• Contrast the main sources of new product ideas (internal and external)

• Identify the stage in the development of a new product or service

• Understand and draw the breakeven chart to assess the likelihood of a profitable

business idea.

12.0 Learning Intentions

Subject: Leaving Certificate Business

Teacher: Ms Goucher

Week: Week 12

Lesson: Identifying Opportunities

12.1 Homework

Net profit margin

Net Profit x 100 = % Sales 1

€33,750 x 100 = = 25% €135,000 1

Current ratio

Current Assets : Current Liabilities €84,500 : €65,000 1.3 :1

Acid Test ratio

Current Assets – Closing Stock : Current Liabilities €84,500 - €39,000 : €65,000 0.7 : 1

Debt Equity ratio

Equity Capital (ord. shares + retained earnings)

Debt Capital : Equity Capital €192,000 : (€300,000 +€20,000) €192,000 : €320,000

0.6 : 1

Results 2008 2009

Net profit margin

32% 25%

Current Ratio 2:1 1.3:1

Acid Test ratio

1.1:1 0.7:1

Debt equity ratio

0.4:1 0.6:1

Results 2008 2009

Net profit margin 32% 25%

The Net profit margin tells us how much profit was made on each €1 of sales. This decreased from

32% to 25%. CES Ltd. has become less profitable.

The Current ratio tells us whether CES Ltd. has enough current assets to pay its current liabilities. It is a measure of the firm’s liquidity. This decreased from 2:1 to 1.3:1. CES Ltd. has less cash on hand to pay its day-to-day expenses. The ideal ratio is 2:1.

Results 2008 2009

Acid Test ratio 1.1:1 0.7:1

The Acid Test ratio is a better measure of the liquidity of CES Ltd. as stock is omitted from

current assets as it may not be quickly turned into cash. This decreased from 1.1:1 to 0.7:1. CES Ltd. does not have enough cash on hand to pay its day-to-day expenses in 2009. The ideal ratio would be 1:1.

Results 2008 2009

Debt equity ratio 0.4:1 0.6:1

Debt Equity ratio shows the relationship between debt capital and equity capital. This

increased from 0.4:0 to 0.6:1. This means that CES Ltd. has greater debt compared to equity in 2009 over 2008. (however it is still not highly geared)

Investors/shareholders Investors/shareholders will be unhappy that the Debt Equity ratio has increased. This indicates that CES Ltd. will have to pay higher interest payments on the increased debt. This will have to be paid before any dividends can be paid to the shareholders.

Also the Net Profit margin has decreased. This will be of concern to the shareholders, as there may be less profit available from which dividends can be paid.

Suppliers

Suppliers could be affected by the decrease in the Current ratio and Acid Test ratio. As CES Ltd. has less money to pay its day-to-day expenses, there is less cash to pay

current liabilities as they fall due. If suppliers are selling to CES Ltd. on credit, they may have to wait longer to receive payment. If this continues, they may be reluctant to provide credit or may charge higher interest on late payments. Employees In 2009, CES Ltd. is making less profit as a percentage of sales, has increased its debt burden and is less liquid than it was in 2008.

Employees will be concerned if the current trend continues as the long term viability of the business would be doubtful. In the short term, CES Ltd. may try to reduce its costs by reducing employee benefits or seeking voluntary redundancies. This would have a direct negative impact on the workforce.

Results 2008 2009

Current Ratio 2:1 1.3:1

2019 Q5 B (i) Explain what is meant by a liquidity problem in a business. A Liquidity problem refers to the inability of a business to raise funds to pay short term debts as they fall due. Calculate the Current ratio and the Acid test ratio for BioMed Ltd for 2017 and 2018. Show your workings.

2017 2018

Current Ratio Current Assets: Current Liabilities

40,000:20,000 2:1

62,500:25,000 2.5:1

Acid Ratio Current Assets minus Closing Stock: Current Liabilities

40,000 – 10,000:20,000 1.5:1

62,500- 42,500:25,000 0.8:1

(iii) Analyse the significance of the trends for the liquidity of BioMed Ltd. The current ratio increased from 2:1 to 2:5:1. This is above the ideal ratio of 2:1.

• The acid test has decreased from 1.5:1 to 0.8:1 This is below the ideal of 1:1.

