SMALL BUSINESS MANAGEMENT

Chapter 3Evaluation of a Business Opportunity

Fou Fou MukluksWIKES Beer mits

Bikers Campground

StarmanKinetic energy

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.

Entrepreneurial Process

The process of starting a new venture can be referred to as the Entrepreneurial Process Identification and evaluation of opportunity Development of a business plan Determination of the resources required Management of the business

Copyright © 2014 McGraw-Hill Ryerson. All rights reserved.

Entrepreneurial Process

Ideas All businesses start with one thing—an idea.

Without ideas there would be no businesses or entrepreneurship

Copyright © 2014 McGraw-Hill Ryerson. All rights reserved.

Entrepreneurial Process

Sources of New Ideas Occupations Hobbies Drawing from Experience Observations – NY Fries

Existing Products and Services Deliberate Searches

Focus groups, brainstorming

0%

5%

10%

15%

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25%

30%

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45%

Prior job Personalintrest

Chance Suggestion Friends &relatives

Familybusiness

Education other

Sources of ideas for new business

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Prior job Personalintrest

Chance Suggestion Friends &relatives

Familybusiness

Education other

Sources of ideas for new business

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Prior job Personalintrest

Chance Suggestion Friends &relatives

Familybusiness

Education other

Sources of ideas for new business

Non-Quantitative Assessment of Business Opportunities

Goals Financial and occupational status

Content of Work Lifestyle Capabilities

Good health management fundamentals financial base

Experience Fou Fou --How are above factors illustrated in his

case

Fou Fou

Breaking Into The Market

Three Ways offer a totally new product

bright lights

offer an existing product to a different market mukluks

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, barman, Fou Fou, Bread man American Clothing, bright lights

Mukluks

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

the right business

Growth areas Health Care Services for small business Mobile Business Services that appeal to parents with children Green Products and services

Collection of Information

Sources of Information Secondary data

Appendix 3A Agencies such as BDC Govt appendix 3B Universities Professionals incubators

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.

1. How often do you normally have your carpets professionally cleaned? If your answer is never, end of questionnaire. If answer is yes, fill out the rest of the questionnaire.

Never _____ Less than once a year _____ Once a year _____ Twice a year_____ Three times a year _____ More than three times a year_____

2. The last time you had your carpets cleaned, what was the approximate cost?

3. Are you going to have your carpets cleaned again in the near future?

Yes _____ No _____

Demographic Information:

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

Is it financially feasible?????

Beermits case – how to determine feasibilityBeer mits

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

Step One - Calculate the Market Potential

potential revenues for the total market

=

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

Step Two - Calculate the Market Share

Our Market Share %

Retail Firm1. 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

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.

Market share in $

XTotal market

Potential ( step 1 )

Our Market Share %

= Market Share in $

Step Three - Calculate net income and cash flow

Market Share in $

Subtractcost of goods sold

gross profit percentages; cash operating expenses;interest and depreciation

= net income (Projected for 1st year)

Bikers Campground

Pharmacy example ( in Text )

Pharmacy example ( in Text )

Pharmacy example ( in Text )

PETITE SHOP "A"

1. Using the information provided, prepare an estimate of the market potential for the target market Alice Wood is aiming at.

2. What portion of this market potential could Alice expect for Petite Shop's market share?

3. What non quantitative considerations should be brought into this analysis?

Self Assessment for a Small Business Opportunity

Personality Nature Abilities Experience Financial base Feasibility

WIKES

Step One - Calculate the Market Potential

potential revenues for the total market

=

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

Bikers Campground

Step Two - Calculate the Market Share

Our Market Share %

Retail Firm1. 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

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.

Market share in $

XTotal market

Potential ( step 1 )

Our Market Share %

= Market Share in $

Step Three - Calculate net income and cash flow

Market Share in $

Subtractcost of goods sold

gross profit percentages; cash operating expenses;interest and depreciation

= net income (Projected for 1st year)

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?

Sales Estimation Methods

Industry or Association Data Market Potential/Market Share Customer Counts Similar Business in Similar

Location Indicator Variable ( sq ft ) Sales of Existing Competitors

Costs and Break-Even

StarmanKinetic energy