entrepreneurship chap 2
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copyright 2003 Jack M. Kaplan
Developing Ideas and Business Opportunities
Patterns of EntrepreneurshipChapter 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
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.
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
IndustryStandards
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?
copyright 2003 Jack M. Kaplan
Where Ideas for Opportunities Originate
Improving Existing Technology, Product, or Service15%
Vision of Opportunity11%
Present Work Environment47%
Secondary Sources: Brainstorming, Trade Publications, Commerce Business Only, Idea Brokers, Venture Capital Firms, Technology Transfer Agencies27%
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?
copyright 2003 Jack M. Kaplan
Evaluating the Opportunity
Does the Opportunity:
Fill a need?
Show evidence of productacceptance?
Show that a marketexists now?
Reflect that yours is betterthan the competitions?
Show an upside gain potential?
Describe the cost to achievethis potential?
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.
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.
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).
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%
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
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
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
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
copyright 2003 Jack M. Kaplan
Where to Find Information
Visit Experts in FieldInternet 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.
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?
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? ?
copyright 2003 Jack M. Kaplan
Market Research Process
Define problem and research objectives
Develop researchplan
Collect Information
Analyze Information
Present Findings
copyright 2003 Jack M. Kaplan
Assessing the Research Plan
Function Define Problemand ResearchObjectives
DevelopResearch Plan
Collect Info Analyze Info
Questions toAnswer
-What is overallobjective ofresearch?-What info isneeded to makedecision?-How can I bestascertain thedemand for myproposed businessidea?
-What is the mostefficient plan forgathering neededinfo?-What are the costs?-Is the value of theadditional infogreater than the costof the research?
-What researchapproach is best? Observational Focus Group Survey
Research Experimental
Research-Sample sizeconsiderations-Use of secondarydata
-What are the bestways to analyze toobtain actionablebusinessrecommendations?-How can Isegment my sampleto understandmicro-segments ofmy potentialcustomer base?-What, if any,statisticallysignificantdifferences occurbetween segments?
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.
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
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
copyright 2003 Jack M. Kaplan
Determine the Resources Needed
- Start personal contacts and networking- Perform financial requirements.- Gather sources of technical skills
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?