To build a business you need a good idea that you can explore and develop. Unfortunately, coming up with good business ideas is not easy. That is why quite often firms hire Management Consultants to help them with this sort of project. I will show you briefly different methods that you can use to come up with business ideas for your customers. We will divide the methods into 2 groups: building on existing business and generating new independent businesses.
In this post, I will show you shortly main methods. For more details check my course Business Idea Generation for Management Consultants.
Let’s start by discussing the methods you can use to generate business ideas using the starting point existing businesses of your customer.
Building on Existing Business.
Customers you can afford hiring Management Consultants, usually want to expand their empire by adding new, yet connect to the original business new entities. Let’s see where you can find good ideas for this sort of strategy.
- Go up or down the Value Chain. The easiest way is to observe the value chain in which your firm is located and invest in things that are linked to you. In other words, you either kill your suppliers or you kill your customers. Let’s have a look at some examples: Apple has built its own retail chains and is trying to switch to direct sales (subscription-based). Amazon has drastically invested in the transportation & logistics that was previously done by UPS or FedEx. Going up or down makes a lot of sense, especially if the supplier’s position is very strong or in other parts of the value chain you can enjoy higher margins
- Vertical Consolidation via M&As. The next logical move is to do M&A within the value chain to kill potential competitors and have a vertically integrated firm. Again a very popular move among the biggest firms. It helps you protect new potential players. However, it requires you to have access to cheap capital and to be great at consolidating firms that you have bought.
- Build add-on business. This technique requires you to spot an opportunity that uses your current assets, capabilities, or customer base to create a new business. Again we will use the example of Amazon. Once they have built the logistics system for their own needs they have discovered that they can offer this sort of service to other players as well. In this way, Fulfillment by Amazon was born. It was not within their current value chain. In a similar manner, they have approached books. They have mastered the distribution of physical books, but once they had a customer base it made a lot of sense to build a digital distribution of books in this way Kindle was born. Afterward, they also bought Audible (audiobooks) and introduced publishing services for authors. A similar strategy was used by WordPress and Shopify. Both have created on the back of their main products (online webpage, stores) marketplaces for developers through which they can sell plugins. WordPress & Shopify enjoy a healthy margin on those sales.
- Build entirely new businesses. In some cases, you have to or you want to build entirely new businesses that have little to do with your current business model. Sometimes you do it because there is not sufficient capacity of something that you need or your supplier, the customer just sucks. A great example of applying this technique is Tesla. They had to build their own Battery factory, supercharger network to make sure that the business grows. By accident, a new business was built. Amazon was generating so much traffic that at some point decide to invest in its own servers. This became Amazon Web Service – the most profitable business in the Amazon Empire.
- Enabling Investments. The logical expansion of the previous method is to remove all potential obstacles that may occur on the distribution, supply, or demand side. Intel for many years would invest in technological firms as VC funds to boost the demand for their product. They knew that technological startups directly or indirectly will require their chips. Also, Tesla is widely using this method. First of all, they convinced governments and regulators to support electric car usage. This made electric cars not that expensive in comparison with traditional cars. Thanks to subsidies they became, to some extent within the reach of a bigger group of potential customers. They were still pretty pricy, yet not exorbitant. To help with the cost of electricity they have additionally invested in solar production capacity. They have taken over Solar City that is installing solar panels for individual consumers. They have also created a big battery for the home, the so-called Powerwall. On top of that, they are creating an integrated roof that can produce electricity from solar energy. This is the so-called Solar Roof. All those actions are attempts to make the product much cheaper to use. Thanks to decreasing costs of electricity, a larger pool of customers would be interested in adopting electric cars. They took also care of another big obstacle – the insurance. They have decided to provide car insurance for Tesla cars. Since they had a lot of data on how people are driving, they could quite easily provide the proper type of insurance to a specific driver.
- Expand the brand into new categories. Many successful firms have been great at simply expanding their brand into new categories. You have plenty of interesting examples of consumer good products. Have a look at IKEA that was a furniture store. Now it sells everything around the house. Nike, Adidas, Puma were all shoe brands (mainly for running). They have expanded their brand not only into other categories of shoes but also clothes and perfumes.
