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Chapter 3
Men Are Cheaper Than Guns


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Business Entry Strategy:
Study Your Industry

Many new entrepreneurs who have little familiarity with the industry they wish to enter ask, "How do I go about writing a business plan?"

Forget writing the business plan! First, focus upon learning as much as you can about the general industry you wish to enter. Second, plan your entry strategy. If you do a good job at these, writing a business plan should be easy.

By gaining experience in your potential industry, you can better decide if you'll really like and enjoy running a business in that industry. The Millionaire Mind by Thomas Stanley points out that the wealthiest of the wealthy are the most likely to say, "I'm financially successful because I love what I do."

It's difficult to succeed if you don't love what you do. And, it's impossible to know what you'll like, unless you have done it or have done something very similar.

Trade associations in your industry are one of the best sources of information. And, don't just narrowly focus upon a small subset of an industry. Study the industry from the basic creation of the product all the way through the use of the product by the end consumer. Study the entire distribution system that supplies end consumers.

In some cases, such as Dell Computer, entrepreneurs have been successful in bypassing the entire established distribution system and selling directly to the end customer. Direct marketing, personal sales, and the Internet may or may not be useful distribution and marketing methods for your business. But, never assume the established distribution system is irrelevant to your company's success.

No matter how good your product, you must have a marketing plan and a distribution system to make potential customers aware of your product and to give them access to it. Lacking this, a product-focused company will fail. And, breaking into the existing distribution system is sometimes difficult for new companies. Don't assume the distributors will line up for your product, even if it's great!

From a distributor's standpoint, one more new company offering a product isn't usually valuable. The costs of offering, ordering, and distributing the new product often exceed any profit to be gained from a limited number of added sales.

Distributors would often prefer to focus upon distributing only a handful of a vendor's most profitable products. It's the distributor's customer's desire for one-stop-shopping and convenience that motivates the distributor to carry a wide range of products. Further, companies with a much-in-demand product or brand name often leverage their position.

Working with distributors is relationship building. And, as with most relationships, you must take the bad in addition to the good. Distributors frequently must take the unprofitable along with the profitable.

If a distributor wants Company X's hot, hot, hot Product ABC, Company X will probably leverage that and get the distributor to also take Product EFG, which isn't so hot. A new entrepreneur comes along and realizes Product EFG isn't so great. He creates a better version of EFG called IJK.

Only the distributor doesn't care about Product IJK. He doesn't care about EFG either! He is distributing EFG only because without doing so he wouldn't have access to ABC. Only the entrepreneur's new start-up company doesn't have an ABC equivalent to force the distribution of IJK. The entrepreneur is SOL.

Back when I taught physics, I enjoyed explaining the dynamics of the power behind a tennis serve or a golf drive. How hard the ball is hit is a function of two things. Technically, we say the change of momentum of the ball is the product of the force applied to the ball times the length of time the force is applied to the ball.

This is why technique is so crucial to tennis and golf. While we can do little to double our physical strength, through improved technique, we might double our contact time on the ball, leading to a far more powerful return. This is why Steffi Graf can deliver a more powerful serve than a brute professional wrestler like The Rock.

Yet, what happens when equally-skilled tennis players meet? Consider Venus Williams' victory at Wimbledon. She overpowered her opponents. There was a noticeable difference in the speed and power of her serves and returns when compared to her opponents. You didn't need to be a tennis aficionado to see that!

So, while technique is crucial, power isn't to be neglected when your dealing with savvy competitors who have also mastered their technique. The entrepreneur might think he's not trying to outmuscle the bigger established competition, when in fact, he is.

The entrepreneur might not see the powerful forces at work behind-the-scenes determining the whos, whats, and whys of what consumers see in the marketplace. Obviously, to be successful, you either need to break into conventional distribution channels, or, like Dell, you need to create your own effective distribution. And, to understand the mechanics behind distribution, you need to study your entire industry.

Entrepreneurs who have failed to crack into an established distribution system frequently say that technology will smash the conventional distribution system in the industry and give the little entrepreneur a chance.

This is often said the way a 98-pound weakling comments upon how the muscular bully who just kicked sand in his face is going to be in real trouble once the weakling receives his Charles Atlas Body Building Course. Possibly, but I wouldn't count on it.

Film offers a good example. Creating a film distribution print to show at a theater is expensive, running, maybe, $2,000 depending upon quantity and discounts. And, big films are released at thousands of theaters. According to the Motion Picture Association of America (trade association), the average film released costs about $3 million in prints. That's a lot.

So, many independent production companies who haven't received conventional film distribution hope that when digital distribution of film comes into popular use, they'll have a better chance of getting distribution to theaters because of the declining cost of distribution. Possibly, but not likely.

According to the MPAA, while prints for the average release cost $3 million, the average release also spends $24 million in advertising. So, prints are only a small component of the cost of distributing and promoting a film. The distributor's effort to make the public aware of the film is the big cost. And, distributors aren't going to spend that much to promote the average independent film with little-known stars.

Lower costs of digital distribution will either add to the profits of the bigger distributors or else free up a bit more money for advertising. But, don't think film distributors are going to forego the usual and favorable contract terms with film exhibitionists to make room for the smaller films!

For example, distributors will still probably require a theater to play the film for at least four weeks. This maximizes the profitability of the films and is necessary to justify the huge marketing cost. And, that ties up a screen. And, there are only so many screens.

According to the MPAA again (Didn't I say these industry associations provide useful information?), in 2000, there were about 37,000 theater screens in the U.S. Dividing a 52-week year by four weeks per screening, we see that each screen can host thirteen films annually. Multiplied by 37,000 screens gives about 480,000 screen opportunities.

Notice that as you learn about an industry, you'll make some of your own estimates and calculations. There might well be a technical name for what you're calculating, but if you don't know it, just make one up that conveys the meaning. I choose "screen opportunities" to refer to the number of product placement slots available to films in theaters.

Given that a heavily-marketed film will easily go to 1,000 theaters, we see that, at most, about 480 films will get good distribution annually. Using the MPAA again, we notice the surprising statistic. Annually, since about 1950, about 300 to 500 films have been released each year. The number hasn't substantially increased in over 60 years!

The lesson is that there are often only so many distribution slots for product placement in an industry. Even if you have a great product, if you can't capture one of those slots, you're probably hurting. And, heavily-marketed products from established companies often capture those slots. Capturing distribution slots should be a key strategic goal of your business entry strategy.