Opportunity evaluation

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Opportunity evaluation template for business ideas. This presentation was delivered by Prof. Prema Basargekar during a crash course organized for e30, riidl - Somaiya Vidyavihar's first business plan competition.

Published in: Business, Economy & Finance

Opportunity evaluation

  1. 1. ENTREPRENEURSHIP Opportunity Evaluation
  2. 2. INTRODUCTION  Three traits of Entrepreneurs : Passion ! Conviction ! Tenacity !  Entrepreneurs‟ daily question – “Why will this new business work when most will fail ?”  Reason to ask the above question –  To know the fatal flaw well in time  If answer is positive : to embrace their opportunity with renewed passion
  3. 3. INTRODUCTION  Serious Entrepreneurs run road tests of the opportunities they consider.  Not about success story of one Entrepreneur or a method to get rich quick  Map for opportunity-assessing, opportunity shaping process  Useful framework – the 7 domains-to lay the foundation on which to build a B-Plan
  4. 4. 7 DOMAINS
  5. 5. THE MARKET/ INDUSTRY DISTINCTION  What‟s a market?  What‟s an industry?  These are frequently confused
  6. 6. MARKET DOMAIN :-MACRO LEVEL • Size of the Market • Number of Customers • Aggregate money spent • Number of units bought annually • Growth prospects of the Market • Recent historical data – on market growth and available forecasts of the future • Broad Macro-Environmental Trends • Demographic • Socio-cultural • Economic • Technological • Natural
  7. 7. INDUSTRY DOMAIN :-MACRO LEVEL • Industry Attractiveness - Porter’s Five Force Model • Threat of Entry • Buyer Power • Supplier Power • Threat of Substitutes • Competitive Rivalry • Future changes in the Industry • Collection of Primary Data
  8. 8. MARKET DOMAIN – MICRO LEVEL  Naïve entrepreneurs say “We have no competition”  Prudent ones, ask these questions:  Is there a customer segment willing to pay a price for the a compelling benefit/resolution of a “pain”  Are these benefits clearly differentiated in the customer‟s mind? – better/faster/cheaper  Size and growth rate of segment?  Will entering this segment allow entry in
  9. 9. INDUSTRY DOMAIN –MICRO LEVEL  Is the business model of the entrant sustainable ?  Barrier to imitations  Proprietary elements : Trade secrets? Patents? Organizational capabilities?  Economically Viable Business model : ASSESS RISK  Revenue w.r.t investment  Costs to acquire and retain customers  Contribution margins and their adequacy
  10. 10. MICRO- ANALYSIS  First-hand experience in the industry makes all the difference  Partner ?  Network?  Such answers cannot be found on the internet  Micro factor are more important to evaluate
  11. 11. CAN THE TEAM DELIVER? • Management- single most important factor • The 3 Domains • Opportunity and team‟s business mission, personal aspirations and risk propensity – How big ? How soon • Ability to execute on the critical success factors • Response across the value chain • Competencies - experience & industry knowhow • Connectedness – Up & down the value chain • Benefits of assessing themselves in the three team domains
  12. 12. LIVE EXAMPLES
  13. 13. DOTCOM CRASH  Markets? Or Industries?  Markets  Growing fast  Shrinking digital divide  Industries  Low entry barriers  Differentiation difficult to establish  Hard to sustain competitive advantage  Introduce both old and new paradigm people on the team
  14. 14. NIKE WINS AT MICRO LEVEL  Running shoes for distance runners  Lighter, better cushioning, better lateral stability  Micro perspective  Similar successes in other sharply targeted footwear niches
  15. 15. PUTTING THE 7 DOMAINS MODEL INTO ACTION  Secondary Data  Trade & Business Publications in Library/Internet  Government Reports  Primary Data  Interviews  Observations  Focus Groups  Surveys  Market Experiments  Interpretation
  16. 16. WHY WON‟T THIS WORK?  Finding the major flaw that cannot be resolved  If found, abandon the opportunity  If not, two outcomes:  Best Case: resource providers identify the flaws and refuse you the resources needed  Worst Case: you secure the required resources and start the business only to discover the flaws later
  17. 17. WHY WILL THIS WORK?  Opportunities can be shaped & developed in many ways  Fatal flaws can be fixed  A different target market can be chosen  The offering can be adapted  Opportunity can be pursued at a different level in the value chain  Additional individuals can be found
  18. 18. HOPE THIS WILL BE USEFUL TO YOU THANKS!
