Because learning changes everything.

Chapter 3

Business Idea
Generation and Initial
Evaluation

Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Learning Objectives

• Describe a systematic means for examining skills in order to generate

new business ideas.
• Discuss the elements of opportunity analysis.
• Analyze how to choose a business.

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 Chapter Overview

Chapter begins by identifying a systematic way to generate a list of

potential businesses.

Next, it examines the marketplace for opportunities.

• Gap analysis is looked at specifically.

Final part of the chapter is devoted to choosing a business, including

analyzing potential risks and threats.

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 Suggested Approach to Developing a Quality Business
Idea

• List and evaluate your own personal skill sets.

• Carefully analyze the market and look for gaps or some unmet need.
• Compare the ability to fill those gaps with the opportunities available.

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 Skills Analysis 1

Founders must have the necessary skills and a depth of understanding to

build a long-term advantage in the market.

Synergy is essential.
• Synergy: Connection between the entrepreneur’s skills,
understanding of an industry, and the ability to create a competitive
advantage such that the sum of the parts of the new business is
greater than the individual parts alone.

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 Skills Analysis 2

Skills are idiosyncratic to the individual.

Specific areas for skill identification include:

• Hobbies.
• Education.
• Work experience.
• Family history.

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 Hobbies and Activities

Each hobby develops a specific skill.

Questions the potential business owner should ask include:

• What hobbies or activities do you pursue on an active, perhaps daily

basis and over your lifetime?
• What excites you about these hobbies or activities?
• What specific skills do they require?
• What have you learned that would help others?
• What products and services did you use?

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 Hobbies

• Your hobbies can impact how you approach business ventures.

• Do you have any hobbies that might lend themselves to a solid
business idea?

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 Education

Opportunities that use education, formal or informal, are another source

of a business.
• What courses did you particularly enjoy?
• What courses did you take where the material came to you very
easily?
• Have you attended any unusual education programs?
• Have you taken specialized training?
• If you had to do it all over again, what areas would you pursue now?

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 Work Experience

In each job, individuals build skills that they take with them when they
start a business.
• In what businesses have you worked?
• What skills were critical to the jobs you performed?
• What positions have you held in business?
• In what areas would you be considered a type of expert?
• What did you really enjoy and what frustrated you about the positions
you held?
• When were you the most excited about your work?

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 Family 1

Family experiences are an often overlooked source of skills for a new

business.
• Does your family history include new business ventures?
• What types of travel and vacations does your family enjoy?
• What skill sets exist within your nuclear family?
• What are the financial resources of your extended family?
• Are there unique things your family does that others seem very
interested in?
• What skills do you develop in your family activities?

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 Family 2

Your family can be a great help in developing a business.

What are some of the risks and rewards that you associate with the idea
of working with your family?

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 Additional Skills

Ask yourself the following questions:

• What are your top three personal skills?

• What things do you like doing best each day, each week?
• In the past year, which one or two things did you enjoy most?
• What are the magazines and books you read?
• What podcasts do you regularly listen to?
• What are your three greatest accomplishments and what skills were
involved in these accomplishments?
• Do you enjoy working with people or alone?
• In what industry, retail; wholesale; manufacturing; or service, would
you prefer to work?
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 More Questions to Tailor the Business to Unique Skills

Goal is to explore the range of potential skills and abilities each of us

possesses.
• Do you prefer to work with people or not?
• Do you have an intense detail orientation?
• Are you trained in the area in which you want to work?
• How quickly and easily can you change?

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 Gap Analysis

Relatively simple process of systematically examining the difference, or

gap, between what is expected and what occurs.

Type.
• Opportunity analysis: Examines opportunities in the marketplace side-
by-side with the individual’s ability to address those gaps.

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 Ways to Identify Gaps

• Examine trends.
• Interview key successful local entrepreneurs.
• Discuss ideas with family members.
• Look for environmental changes that create opportunities.
• Brainstorm.
• Look at daily frustrations.
• Examine patent files: United States Patent and Trademark Office.

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 Choosing a Business

• Generation of ideas along the way to selecting a business is a process

that takes time and frequent interaction.
• Entrepreneur business ideas index.

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 Business Opportunities

Monkey Business Images/Shutterstock EQRoy/Shutterstock

wavebreakmedia/Shutterstock

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 Initial Analysis

Potential entrepreneurs often have several ideas but need to identify one
to analyze.
• In-depth analysis may lead to scrapping the idea and starting over.

Analysis requires focus, time, and financial investment.

