SMALL BUSINESS MANAGEMENT

Chapter 3 Evaluation of a Business Opportunity

CHAPTER OBJECTIVES

1. To review the nonquantitative aspects of evaluating business opportunities. 2. To introduce the methods by which an entrepreneur can enter a market with a product or service. 3. To discuss the types of information available to assist in the quantitative analysis to select a small business and illustrate how that information can be used. 4. To discuss ways that the entrepreneur can develop a strategic competitive advantage. 5. To provide a systematic way to quantitatively assess an industry and evaluate the financial feasibility of a specific small business opportunity.

Non-Quantitative Assessment of Business Opportunities Wikes case

Goals

Financial and occupational status

Content of Work Lifestyle Capabilities

Good health, management fundamentals, financial base IE Sunblush Technologies

Experience

Wikes Video Case How are above factors illustrated in his case

Breaking Into The Market

Three Ways

offer a totally new product Muttluks offer an existing product to a different market Earthbuddy - Israel offer a product or service similar to those existing in the same market Oil change specialists How did they break into the market ? Java nook, Earthbuddy, Wikes, American Clothing

Developing a Strategic Competitive Advantage

the right industry Owners attention to daily operations Contact with employees Demand is small or local Require flexibility More labor less capital Govt. encouragement the right business Growth areas the right aspect of the business Flexibility, innovation, location , price etc

Collection of Information

Sources of Information Secondary data Primary data

observations surveys

mail surveys, telephone surveys, personal interviews, focus groups

test marketing

Design a simple mail questionnaire to assess demand for a carpet cleaning business in your city.

Once the Qualitative analysis is done ------ do _________ analysis

Is it _________ feasible?????
Beermits case how to determine _________

Quantitative Assessment of Business Opportunities

Preparing the Feasibility Analysis

Step One - Calculate the Market Potential Step Two - Calculate the Market Share Step Three - Calculate the Net Income and Cash Flow

Quantitative Assessment of Business Opportunities

Step One - Calculate the Market Potential

Determine the market area and its population Obtain revenue , (sales) statistics for the product or service in the area Adjust the market potential total as necessary

Quantitative Assessment of Business Opportunities

Step Two - Calculate the Market Share Retail Firm

1. Estimate the total amount of selling space in the market devoted to the merchandise the new business will sell 2. Estimate the size of the proposed store 3. Calculate the market share based on selling space

Quantitative Assessment of Business Opportunities

Step Two - Calculate the Market Share Retail Firm (cont)

4. Make adjustments to reflect any competitor strengths and weaknesses regarding the proposed store 5. Multiply the revised market share percentage by the market potential estimate obtained in step 1.

Quantitative Assessment of Business Opportunities

Step Two - Calculate the Market Share Manufacturing Firm

1. Estimate the total productive capacity in the market for the product to be manufactured. 2. Estimate the total productive capacity of the proposed manufacturing plant. 3. Calculate the market share based on productive capacity.

Quantitative Assessment of Business Opportunities

Step Two - Calculate the Market Share Manufacturing Firm (cont.)

4. Make adjustments to reflect competitive strengths and weaknesses the competitive plant may possess 5. Multiply the estimated market share percentage by the market share potential estimate obtained in Step One.

Quantitative Assessment of Business Opportunities

Step Two - Calculate the Market Share Service Firm

1. Estimate the total capacity of the service available in the market area. 2. Estimate the service capacity of the proposed business. 3. Calculate the market share based on the capacity base.

Quantitative Assessment of Business Opportunities

Step Two - Calculate the Market Share Service Firm (cont.)

4. Make adjustments similar to those made for a retail store. 5. Multiply the revised market share percentage by the market potential estimated in Step One.

Quantitative Assessment of Business Opportunities

Step Three - Calculate net income and cash flow

1. Using the market share from Step Two, calculate the expenses expected

cost of goods sold and gross profit percentages; cash operating expenses; interest and depreciation

2. Subtract expenses from revenue to determine projected net income in the first year and subsequent years.

Petite Shop A & B

Self Assessment for a Small Business Opportunity

Personality Nature Abilities Experience Financial base Feasibility

Concept Checks

1. What non-quantitative factors should be considered in the selection of a small business? 2. What are three ways of entering the market? 3. What are two methods of collecting information? In what situations would they be most useful?

Concept Checks

4. What are the three methods of collecting primary data? Which is the most relevant to a small business? 5. What steps are involved in determining the financial feasibility of a retail store?

PETITE SHOP "A"

1.

Using the information provided, prepare an estimate of the market potential for the target market Alice Wood is aiming at. What portion of this market potential could Alice expect for Petite Shop's market share? What non quantitative considerations should be brought into this analysis?

2.

3.

PETITE SHOP "B"

Question 1. Using the information presented in Petite Shop "A" and this case prepare an estimated income statement and return on investment calculation for Petite Shop's first year of operation.

Question 2. What areas has Alice overlooked in her investigation?

Question 3. Given your analysis, what would you recommend to Alice?