- Disrupt Yourself. If you have a nice cash-generating business you are unfortunately running the risk of being disrupted by some newcomer operating in a different business model. We know the unfortunate case of Blockbuster that did not want to disrupt their business model with late fees, so they were brutally murdered by Netflix. Master of this method will disrupt themselves ahead of time before somebody disrupts them. A great example of the successful application of this strategy was the purchase of WhatsApp by Facebook and switching the WhatsApp to a free product and after that building their own independent messenger. This was done to protect themselves from WeChat.
- Intrapreneurship, in other words creating startup projects within a big corporation, is also a great source of new business ideas. The master of this method is most likely Google that has created plenty of new businesses like Gmail, Google Maps, AdWords, and not that successful Google Glasses. Also, Apple successfully have used this method (iPhone, iPod, iTunes, iCloud)
- Use existing assets in a new way. One of the ways to generate new businesses is to put to use existing assets. This is usually a pretty fast way to generate additional cash and maybe create a new business. Let’s have a look at some examples. Old shopping malls, which were previously used mainly as a retail space, are transformed into offices, museums, and apartments. Old hangers, that used to provide shelter to planes, become amusement parks and venues for events. Merchandising teams, which used to work for just one brand, now are providing services for many brands in the very same location. You will either try to put to new use physical assets or less tangible assets like customer base, data, and brands.
- Experiment with different sales channels & revenue streams. By changing sales channels or the revenue formula you can reach new customers, or create different business models. Sales channels may require sometimes a change in the product and your policies. When it comes to sales channels the best examples of applications are Tesla and Apple that have bet on their own retail and direct-to-consumer approach despite the fact that the standard approach in the industry was to use middlemen. We have seen also a huge revolution in the way software is being sold. The dominating method was to sell software via a direct sales force. Once the software became more popular, especially with the birth of SaaS solutions, new ways of selling the software have been developed. Currently, a lot of software firms offer a freemium version. This means that they offer some part of the product for free and hope that at some point you will start using their paid version. The best examples of adopting that strategy are Spotify, Gmail, Dropbox, and Slack. Lots of firms also use content marketing to generate traffic and convert it into sales. Obviously, a lot of money is spent on digital marketing as well.
- Turn failure into success. A lot of businesses are born from failure. The key is to recycle the elements that worked or can be used for another project and not penalized failure. Amazon’s failure on the phone market gave a rise to Amazon Echo (Alexa). Slack was born out of a failed attempt to build an online game. Twitch was the only thing that kind of worked in a startup trying to create an online reality TV show. As you can see the key is to spot the gold in the mud.
- Repurpose a product / Find a new application to a product. You can also try to repurpose the product that you have for a new customer group. One of the most famous examples are diapers for babies that were later on adopted by elderly people. In Japan, this segment is bigger than the segment for diapers for babies. Play-Doh – pliable modeling clay that you may have played with was originally used as a wallpaper removal.
Generate new independent businesses by improving existing things.
Now let’s discuss the second group of methods you can use to come up with an interesting business idea. We will not use here existing business as the backbone for the new business, but still, we will avoid building in a vacuum. We will try to improve already existing business or solve existing problems better.
- Do what you have done but on your own. One of the easiest ways to start a business is to do what you have done so far, but become independent. In other words, do it on your own. This principle has been applied numerous times in many industries. Let’s have a look at some examples. In consulting, this method is very popular. For example Bain & Company – was created by ex BCG employees; Alvarez & Marsal on the other hand was created by ex PwC (Coopers & Lybrand at that time) and ex-Citibank employees. The luxury product industry is also full of similar examples. For example, Yves Saint Laurent was working for Dior before starting his own brand. Another famous fashion designer, Tom Ford previously worked for Yves Saint Laurent, and Gucci
- Solve your own problem. If you are solving your own problem, you avoid a lot of troubles that a typical startup has to go through. So, you don’t have to guess about the problem. You know it because you have been experiencing it yourself. You don’t have to research the customers, or the market, because you’re one of them! In other words, you have an in-depth knowledge of markets and consumers and at least some of the competitors. You may also know something about how the solutions to your problems are sold. A great example of a firm applying this concept is Codecademy. It is a platform that helps you learn how to code. The founders of the company, as students saw the potential in the US market for programming schools. One of the founders was terrible at coding, so, they have decided to solve his own problem. This proved to be a gold mine.
