominated by innovation. From high-tech garage start-ups—such as Hewlett-Packard and Apple—to the websites, mobile apps, and social-media forums of the modern business environment, technology is increasingly vital for business.

  The explosion of new businesses thanks to technology also helped to expand the availability of finance. During the 1980s and 1990s finance had grown into a distinct discipline. Corporate mergers and high-profile takeovers became a way for businesses to grow beyond their operational limits; leverage joined marketing and strategy as part of the management lexicon. In the late 1990s this expanded to venture capital: the funding of small companies by profit-seeking investors. The risk of starting and running a business remains, but the opportunities afforded by technology and easier access to finance have made taking the first step a little easier. With micro-finance, and the support of online networks and communities of like-minded people dispensing business advice, enterprise has never been more entrepreneurial.

  Recent business thinking has brought diversity and social responsibility to the fore. Businesses are encouraged, and increasingly required by law, to employ people from diverse backgrounds and to act in an ethical manner, wherever they operate in the world. Businesses such Nike and Adidas require suppliers to prove that labor conditions in their factories meet required standards. Sustainability, recycling, diversity, and environmentalism have entered business thinking alongside strategic management and risk.

Business can be a source of progressive change.

Jerry Greenfield

US businessman, co-founder of Ben and Jerry’s ice cream (1951–)

New horizons

If business thinking has shifted, so too has the nature of business itself. Where once a company was constrained by its locality, today the opportunities are truly global. Globalization does, however, mean that business is more competitive than ever. Emerging markets are creating new opportunities and new threats. They may be able to outsource production to low-cost countries, but as their economies grow, these emerging nations are breeding new competition. China, for example, may be the world’s factory, but its home-grown companies are also starting to represent a threat to Western businesses. As the global recession of 2007–08 and ongoing economic uncertainty have proven, business in the 21st century is increasingly more interdependent and more challenging than ever before. Starting a business might be easier, but to survive entrepreneurs need the tenacity to take an idea to market, the business acumen to turn a good plan into a profitable enterprise, and the financial skill to maintain success.

Continual change

For centuries social, political, and technological factors have forced companies and individuals to create new ways of generating profits. Whether bartering goods with a neighboring village or seeking ways to make profits from social networking, business thinking has changed, shifted, and evolved to mirror the wants and needs of the societies whose wealth it creates. Sometimes, as in the 2008 financial crisis, business failed in its efforts. In other examples—the legacy of Apple’s game-changing products, for example—companies have been spectacularly successful.

  Business is a fascinating subject. It surrounds us and affects us daily. A walk down the street, a wander around a supermarket, an Internet search on almost any topic will reveal commerce in its many and varied forms. At its core business is, and always has been, about survival and surplus—about the advancement of self and of society. As the world continues to open up, and as opportunities for enterprise multiply, an interest in business has never been more relevant, or more exciting. Moreover, for those with entrepreneurial spirit, business has never been more rewarding.

Business, more than any other occupation, is a continual dealing with the future; it is a continual calculation, an instinctive exercise in foresight.

Henry R. Luce

US magazine publisher (1898–1967)

INTRODUCTION

All businesses start from the same point: an idea. It is what happens to that idea that determines business success.

According to Entrepreneur magazine, nearly half of all new start-ups fail within the first three years. Beating the odds at start-up is tough. First and foremost an idea, no matter how good, must be combined with entrepreneurial spirit, defined as the willingness to take risk. Without entrepreneurial spirit a great idea might never be pursued. Not all ideas are good ones though; it would be a foolish entrepreneur who rushed a product to market without careful thought, research, and detailed planning. Risk might be inherent in business enterprise, but successful entrepreneurs are those who are not only willing to take risks, but are also able to manage risk.

Realistic propositions

Having an idea is the first step—the next hurdle is finance. Some start-ups require very little capital, and a few require none at all. However, many require significant backing, and most will need to seek funding at some stage in the growth process. An entrepreneur must be able to convince financial backers that the concept is valid and that they have the skills and knowledge to turn the original concept into a successful business.

  It follows that the idea must be profitable. Sometimes, an idea may look great on paper, but turn out to be uncommercial when put into practice. Determining whether an idea has potential requires a study of the competition and the relevant market. Who is competing for customers’ time and money? Are these competitors selling directly competitive products or possible substitutes? How are competitors perceived in the market? How big is the market?

  Most markets are increasingly global, crowded, and competitive. Few companies are lucky enough to find a profitable niche—to succeed, companies need to do something different in order to stand out in the market. The strategy for most companies is to differentiate; this means demonstrating to customers that they offer something that is not available from competitors—a Unique or Emotional Selling Proposition (USP or ESP).

