1b Opportunity Evaluation

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1b Opportunity Evacuation New Venture Creation 2012

1b Opportunity SpottingFrank Martin

Hunter Centre for Entrepreneurship


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Opportunity Spotting

Is it about finding anopportunity . . . or theability continuallyspotopportunities?

Can firms be opportunityseeking?

Enterprising

Approaches to OpportunitySpotting

Why nothing isimpossible.

Faint hearted neer wonfair lady attributed to Miguelde Cervantes 1574 in DonQuijote

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Why produce a Plan?

"Would you tell me, please, which way I ought to go from here?""That depends a good deal on where you want to get to," saidthe Cat."I dont much care where--" said Alice."Then it doesnt matter which way you go," said the Cat.

"--so long as I get SOMEWHERE," Alice added as anexplanation."Oh, youre sure to do that," said the Cat, "if you only walk longenough."

(Alices Adventure in Wonderland)


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On Spotting Opportunities

In business . . .

there is no such thing as a threat onlyopportunities disguised as treats . .

So where others see a problem entrepreneurs see a chance todo something different and better


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Stages of Starting a Business 1

Validating the Idea

Technical testing of Product or Service Market Acceptance

Finding an Idea

Getting a raw idea for further investigationAlternatives forgetting into business, e.g.,

franchising or buying a going concern.

Acquiring Motivation

Finding the stimulus and commitment Building the Support Network


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Stages of Starting a Business - 2

Birth and Survival

Business processes, regulationRelationship with customers and

suppliers

Negotiating to get into Business

Legal Structure, Ownership Funding, Premises Contracts

Identifying the Resources

Determiningthe scale Resources needed.


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9 Steps into Business (Non-Recursive)

Generate and refine the business idea

Gauge demand for the product/service

Produce detailed Business Plan

Arrange Resources

Adopt legal structure

Make tax and legal arrangements

Confirm sales Potential in BusinessPlan

START BUSINESS

Get thefirst stepright andthenfollowthrough?Tooeasy!


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Approaches to Start-Up

Intuitive

Opportunistic, go for it, strong personal belief, minimal planning. Sometimes seen (by outsiders!) as the true entrepreneurial approach. Has the advantages of speed but tends to be very high risk.

Methodical

Clear goals and plans methodically pursued. Minimises risk.

Maximises chances of support. Can lead to paralysis by analysis.

Incremental

A clear intention to go into business, but step-by-step. Steps related to risk reduction or maintaining existing commitments. e.g.

working in spare time to develop product/service leads to self employment,

to forming partnership or company, to taking on staff. Often involves some degree of planning, but can be highly pragmatic.

Which

isbest?

BeingOp

portunist


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An opportunity is a business concept that if turned intoa tangible product or service offered by a businessenterprise will result in a financial profit

Entrepreneurial opportunity

is about seeing an opportunity AND

Talking the talk

Exploiting that opportunity

Walking the walk

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Crash and Burn . .

BUT Opportunities arise from experienceHigh potential/high risk - the breakthrough technologies (Schumpeter)

Lower potential/lower risk - the steady as she goes opportunities (Kirzner)

AND personal goals and objectives important in shaping what is

and what is not an opportunity for the individual.

This is what gives risk profiles

Individual Risk Profiles

Comfort Zones

Organisational Risk profile

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Approaches? Being Intuitive

Opportunistic, go for it, strong personal belief, minimalplanning.

Sometimes seen (by outsiders!) as the true entrepreneurialapproach.

Has the advantages of speed (fads and fashions, secrecyetc.)

Tends to be very high risk business.

Evolutionary rather than revolutionary ideas

Source: Richardson and Clarke (1993)

The Cheshire Cat

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http://www.merriam-webster.com/dictionary/opportunistichttp://en.wikipedia.org/wiki/Cheshire_Cathttp://en.wikipedia.org/wiki/Cheshire_Cathttp://en.wikipedia.org/wiki/File:Cheshire_Cat_Tenniel.jpghttp://www.merriam-webster.com/dictionary/opportunistic


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Entrepreneurial Opportunities

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What makes a truly successful entrepreneur is notintelligence, education, lifestyle or background. The principalfactor that seems to determine success is the entrepreneursability to effectivelydeal with opportunitiesthrough thedynamics of an organizational setting, thereby enabling the

people concerned to be actively and enthusiasticallyinvolved and successful.

Entrepreneurs who strive to establish a setting that issupportive . . . help to instil within those individuals a loyaltythat will serve to enhance the continued achievement of

organizational excellence and the operational success of theorganization. Darling et al 2007


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How to Evaluate an opportunity?

