How To Start Your Own Star Business In Seven Steps

As described earlier, a star business is one which enjoys niche market leadership (market share greater than 50%) in a fast growing niche (growing at least 10% per annum for the next many years.)

This blog post is a summary of Chapter 8 from The Star Principle by Richard Koch. You really must buy the book to begin understanding the Star Principle. But if you need to start building your own business in a hurry, this chapter can help you get started.

Creating a new business is not like creating the universe with a big bang (or constructing a building or launching a spaceship.)In other words, a star business usually evolves and changes to find it's leadership position and niche. But to get started with finding your initial positioning, the following seven steps can help:

1. Take an existing market and segment it into two: For example, let's take the highly competitive field of search which is dominated by Google. A would-be competitor (say Cuil.com) can either go head-to-head against Google (the "mine is bigger than yours" trap.) Or they can break up the search market into two conceptually. If I were doing the start-up positioning for Cuil, I would conceptually divide the search market into Non-Private Search (where your search data is recorded - the kind that Google specializes in) or Private Search (where your search data is not recorded.) When you cut up a market into two, it is okay if your niche is much smaller than the main market. What you're trying to do is to seek a dominant position of a niche.

2. Estimate if your market niche is going to grow at faster than 10%: If not, go back to step 1 and segment again. For example, you can segment the search market into "Business Search" and "Non-Business Search." Or "Fun Search" and "Not-Fun Search." What you are seeing is whether you can find a gap in the market that is likely to grow faster than 10% per annum.

3. Identify your target customers: Your target customers should be different in terms of profile compared to the main market. For example, in the earch example, if Cuil chooses the positioning statement of "Private Search", the target customers (users in this case) can be people who are conspiracy theorists or people who are distrustful of government (who can one day ask Google to submit all the user data it has been collecting.) Alternatively, the target customers can be the same as the main market but will still towards the niche because you're serving their needs in a different way. Continuing the search example, people may use Private Search when they want to keep certain searches private and they may use non-private search when they desire to get results that rely on page rank.

4. Define the benefits of the new niche: How will the new category niche (note - we're still thinking in terms of the niche category and not yet about the product directly) help your target customers? How are the benefits offered different and better from the benefits offered by the main market? For example, continuing the search example, the major benefit would be assured privacy by not recording user actions and IP addresses.

5. Ensure profitable variation: Figure out why your niche will be more profitable than the main market? If your niche is potentially not more profitable than the main market you go back to step 1 and do your segmentation again. With the search example, the Private Search category can potentially charge users for using the product. Or perhaps they can sell it to enterprises. Or perhaps advertisers will pay a premium to be associated with a 'non-evil' brand.

6. Name the niche you plan to lead: We've already done this above in the search example. But it will probably need to be refined. Doing this will help you identify who your niche competitors are - the firms that you must really worry about. The best way to be a leader of a niche is to invent and name the niche. Then if competitors enter the niche or the main market leader introduces a competitive offering, they look like followers. Massive niche leadership = Massive profitability. Ensure that your business formula (operations, marketing, pricing, business model, technology, patents) is difficult to copy. This will help you hang-on to your niche leadership for the long run. Your secret sauce will be the reasons behind your profits and growth. Keep these secret and do not boast about them. Aim to increase the depth of your offering while staying focused on your target niche. Don't aim to broaden your offering to adjacent markets however tempting it may be. As Jack Trout would say, "Differentiate or die."

7. Name the product / service: Ideally, the name of the product should appeal to your target market, it should be short, memorable, distinct and easy to associate with your niche. The interesting and important thing is to name the brand after you have completed the preceding six steps. Most entrepreneurs begin by naming their proposed venture first and then think about the other issues of positioning etc. This is really the wrong way to go about starting your venture.

Once you've done this, you're on your way to starting a star venture. Now all you've got to do is get good people on board, raise as much capital as necessary, think about potential risks (especially from substitute products) and have fun while your business takes off!