  Such attempts to stand out are everywhere. Every business, and at every stage of production, from raw-material extraction to after-sales service, tries to distinguish its products or services from all others. Walk into any bookstore, for example, and you will see countless examples of books, often on the same topic, using design, style, and even size (large or small) to stand out from the competition.

  Gaining an edge often depends on one of two things: being first into a new market niche, or being different from the competition. For example, in 1995 eBay was first into the online auction market, and has dominated it ever since. Similarly, Volvo was first to identify the opportunity for luxury bus sales in India, and has enjoyed healthy sales. In contrast, Facebook was by no means the first social network, but it is the most successful; its edge was having a better product.

  Once a company is established, the challenge shifts: the objective now is to maintain sales and grow in the short- and long-term.

The only thing worse than starting something and failing … is not starting something.

Seth Godin

US entrepreneur (1960–)

Adapting to survive

Long-term business survival depends upon the company constantly reinventing and adapting itself in order to remain ahead of the competition. In dynamic markets, which are growing and evolving all the time, the idea on which the company was founded may become irrelevant over time, and rivals will almost certainly copy it. The ecosystem in which a business operates is rarely, if ever, static. Corporations exist in these ecosystems as living organisms that must adapt to survive. In their 2013 book, Reinventing Giants, Bill Fischer, Umberto Lago, and Fang Liu noted that the Chinese home appliances company Haier had reinvented itself at least three times in the past 30 years. In contrast, Kodak, a US giant of the 20th century, was slow to react to the rise of digital photography, and went bankrupt.

  Moreover, just as the enterprise must adapt, so too must the owner. Most businesses start small, and remain small. Few entrepreneurs are willing or know how to take the second step of employing people who are neither family nor previously known friends. This is the start of a move from entrepreneur to leader, and it requires a new set of skills, as new demands are placed on the business founders. Where once energy, ideas, and passion were enough, evolving businesses require the development of formal systems, procedures, and processes. In short, they require management. Founders must develop delegation, communication, and coordination skills, or they must employ people who have them.

  As Larry Greiner described in his 1972 paper, Evolution and Revolution as Organizations Grow, as a business grows, the demands on it change. The Greiner Curve is a graphic that shows how the initial stages of growth rely on individual initiative, and that evolving ad-hoc business practice into sustainable and successful growth can only be achieved by experienced people and rigorous systems. Professional management, as opposed to entrepreneurial spirit, becomes essential to business evolution.

  Some leaders, such as Bill Gates and Steve Jobs, for example, are able to make the transition from entrepreneurial founder to corporate leader. Many others, however, struggle to make the necessary changes; some try and fail, while others decide to remain small.

Finding a balance

Determining how fast to grow is, therefore, a balance of the founder’s skills and desires. But in order to survive, the idea must be unique enough to define its own niche, and the individual or group behind it must demonstrate entrepreneurial spirit. They need the flexibility to adapt the idea—and themselves—as business and market pressures demand. Luck will play a part, but it is the balance of these factors that determines whether a small start-up becomes a giant.

When you have to prove the value of your ideas by persuading other people to pay for them, it clears out an awful lot of woolly thinking.

Tim O’Reilly

Irish entrepreneur (1954–)

IN CONTEXT

FOCUS

Business start-ups

KEY DATES

18th century The term entrepreneur is used to describe someone who is willing to risk buying at certain prices and selling at uncertain prices.

1946 Professor Arthur Cole writes An Approach to Entrepreneurship, sparking interest in the phenomenon.

2005 The micro-finance, nonprofit site Kiva.com launches to make small loans to very small businesses.

2009 Crowdfunding websites, such as Kickstarter.com, allow individuals to provide funding for businesses.

2013 A study by Ross Levine and Yona Rubinstein finds that as teenagers, many successful entrepreneurs exhibited aggressive behavior, broke the rules, and got into trouble.

The reasons for starting a business are many. Some people dream of being their own boss—of turning their hobby into a profitable enterprise, of expressing their creativity, or of being richly rewarded for their hard work. Although Walt Disney’s maxim if you can dream it, you can do it holds true for some, pursuing the dream is risky. Those who attempt it must have the entrepreneurial spirit to fearlessly quit a well-paid job, go it alone, and face a future filled with uncertainty. Others might need a push; often being laid off (and its associated lump-sum payment) can be a springboard. Younger entrepreneurs are increasingly a part of the start-up scenario. They may have gained the necessary skills for business by their early twenties, and enjoy the excitement and freedom of running their own venture.

