The Role of Entrepreneurship in Value Creation in … Role of Entrepreneurship in Value Creation in Large and Small Enterprises ENT422 Fall Quarter, 2006 Opportunity Exercise Packet

The Role of Entrepreneurship in Value Creation in Large and Small Enterprises

ENT422

Fall Quarter, 2006

Opportunity Exercise Packet

Chapter 3 The Opportunity: Creating, Shaping, Recognizing, Seizing 115

Exercise Idea Generalization Guide

Before beginning the process of generating ideas for new ventures, it is useful to reflect on an old German proverb that says, “Every beginning is hard." If you allow yourself to think creatively, you will be surprised at the number of interesting ideas you con generate once you begin.

The Idea Generation Guide is an exercise in generating ideas. The aim is for you to generate as many interesting ideas as possible. While generating your ideas, do not evaluate them or worry about their implementation. Discussion and exercises in the rest of the book will allow you to evaluate these ideas to see if they are opportunities and to consider your own personal entrepreneurial strategy.

And remember – in any creative endeavor there are no right answers.

Chapter 3 The Opportunity: Creating, Shaping, Recognizing, Seizing 116

Exercise Idea Generalization Guide NAME: DATE: STEP 1 GENERATE A LIST OF AS MANY NEW VENTURE IDEAS AS POSSIBLE. Thinking about any unmet or poorly filled customer needs you know of that have resulted from regulatory changes, technological changes, knowledge and information gaps, lags, asymmetries, inconsistencies, and so forth, will help you generate such a list. Also think about various products and services (and their substitutes) and the providers of these products or services. If you know of any weaknesses or vulnerabilities, you may discover new venture ideas. STEP 2 EXPAND YOUR LIST IF POSSIBLE. Think about your personal interest, your desired lifestyle, your values, what you feel you are likely to do very well, and contributions you would like to make.

Chapter 3 The Opportunity: Creating, Shaping, Recognizing, Seizing 117 STEP 3 ASK AT LEAST THREE PEOPLE WHO KNOW YOU WELL TO LOOK AT YOUR LIST, AND REVISE YOUR LIST TO REFLECT ANY NEW IDEAS EMERGING FROM THIS EXCHANGE. See discussion about getting feedback in Chapter 18. STEP 4 JOT DOWN INSIGHTS, OBSERVATIONS, AND CONCLUSIONS THAT HAVE EMERGED ABOUT YOUR BUSINESS IDEAS OR YOUR PERSONAL PREFERENCES:

Chapter 4 Screening Venture Opportunities 121

Exercise

QuickScreen I. Market and Margin Related Issues

Criterion Higher Potential Lower Potential

Need/want/problem Identified Unfocused

Customers Reachable and receptive Unreachable/loyal to others

Payback to users Less than one year More than three years

Value added or created IRR 40% + IRR less than 20%

Market size $50-100 million Less than $10million or + $1 billion

Market growth rate More than 20% Less than 20% contracting

Gross margin More than 40% and durable Less than 20% and fragile

Overall Potential:

1. Market higher avg lower

2. Margins higher avg lower II. Competitive Advantages

Higher Potential Lower Potential

Fixed and variable costs Lowest Highest

Degree of control Stronger Weaker

Prices and cost

Channels of supply and distribution

Barriers to competitor’s entry Can create Weak/None

Proprietary advantage Defensible None Lead time advantage (product, technology, people, resources, location)

Service chain Strong edge No edge

Contractual advantage Executive None

Contracts and networks Key access Limited

Overall Potential:

1. Costs higher avg lower

2. Channel higher avg lower

3. Barriers to entry higher avg lower

4. Timing higher avg lower III. Value Creation and Realization Issues

Higher Potential Lower Potential

Profit after tax 10-15% or more and durable Less than 5%, fragile

Time to breakeven Less than 2 years More than 3 years

Time to positive cash flow Less than 2 years More than 3 years

ROI potential 40-70% +, durable Less than 20%, fragile

Value High strategic value Low strategic value

Capitalization requirements Low-moderate, fundable Very high, difficult to fund

Exit mechanism IPO, acquisition Undefined, illiquid investment

Overall value creation potential:

1. Timing higher avg lower

2. Profit/free cash flow higher avg lower

3. Exit/liquidity higher avg lower

Part 1 The Opportunity 122 IV. Overall Potential Go No Go Go, if . . . 1. Margins and markets 2. Competitive advantages 3. Value creation and realization 4. Fit: “O” + “R” + “T” 5. Risk-reward balance 6. Timing 7. Other compelling issues: must know or likely to fail a. b. c. d. e.