• Focus must be on one idea at a time.

One means to identify which business to pursue is through a gap

analysis.

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 Analyzing Gaps

• How do you decide that a sufficient business opportunity exists and

that you have the resources necessary to take advantage of that
opportunity?
• Using your list of three to five ideas, develop a chart that examines the
issues that might impact success.

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 Table 3.1: Form to Compare Three Different Business
Ideas

Business Our Resources

Category Deficit
Idea Resources Required
• Finances NA NA NA
Catering
• Time
Operation
• Nonfinancial resources
In-your-home
• Risk
focus
• Competitors
Sports • Finances NA NA NA
Memorabilia • Time
Shop • Nonfinancial resources
Family history • Risk
and support • Competitors
• Finances NA NA NA
Restaurant
• Time
Fast-food
• Nonfinancial resources
cross with
• Risk
service
• Competitors

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 Gap Analysis Categories

Nonfinancial
Finances Time
Resources

Risk Competitors

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 Gap Analysis Categories: Finances

Entrepreneurs must examine:

• Amount of money required to start and operate a business.

• Their own resources and business needs.

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 Gap Analysis Categories: Time

• It takes time to start a business.

• Each type of business will require different time frames.
• Entrepreneurs must look at their own resources and those needed by
the business.

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 Gap Analysis Categories: Nonfinancial Resources

A new business requires resources beyond financing and time

commitment.
• These resources include:

• Special contacts with suppliers or customer groups.

• Physical location of the business.

An entrepreneur should exercise some creativity in the analysis of the

situation and the needs of the business.

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 Gap Analysis Categories: Risk

New businesses have an inherent amount of risk associated with the

starting and operation of the business.

Level of risk needs to be commensurate with the rewards and within the
tolerance level of the individual involved in the business founding.

Types of specific risk.

• Personal.
• Business.

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 Threats to Business Success

Threats to profit margin.

• Not being able to achieve a profit margin sufficient to allow the
business to attain substantial returns.

Threats to sales generation schemes.

• Not being able to generate sufficient sales required to make the firm
profitable.

Threats to operational financing.

• Not obtaining sufficient financing to operate the firm.

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 Gap Analysis Categories: Competitors

• Competitors exist for every business contemplated.

• Entrepreneurs should list who exists in the competitive set and why
they believe they are competitors for their new business.

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 Table 3.2: Example of Entrepreneur’s Personal Deficit
Analysis 1

Business Resources
Category Our Resources Deficit
Idea Required
Finances Savings and some Need additional Medium
ability to get loans funds for
equipment
Time Full time Full day—high Low
volume work with
Catering deadlines
Operation;
Nonfinancial Little knowledge Need catering High
In-your-
risk expertise
home
design Risk Moderate—cheaper Rapid acquisition Medium
space, expensive of used
equipment equipment and
cheap space
Competitors Moderate Advertising and High
sales to counter

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 Table 3.2: Example of Entrepreneur’s Personal Deficit
Analysis 2

Business Resources
Category Our Resources Deficit
Idea Required
Finances Savings, loans, Attending and Low
family money acquiring good
memorabilia, basic
equipment, display
cases
Sports Time Full time + family Full day Medium
Memorabilia time
Shop; Family Nonfinancial Significant family Arrangement, pricing, Low
history and risk knowledge acquisition
support knowledge
Risk Smaller footprint; Knowledge of market, Low
expensive interior high availability
Competitors Strong and many Positioning, leverage High
family; differentiation

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 Table 3.2: Example of Entrepreneur’s Personal Deficit
Analysis 3

Business
Category Our Resources Resources Required Deficit
Idea
Finances Savings, loans Significant resources High
needed for equipment;
customer face
Time Full time 10 to 9 daily; lots of High
staff needed for
cooking, serving, etc.
Restaurant;
Nonfinancial Little knowledge Food prep, licensing, High
Fast-food
risk ordering, serving
crossed
with service Risk Heavy investment Attraction based on High
and employees; concept unproven;
could be easily fickle customers;
copied holding onto concept
Competitors Numerous in Pricing, positioning, High
general; few newness issues
specifically
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 Chapter Review

• Chapter began with a method for the potential entrepreneur to develop

and perform an initial evaluation of various business ideas.
• Next, it looked at the world around the entrepreneur and
systematically evaluated the potential opportunities.
• Final part of the chapter was devoted to a gap analysis methodology
that has been used successfully for some time to determine potential
fit with a business idea.

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Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.