Keeping the faith

While the reasons for start-up may vary, what all entrepreneurs have in common is the willingness to take risks. Few entrepreneurs get it right first time—it takes resilience and tenacity to keep going in the face of failure, and it takes perseverance to remain positive when customers, banks, and financial backers repeatedly say no. Faith in the idea is essential. While some start-ups require very little capital, most require funding during their early growth phases. A business owner must be able to convince banks, or other financial backers, that their concept is valid and that they have the skills to turn the idea into a profitable venture, even though this may take some time. It took Amazon six years to make a profit.

  In recent years, securing finance for start-ups has become a little easier. Many governments offer loan plans or grants. Entrepreneurs with big ideas can access large funds of money and managerial support from venture capitalists, whose sole purpose is to incubate start-ups. For smaller start-ups, and for people with very little of their own capital, micro-loans and crowdfunding finance—such as that offered by Kickstarter.com—are increasingly popular.

Sustaining a business is a hell of a lot of hard work, and staying hungry is half the battle.

Wendy Tan White

UK business executive (1970–)

The business plan

The key to securing financing is a business plan. A good plan will outline the idea itself, detail any supporting market research, describe operational and marketing activities, and give financial predictions. The plan should also outline a strategy for long-term growth and identify contingencies (alternative ideas or markets) if things do not go as planned.

  Most importantly, a good business plan will acknowledge that the biggest reason for business failure is a lack of cash. While loan capital can help for a while, eventually a business must fund its operations from revenue. A good business plan will analyze future cash flows and identify any potential shortfalls.

  Beating the odds at start-up is defined by the tenacity to take an idea to market, the ability to secure sufficient finance, and the business acumen to turn a good plan into a long-term, profitable enterprise.

TONY FERNANDES

Tan Sri Anthony Tony Fernandes was born in Kuala Lumpur in 1964 to an Indian father and Malaysian mother. He went to school in England and graduated from the London School of Economics (LSE) in 1987. He worked briefly for Richard Branson at Virgin Records as a financial controller before becoming Southeast Asia Vice President for Warner Music Group in 1992. In 2001, Fernandes left Warner to go it alone. He mortgaged his home to raise the finance needed to buy the struggling young airline, AirAsia. His low-cost strategy was clear in the company’s tagline: Now everyone can fly. One year after his takeover, the airline had cleared its debts of $11 million and had broken even. Fernandes estimates that around 50 percent of its travelers are first-time flyers. The company is now widely regarded as the world’s best low-cost airline.

  In 2007 Fernandes founded Tune Hotels, a low-cost hotel chain that promises Five-star beds at one-star prices. He advises potential entrepreneurs to dream the impossible. Never take no for an answer.

See also: Finding a profitable niche • Managing risk • Luck (and how to get lucky) • Take the second step • From entrepreneur to leader • Learning from failure • Small is beautiful

IN CONTEXT

FOCUS

Positioning strategy

KEY DATES

1950s and 60s Markets are dominated by large companies offering mass-produced items, such as Coca-Cola. Choice is limited, but the scope for products targeted at new sectors of the market is high.

1970s and 80s Markets become more segmented as companys generate new products and market them toward narrower groups.

1990s and 2000s Companies and brands position themselves ever-more aggressively and distinctively in the overcrowded marketplace.

2010s Finding and sustaining market niches is assisted by the promotional capabilities of the Internet, which allow one-to-one marketing and customization of products.

Finding a space in the market that is unchallenged by competition is the Holy Grail of positioning strategy. Unfortunately these spaces—known as market gaps—are often illusive, and the benefits of finding one are often equally illusory.

Although competition is a fact of life, it makes business difficult, contributing to an ever-downward pressure on prices, ever-rising costs (such as the funding of new product development and marketing), and an incessant need to outmaneuver and outsmart rivals. In contrast, the benefits of finding a market gap—a small niche segment of a market that is unfettered by competition—are obvious: greater control over prices, lower costs, and improved profits.

  The identification of a market gap, combined with a dose of entrepreneurial spirit, is often all that is needed to launch a new business. In 2006, Twitter founder Jack Dorsey combined short-form communication with social media, providing a service that no one else had spotted. Free to most users, revenue comes from companies who pay for promotional tweets and profiles: Twitter earned advertising revenues of $582 million in 2013.