• The business is carrying too much stock in its current assets. This may result in a difficulty in raising cash to pay short term debts, as stock can take time to sell.

dea Generation

This is a way of coming up with new ideas for goods and services.

People are always willing to buy new goods and services

Every business has a means of coming up with goods and services for the future.

There are two main sources of ideas for businesses

1. Internal Sources: those working inside a business come up with ideas for goods

and services

2. External Sources: ideas for goods and services coming from outside a business

1. Internal Sources of Ideas

i. Research and Development (R&D) Department

Most big companies have their own R&D department that is constantly coming up with

and researching new product ideas.

This department will be made up of creative and innovative employees.

R&D is about discovering new knowledge and applying it to old and new products

R&D is about inventing and perfecting new products as well as improving old products.

E.g. .: Glanbia and Nokia both have R&D departments

ii. Customer Feedback

Ideas from retailers or customers can be turned into successful products.

Customer complaints can be the source of a new idea.

E.g. .: Pizza Hut noticed that most families shared a pizza, but each family member wanted

a different topping. Pizza Hut developed a 4 for all Pizza (one Pizza divided into 4 with 4

separate toppings).

iii. Employees

Some firms encourage intrapreneurship and reward employees who come up with ideas

for new goods and services.

E.g. Staff suggestion box

iv. Brainstorming

This is when a small group of people are brought together and asked to come up with new

ideas. Everyone calls out their idea when they get one. Hearing an idea encourages other

people to add to these ideas or to come up with their own.

No one is criticised for coming up with ‘stupid ideas’.

The aim is to encourage creativity and imagination

Later these will be discussed, evaluated and analysed by a different group of people.

v. Skills and Interests

A potential entrepreneur may have special skills or talents which he/she could turn into a

profitable business. He/she may be born with these talents or may have developed them over

time.

E.g.: a good driver could set up a driving school,

Someone interested in gardening could set up a flower shop

12.2. Identifying Opportunities

2. External Sources of Ideas

i. Competitors

If a rival company comes up with a new idea, then other companies can copy and adapt

that idea if it is successful.

If a rival company’s idea has not been successful, other companies can learn from their

mistake.

E.g. .: Coca Cola brought out Deep River Rock water when it saw the success of other

bottled waters.

ii. Customers

Customers requirements and suggestions can be a good source of new ideas. If enough

customers demand something, then there is a gap/niche in the market for it.

iii. Market Trends

If companies keep up to date with changes in society, this will create openings for new

goods and services.

E.g. .: Changes in tax means less demand for 4x4’s and more demand for small engine

vehicles.

E.g. .: Health conscious people may want access to more leisure facilities, organically

grown food and low fat products, etc.

These are variations of existing products, but as tastes changed these product ideas

boomed.

iv. Abroad

Businesspeople often travel to trade fairs in other countries or may spot ideas when

away on foreign trips or holidays.

They may see products that are available abroad but which are not available in Ireland.

These may suit or could be adapted to suit the Irish market

E.g. .: ideas for new food and drink.

v. Market Research Agencies

These companies do research in different areas and sell this information in return for

a fee.

They can find out what good or service is not being provided or if it is of poor quality.

These firms can identify customer needs, wants and demands for new products.

vi. State Agencies

Government agencies such as Enterprise Ireland, or at local level the County

Enterprise Boards, can help come up with new ideas or new places to sell products.

SWOT Analysis

This looks at the strengths , weaknesses, opportunities and threats of an idea. A SWOT

analysis may lead to weaknesses being improved and possible new ideas developed.

New Product and Service Development Process

1) Idea Generation

2) Product Screening

3) Concept Development

4) Feasibility Study

5) Prototype Development

6) Test Marketing

7) Production and Launch

1) Idea Generation

The first step in bringing out a new good or

service is thinking up what that good or service will be.

Good ideas can come from internal and external

sources.

Firms try to address customers’ needs and wants.

Firms use market research to identify customers’

needs and wants

Example: Cadbury’s Protein BarCadbury’s did market research and found that people were

‘snacking’ more. They spotted a gap in the market for a more ‘chocolatey’ snack.

Cadbury’s R&D team were asked to combine various ingredients to develop a number of new

product ideas. They came up with over 250 ingredients such as cereal, peanuts, wafer, etc.