  19. 19. SESSION PLAN  Moving from Ideas to Opportunities  How to assess opportunities  Seven domain framework to evaluate opportunities  Evaluation process  Creating, shaping, recognizing and seizing opportunities
  20. 20. NEW VENTURES  Fundamental realities  Success is highly situational, depending on time, space, context, and stakeholders  The best entrepreneurs specialize in making “new mistakes” only  Starting a company is much harder than it looks, or you think it will be; but you can last a lot longer and do more than you think if you do not try to do it solo
  21. 21. WHEN IS AN IDEA AN OPPORTUNITY?  They create or add significant value to a customer or end user.  They do so by solving a significant problem or meeting a significant want or need  They have a robust market, margin that will create a substantial value to potential stakeholders  They are good fit with founder‟s and management team and market place along with attractive risk reward balance.
  22. 22. SUMMERY  In short , a superior opportunity has the qualities of being attractive, durable and timely and is anchored in a product or service which creates or adds value for its buyers or end users usually by solving a very painful or serious problem.  Opportunities always start with customers and marketplace want.
  23. 23. SPAWNERS AND DRIVERS OF OPPORTUNITIES  Changes in business environment & ability to anticipate these changes  Use of IT, microcomputers, MIS and computer networking in routine business  Regulatory changes such as deregulation of telecom, airlines, insurance, financial services, banking, pension fund management, etc  Emergence of service industries – higher focus on customer service  Sea changes – technology, market & societal – eg – Moor‟s law of computer chips power, gene mapping, cloning, nanotechnology, biotechnology, internet, etc.
  24. 24. EVALUATING  Criteria for evaluating venture opportunity  Industry and market  Economics  Harvest issues  Competitive advantage issues  Management team issues  Personal criteria  Strategic differentiation
  25. 25. 1. INDUSTRY & MARKET  Market: identifying a market niche for a product or a service that meets an important need of the customer  Market structure: number of sellers, differentiation in the product or service, conditions of entry & exit, number of buyers, cost conditions, sensitivity of demand to changes in price, income, etc.  Marker size & growth rate  Market capacity: a demand that existing suppliers are not able to meet  Potential market share  Cost structure: whether economies of scale is possible
  26. 26. ECONOMICS  Profit after tax: high & durable gross margins result in at least 10 to 20 % profits after tax.  Time to breakeven & positive cash flow: within two to three years  ROI potential: more or up to 25 % per year.  Capital requirement  Internal rate of return potential: Is the risk reward relationship attractive? – if 5 to 10 times of original investment in 5 to 10 years  Free cash flow characteristics: capital requirement of fixed & working capital, capacity to serve external capital, etc  Gross margin: unit selling point – direct & indirect costs- up to 40 % leads to healthy growth.
  27. 27. HARVEST ISSUES  Value added potential: ventures based on strategic value in an industry are more attractive than those having less or no strategic value. Eg. Proprietary technology, contractual rights, geographic coverage, etc.  Exit mechanism & strategy: realising capital gains from sale or IPO or exit from the industry  Capital market context: proper timings for entry & exit
  28. 28. COMPETITIVE ADVANTAGES ISSUES  Variable & fixed costs: potential for being lowest cost producer eg- electronic goods like calculators  Degree of control: moderate to strong over prices, costs, channels of distribution, etc.  Entry barriers: proprietary protection, regulatory advantage, contractual advantage, advantage in lead time/ response in technology, product innovation, people, location, etc. create entry barriers.
  29. 29. MANAGEMENT TEAM ISSUES  Entrepreneurial team  Industry & technical expertise  Integrity  Intellectual honesty  Fatal-flow issues: an opportunity is rendered as unattractive if it suffers from one or more fatal flows such as high cost of entry, inability to produce at competitive prices, etc.
  30. 30. PERSONAL CRITERIA  Goals & Fit: good match between requirement of business & what the founders want out of it.  Upside & downside issues: If downside is more than entrepreneur‟s net worth, the opportunity becomes unattractive  Opportunity cost: of time, experience, resources used in the venture  Desirability  Risk/ reward tolerance  Stress tolerance
