How big is the threat of new entrants?
If you're smart enough to spy a profitable business opportunity, you can bet competition isn't far behind. Some barriers to entry--patented technology, a storied brand--are more fortified than others, but eventually someone will find a way to do what you do faster, cheaper and maybe even better. If not a direct competitor, then a substitute technology might take a chunk out of your hide. (Think what digital film did to Kodak.) The trick: building a loyal following before that happens.
How much power do your suppliers have?
Convincing customers to buy your products is tough enough without suppliers breaking your back. Basic rule of thumb: The fewer the number of suppliers, the more sway they have. Take the steel industry, which relies on a handful of companies for its iron feedstock. If two of those big guys should get together--as BHP Billiton and Rio Tinto have been discussing--they would have significant pricing power, potentially crimping steel producers' margins. On the flipside, beware getting hooked on low-cost providers who don't keep an eye on quality. ("Lead-laced" Barbie, anyone?)
Does the business scale?
Bill Gates plowed piles of money into developing the first copy of Microsoft Office. The beauty: Each additional copy of that software program costs next to nothing to produce. That's called scale--and it's the difference between modest wealth and obscene riches. What models don't scale? Think service businesses, where the need for people grows along with revenues.
What price will your customers pay?
Get this answer wrong and you could leave bags of money on the table--or worse, send customers running into the arms of the competition. When Apple sliced the price of its iPhone by a third after only two months on the market, even loyal customers screamed, forcing chief Steve Jobs to apologize and offer a partial rebate. Consultants get paid handsomely to help companies arrive at the right price. For more affordable advice, check out The Six-Step Guide To Pricing Your Product. Wannabe consultants should read How To Price Your Consulting Services.
How committed are you to making this happen?
About a year ago, Chuck Prince, recently resigned chief executive of Citigroup, addressed a group at New York University's Stern School of Business. An audience member asked what life looked like at the helm of such a colossal firm. Prince responded that, save for a few exceptions, every evening for the next five months was already accounted for. Fair warning: If you want to run the show, get ready to give everything--and then some.