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What constitute good businesses? (8Jan2015)

(Written by Conrad Ko, Edited by Margaret Jarvis)

In picking businesses to run, I believe there are three important elements

• It doesn’t look good
• Small sum per transaction and constant demand
• Weak competition

Doesn’t look good

 

If the industry does not appeal to college graduates and glory hunters, it’s a good sign. There are a lot of businesses that people operate based purely on emotion, such as salons, boutique dessert shops, investment banking, finance shops… Tons of these shops are operated by irrational people who know little about business, and are trying to look good by operating these businesses. This is one of the worst things that can happen to an entrepreneur – an irrational competitor. Therefore, if people look down on an industry, it’s usually a good business to be in, because it is operated by people who are doing it for one reason and one reason only, profits.

Good Examples:

  • Clearners
  • Plumbers
  • Lock Smith
  • Butchers
  • Farmers
  • Waste Managers

Small sum per transaction and constantly in demand

title

Small sums trump big sums. When you are a banker, one deal can cost you the whole year’s bonus. If you are operating a brokerage office, losing a few big clients can cost you the business itself. Your reliance on the customers is huge, which means your client can negotiate with you from a vantage point of strength. The clients are your boss, since they pay you, they own you. You cannot say “no” to them if you are a big bank. How about Coca Cola going out of business? Yes, but most certainly not due to losing one or two big clients. The same strategy can be seen from Mao Ze Dong’s thought focuses on “surrounding the cities from the countryside”. Having masses of clients is more reliable than one big client. Period. On top of that, good businesses make products that are cheap and affordable, so even on rainy days, your clients can afford your products, maybe at a discount but still with a healthy margin. And B to C always wins over B to B.

Good Examples:

  • Fast food chains
  • FMCG
  • Telecommunications

Weak Competition and low barriers of entry

muscles_vs_weak

Although we know there are lot of good businesses in the world, we have to find good businesses that can be operated with few or no barriers of entry, so that we can easily convert our model or try new directions with changing demand. Good businesses always try new things and more profitable work processes. If it’s a highly regulated industry, chances are there is not much to change and you cannot have an edge over your competitor. Find markets that are dominated by small players, in which case you can merge and expand your good business with ease.

Perfect Business

  • Printing Shops
  • Glasses
  • Main Agencies

 

Conrad Ko

Conrad Ko

Conrad Ko is an exam consultant, grassroot entrepreneur and growth hacker.

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