Opportunities Resources Team


Exercise 1 Opportunity Concept and Strategy Statement Briefly describe your vision, the opportunity concept, and your strategy. What is your vision for the business? What is the creation proposition? What is the significant problem, want, or need that it will solve? Why is this important enough that a customer or end user will pay an above average to a premium price for it? Why does this opportunity exist, now, for you? Can you describe the concept and your entry strategy in 25 words or less?

Part 1 The Opportunity 124

Exercise 2 The Venture Opportunity Profile Fill in this profile by indicating for each criterion where your venture is located on the potential continuum. Check off your best estimate of where your idea stacks up, being as specific as possible. If you are having trouble, information can be found in magazines and newsletters, from other entrepreneurs, from trade shows and fairs, or from online resources.

Venture Opportunity Profile

Criterion Highest Potential Lowest Potential Industry and Market Market: Need Market driven; identified;

recurring revenue niche Unfocused; onetime revenue

Customers Reachable; purchase orders Loyal to other or unreachable

User benefits Less than one year payback Three years plus payback Value added High; advance payments Low; minimal impact on market Product life Durable Perishable Market structure Imperfect, fragmented competition

or emerging industry High concentrated or mature or declining industry

Market size $100 + million to $1 billion sales potential Unknown, less than $20 million or

multibillion sales Growth rate Growth at 30 to 50% or more Contracting or less than 10% Market capacity At or near full capacity Under-capacity Market share attainable (Year 5) 20% or more; leader Less than 5%

Cost structure Low-cost provider; cost advantages Declining cost

Chapter 4 Screening Venture Opportunities 125 Criterion Highest Potential Lowest Potential Economics Profits after tax 10% 10 15% or more; durable Less than 15%; fragile

ROI potential 25% or more; high value Less than 15% to 20%; low value

Capital Requirements Low to moderate; fundable Very high; unfundable Internal rate of return potential 25% or more per year Less than 15% per year Free cash flow characteristics Favorable; sustainable; 20-30 + % of sales Less than 10% of sales Sales growth Moderate to high (15 +% to 20 +%) Less than 10%

Asset intensity Low/sales $ High/sales $

Spontaneous working capital Low, incremental requirements High requirements R&D/capital expenditures Low requirements High requirements Gross margins Exceeding 40% and durable Under 20%

Time to breakeven–cash flow Less than 2 years; breakeven not creeping Greater than 4 years; breakeven creeping up

Time to breakeven – P&L Less than 2 years; breakeven not creeping Greater than 4 years; breakeven

creeping up Harvest Issues Value-added potential High strategic value Low strategic value

Valuation multiples and comparables p/e = 20 + x; 8-10 + X EBIT;

1.5 – 2 + x revenue Free cash flow 8-10 + x

p/e = 5 x, EBIT = 3-4x; revenue = .4

Exit mechanism and strategy Present or envisioned options Undefined; illiquid investment

Capital market context Favorable valuations, timing,

Capital available; realizable liquidity Unfavorable; credit crunch

Competitive Advantage Issues Fixed and variable costs Lowest; high operating leverage Highest

Control over costs, prices, and distribution

Moderate to strong Weak

Part 1 The Opportunity 126 Criterion Highest Potential Lowest Potential Barriers to entry: Proprietary protection

Have or can gain None

Response/lead time Competition slow; napping Unable to gain edge

Legal, contractual advantage Proprietary or exclusivity None Contracts and networks Well-developed; accessible Crude; limited Key people Top talent; an A team B or C team Management Team Entrepreneurial team All-star combination; free agents Weak or solo entrepreneur

Industry and technical experience Top of the field; super track record Underdeveloped Integrity Highest standards Questionable Intellectual honesty Know what they do not know Do not want to know that they