2) Product Screening

This is the process of separating weak ideas from strong ideas. A firm needs to eliminate

poor ideas as soon as possible so as to not lose money developing them.

Firms choose the ideas that they think will be the most successful (easy and cheap to

produce, good seller, profitable).

At this stage the firm will ask the following questions:

- Will customer’s buy it?

- Will it beat off competition?

- Will the product be profitable?

Example: Cadbury’s Protein bar

Cadbury’s R&D team thought up of over 250 ingredients in various combinations. It rejected

recipes that did not have the right balance of chocolate, food elements and texture until it

narrowed the recipe ideas down to the most promising.

New Product

Development

Process

12.3 New Product and Service Development Process

Idea Generation

Product Screening

Concept Development

Feasibility Study

Prototype Development

Test Marketing

Production and Launch

3) Concept Development

At this stage the idea will be made more precise

The idea will be turned into a good that would meet consumers needs and wants and

which consumers would be willing to buy.

Concept Development must identify the products USP.

At this stage the firm asks the following questions:

- What will the product actually look like?

- What will it do for the customer?

Example: Cadbury’s

Other companies make snack bars by focusing entirely on the ingredients with chocolate

used to coat the bar; Cadbury’s used chocolate to put together a number of popular snacking

ingredients such as raisins, peanuts, crisp cereal, etc.

What does ‘U.S.P.’ mean?

Unique Selling Point

This is one particular point/aspect/feature of the product that makes it different from the

competitions product. This difference is valued by customers

E.g. .: The Nintendo Wee is a computer game with a different controller

4) Feasibility Study

This is an investigation carried out on the product or service to see if it would be

possible to make the good and, if it is, to see whether it can be made at a reasonable cost

and whether it will sell well enough to make a profit.

Businesses could use a Cash Flow Forecast or a Breakeven Chart.

At this stage the firm asks the following questions:

- Does the firm have the necessary skills to make it?

- How much will it cost to make and can the firm afford to make it?

- How will it effect existing products/services?

Example: Cadbury’s Protein bar

Approximately 85% of all new products launched into the grocery sector fail in their first

year. Major research is needed when launching a product into this type of market. Cadbury

Protein went through 2 major tests. Cadbury’s were able to estimate how many Protein bars

it would sell. The figures allowed Cadbury’s to determine that the venture would be

profitable and Cadbury’s decided to go ahead with the project.

5) Prototype Development

This is the first working example of the product.

It is an experiment to see if the idea actually works in practise and whether it would

appeal to customers.

From this model improvements can be made.

From this model, copies can be made.

This stage

- proves the product can actually be made

- shows what the product will actually look like

- identifies any problems with the product

example: Cadbury’s Protein bar

Cadbury’s tried out many different recipes for the new bar using different ingredients in

various combinations until it came up with the recipe for the Protein bar. It tried out many

different styles of brand names (Protein bar), logos and packaging.

6) Test Marketing

This involves getting a small number of people and testing what they think of the

product before it goes into large scale production

This reduces the risk of a product failing

What consumers think of a product is taken on board and improvements or changes to

the product can then be made. Changes can be made in terms of the product itself, its price,

advertising, etc.

A decision can now be made on whether or not to produce the product.

Example: Cadbury’s Protein bar

Cadbury’s asked consumers to test market for the new Protein bar. 82% of customers rated

Protein as excellent or very good and 83% said they would buy it regularly.

7) Production and Launch

If the results of test marketing are good, the firm will go into full scale production and

make the product available for sale.

It will be very expensive to promote and advertise a product when it’s being launched in

order to get the product known.

Example: Cadbury’s Protein bar

When launching Protein Cadburys held one-to one meetings with over 70 of the biggest

retailers in the UK to inform them about Protein and to get them to support its launch in

their shops.

The launch was a big success and Protein sold over 70 million bars in its first 3 months.

2014 Q2 SQ

Financial Feasibility The breakeven Chart

Diagram/chart that shows

Where revenue and costs are equal

Not making a profit or a loss

Fixed costs= never changes no matter how much it sells

Variable cost= changes depending on how much it sells

Total cost= VC+FC

Total revenue:

If you know all of these you can find your break even point

break even

point

(units)=

12.4 Breakeven Chart

break even point (euro)= breakeven points in units x selling price

2016 Question 6

Breakeven chart of Medron PLC

Breakeven chart of Medron PLC

If

• New breakeven point is

• 20,000 units and €600,000 units

(ii) Outline one limitation of a breakeven analysis.

