What is the importance of identifying profitable business opportunities?

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To be successful and remain in business, both profitability and growth are important and necessary for a company to survive and remain attractive to investors and analysts. Profitability is, of course, critical to a company's existence, but growth is crucial to long-term survival.

• When evaluating a company, what should you weigh heavier: profitability or growth?
• A growing company may not be earning any profits yet, but may nevertheless provide a great investment opportunity.
• Other times, a lack of profitability can be a huge red flag that something is wrong with the firm.

A company's net profit is the revenue after all the expenses related to the manufacture, production, and selling of products are deducted. Profit is "money in the bank." It goes directly to the owners of a company or shareholders, or it is reinvested in the company. Profit, for any company, is the primary goal, and with a company that does not initially have investors or financing, profit may be the corporation’s only capital.

Without sufficient capital or the financial resources used to sustain and run a company, business failure is imminent. No business can survive for a significant amount of time without making a profit, though measuring a company's profitability, both current and future, is critical in evaluating the company.

Although a company can use financing to sustain itself financially for a time, it is ultimately a liability, not an asset.

An income statement shows not only a company’s profitability but also its costs and expenses during a specific period, usually over the course of a year. To compute profitability, the income statement is essential to create a profitability ratio. A number of different profitability ratios can be calculated from which to analyze a company's financial condition.

Determining and focusing on profitability at the beginning, or start-up, of a company, is essential. On the other hand, growth of market and sales is the means to achieving that initial profitability. Identifying growth opportunities should become the next important item on any company’s goal list after a company moves beyond the start-up phase.

Growth for a business is essentially an expansion, making the company bigger, increasing its market, and ultimately making it more profitable. Measuring growth is possible by looking at some pertinent statistics, such as overall sales, the number of staff, market share, and turnover.

Though the present profitability of a company may be good, growth opportunities should always be explored since they offer opportunities for greater overall profitability and keeps analysts and potential, or current, investors interested in the company.

Knowing the present condition of any company is essential to creating a successful growth strategy. If a company has too many weak areas, such as performance, sales or marketability, a premature attempt to grow can ultimately collapse the business. A first step is the consolidation of current markets, essentially meaning the lockdown of the current state of a company before attempting to alter it with growth.

Profitability and growth go hand-in-hand when it comes to success in business. Profit is key to basic financial survival as a corporate entity, while growth is key to profit and long-term success. Investors should weigh each factor as it relates to a particular company.

Although many aspiring entrepreneurs start with an idea for a new business, the question remains: Is the idea a business opportunity? In other words, does it fulfill a market need, solve a customer pain point, or improve an existing product?

Perhaps you want to assess whether your business idea is viable, or you like the concept of entrepreneurship and are searching for the right opportunity to jump in. Either way, you need to familiarize yourself with different types of business opportunities and learn to identify them.

Lessons for recognizing and acting on business and market opportunities can be gleaned from Harvard Business School Professor Clayton Christensen, who teaches the online course Disruptive Strategy.

Here are three types of business opportunities to search for, tips to identify them, and how to maintain a disruptive mindset for entrepreneurial success.

Types of Business Opportunities to Search For

1. Jobs to Be Done

At its core, entrepreneurship is the process of using available resources to fill unmet market needs. One way to identify those needs is through Christensen’s jobs to be done theory, which states that people don’t buy a product; they “hire” it to do a job.

One example Christensen outlines in Disruptive Strategy is McDonald’s milkshakes. McDonald’s executives were surprised to find milkshake sales were highest in the morning. By conducting research, they discovered customers were hiring milkshakes to do the job of keeping them occupied and full during their morning commutes.

“It allows you to reach out and grab ahold of the causal mechanism that causes customers to buy your product or service,” Christensen says in Disruptive Strategy. “If we understand the job the customer is trying to do, and then develop a product that nails this job perfectly, the probability that your innovation will be successful is improved in dramatic ways.”

This theory also expands the scope of the competitive landscape and helps you conceptualize how many choices customers have when they want to get a specific job done.

Returning to the milkshake example, customers could have hired quicker snacks like bananas or granola bars to do the same job of keeping them full and occupied during their commutes, even though they wouldn’t be considered direct competitors. In this case, the milkshake beat out competitors because its thick consistency allowed it to be consumed slowly over commutes.

2. Low-End Market Opportunities

The key to identifying market gaps is understanding the theory of disruptive innovation. This theory, also coined by Christensen, explains how companies with fewer resources can enter existing markets and disrupt incumbent businesses that own segments of them. There are two types of disruptive innovation: low-end disruption and new-market disruption.

