opportunity evaluation
DESCRIPTION
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.TRANSCRIPT
ENTREPRENEURSHIP
Opportunity Evaluation
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
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
7 DOMAINS
THE MARKET/ INDUSTRY DISTINCTION
What’s a market? What’s an industry? These are frequently confused
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
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
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
related segments?
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 investmentCosts to acquire and retain customersContribution margins and their adequacyOperating cash cycle characteristics (WCM)
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
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
LIVE EXAMPLES
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
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
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
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
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
HOPE THIS WILL BE USEFUL TO YOU THANKS!
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
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
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.
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.
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.
EVALUATING Criteria for evaluating venture opportunity
Industry and market Economics Harvest issues Competitive advantage issues Management team issues Personal criteria Strategic differentiation
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
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.
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
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.
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.
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
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
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.
MTeam 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
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.
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.
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
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
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
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’.
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.