ENTREPRENEURSHIP

NEU Dr. Jean Dautrey ENT501

Evaluating an Opportunity
From Identification to Evaluation
Identifying an opportunity is only…
 The first step in the entrepreneurial
process. The next is evaluation.
 Its purpose is to reveal the scope
and details of the perceived
opportunity.
 Promising opportunities must be
systematically evaluated through
a four-step process
Promising opportunities must be evaluated
through a process that considers….

1. The market for the product or

service
2. The current and anticipated level
of competition
3. The underlying economics of the
opportunity
4. The financial and human
resources required for success
1. Examining the Market
 A business can succeed only if
enough people recognize the
value and are willing to pay for
it…
 An entrepreneur should begin by
answering a series of marketing
questions about the opportunity
he/she has identified…
1) How will it benefit customers?
2) How many people stand to benefit?
(i.e., what is the size of the market?)
3) Is the market stable or growing? (if
growing at what annual rate?)
4) What percentage of the market
could the product (or service)
reasonably expect to capture over
the next few years?
5) Is any product (or service) from
competitors available to fill part of
this demand ?
6) Are potential customers aware of
their need for this product (or service)
or is the need latent (undiscovered)?
7) Who exactly are the potential
customers? (Can you name them/
describe them?)
8) How can you reach the potential
customers and make a
transaction? Directly, through
distributors, retail stores?
9) What is the utility of the product
(or service) relative to substitutes?
2. Assessing the Current and Anticipated
Level of Competition
 Entrepreneurs entering an existing
market will be up against competitors,
some of whom may be well entrenched…
 If the market is new and attractive,
other entrepreneurs are likely to enter
it

 There are 5 key questions to answer

1)How are customers currently
satisfying the need you have
identified?
2)What are the strengths and
weaknesses of your main
competitors? (e.g., high quality,
poor customer service, high price, etc…?)
3)How would a smart competitor
respond to your entering the
market? (e.g., by reducing price, making
product improvement, etc…?)
4)Are the barriers to market entry
high or low? (low barriers means
competitors will keep entering the
market until returns are driven to a low
level)
5) What the single worst thing a
competitor could do to your business
prospects? (e.g., drop the price 20 percent
reducing price, making product improvement,
etc…?).
- How would you respond?
- What strategy on pricing, positioning,
service, distribution, or product features
would give you a reasonable
competitive advantage?
3. Looking at the Underlying Economics

 Every business rests on an economic

structure that influences its ability to
compete and succeed.
 Some businesses operate with high
fixed costs and low variable costs
and vice versa

 It is therefore critical to understand the profit

structure of the business opportunity
 Fixed costs remain about the same no
matter how many units are produced
(insurance, rent or lease payments…)
 Variable costs rise or fall with the level
of output (raw materials, direct labor)

 Understanding these costs helps

understand the basis of profitability
 If you know the revenue from
each unit sale, you can calculate
the breakeven point of your
operation…

Breakeven point = The number of

units you need to sell before
you earn a profit
 First, you need to know the
contribution margin, that is…
 The amount of money that every
sold unit contributes to paying for
fixed costs
Unit Contribution Margin = Unit Net Revenue - Unit Variable Cost
• Company A is planning to sell its
new wall-mounted hat rack for $75
per unit. It variable cost per unit
is $22. Its fixed costs total
$100,000.
• How many racks does Company A
needs to sell in order to
breakeven?
Unit Contribution:
Unit Sales Price – Unit Variable Cost = Unit Contribution Margin
$75 $22 = $53

Therefore
Fixed Cost
--------------------------- = Breakeven Volume
Unit Contribution Margin

$100,000
----------------------- = 1,887 units
$53

Company A must sell 1,887 hat racks to breakeven

on its $100,000 investment.
At this point, it must also decide whether the
breakeven volume is achievable…
 It is realistic to expect to sell 1,887 hat racks
and if so how quickly?
However, Company A….
 Represents a simple case. It
assumes that costs and unit
contributions will not change as a
function of volume…
 For example, rent will stay the
same whether 1,000 or 10,000
units are produced or…
 The sale price will not change at
different levels of output
But rent…
 May be fixed up to a certain level (e.g.
10,000 units) and then increase as a
secondary facility is rented to handle
expanded output…
 Price discounts may be offered as more
products are pushed into the market
 The breakeven point calculation
must be adjusted to accommodate
these realities
Operating Leverage
 After fixed costs are covered with the
contribution of many sales units…
 Every subsequent sales contributes
directly to profit

Unit Net Revenue - Unit Variable Cost = Contribution to Profit

 The lower the unit variable cost, the

greater the contribution to profit
 The relationship between fixed and
variable costs is often described in terms
of operating leverage
 Firms whose fixed costs are high
have high operating leverage
 Firms whose fixed costs are low
relative to the total cost of producing
each unit of output have low operating
leverage
 Firms with high fixed costs and
low variable costs (i.e., firms
that have a high operating
leverage) generally have high
breakeven points BUT…
 Enjoy high profitability on
sales after they get passed that
point
 A high operating leverage is a great
thing after a company passes its
breakeven point BUT….
 It can cause substantial losses if
breakeven is never achieved