• Break-even analysis assumes Fixed Costs are constant – FCs can vary as output

changes.

• It assumes that the business knows all its costs and can break them down into fixed

and variable.

• Variable costs may increase/decrease as output increases – business may be able to

purchase larger amounts of raw materials at lower prices (economies of scale from

bulk buying).

• Assumes that firm sells all its output – in times of low demand a firm may have

difficulty in selling all its products.

• Assumes a firm sells all its output at a single price -firms may offer discounts for bulk

purchases/ may produce more than it can sell and may have to sell the surplus at a

discounted price. Ignores the effect that a change of price may have on sales-price increase fall in demand for the product and vice versa. Most businesses sell more than one product, so break-even becomes harder to calculate

2011 Q7

Extra break even Question

Question 1 Fixed Cost €360

Variable Cost per Unit €18

Expected/Forecasted Output 50 units

Selling Price per Unit €30

• Illustrate by means of a break-even chart

- Break even point

- Profit at full capacity

- Margin of safety

Outline one effect on the break even point if the selling price decreased to €27 per unit.

-

Solution: Break Even Point = Fixed Costs

Selling Price – Variable Cost

€360 30 units €12 per unit

Breakeven Point – 30units €900

0 BEP EXPECTED

SALES

Output

(number of units)

0 30 50

Revenue

(selling price x no. of units)

0 x 30=

0

30 x 30=

900

50 x 30=

1,500

Fixed Costs

Never changes

360 360 360

Variable Costs

V.C x no. of units)

0 x 18=

0

30 x 18 =

540

50 x 18=

900

Total Costs

F.C + VC=

360 900 1,260

Profit/Loss

Revenue - TC

-360 0 240

12.5 Homework

• Margin of Safety = Expected Sales – Break Even Sales

50 units – 30 units = 20 units

• If Selling Price Falls to €27

Contribution = €27 – €18 = €9

Break-Even Point €360 =

€9 40 units need to be sold before you

cover your costs

40 units x €27 = €1,080

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

0 10 20 30 40 50 60 70

Out

put

(units

)

Sales (€)

Break Even Chart

Fixed Costs

Total Cost

Sales

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

0 20 40 60 80

Out

put

(units

)

Sales (€)

Break Even Chart

Fixed Costs

Total Cost

Sales

Sales (27)

Break Even Point

Question 2 Fixed Cost €200,000

Variable Cost per Unit €55

Expected/Forecasted Output 10,000 units

Selling Price per Unit €80

• Illustrate by means of a break-even chart

- Break even point

- Profit at full capacity

- Margin of safety

Solutions

• Contribution per Unit = Selling Price – Variable Cost

€80 - €55 = €25

• Break Even Point =

Fixed Costs €200,000 = 8,000 units Contribution

per Unit €25

0 BEP EXPECTED

SALES

Output

(number of units)

0 8,000 10,000

Revenue

(selling price x no. of units)

€80 x 0=

0

€80 x 8,000=

640,000

€80 x 10,000=

800,000

Fixed Costs

Never changes

€200,000 €200,000 €200,000

Variable Costs

V.C x no. of units)

€55 x 0 =

0

€55 x 8,000=

440,000

€55 x 10,000=

550,000

Total Costs

F.C + VC=

€200,000 640,000 €750,000

Profit/Loss

Revenue - TC

-€200,000 0 €50,000

Profit at full Capacity €50,000

• Margin of Safety = Expected Sales – Break Even Sales

10,000 units – 8,000 units = 2,000 units

2009 QUESTION 7 A

Olympian Ltd is a company that produces a range of high quality branded sportswear. Following a lengthy market research process, the firm is now expanding its business to include a new range of Hoodie Tracksuits, aimed at the teenage market.

Outline the stages involved in the development process of the Hoodie Tracksuits. (20 marks)

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

0 2000 4000 6000 8000 10000 12000 14000

Out

put

(units

)

Sales (€)

Break Even Chart

Fixed Costs

Total Cost

Sales

Break Even Point

2019 Short Question 10