A Wall Street Journal article once listed five things every business needs to be successful. The first three on their list, access to capital, business acumen, and energy are absolute necessities and were discussed in a previous post. The remaining two things, industry knowledge, and a great business idea, are often given a lot of attention by founders, but don’t apply to many businesses and can sometimes even be associated with negatives aspects. Let’s explore the two things that many founders think are important, but often are not.
Industry Knowledge
Not every business needs an owner with industry knowledge, Business owners can hire expert technicians. The time and energy expended on starting and operating a small business leave little time for the actual technical side of the business.
Industry knowledge was number four on a list of business needs for a reason. Industry knowledge, while important for some businesses such as freelancers, is less important than access to capital, business acumen, and energy. During many lectures and workshops, when I discuss the role of industry knowledge, I always have someone challenge me. They say something like, “Wait a minute, are you saying I could have a business in an industry that I don’t really have much knowledge of?” To that, I answer: “Absolutely yes”. In fact, in some businesses, having industry knowledge can be a liability.”
Industry knowledge can be an impediment to success for several reasons. When things in business start to go wrong, many people tend to focus on what they can do best, which often means taking off their business operations hat and rolling up their sleeves to become a technician again. While it is more comfortable to retreat to what you know and what you do well, it is counterproductive when it comes to running an employee-based business. This is because:
“A successful business owner needs to work ON their business not IN it.”
Let that sink in for a minute.
Industry knowledge also shapes our worldview. An accountant whose practice is struggling will too often look to the numbers to find the cause. A restaurant owner who is losing business to the competition will look at the menu as the reason. My dad always said that “If you’re a hammer, everything looks like a nail.” What he meant by that statement was that we often look at things through the lens of our job and experiences.
If you want to purchase a franchise, many franchisors will immediately disqualify you if you have any industry knowledge. The reason is that franchises give you a system. They don’t want you to use your industry knowledge to try to reinvent any part of the business model since franchises are all about consistency across the brand.
I own a Wendy’s restaurant in Ohio. Prior to March 2020, offering breakfast was not an option if we wanted it. Wendy’s International does not want its franchisees to have any culinary knowledge that may lead them to feel the urge to alter the menu items and recipes they provide. They tell franchisees exactly what items to offer, how to prepare them, and even when and how to run promotions.
One of the first questions I ask clients that want to open a restaurant is if they are a good cook and if they enjoy cooking. If they respond yes, I tell them that opening a restaurant is not going to make them happy. I share that once they open a restaurant, they will have to hire a cook to prepare their menu while they deal with customers, staffing issues, food vendors, the landlord, the health department, and a host of others. There will be little to no time left to do what they are good at or love to do. This is equally true with about every service-related business.
Moreover, when you are a good technician, and you hire someone to do a job that you are an expert at, you are rarely happy with their performance since they never seem to live up to your high standards, leaving you frustrated with the caliber of applicants.
Not every business needs a leader with industry knowledge. In fact, industry knowledge can often have a greater negative effect on your success.
Great Business Idea
Not every business needs agreat idea to be a success. The need of a great idea is overrated. Having a great idea means people don’t know the product or service even exists.
Having a great business is dead last on the list of business needs for a reason. Having a great and novel business idea is often touted as the path to riches, however, most new businesses are simply based on an existing business model with little or no differentiation from similar businesses in their industry. While finding a niche is always desirable, most businesses simply rework existing features in unique ways and do not qualify as a great business idea. When it comes to having a great business idea, few founders realize the hurdles that lay before them to get their idea to market.
New and novel business ideas require that you first educate consumers about your new product or service. If you have a great idea, it will often take years if not decades to gain the traction necessary to make the business a financial success.
If I had to pick the single most common reason that a majority of my clients seek my advice, it might very well be that they have an idea for a revolutionary new product they think will become a major hit with consumers. They see how some inventors such as Scott Seamans, George Boedecker, and Lyndon Hanson, inventors of Crocs, or how Sara Blakely, inventor of Spanks, struck it rich and built an entire business around a single product. Unfortunately, these kinds of business successes are extremely rare.
Most new product or service ideas take a long time to mature to the point of reaching mass adoption if they ever get there at all. Until the point of mass adoption, founders or the business needs a source of revenue or access to capital to keep the idea alive. When a business is based on a single great idea and there are no other sources of income, many will simply run out of money long before they become financially viable. Sure, some businesses may get money from investors but as time goes on, founders will often have to offer successive funding rounds, giving up more and more equity until they are completely marginalized.
During my lectures and workshops where I talk about the value of having a great idea, I often hold up a ballpoint pen to drive this point home. I begin by asking them, “What did people use before the invention of the ballpoint pen?” Eventually, someone brings up the fountain pen. I then ask, “Was the invention of the ballpoint pen a major improvement over the fountain pen?” Of course, they all agree. Being a major improvement over the fountain pen should fast track adoption, right? I then ask them, “How long do you think it took from the time the ballpoint pen was invented to the time ballpoint pen sales reached mass appeal and exceeded fountain pen sales?” After many guesses, I give them a quick history lesson on the ballpoint pen.
The inventor of the ballpoint pen was a guy named John J. Loud who received a patent for his invention in 1888. I share that although many future investors, such as László Bíró in 1935, improved the design, ballpoint pens remained a mere novelty because they were too expensive to produce, about $200 in today’s dollars until Bic introduced the first affordable ballpoint pen in the 1960s. It took over 70 years from the time the product was invented to the point of mass adoption for something as simple as a ballpoint pen.
My first foray as a business owner came when I became an Invisible Fencing dealer in the late 1980s. For my wife and me, the business was always a side hustle while I maintained a full-time job at a computer company. At some point, we hoped to make it our full-time gig, but we ran out of time for the business to reach mass appeal.
The product used a rather simple single-frequency AM transmitter, a wire antenna that encircled the entire property, and a receiver collar worn by the dog. The inventor was a traveling salesman by the name of Richard Peck who received a patent for his invention in 1973. Turned out that Peck was a better inventor and salesman than a business owner and sold his idea to a bunch of entrepreneurs in the early 1980s. The new owners created a dealership network. By the time I got involved in the late 1980s, they were generating sales of about $4.5 million per year.
While Invisible Fencing was a revolutionary product that was both far cheaper and maintenance-free compared to alternatives such as chain-link and stockade fencing, we struggled to create enough brand awareness for the product during our five years as a dealer to make it financially viable for us to go all-in, mainly because our customer acquisition costs were too high. It was not until the patents expired years later and upstart copycat competitors entered the market and invested millions of dollars in marketing that the concept reached mass appeal in the 1990s.
So, when someone says, “Listen, Steve, I got this great idea for a business,” I often reply, “How much money have you saved?” and “Is it enough to fund your lifestyle until you get traction for your idea?” It takes a long time for any new idea to reach the tipping point. People see businesses like Facebook but many fail to realize it took 10 years for Facebook to become a common household name and financially viable. It takes a person with a high degree of perseverance to bring a new product from idea to profitability. It almost always requires the founder to go all-in and assume a life of poverty in the hope that their idea will catch on in the market before they go completely broke or die. Although as a species we would be nowhere without these hardy souls willing to bring new ideas to market, few will see their ideas rewarded.
Not every business needs a great business idea to be successful. Most successful businesses clone an already successful business model but operate in a niche market because great business ideas are often too novel and take too long to gain traction.
In your industry, do business needs require the founder to have the industry knowledge and a great business to be successful?