  31. 31. STRATEGIC DIFFERENTIATION  Degree to fit: good fit among the driving forces & timing given the external environment  Team: execution & ability to adopt and devise new strategies, constant learning & improvements, etc.  Service management  Timing  Technology  Flexibility  Opportunity orientation  Pricing  Distribution channels  Room for error
  32. 32. WHY OPPORTUNITY MAY OR MAY NOT WORK?  What most new start up need to understand:  A. Market & industries are not the same.  B. Both macro & micro level considerations are necessary: markets & industries must be examined at both levels.  C. The key to assessing entrepreneurs & entrepreneurial teams aren‟t simply found on their resumes or in assessing their entrepreneurial character.
  33. 33. M Team Domain Mission, aspiration, risk Ability to execute Connectedness – up, down, across value chain Industry Attractiveness Market Attractiveness Target segment benefit & attractiveness Sustainable advantage Micro level Macro level Market domain Industry domain
  34. 34. SEVEN DOMAINS OF ATTRACTIVE OPPORTUNITY:  1. Is market attractive?  Market & Industries are different:  Market consists of group of current or potential buyers having willingness & ability to buy products.- not products.  An industry consists of sellers that offer products that are similar or close substitute for one another.  The distinction is important as the judgment about attractiveness of market can be different than attractiveness of industry. E.g – In dot.com failures while market was attractive, industry was not.- recognition came late.
  35. 35. SEVEN DOMAINS OF ATTRACTIVE OPPORTUNITY  At micro level, one needs to see if target consumer segment which we want to cater to is willing to pay, getting additional value, how large is this segment, is it growing, is entry in this segment provide us entry in other segments, etc.  Eg. Nike- though at macro level demand for sports shoes was stagnant, the demand for running shoes for distant runners was high, which later on spread to other specialty sports shoes.
  36. 36. SEVEN DOMAINS OF ATTRACTIVE OPPORTUNITY:  2. Is this a good market?  Is my market large enough today to allow different competitors the opportunity to serve different segments without getting in each other‟s way?  Macro level market assessment such as size of the market, growth rate, demographic, socio-cultural, economic, technological, regulatory trends have to be assessed to see the attractiveness of the opportunity.  How can short term and long term growth be predicted?  Hero Honda: market driven company
  37. 37. SEVEN DOMAINS OF ATTRACTIVE OPPORTUNITY  3. Is industry attractive?  Macro level: Porter 5 forces model:  Threat to entry  Buyer power  Supplier power  Threat of substitutes  Competitive rivalry  Eg: Pharma industry in 1980s and 2000
  38. 38. SEVEN DOMAINS OF ATTRACTIVE OPPORTUNITY  4. How long your advantage will last?  What sustainable competitive advantage we have? – proprietary element such as patents, trade secret, etc; presence of superior organizational processes, capabilities, resources, etc; presence of economically viable business model, etc.  Eg – Zantac, an anti ulcer medicine produced by Glaxo  5. What drives your entrepreneurial dream?  An integration of organization mission, personal aspirations and personal risk propensity  Eg. Jeff Bezos of amazon.com, Phil Knight of Nike or Howard Schultz of Strbucks
  39. 39. SEVEN DOMAINS OF ATTRACTIVE OPPORTUNITY  6. Can team deliver?  Does the team have experience, industry know how, to deliver the superior performance?  Do you have a control over crucial success factors required in your business?  Eg: Kishor Biyani- Pantaloon; Jeff Hawkins- Palm Computing  7. Connectedness up and down the value chain  Is the team well connected up, down and across the value chain so it will be quick to notice any opportunity or need to change its approach if conditions warrant? – people make more money in plan „B‟ than on „A‟.
  40. 40. SEVEN DOMAINS OF ATTRACTIVE OPPORTUNITY  Seven domains road helps an entrepreneur to see whether the idea can be converted into opportunity.  It also enables an entrepreneur to take the necessary mid course corrections to reshape opportunity when micro or macro indicators change.  It helps an entrepreneur to see the fatal flaws in the business plans and shows how and where attractive opportunities can be found in stagnant or otherwise unattractive markets.

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