Risk & reward. Thabani Zulu
I am hopeful of its growth potential and that the trends suggest that the returns will surely come, the business employs more than 15 people in permanent positions. That, on its own, is motivation enough to keep running it.
Competition
A critical factor that we often fail to consider when deciding on business ventures is the extent to which competition can dilute our earning potential and even sink us. We often decide to enter into a particular kind of business because we like it. In fact, in many cases we do it because we have seen it working well for our friends and people we know, and we believe that it will be a safe and tested market, therefore we cannot fail. We do this without realising that those people have created a supplier base in the market that will increase consumer choices and dilute demand across the suppliers, thus reducing the prices and market share to our detriment.
Although venturing into a competitive environment is risky, it does not mean that you should not do it. All it suggests is that you develop a thorough assessment of the terrain to establish the following:
1. The size and potential of the market for your commodities
Sometimes you may find that the demand for certain commodities is well in excess of the supply; in other words, more people need more of a commodity than is available. Often people end up importing these commodities because the local market cannot meet the demand, or they resort to alternative commodities. These are the business ventures that you want to explore seriously, as they give you immediate space in the market to make money.
The opposite can also be true. You often find an influx of suppliers where the demand is not really that great. Getting into such a business is like setting yourself up to fail.
I am not suggesting that businesses that enter into a highly contested market are doomed to fail. As has been mentioned, a huge base of suppliers increases consumer choices, which invariably dilutes the potential of your business. But having made that statement, I want to note that there are many factors at play here. Right at the beginning of the book, I presented a diagram of the dynamics surrounding your business. Striking a right balance among these will lead to success, sometimes in the midst of steep, very steep, competition. The challenge in business is how to strike that balance.
In looking at the size of the market, we should not forget that South Africa is a global player and is generally well accepted in neighbouring countries. This creates a huge opportunity for our products to enjoy a market in Namibia, Zimbabwe, Swaziland, Mozambique and many other states. We often limit ourselves unnecessarily when we assume that we can play only in our local economies and not spread our wings more widely.
When I started my business consulting company, I never imagined operating outside KwaZulu-Natal, South Africa. I never explored avenues outside this space. Intensifying my research and striking the right business partnerships opened my eyes to the opportunities that existed for the business in the Eastern Cape, Gauteng and even outside South Africa’s borders in countries such as Ghana and Namibia, where there is an even bigger demand for the services that the business has to offer.
2. The critical competitive criteria in the market
In light of serious and vibrant competition for the venture you are contemplating, you need to establish what the stimulus for the buying community is. In other words, you need to ascertain what the buyers respond to. Typically, buyers respond to the following:
Cost, Service Excellence and Quality
You will often hear people saying, “I like buying at Joe Soap because they are cheap,” or “I will never place an order with Tom Shank, because he takes a long time to deliver”. Some will say: “Even though his prices are steep, I prefer him because his quality is good; you don’t have to keep replacing his stuff.” This basically gives you an indication of how players get sifted out from the market space because of their inability to satisfy the requirements of the market. Conversely, it also speaks to you of what to be careful about as you venture because that would be what the market wants.
The reality, though, is that the market will naturally want to balance out these factors. You will hardly find a scenario where buyers want the cheapest, irrespective of quality or delivery, or where they will buy an item because of its quality regardless of its exorbitant price. They know when to put on the brakes in their purchasing decisions and evaluate the other factors to eventually buy the right stuff! I believe that Mercedes-Benz customers, for instance, are less focused on price as they place more emphasis on quality and service, but they know when the price is unreasonable and will settle for less.
Studies that are continuously conducted on market trends can give you ideas of how to play with competition. There also are numerous market research companies that can assist you in studying these trends and behaviours.
3. Your competitive edge
Once you have assessed the market and its dynamics, it is vital that you establish where in the market you would have a competitive advantage over the other players. This assessment is particularly important because it will inform you upfront when you cannot play in this field because the competition will simply break you apart. Your competitive edge could be any of the following:
• your relationships in the market;
• your financial strength;
• your skills and expertise;
• your technology;
• your pricing structure; or
• your service offering.
Barriers to entry
One of the considerations as you decide on your venture is how easy or difficult it is for the average person to enter that particular field. It could be to your advantage if it is easy to get into your line of business and make money, but it could also be a serious disadvantage, as it increases the chances for competition both in the present and in the future. The easier it is for everybody, the more people will want to play in that market and the stronger the competition will be. As you make your assessment, some of the barriers to entry that you have to consider are finance, approvals and skills.
1. Finance
Some industries require huge investments to start and could be significantly unattractive to potential investors because of the risk involved. Think about how much money it would require to start a mining company and how much time it would take before you made your first rand of return. Consider tree planting, and how much you would have to put into the ground before you could smell profits.
The company I referred to earlier that is taking a long time to yield returns is a document management company. In simple terms, we keep documents on behalf of clients. The price to keep a bunch of documents in a box for a month is as low as R1.90. The investment that has to be made, however, is enormous. We have to have a warehouse that satisfies the requirements of the National Archives Act, is attractive and safe for the customers to trust, is adequately racked for ease of access to documents, and is equipped with the right security measures against fire and theft. Clearly, keeping boxes at R1.90 means that it will take a long time for the infrastructure to start paying for itself, which is a serious disincentive for most people. That is why there are so few of these companies around.
2. Approvals
There are businesses that do not have to go through rigorous certification and approval processes before they can be established and run. It is simply a case of starting and flying. Others, on the other hand, require many cumbersome applications, inspections, motivations and approvals before they can operate. The barriers are many, and many people will not make it into that space. The following are examples of approvals and certifications that you would require to succeed in certain fields:
− In the construction industry, government tenders require you to have CIDB (Construction Industry Development Board) and NHBRC (National Home Builders Registration Council)