 Since it is risky, it is referable to find the

right balance between fixed and variable
costs
 The following questions are helpful
to think through and evaluate the
economics of an opportunity…
1)Will the business be a price
setter or a price taker?
2)What are the constraints on
pricing what the business
sells?
3)What is the supply/demand
situation relative to the product
or service?
4)Is demand elastic or inelastic?
That is, would a price increase
dramatically reduce demand (elastic)
or would demand be slightly affected
(inelastic) in the short run?
5)What substitutes do prospective
customers have for the product or
service?
6)Will the business be dominated by
fixed or variable costs?
7)To what extent can suppliers and
employees enforce cost increases
on the proposed business
4. Considering the Resources Required

for Success

 Money greases the wheels of an

enterprise…
 Without it even the boldest and
best business plan would remain
nothing more than a document
After an opportunity has been
identified and evaluated in terms of
market, competition, and economic
value…
The next questions to answer
are…
1. Is this opportunity still attractive
in terms of risk/return
relationship?
2. Is it more or less attractive than
other opportunities available to
you?
 It is important to always consider the
attractiveness of an opportunity
relative to others than could be
pursued including…
 Doing nothing until an
opportunity with the right
characteristics appears
A final thought…
 Many people confuse their
personal interests with real
business opportunities…
 For example, they open a
bookstore because they like
being around books or…
 A pet store because they love
animals
Keep in mind that…
 A passion for a product or service is
no substitute for a sound business
opportunity.
 Passion is a big plus. Passion and
commitment make it possible for
business owners to put in the long
days that success requires BUT….
 Before leaping in there are
fundamental questions to answer
i. Is there a significant unmet
demand for the product or
service offered?
ii. Does the business have real
profit potential?
iii. Do you as the owner have the
experience or know-how to
successfully manage the venture?
What are the characteristics of a
genuine opportunity?
An opportunity is a product or service
that…
1. Creates significant value for
customers
2. Offers significant profit potential to
the entrepreneur
3. Represents a good fit with the
capabilities of the founder and the
management team
4. Is sustainable (durable)
5. Is amenable to financing
An opportunity is a product or service that…

1.Creates Significant Value

for Customers
2. Offers significant profit potential to the
entrepreneur
3. Represents a good fit with the capabilities of the
founder and the management team
4. Is sustainable (durable)
5. Is amenable to financing
1. Creating Value
 Value can be defined as...
 The perception of the benefits
associated with a good or service,
(the customer benefit package) in
relation to what buyers are
willing to pay for them
Value = Perceived benefits/Price (cost) to the customer
 Consumers want value in every
purchase or experience…
 The underlying purpose of every
organization is thus to provide value
to its customers by…
 Solving a significant problem or
filling a significant unmet need for
which they are willing to pay a
premium
 Customers will pay for a product or
service only if they perceive a
benefit whose value exceeds its
cost…
 The greater the perceived value…
 The more they will pay
 To increase value, an enterprise can
either…
a) Increase perceived benefits while
holding price or cost constant
b) Increase perceived benefits while
reducing price or cost
c) Decrease price or cost while holding
perceived benefits constant
 A competitively dominant
customer experience is often
called a….
 Customer Value Proposition
(CVP)
An opportunity is a product or service that…
1. Creates significant value for customers

2.Offers Significant Profit

Potential
3. Represents a good fit
4. Is sustainable (durable)
5. Is amenable to financing
2. Significant Profit Potential
 To qualify as an opportunity, a
business must offer the potential
for significant profit…
 What is “significant” depends on each
person…
 Lifestyle vs. truly ambitious
entrepreneurs will have very
different views
 Risk must play a part in every
consideration of profit opportunity as
the two go hand in hand…
 Given the high risks of
entrepreneurship, there should be…
 A correspondingly high potential
rewards associated with an
opportunity
 There is a very real trade-off
between risk and return…
 The profit opportunity can be
measured by means of a pro forma
income statement…
 Naturally, it is only as valid as the
numbers it contains, revenue
projections in particular
An optimistic revenue projection is
 The most dangerous trap for prospective
business owners but not the only one…
 They also often underestimate…
 The space and personnel required to
operate the business (renting too much space
or hiring too many people or the reverse) and…
 The amount of advertising they must
do to show up on customers’ radar
An opportunity is a product or service that…
1. Creates significant value for customers
2. Offers significant profit potential to the
entrepreneur

3.Represents a Good Fit

4. Is sustainable (durable)
5. Is amenable to financing
3. A Good Fit
 A good fit is a situation in which the
entrepreneur and management team
have…
 The managerial, financial, and
technical capabilities along with the
personal commitment that are
needed to…
 Address a business opportunity
An opportunity is a product or service that…
1. Creates significant value for customers
2. Offers significant profit potential to the
entrepreneur
3. Represents a good fit

4.Is Sustainable (durable)

5. Is amenable to financing
4. Sustainability
 Some opportunities are durable, business
people can exploit them over long
periods…
 They are destined to grow over time
 Others are too fleeting to sustain
profitability…
 Most opportunities associated with
adolescent fads and fashion are
short-lived (adults, not only
adolescents, are fickle customers)
 The difference between a trend and a
craze may be hard to pick at first but…
 What’s hot today may be ice-cold
tomorrow so…
 It is better to jump on the bandwagon
near the beginning or during the
build-up…
 Not at the peak
 To persist over a reasonable length of
time the opportunity for profits must
NOT be based on…
 A momentary fad or a need that
will quickly disappear or….
 A situation where competitors can
quickly enter the field (low entry
barriers)
 Some opportunities lack
sustainability (not profitable over
a reasonable time span) even
though….
 Demand remains high for a
long time
Why?
 Because of low barriers to entry…
 A visible opportunity with low entry
barriers to new competition is a deadly
combination as…
 The supply of the product or service
can quickly exceed demand resulting
in…
 Price reductions and business distress
THANK YOU FOR YOUR ATTENTION