copyright 2003 jack m. kaplan developing ideas and business opportunities patterns of...

copyright 2003 Jack M. Kaplan

Developing Ideas and Business Opportunities

Patterns of EntrepreneurshipChapter 2


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


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.


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?


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%


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?


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?


Time Horizon

• A window of opportunity is a time horizon during which opportunities exist before something else happens to eliminate them.


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.


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).


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%



Financial and Harvest Issues:


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



Competitive Advantage Issues


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



Management Team and Risk Issues:


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


- Ask preliminary questions

- Prepare data collection.

- Execute a study to get answers.

- Analyze the data.

Investigate the need Through Market Research


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.


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?


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? ?


Market Research Process

Define problem and research objectives

Develop researchplan

Collect Information

Analyze Information

Present Findings


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?


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.


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


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


Determine the Resources Needed

- Start personal contacts and networking- Perform financial requirements.- Gather sources of technical skills


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?

copyright 2003 jack m. kaplan developing ideas and business opportunities patterns of...

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