Do not know Fatal-Flaw Issue Nonexistent One or more

Personal Criteria Goals and fit Getting what you want; but wanting what you get Surprises

Upside/downside issues Attainable success/limited risks Linear; on same continuum

Opportunity costs Acceptable cuts in salary, etc. Comfortable with status quo

Desirability Fits with lifestyle Simply pursuing big money

Risk/reward tolerance Calculated risk; low R/R ratio Risk averse or gambler

Stress tolerance Thrives under pressure Cracks under pressure

Strategic Differentiation Degree of fit High Low

Team Best in class; excellent free agents B team; no free agents

Chapter 4 Screening Venture Opportunities 127 Criterion Highest Potential Lowest Potential Service Management Superior service concept Perceived as unimportant

Timing Rowing with the tide Rowing against the tide

Technology Groundbreaking; one-of-a-kind Many substitutes or competitors Flexibility Able to adapt; commit and de-commit quickly Slow; stubborn Opportunity orientation Always searching for opportunities Operating in a vacuum; napping Pricing At or near leader Undercut competitor; low prices

Distribution channels Accessible; networks in place Unknown; inaccessible Room for error Forgiving strategy Unforgiving, rigid strategy Assess the external environment surrounding your venture opportunity, including the following: An Assessment of the characteristics of the opportunity window, including its perishability:

A statement of what entry strategy suits the opportunity, and why:

A statement of evidence of and/or reasoning behind your belief that the external environment and the forces creating your opportunity, as described in Exercise 1 and the profile you just competed, fit:

A statement of your exit strategy and an assessment of the prospects that this strategy can be met, including a consideration of what the risk, rewards, and tradeoffs are acceptable:

Checkpoint

Before you proceed to further exercises, be sure the opportunity you have outlined is compelling and you can answer the question, “Why does the opportunity exist now?” It is possible you ought to abandon or alter the product or service idea behind your venture at this point. The amount of money and time needed to get the product or service to market, and to the open for business, may be beyond your limits. Beware the opportunity for which the potential rewards are too large compared to the risks and vulnerabilities to obsolescence and competition.


Exercise 3 Opportunity Shaping Research and Exercise Articulate the reasons that make you believe your idea is an opportunity. This will likely affect or “shape” your opportunity. We have listed some important questions that you should address, but you might also want to add additional perspectives. The principle objective of this exercise is to focus the lens oh the major components of your opportunity.

Access the attractiveness of your venture opportunity by applying screening Criteria. Include the following:

What is the critical problem, want or need your product or service will solve?

Why is this critical problem?

Who will pay a premium price, compared with alternatives, if you can address this problem or want?

What is the underlying value creation proposition: How and why will it pay for itself, yield major benefits/advantages, etc.?

A brief description of the market(s) or market niche(s) you want to enter:

An exact description of the product(s) or service(s) to be sold and, if a product, its eventual end use(s). (If your product(s) or service(s) are already commercially available or exits as prototypes, attach specifications, photographs samples of work, etc.)

Chapter 4 Screening Venture Opportunities 129 An estimate of how perishable the product(s) are, including if it is likely to become obsolete and when:

An assessment of whether there are substitutes for the product(s) or service(s):

An assessment of the status of development and an estimate of how much time and money will be required to complete development, test and product(s) or service(s), and then introduce the product(s) or service(s) to the market:

Development Tasks

Development Task Dollars Required Months to Complete

An assessment of any major difficulties in manufacturing the product(s) or delivering the service(s) and how much time and

money will be required to resolve them:

Part 1 The Opportunity 130 An assessment of your primary customer group:

–A description of the main reasons why your primary group of customers will buy your product or service, including whether customers in this group are reachable and receptive and how your product or service will add or create value, and what this means for your entry or expansion strategy:

A description of the necessary customer support, such as warranty service, repair service, and training of technicians, salespeople, service people, or others:

An assessment of the strengths and weaknesses, relative to the competition, of the product(s) or service(s) in meeting customer needs, including a description of payback of and value added by the product(s) or service(s):


–A list of 5 to 10 crucial questions you need to have answered and other information you need to know to identify good customer prospects:

–An indication of how customers buy products or services (e.g., from direct sales, either wholesale or retail; through manufacturers’ representatives or brokers; through catalogs; via direct mail; on the Web; etc.):

–A description of the purchasing process (i.e., where it occurs and who is ultimately responsible for approving expenditures; what and who influence the sale; how long does it take from first contact to close, to delivery, and to cash receipt; and your conclusions about the competitive advantages you can achieve and how your product or service can add or create value):

Part 1 The Opportunity 132 An assessment of the market potential for your venture’s product or service, the competition, and what is required to bring

and sell the product or service to the customer. (Such an analysis need not be precise or comprehensive but should eliminate from further consideration those ventures that have obvious market difficulties.) include the following information: –An estimate, for the past, present, and future, of the approximate size of the total potential market, as measured in units and in dollars or number of customers. In making your estimates, use available market data to estimate ranges of values and to identify the area (country, region, locality, etc.) and data for each segment if the market is segmented:

Total Market Size

Year 20_ _ 20_ _ 20_ _ 20_ _ 20_ _

Sales of Units/ Number of Customers

Sales in Dollars

Sources of Data:

Researcher:

Confidence in Data:

Chapter 4 Screening Venture Opportunities 133 –An assessment of the type of market in terms of price, quality, and service; degree of control, and so on; and your conclusions about what approaches are necessary to enter, survive, and win:

What good news or information will arrive (or can you cause to arrive) that will enhance your opportunity?

What are the odds for (a) implementation success or (b) sufficient magnitude of the new venture?

What can you alter or add to enhance the opportunity?

What can you do or learn to make you the most knowledgeable competitor in this industry?

Other compelling issues:


Exercise 4 Customer Contact Research and Exercise

Entrepreneurship is o full-contact activity. That contact is first foremost with potentially revenue-generating customers. It is essential that you communicate with customers and document their responses. Attempt to reconcile customer reactions in this section to the opportunity shaping research and exercise (Exercise 3). Please provide:

An assessment, based on a survey of customers, of how your customers do business, and of what investigative steps ore needed next:

Customer Survey

Customer No. 1 No. 2 No. 3

Nature of Customers

Business or Role

Reactions:

Positive

Negative Questions


Specific Needs/Uses

Acceptable Terms–Prices, support, etc.

Basis of Purchase Decisions: Time Frame Who Makes Decision Dollar Limits

Substitutes/Competitive Products or Services Used


Names of Competitors Competitive Products Substitute Products

Customers Surveyed

No. Name


Exercise 5 Mining the Value Chain–Defining the “White Space”1 Your opportunity must be placed in the context of both a competitive environment and on existing value chain that you believe can be improved upon and altered in a way that creates value. In addition to tracing the movement of physical goods, you should also map the flow of information and the resultant margins hot 'flow' to channel payers. Please provide: An assessment of how your product or service will be positioned in the market, including:

–A statement of any proprietary protection, such as patents, copyrights, or trade secrets, and what this means in the way of competitive advantage: –An assessment of any competitive advantages you can achieve in the level of quality, service, and so forth, including an objective description of ay strengths (and weaknesses) of the product or service: 1”White space” refers to those gaps in an industry or market into which your opportunity falls. When you complete the value chain exercise – looking at the flow of physical, informational, and financial margins – you will be able to see the market anomalies (positive or negative) that create space for your opportunity.

Part 1 The Opportunity 138 –An assessment of your pricing strategy versus those of competitors:

Pricing Strategy Highest Price Average Price Lowest Price

Retail

Wholesale

Distributor

Other Channel

Manufacturing

Chapter 4 Screening Venture Opportunities 139 –An assessment of the competitors in your industry or market niche in terms of price versus performance/benefits/value added: Highest

Average Lowest

Lowest Average Highest Performance/Benefits/Value Added –An indication of how you plan to distribute and sell your product or services (e.g., through direct sales, mail order, manufacturers’ representatives, etc.) and the likely sales, marketing, and advertising/trade promotion costs: –A distribution plan for your product(s) or service(s), including any special requirements, such as refrigeration, and how much distribution costs will be as a percent of sales and of total costs:

Price

Part 1 The Opportunity 140 Complete this chart of the three flows (physical, informational, margin) to find the value chain for your product or service.