Opportunity(rather than just a good idea)

Attractive Timely

Creates value Sustainable


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What is an opportunity?

A new or improved product A new service A new means of production A new way of distributing the product or service

An improved service New combinationsOr a hybrid of the above


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Best ways to create opportunities?

Combining resources Solving problems/eradicating pain Satisfying unmet needs

Using existing knowledge/skills in a different way Taking advantage of new trends


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Assessing the opportunity

Assessing theopportunity

Investment(20)

Timescale(20)

Impact ofchange (20)

Risk(20)

Return (ROI)(20)

The pentagon model of opportunity assessment (Rae, 2007)

Different

entrepreneurs different

perspectives


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Investment

Resources are a key dimension of any opportunity. Key issues

include:How much is required and over what period? Is staged investment

required?

Tangible

IntangibleWhat proportion of your own resources does this represent and what

additional resources are required?

If so, who will contribute them and on what terms?

What does the investment actually buy?

Is it tangible assets that have disposal value or it is intangible resources

such as knowledge, information, expertise, networks, IPR?

Is Franchising cheaper than a newstart?


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Risk and uncertainty

Essential to evaluate risks involved arising from uncertainty

surrounding the opportunity. These may include:

Knowledge:Lack of information about market factors and likely demand

The economy:Fluctuations in macro-economic conditions such as marketstability, currency exchange and interest rates

Technology:Will the technology work as planned?

Financial factors:Are the financial costings realistic and achievable?

Competition:How will they respond?

Customers:Will they buy and pay as expected?

Supply chain:Will supplier and distributors deliver as expected?Human elements:Does the venture team have the managementskills, experience, credibility and expertise to manage the venture?

Risk is the risk of loosing

money

Professional gambler??


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Return and value added

Also vital to assess the acceptability of the return which shouldtake into account the following factors:

The amount invested:It may be acceptable to lose a small amount completely

Return in relation to risk:The higher the risk, the higher the return will normally b

Timescale over which return will come:Risk tends to increase further ahead in timThe form of return:e.g. As capital growth in the investment or as a flow of income

The exit strategy:e.g. As liquidation of assets, sale as a going concern, flotation,

value anticipated and timescale

The size of return:What profits will be generated? What are the costs?What prices can be set? What will be the margin?


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Impact of innovation and change

It assessing the impact of change caused by the opportunity,important to examine the extent to which it will either drive and leada change process

Strategic and disruptive innovations can reduce competitor's powerand create new markets. The following key factors are vital to assess:

How far does the opportunity create or develop a new market, identify unmetdemand, or meet customer requirements in a new way?

Does the opportunity apply innovation to offer customers new benefits or meet thneeds more effectively?

Does the opportunity use a new distribution method to communicate and sell to

customers?

Will the opportunity lead to significant change in the structureof the industry e.g. for competitors and suppliers?


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Timescale

Achieving the right timing is crucial factor in the viability of anopportunity. Creating an entirely new market or product can createhigh rewards but also high risks

Some opportunities can be ahead of their time or take too long toestablish customer acceptance. Key issues to consider include:

Is the timing of entry 'leading' the rest of the market, which may give an advantagbut also require greater time and investment? Is it entering the market at the samtime as competitors, or trailing behind in a mature or declining market?

What is the duration of the opportunity from short to long term?

What is the lead time needed to enter the market?

When will the investment achieve a return?


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The Idea or the Individual?

Timmons (1994) emphasises fit;

fit between the individuals, and the opportunity, and between the individualsand their abilities to resource and exploit the opportunities.

Other fundamentals are:

the founders are the drivers of the entrepreneurial process:the quality of the lead entrepreneur and the team are vital

a team grows a business while a solo entrepreneur makes a living (Timmons,1994, p.20),

a business idea is not necessarily an opportunity,

entrepreneurs seek access and control of re sources rather than ownership,

timing is a vital component of good fit

Timmons, cited in Scott, 1999


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Types of opportunity

Personal risksfinancial - can you afford to lose your investment

career - can you return to your previous job

family and social - how will it affect your reputation

psychic - how afraid are you of failure

Business risks

market - will the product sell?

credit - will the customers pay, and when?

operational - are the right control systems in place?

resources - are the resources (people, finance) adequate?

reputational - does the market believe this can be done

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Its about Adding Value . . .

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Nilson (1992) defines value added as:

constantly looking for ways to improve the perceived value-for-money of products and services.

Compared with reactivemarketing, value-added marketing

means constantly seeking out new opportunities to exceedcustomer expectation and beat the competition.

Value added market relies on continual research to spotemerging opportunities that others are missing.