- Carve out existing business. Carving out a piece from an existing business is an interesting option to build a new business. Usually, you already have a customer base and ways to deliver value. So, in a sense, business creation is much easier. A great example is what happened to Integrated Airlines. Thanks to gradual carving out they were divided into a lot of smaller, independent business units. Instead of Integrated Airlines, now we have pure airlines that are responsible for buying and organizing planes. We have also aircraft maintenance services, which take care of the planes and make sure that they are suitable for flying. On top of that, we have firms handling the luggage, firms responsible for managing airports, and finally, firms responsible for leasing the planes
- Cloning 1 to 1. One of the most interesting methods is simply to clone a successful business from the original market to a new market. In this technique, you make almost an exact copy of the original business. Let’s have a look at some examples of a successful cloning. Amazon that was successfully copied in China by Alibaba. eBay has been cloned in Poland by Allegro. Allegro has been much more successful in Poland than eBay in the USA, mainly due to the long absence of Amazon. Famous Fashion player Inditex (which owns the brand Zara) has been also copied. Their clone for Eastern Europe is called LPP. LPP, similarly to Inditex, runs a lot of fashion brands in many countries.
- Idea Cloning. Some business ideas are coming from an attempt to apply the famous concept to a new industry. This has produced a lot of interesting businesses and can be used in a wide range of industries. This idea cloning can be described using the following formula: New Concept is a Famous concept for New Industry/Market. Let’s go through a few examples: SlideShare is a YouTube for Presentations, Lime is Uber for scooters, Udemy is Amazon for online courses. There are 4 main ways to clone an idea using this framework. You can narrow down the target group, change the product to another one, change pricing formula, or change operations.
- Blue Ocean. Blue Ocean is a great framework that can be used to generate business ideas by observing existing industries and looking for an unsatisfied customer, non-users. In this method instead of competing in the current market segmentation, you look for a niche / market where there is no competition or very small competition. Famous Californian and Australians wines were developed using this method. Wine producers were not trying to grab share from the wine lovers that crave for French wine, but they rather concentrated on people who did not drink wine at all – the non-users. Also, low-cost players (Aldi, Costco, Southwest Airlines, McFit, etc.) to some extent are examples of applying this framework.
- 10 x current solution using the first principals. One of the ways in which you can come up with new business ideas is to use the 10x framework where you resort to so-called first principals. This is a favorite method of Elon Musk. In this method, you identify the business drivers that help you achieve the goal (of 10x), estimate their impact on your goal, and in this way you identify what should be done. In this method, nothing is off the table. In other words in this method, you question all the assumptions of existing business to find out what should be done to achieve 10 x cheaper, 10 x better or 10 x faster solution. Elon Musk applied this method to identify what should be done in the case of Tesla, Space X, and the Boring Company.
- From Free to Paid. Inspiration for the business you can also find in free solutions already existing on the market. They generate sufficient demand for a paid solution as well. Free solutions help create the initial demand. At some point, the customers start looking for paid solutions with higher quality. Before Airbnb was born we actually had a free version of the very same service called couch-surfing. In order to use it you would have to offer free accommodation as well. In a sense, you were exchanging accommodation in one place for accommodation in another city or country. Airbnb helped professionalize the market and raised drastically the standards. In a similar manner, the illegal download of music created the demand for Netflix, Spotify, Amazon Prime.
- Ride a trend. Trends can change something small into an unstoppable beast. That’s why, you can gain a lot, by spotting trends early on and creating a business around the trend. In this method you have to first spot a trend, then identify which industries and customers it will affect. On the basis of that, you pick a business that will be fueled by the new or rising trend. You should start building the business before the trend becomes apparent to everybody.
- Disrupt others. Many industries are ready to be disrupted. This was a huge source of business ideas in the last 15 years. There are still many industries in which this method can be used. Let’s have a look at some examples. Uber has disrupted the cab / taxi market. Telemedicine is disrupting traditional clinics. YouTube, Netflix, Amazon Prime are slowly but surely killing traditional cable TV stations. Apple with iTunes and later Spotify have disrupted the music industries. Disruption will be successful if one of the following conditions is met: there are expensive workers or big share of labor costs, there are too many small players or 1-2 big players that provide low customer experience or high prices, new technology is changing the economics of the industry, there is lack of logic in how currently business operates in the industry, there is a lot of friction and customer experience is not good.
That’s in short. For more details check my course Business Idea Generation for Management Consultants.