Following the physical flow, map how your product or service will get to the end user or consumer, the portion of the final selling price realized in each step, and the dollar and percentage markup and he dollar and percentage gross margin per unit. This exercise will help you identify the market anomalies (positive and negative) that can identify spaces in which you can create your opportunity. The value chain formed from these flows is constructed for a generalized consumer product and needs to be modified for your particular produce, service, industry, or region.

Mining the Value Chain

Phys

ical

Flo

w

Components Materials and

Labor Raw Materials

Manufacturer or Service Provider Distributor Wholesaler

End User or Customer

Price/Unit: Dollars Percent





Markup/Unit: Dollar Percent




Markup/Unit: Dollar Percent M

argi

n Fl

ow

Gross Margin: Dollar Percent





Key Data

Key Data

Key Data

Key Data

Key Data

Info

rmat

iona

l Fl

ow

Mean of Data Transfer






Exercise 6 Economics of the Business–How Do You Make Money in the White Space? Your mining of the value chain (Exercise 5) should present a view of the “white space” for your business. In this section, we ask you to begin to quantify the space and to estimate the time and resources it will take to fill that space. These preliminary Assessments provide the foundation for the development of your financial statements, including income statement, balance sheet cash flow, and break-even point. Please Provide:

A realistic estimate of approximate sales and market share for your product or service in market area which your venture can attain in each of your first five years:

Product/Service Sales and Market Share Year 1 2 3 4 5

Total Market: Units Dollars

Est. Sales: Units Dollars

Est. Market Share (percent):

Est. Market Growth: Units Dollars

Source of Data: Researcher: Confidence in Data:

Part 1 The Opportunity 142 Checkpoint

Consider whether you suffer from mousetrap myopia or whether you lack enough experience to tackle the venture at this stage. It is possible that if your venture does not stand up to this evaluation, you may simply not be as for along as you had thought. Remember, the single largest factor contributing to stillborn ventures and to those who will ripen as lemons is lack of opportunity focus. If you were unable to fill in the on Product/Service Sales and market share on page 141, or do not have much of an idea of how to answer them, it is possible that you need do more work before proceeding with this venture. An assessment of the costs and profitability of your product or service:

Product/Service Cost and Profitability Product/Service: Sales Price: Sales Level:

Dollar/Units Percent of Sales

Price/Unit Production Costs (i.e., labor and material costs) or Purchase Costs

Gross Margin

Fixed Costs

Profit before Taxes

Profit after Taxes


An assessment of the minimum resources required to “get the doors open and revenue coming in,” the costs, dates required,

alternative means of gaining control of (but not necessarily owning) these, and what this information tells you:

Resource Needs Minimum

Needed Cost ($) Date

Required Probable Source

Plant, Equipment, and Facilities

Product/Service Development (including raw materials and other inventory)

Market Research

Setup of Sales and Distribution (e.g., brochures, demos, and mailers)

One time Expenditures (e.g., legal costs)

Lease Deposits and Other Prepayments (e.g., utilities)

Part 1 The Opportunity 144 Overhead (e.g., salaries, rent, and insurance)

Sales Costs (e.g., trips to trade shows)

Other Startup Costs

Total

Comments

A rough estimate of requirements for manufacturing and/or staff, operations, facilities, including:

– An assessment of the major difficulties for such items as equipment, labor skills and training, and quality standards in the manufacture of your product(s) or the delivery of your service(s):

Chapter 4 Screening Venture Opportunities 145 –An estimate of the number of people who will be required to launch the business and the key tasks they will perform: –An assessment of how you will deal with these difficulties and your estimate of the time and money needed to resolve them and begin scalable production: An identification of the cash flow and cash conversion cycle for your business over the first 15 months (including a

consideration of leads/lags in getting sales, producing your product or service, delivering your product or service, and billing and collecting cash). Show as a bar chart the timing and duration of each activity below:

Cash Flow, Conversion Cycle, and Timing of Key Operational Activities Development of Forecasts

Manufacturing

Sales Orders

Billing:

Invoice

Collect

Selling Season

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Months

Part 1 The Opportunity 146 A preliminary, estimated cash flow statement for the first year, including considerations of resources needed fro startup and

your cash conversion cycle: An estimation of (1) the total amount of asset and working capital needed in peak months and (2) the amount of money

needed to reach positive cash flow, the amount of money needed to reach breakeven, and an indication of the months when each will occur:

Create a break-even chart similar to the following:

An estimate of the capital required for asset additions and operating needs (and the months in which these will occur) to

attain the sales level projected in five years:


Exercise 7 Capital and Harvest– How Will You Realize Dollars from the Venture The amount and nature of capitol requirements for launching a new venture must be articulated in the context of the needs of the resource provider(s). In this section, you should purposefully link capitol needs with the requirements of that provider(s). Specifically, the investor usually reaps a reword at harvest. The realistic timing and nature of the harvest will help define the logical investor or investors.

After reviewing both Chapter 3 and Chapter 14, think about your opportunity in the context of the capitol markets food chain. Ask yourself:

Who is this opportunity for, and not for?

Who will, and will not invest in this venture?

Who should invest? Please Provide:

A statement of how you intend to raise capitol, including all types (e.g., venture capitol, financing raised though asset lenders,

financing against inventory, receivables, equipment, and real estate), when, and from whom: A statement of whether you intend to harvest our venture, how and when this might occur, and the prospects. (If you do not

intend to harvest the venture, include instead of statement of the prospects that profits will be both durable and large enough to be attractive.)

Chapter 4 Screening Venture Opportunities 148 An assessment of the sourc3es and value, such as strategic, to another firm already in the market or one contemplating entry

and an indication if there is a logical buyer(s) of your venture: An assessment of how much it would take to liquidate the venture if you decided to exit and whether this is high:

Checkpoint

Reconsider if your venture opportunity is attractive. Beware of compromising on whether your opportunity has forgiving and rewarding economics. For example, are you convinced that the amount you need to raise is reasonable with respect to the venture’s potential and risk? Are others convinced? If they are not, what do you know that they do not (and vice versa)? Most startups run out of cash before they secure enough profitable customers to sustain a positive cash flow. Your preliminary estimates of financial requirm3eents need to be within the amount that an investor, venture capitalist, or other lender is willing to commit to a single venture or that you can personally raise. Even if your idea is not a candidate for venture capital financing, it is worth looking at your venture in this way


Exercise 8 Competitive Landscape– Your Strategic Analysis Every company has a competitor or substitute! Your customers were putting their money somewhere before you created your business. Look at both direct and indirect competitors. Who is the most knowledgeable person or competitor in this market? How does this affect you, your team, and your venture opportunity? Who can/should do this other than you? How do you become that person? You may have acquired competitive information when you talked to potential customers in the customer contact research and exercise (Exercise 4). Estimates and relative position of he competitors is appropriate. When you have a relative understanding of the competitors, you should assess your position among these firms in terms of sustainable competitive advantages. Please provide: An assessment of competitors in the market, including those selling substitute products:

Competitor No. Name

Products/Services That Compete Directly Substitutes

A profile of the competition:

Competitor Profile

Competitor No. 1 2 3 4 Estimated Sales/Year ($)

Estimated Market Share (%)

Description of Sales Force

Chapter 4 Screening Venture Opportunities 150 Marketing Toctics: Selling Teams Advertising/Promotion Distribution Channel Service/Training/Support Pricing

Major Strengths

Major Weaknesses

A ranking of major competitors by Market Share:

No. Competitor Estimated Market Share

Part 1 The Opportunity 151 A Robert Morris Associates statement study:

RMA Study

RMA Data for Period Ending Estimates for Proposed Ventures

Asset Size Under $250M

$250M to Less than

$1MM

$1MM to Less than

$10MM

$10MM to Less than

$50MM All

Sizes Number of Statements

Assets: Cash Marketable securities Receivables net Inventory net All other current Total current Fixed assets net All other non-current Total

% % % % %

Liabilities: Due to banks–short-term Due to trade Income taxes Current maturities long-term debt All other current Total current debt Non-current debt, unsubordinated Total unsubordinated debt Subordinated debt Tangible net worth Total

Income data: Net sales Cost of sales Gross profit All other expense net Profit before taxes

