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Entrepreneurship Chap 2

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Entrepreneurship Chap 2

  1. 1. copyright 2003 Jack M. Kaplan Developing Ideas and Business Opportunities Patterns of Entrepreneurship Chapter 2
  2. 2. copyright 2003 Jack M. Kaplan Session Outline • Prepare a Opportunity Analysis • Questions to Evaluate the Opportunity • Opportunity Costs • Framework for Evaluating an Opportunity • Where to find Research Information • Marketing Primary and Secondary research
  3. 3. copyright 2003 Jack M. Kaplan Prepare an Opportunity Analysis  Identifying which business ideas have real commercial potential is one of the most difficult challenges that an entrepreneur will face. • Seize the Opportunity • Know what factors create opportunity. - Calculate the opportunity costs. - Access the risks and rewards.
  4. 4. copyright 2003 Jack M. Kaplan What Factors Create Opportunity? Opportunity Factors Technology • Replace present technology? • Niche Market Applications • Infrastructure Replacement Economic • Cost decreasing • Productivity gains • Better service Demographic • Technology generation Industry Standards Government & Privacy Issues Market Shift Will these factors continue? For how long? What is the market size, growth and outlook? Will this lead to another opportunity?
  5. 5. copyright 2003 Jack M. Kaplan Where Ideas for Opportunities Originate Improving Existing Technology, Product, or Service 15% Vision of Opportunity 11% Present Work Environment 47% Secondary Sources: Brainstorming, Trade Publications, Commerce Business Only, Idea Brokers, Venture Capital Firms, Technology Transfer Agencies 27%
  6. 6. copyright 2003 Jack M. Kaplan Questions to Evaluate the Business Opportunity • What are the indicators that lead to this idea and opportunity? • What are the conditions that permit the opportunity to occur? • How will the future of this new product or service change the idea? • How great (in terms of time) is the window of opportunity?
  7. 7. copyright 2003 Jack M. Kaplan Evaluating the Opportunity Does the Opportunity: Fill a need? Show evidence of product acceptance? Show that a market exists now? Reflect that yours is better than the competitions? Show an upside gain potential? Describe the cost to achieve this potential?
  8. 8. copyright 2003 Jack M. Kaplan Time Horizon • A window of opportunity is a time horizon during which opportunities exist before something else happens to eliminate them.
  9. 9. copyright 2003 Jack M. Kaplan Opportunity Costs • Opportunity costs are the value of benefits lost when one decision alternative is selected over another. • For example, a software company refuses to deliver a software program, because writing the software code will require the company to miss a major deadline for another company.
  10. 10. copyright 2003 Jack M. Kaplan Opportunity Costs • The order for the software program would generate revenue of $25,000 and $14,000 of additional costs. • Then the opportunity cost and the net benefit lost associated with the software deadline is $11,000 (i.e. $25,000 - $14,000).
  11. 11. copyright 2003 Jack M. Kaplan Framework for Evaluating an Opportunity Market Issues: Criterion Stronger Opportunity Weaker Opportunity Need Identified Unclear Customers Reachable; receptive Unreachable or loyalties established Payback to user/customer Less than one year Three years or more Product life cycle Long; recover investment Short; recover investment Industry structure Competition or emerging Aggressively competitive Potential market size $100 million sales Less than $10 million sales Market growth rate Growing at 30% to 50% Contracting less than 10% Gross margins 30% to 50% Less than 20%; volatile Market share attainable (year 5) 20% or more Less than 5%
  12. 12. copyright 2003 Jack M. Kaplan Framework for Evaluating an Opportunity Financial and Harvest Issues: Criterion Stronger Opportunity Weaker Opportunity Profits after tax 10% to 15% or more; durable Less than 5%; fragile Time to: Break-even Positive cash flow ROI potential Under 2 years Under 2 years 25% or more per year More than 3 years More than 3 years Less than 15-20% per year Value Capital requirements High strategic value Low to moderate; fundable Low strategic value Very high; unfundable Exit mechanism Present or envisioned harvest options Undefined; illiquid investment
  13. 13. copyright 2003 Jack M. Kaplan Framework for Evaluating an Opportunity Competitive Advantage Issues Criterion Stronger Opportunity Weaker Opportunity Fixed and Variable Costs Production, marketing distribution Lowest Highest Degree of Control Prices, channels of resources/distribution Moderate to strong Weak Barriers to Entry Proprietary protection Response/lead time Yes 6 months to one year None None Legal contractual advantage Proprietary of exclusivity None Sources of differentiation Numerous Few or none Competitors mindset and strategies Live and let live; not self destructive Defensive and strongly reactive
  14. 14. copyright 2003 Jack M. Kaplan Framework for Evaluating an Opportunity Management Team and Risk Issues: Criterion Stronger Opportunity Weaker Opportunity Management team Existing, strong, proven performance Weak, inexperienced, lacking key skills Contacts and networks Well-developed; high quality; accessible Crude; limited; inaccessible Risk Low High Fatal Flaws None One or more
  15. 15. copyright 2003 Jack M. Kaplan - Ask preliminary questions - Prepare data collection. - Execute a study to get answers. - Analyze the data. Investigate the need Through Market Research
  16. 16. copyright 2003 Jack M. Kaplan Where to Find Information Visit Experts in Field Internet Searches Library Research Questionnaire Surveys Existing Research Trade Associations Market Research Firms • Contact well known entrepreneurs to get advice. • Visit web sites on companies and new products or technologies • Use college libraries to access references and specialized bibliographies • Use mail, phones, Internet, or professional interviews. Write and prepare questions to give you the right data. • Use investment banking firms, advisory services, or consulting firms to gather data and ask to receive findings. • Visit trade shows, read trade publications. • Hire a firm to prepare a report on market survey for the proposed idea.
