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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%
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
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