  Not all gaps are lucrative, however. The Amphicar, for instance, was an amphibious car produced in the 1960s for US consumers who wanted to drive on roads and rivers. It was a quirky novelty, but the market was too small to be profitable. This was also true for bottled water for pets—launched in the US in 1994, Thirsty Cat! and Thirsty Dog! failed to entice pet owners.

A sustainable niche

Snapple, the manufacturer of healthy tea and juice drinks, is a company that has successfully found a sustainable and profitable niche. A glance at the beverage counter of any supermarket reveals that dozens of brands compete for sales. Many companies have failed in this ultra-competitive market: for example, Pepsi tried to capture a nonexistent market for morning cola with its short-lived, high-caffeine drink, AM.

  Success for Snapple came from positioning the product as a unique brand—Snapple was one of the first companies to manufacture juices and drinks made completely from natural ingredients. Its founders ran a health store in Manhattan, and the company used the slogan: 100% Natural. Snapple targeted students, commuters, and lunch-time office workers with a new healthy snack drink, combining its Unique Selling Proposition (USP) with irreverent marketing and small bottles that were designed to be consumed in one sitting. Distribution was through small, inner-city stores where customers could grab-and-go. These tactics helped to secure a profitable and sustainable niche, distinguishing Snapple from its rivals in the 1980s and 1990s. In 1994 sales peaked at $674 million.

  Unoccupied market territory can present major opportunities for companies, but the challenge lies in identifying which gaps are profitable and which are traps. During the 1990s, many companies became excited about the potential of the green market, across a whole range of goods. But this market has failed to materialize in any profitable way. This marks one of the potential pitfalls in identifying market gaps based on market research: sometimes consumers have strong attitudes or opinions on trends or issues—such as ecology—that they are disinclined to consider when purchasing products, especially if they affect cost. Many market gaps, it seems, are tempting, but illusory.

Snapple’s positioning in the crowded US beverage marketplace was the key to its success. By focusing on a niche healthy product and marketing itself as a quirky company, Snapple was able to wrestle a large market share (indicated here by circle size) from its rivals.

SNAPPLE

A contraction of the words snappy and apple, Snapple was launched in 1978 by Unadulterated Food Products Inc. The company was founded in 1972 by Arnold Greenberg, Leonard Marsh, and Hyman Golden in New York, US.

  Such was the popularity of Snapple that the company has been subject to numerous buyouts. Unadulterated was purchased by Quaker Oats for $1.7 billion in 1994 but, following differences in strategic vision that led to falling sales, was sold to Triarc in 1997 for $300 million. Triarc then sold the Snapple brand to Cadbury Schweppes for $1.45 billion in September 2000, with a further deal in May 2008 seeing Snapple become part of what is now the Dr Pepper Snapple Group.

  Marketed as Made From the Best Stuff on Earth, Snapple’s unusual blends of ready-to-drink teas, juice drinks, and waters are sold in more than 80 countries around the world.

See also: Stand out in the market • Gaining an edge • Reinventing and adapting • Porter’s generic strategies • Good and bad strategy • The value chain • Marketing mix

IN CONTEXT

FOCUS

Analytical tools

KEY DATES

1950s Harvard academics George Smith and C. Roland Christensen develop tools to analyze companies and competition.

1960s US management consultant Albert Humphrey leads a research project that yields SOFT analysis, the forerunner to his later SWOT analysis.

1982 US professor Heinz Weihrich develops the TOWS matrix which uses the threats to a company as the starting point for formulating strategy.

2006 Japanese academics Shinno, Yoshioka, Marpaung, and Hachiga develop computer software that combines SWOT analysis with AHP (Analytic Hierarchy Process).

Whether a company is long established or in its start-up phase, a key strategic issue is its competitive advantage—the factor that gives it an edge over its competitors. The only way to establish, understand, and protect competitive advantage is to study the competition. Who is competing with the company for its customers’ time and money? Do they sell competitive products or potential substitutes? What are their strengths and weaknesses? How are they perceived in the market?

For Ray Kroc, the US entrepreneur behind the success of fast-food chain McDonalds, this reportedly involved inspecting competitors’ trash. But there is a range of more conventional tools to help companies to understand themselves, their markets, and their competition.

SWOT analysis

The most popular such tool is SWOT analysis. Created by US management consultant Albert Humphrey in 1966, it is used to identify internal strengths (S) and weaknesses (W), and to analyze external opportunities (O) and threats (T). Internal factors that can be considered as either strengths or weaknesses include: the experience and expertise of management; the skill of a work force; product quality; the company’s financial health; and the strength of its brand. External factors that might be opportunities or threats include market growth; new technologies; barriers to