Ratios: Quick Current Fixed/worth Debt/worth Unsubordinated debt/capital funds Sales/receivables Cost sales/inventory Sales/working capital Sales/worth Percent profit before taxes/worth Percent profit before taxes/total assets Net sales/total asset

M = thousand. MM = million

Chapter 4 Screening Venture Opportunities 152 An assessment of whether there are economies of scale in production and/or cost advantages in marketing and distribution:

An assessment, for each competitor’s product or service, of its costs and profitability:

Competitor Costs and Profitability Product/Service

Sales Price

Sales Level

For Each:

Dollars/Unit Percent of Sales Price/Unit

Production Costs (i.e., labor And material costs) or Purchase Costs

Gross Margin

Fixed Costs

Profit Before Taxes

Profit After Taxes

Part 1 The Opportunity 153 An assessment of the history and projections of competitors’ profits and industry averages:

Competitor Profits–Historical and Projected

Competitor

Industry Average 1 2 3 4

Profits (percent of sales)

Past Two Years

Current Year

Projected Next Two Years

Sales/Employee

Profit/Employee

A ranking of competitors in terms of cost:

No. Competitor

Chapter 4 Screening Venture Opportunities 154 A profile for the current year of your competitors in terms of price and quality and of market share and profitability. Place

competitors (using small circles identified by names) in the appropriate locations in the boxes below:

Array of Competitors Price

Highest

Lowest Last Quality Leader

Market Share

Largest

Smallest Lowest Profitability Highest

Part 1 The Opportunity 155 An assessment of the degree of control in the market (including that over prices, costs, and channels of distribution and by

suppliers, buyers, etc.) and the extent to which you can influence these or will be subject to influence by others: An assessment of current lead times for changes in technology, capacity, product and market innovation, and so forth:

An assessment of whether your venture will enjoy cost advantages or disadvantages in production and in marketing and

distribution, a d on indication of whether your venture will have the lowest, average, or highest costs of production, marketing, and distribution:

An assessment of other competitive advantages that you have or con gain, how you would secure these, and what time and

money is required, including:

–An indication of whether your product or service will benefit from, or be subject to any regulations and of the status of any copyrights, trade secrets, or patents or licenses and distribution or franchise agreements:


–An indication if you enjoy advantages in response and lead times for technology, capacity changes, product and market innovation, and so forth: –An indication if you enjoy other unfair advantage, such as a strategic advantage, people advantage, resource advantage, location, advantage, and so on: –An assessment of whether you think you can be price competitive and make a profit, or other ways, such as product differentiation, in which you can compete:

A ranking of your venture in terms of price and quality and of market share and profitability relative to your competitors. Add your venture to the Arrays of Competitors above:

Part 1 The Opportunity 157 An assessment of whether any competitors enjoy competitive advantages, such as legal or contractual advantages:

An assessment of whether any competitors are vulnerable, the time period of this vulnerability, and the impact on market

structure of their succumbing to vulnerabilities: Checkpoint

Do you have sufficient competitive advantage? Remember, a successful company sells to a market that is large and growing, where capturing a small market share can bring significant sales volume, where it does not face significant barriers to entry, and where its competition is profitable but not so strong as to be overwhelming. Further, a successful company has a product or service that solves significant problems that customers have with competitive products, such as poor quality, poor service, poor delivery, etc., and a sales price that will enable it to penetrate the market.


Exercise 9 Founder’s Commitment For the team to conclude that the idea is truly on opportunity, the founders must assess the commitment of their partners. There many aspects of commitment, including but not limited to trust, on understanding and belief in responsibilities, financial contribution and extraction, and the overall belief in the team. Please provide:

An assessment of your partners and/or management team, including:

–An evaluation of whether the founders and/or the management team ore sufficiently committed to the opportunity and how much they ore personally willing to invest in time, money, personal guarantees, and so forth:

–An assessment of whether the founders and/or the management team possess the industry knowledge, experience, know-how, and skills required for the venture's success; if additional personnel is necessary and if these con be attracted to the venture; and if anyone on the team has managed previously what you ore trying to undertake: –An assessment of whether the founders and/or the management team have the necessary vision and entrepreneurial zest and whether they will be able to inspire this in others:

Part 1 The Opportunity 159 –An assessment of the level of trust felt among the founders and/or management team: –A statement about who will do what–roles, responsibilities, and tasks: –A statement about the contributions each founder and team member is expected to make: –A statement about who will get what salary, what benefits, and what ownership share: Checkpoint

Can do? Remember, the team is a primary force driving successful entrepreneurial ventures. It is important to questions the assumptions on which your tam has been shaped; for example, equal salaries and stock ownership can indicate that assumptions as to tasks, roles, and responsibilities are naïve. Someone on your team needs to be experienced and competent in the areas of team dynamics and management, or the team needs to be able to attract someone who is. If you have completed Exercises 1 through 9 and reviewed each checkpoint, you should have a fairly good handle on whether your idea is an opportunity and you will have completed most of the due diligence required to write a business plan. Completing the next two exercises will be very helpful as you build a strategy to launch time.


Exercise 10 Flaws, Assumptions, and Downside Consequences–Risk Reconsidered Assess whether your venture opportunity has any fatal flaws: List significant assumptions (assumptions about customer orders, sales projections, etc.), including:

A consideration of significant tradeoffs that you have made: A consideration of the major risks (unreliability of customer orders; overoptimistic sales projections; inability to achieve cost

and time estimates; underestimating the magnitude, intensity, and vindictiveness of competitors’ responses; etc.): Rank assumptions according to importance:

Part 1 The Opportunity 161 Evaluate the downside consequences, if any, when your assumptions are proved invalid; how severed the impact would be; and if and how these can be minimized, including:

The cost and consequences of (1) lost growth opportunities and (2) liquidation or bankruptcy to the company, to you, and to other stakeholders:

Rate the risk of the venture as high, medium, or low:


Exercise 11 Action Steps–Setting a Week-by-Week Schedule List chronologically the 10 to 15 most critical actions you need to take during the next six months and the hurdles that need to be overcome to convert your idea into a real opportunity. It is a good idea to have another person review what you hove listed and adjust the list, if warranted.

Date Action

Part 1 The Opportunity 163 Make a week-by-week schedule of key tasks to be performed, when they are to be performed, and by whom. Break larger tasks into their smallest possible components. Be alert to conflicts.

Week No. Task Date Completed Person Responsibility

Checkpoint

It is important to take a hard look at the assumptions you have made, both implicit and explicit, and to assess the risk of the venture. Time and again, first-time entrepreneurs overestimate sales and delivery dates and underestimate costs, effort, and time required to execute the opportunity and to reach a positive cash flow. Also, while each new business has its risks and problems, as well as its opportunities, difficulties need to be identified as soon as possible so they can be avoided or eliminated or their impact minimized.


Exercise 12 Four Anchors Revisited Revisit Exercises 1 and 2. A FINAL CHECKPOINT: Your responses to the VOSE will help you determine whether you want to continue with your venture and develop a completed business plan. If your venture has passed, a crucial question to consider before proceeding is, “What do I want to get out of the business?” You will want to think twice about whether the venture provides a strong fit with your personal goals, values, and needs, is what gives you energy, and leads you down the path you want to be on and to further and even better opportunities. Remember, you are what you do. If you have been able to complete all the exercises, are satisfied that most of the results are positive, and if the answers to the personal issues are yes (see the QuickLook exercise in Chapter 7), then go for it! After completing all the previous exercises, you should have a much sharper sense of the extent to which your good idea exhibits the four anchors described at the beginning of the chapter. Also ask yourself, who are the one or two best people on the planet to answer the following questions and what is their effect on me, my team, and this opportunity? As you continue to work on your business you need to constantly consider the following questions, since creative insights that can make a significant difference can occur at any time:

1. How can the value proposition be enhanced and improved: 2. What can be changed, added, modified, or eliminated to improve the fit? 3. What can be done to improve the value chain and the free cash flow characteristics? 4. What can be done to enhance the risk–reward balance?

Documents

The Role of Entrepreneurship in Value Creation in … Role of Entrepreneurship in Value Creation in Large and Small Enterprises ENT422 Fall Quarter, 2006 Opportunity Exercise Packet