So a good Business (Idea) is distinctive, no-one else is brave(or stupid) enough to do it!

Being average (me-too) is not special but it is safe!


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SEARCHING FOR OPPORTUNITIES

Meet already articulatedneeds better (by an orderof magnitude or marginally)

niches and market gaps

customer complaints

exploitation of enablingtechnologies

Define a new need andmeet it by creating themarket (changing theworld, history making)

Disruptive innovation

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Forward Looking Organisations(not Individuals)

Having a good product or service is not distinctiveDo not compete on price, compete on focuseddifferentiation (Porters Generic strategy)

Market orientated means putting customer value first?

Understanding what buyers want and achieving that profitably.

Look for a sustainable and differential competitive advantage

Formal bureaucracies are the antithesis of the market opportunityseeking enterprising organisation.

entrepreneurship and marketing are focused on innovationand change.The really skilful entrepreneur sees things in a way no one else does.They perceive opportunities in the market place which perhaps are notyet fully formed but are currently no more than shapes and patternsarising from a new technology and fashion or trend, a possible culturalshift. Carson (1995)

27Hunter Centre for Entrepreneurship; New Venture Creation
http://www.quickmba.com/strategy/generic.shtmlhttp://www.quickmba.com/strategy/generic.shtmlhttp://www.quickmba.com/strategy/generic.shtmlhttp://www.quickmba.com/strategy/generic.shtmlhttp://www.quickmba.com/strategy/generic.shtml


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Forward Looking Organisations

Is it about the person (entrepreneur) or the organisation(enterprise)?

Formal bureaucracies are the antithesis of the marketopportunity seeking enterprising organisation.

entrepreneurship and marketing are focused on innovation andchange. The really skilful entrepreneur sees things in a way noone else does. They perceive opportunities in the market placewhich perhaps are not yet fully formed but are currently no morethan shapes and patterns arising from a new technology andfashion or trend, a possible cultural shift. Carson (1995)

Forward looking organisations are alwayslooking for newopportunities new ways to add value.

28Hunter Centre for Entrepreneurship; New Venture Creation


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Opportunity evaluationPurpose of opportunity evaluation is to assemble all known information

about the opportunity and use it to investigate essential, strategic decisions

Aims to reduce risk of project failure and to ensure opportunity offersattractive rewards

Critical factors:

Reasons for perceived opportunity solving a problem, meeting a need

Market opportunity for business size, value, durationKey market segments and customer groups, preferences and distributionchannelsBarriers to entry and protecting the opportunityIndustry structure, driving forces and competitionRoutes to market

Who may support or invest in the businessOptions, resources and key success factors for theprojectDynamic effects of change on the industry


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However...

'While information reduces risk, the entrepreneur cannot expect to eliminate allriskand sometimes they must make a step in the dark. The entrepreneur must walk anarrow path between making ill-informed and ill-judged decisions, and inertiacaused bybecoming more interested in gathering and analysing informationthan in taking direct action' (Wickham, Strategic Entrepreneurship, 2006).

'It is easy to get carried away with enthusiasm for the potential of an opportunityand to neglect the risks representing the downside, only to discover these later.On the other hand, over-analysis can lead to very slow decision-making or evenfailure to act at allIn some situations, it may be better to act and learn quicklyfrom what happens, and then modify the strategy, than to fail to act at all'(Rae, Entrepreneurship: From Opportunity to Action, 2007).


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Spotting Opportunities

InformationMarket CharacteristicsProduct CharacteristicsBuyer Characteristics

AnalysisCritical relationshipsKey Success Factors

SynthesisRefine Criticalrelationships

New Opportunity

The heuristic approach.

Process is interactiveeachcycle refines the opportunity

Wickham, Strategic Marketing, Pitman, p158, 1998

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Opportunities: Wood and trees

Opportunities are about creating value not reducing cost by doingsomething cheaper.

Most people fail to pursues opportunities, even when they areobvious

Opportunity rarely found in well-documented markets (but look out

for disruptive innovations)

Opportunities are not necessarily the result of inventions the bestone may not be innovations . .

So why do some people discover opportunities?

Superior opportunity recognition capabilities, given access to the sameinformation.

It a way of viewing the world.


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The best Opportunities

The greater the number of entrepreneurs searching in agiven area, the lower the probability that any givenone of them will be first to make a discovery. If eachentrepreneur is basically as well equipped for searchas the others, then his probability of obtaining a

reward from search varies inversely with the numberof entrepreneurs in the field Casson (1982)

Hence Competition sucks! and the best opportunities areunique but not so unique that NO-ONE has done it before.

That is just plain stupid

Quick in and quick out!

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1b Opportunity Evaluation

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