  17. 17. copyright 2003 Jack M. Kaplan Ask Preliminary Questions • Need. Will this product be serving customers’ real needs? • Niche/Competition. What is different about the product or service that will cause the customer to choose it over the competition’s product or service? • Proprietary Questions. Can the product be patented or copyrighted? Is it unique enough to get a significant head start on the competition? Can the process be easily copied?
  18. 18. copyright 2003 Jack M. Kaplan Ask Preliminary Questions • Costs- How much will materials and labor time cost? How much will be needed in the future? Now? • Advertisement and Packaging. What type of advertising and promotional plans will be used to market the product? • Sales. What distributions and sales methods will be used? ?
  19. 19. copyright 2003 Jack M. Kaplan Market Research Process Define problem and research objectives Develop research plan Collect Information Analyze Information Present Findings
  20. 20. copyright 2003 Jack M. Kaplan Assessing the Research Plan Function Define Problem and Research Objectives Develop Research Plan Collect Info Analyze Info Questions to Answer -What is overall objective of research? -What info is needed to make decision? -How can I best ascertain the demand for my proposed business idea? -What is the most efficient plan for gathering needed info? -What are the costs? -Is the value of the additional info greater than the cost of the research? -What research approach is best?  Observational  Focus Group  Survey Research  Experimental Research -Sample size considerations -Use of secondary data -What are the best ways to analyze to obtain actionable business recommendations? -How can I segment my sample to understand micro-segments of my potential customer base? -What, if any, statistically significant differences occur between segments?
  21. 21. copyright 2003 Jack M. Kaplan Research Tool Kit • Primary Research: Investigating the “original source” of data, interviewing customers/prospects – Focus groups: gathering of 6-10 pre-selected respondents to discuss product or service; candid discussions encouraged; sample is too small to be projected; objective is exploratory – Survey Research: Usually randomly selected (with parameters) sample to project to larger population in question; survey can contain open-ended and closed-ended questions; objective to learn perceptions, satisfaction levels, etc. • Primary Research: Continued – Experimental Research:Most scientifically valid; If you can develop a version of your product/service, select different groups of subjects, control for external variables and note differences. Comparable to a “test run” before product/service enters market.
  22. 22. copyright 2003 Jack M. Kaplan Secondary Research Resources • Secondary Research: Investigating research findings already written • Sources - Government Publications – Statistical Abstract of US (demographics, economics and social data) – County and City Data Book (relevant stats broken down by county and city) – U.S. Industrial Outlook (projections of industrial activity by industry including production, sales, shipments, etc.) – Other government publications like Census of Population, Federal Reserve Bulletin, Survey of Current Business • More Sources - Periodicals – Standard and Poor’s Industry Surveys (provide updated stats and analyses of industries) – Moody’s Manuals (financial data and names of executives) – Marketing journals like Journal of Marketing, Journal of Marketing Research, Journal of Consumer Research – Trade Magazines including Direct, BrandWeek, Sales and Marketing Management – Business Magazines like Harvard Business Review and The Economist
  23. 23. copyright 2003 Jack M. Kaplan Secondary Research Resources • Quantitative Sources - Commercial Data – A.C Nielsen Company Data (Data on products sold in retail, supermarket scanner, television and others) – MRCA Information Services (Data on weekly family purchases of consumer products) – Simmons Market Research Bureau (Annual reports covering verticals by demographics and brand preferences) • Research Houses – Sell data to subscribers useful to construct models for forecasting demand – Audit Bureau of Circulation – Arbitron – Audits and Surveys – Dun and Bradstreet – National Family Opinion – Standard Rate and Data Service
  24. 24. copyright 2003 Jack M. Kaplan Determine the Resources Needed - Start personal contacts and networking - Perform financial requirements. - Gather sources of technical skills
  25. 25. copyright 2003 Jack M. Kaplan Financing Alternative Questions – be self-financed, if necessary, and still withstand Sufficient capital is required to sustain the company for a specific length of time, possibly a one- or two-year period. – .How much initial capital is needed? What resources are available for financial support? – .How long can the new business initial losses? – .How long will it take to make the business profitable? – .What kind of profit margin will eventually result from the product or service? – .How can the revenue and financial model be presented to investors for their involvement in the business?