Low-end disruption occurs when a new market entrant claims the lowest segment with a low-profit business model. Entering at the bottom of the market ensures the incumbent company isn’t financially motivated to fight back; after all, it owns the highest-profit segments.

Over time, the new entrant moves into the next highest market segment. Once again, the incumbent company is financially motivated to pull out of that segment and move into higher-profit ones. This continues until the new entrant has completely driven the incumbent company out of the market.

This method is more effective than trying to directly compete with the incumbent company for top market segments because it’s likely to defend its position.

3. New Market Opportunities

The other type of disruptive innovation is new-market disruption. It provides ample opportunity for entrepreneurial success, so it’s important to know how to identify it.

New-market disruption occurs when a company creates a new segment in an existing market. This new segment can often cater to people overserved by existing offerings, meaning they aren’t willing to pay for the latest features of the incumbent company’s products.

If you identify such an opportunity, make a product that’s less expensive and of “good enough” quality to create and capture a new market segment.

One example of new-market disruption is the transistor radio, which entered the personal entertainment market with the first model by Texas Instruments in 1954. The portable radio catered to young, non-wealthy people who were overserved by other radio offerings at the time, which were large, expensive, and designed to sit in homes like a piece of furniture. By creating a cheap, “good enough” option for listening to music, Texas Instruments paved the way for higher-quality options, such as the Sony Walkman and Apple iPod, which eventually rendered in-home radio consoles obsolete.

By identifying overserved people in any market, you can find and act on opportunities.

Related: Innovation in a Disrupted World: How to Discover New and Emerging Jobs to Be Done

3 Ways to Identify Business Opportunities

With a foundational understanding of the types of opportunities that exist, you can dive into identifying them. Here are three ways you can do so and examples to learn from.

1. Identify Your Pain Points

When searching for potential market needs, start with yourself. In your everyday life, what processes or tasks bother you? What’s the job to be done that you haven’t quite found the perfect product to fulfill?

Many successful entrepreneurial ventures began with a personal problem in the founder’s life. For instance, after Neil Blumenthal lost his prescription glasses and couldn’t afford to buy new ones, he created an eyewear company that provides inexpensive, stylish glasses: Warby Parker.

Another example is the dating app Bumble, which Whitney Wolfe Herd created after leaving an abusive relationship. The app puts women first, requiring them to make the first move in heterosexual pairings, and advocates for gender equality and sexual harassment prevention.

Starting with personal questions can help determine if others have the same pain point and if opportunities are low-end or new-market disruptions.

Related: 4 Entrepreneur Success Stories to Learn From

2. Conduct Market Research

Another way to prove whether a business idea is viable is by conducting market research. This includes using industry research to define the competitive landscape and determine your target audience, as well as interviewing or surveying people who fit your target demographics.

Observing and gathering feedback from real people enables you to consider their perspectives and gain a deeper understanding of their motivations, frustrations, fears, and desires. This can help you conceptualize whether your product addresses a job to be done and the size of the audience that could benefit from it.

Once an opportunity is identified, you can utilize design thinking to create an innovative product that fits the job to be done you uncovered through research.

3. Question Processes

You can also identify business opportunities by examining the processes and delivery methods of existing product or service offerings. Try to evaluate each process with an open mind and ask questions about how you could improve it, such as:

• Could this process be faster?
• Could this process be executed using a cheaper business model?
• Is there a more sustainable way to execute this process?
• Does this process exclude certain groups of people? If so, is there a way to make the process accessible to all?

You don’t have to reinvent the wheel to break into entrepreneurship—you just need to recognize the potential for innovation that already exists.

Leading with a Disruptive Lens

When searching for business and market opportunities, lead with a disruptive lens. Using Christensen’s jobs to be done theory, you can identify customer needs that aren’t being fulfilled, then assess them using his theory of disruptive innovation to determine if there’s a low-end or new-market entry point for your product.

Rather than directly challenge companies dominating market segments, you can identify people who are over- or underserved by existing offerings and compete on a disruptive level.

To deepen your knowledge and learn how to craft an end-to-end disruptive strategy, consider taking an online course. Disruptive Strategy uses a “learn, practice, apply” approach: Christensen teaches key concepts and frameworks, then introduces case studies and interviews featuring real business leaders. Christensen also encourages you to put those frameworks on “like a set of lenses” and apply what you’ve learned to your business.

Are you interested in crafting an innovative strategy for your business? Explore our six-week course Disruptive Strategy, one of our online entrepreneurship and innovation courses. If you aren't sure which is the right fit, download our free course flowchart to determine which best aligns with your goals.