Developing Business Ideas Through Opportunity Analysis

copyright 2003 Jack M. Kaplan
Developing Ideas and Business
Opportunities
Patterns of Entrepreneurship
Chapter 2

Session Outline
• Prepare a Opportunity Analysis
• Questions to Evaluate the Opportunity
• Opportunity Costs
• Framework for Evaluating an Opportunity
• Where to find Research Information
• Marketing Primary and Secondary research

Prepare an Opportunity Analysis
 Identifying which business ideas have real
commercial potential is one of the most
difficult challenges that an entrepreneur
will face.
• Seize the Opportunity
• Know what factors create opportunity.
- Calculate the opportunity costs.
- Access the risks and rewards.

What Factors Create Opportunity?
Opportunity Factors
Technology
• Replace present technology?
• Niche Market Applications
• Infrastructure Replacement
Economic
• Cost decreasing
• Productivity gains
• Better service
Demographic
• Technology
generation
Industry
Standards
Government &
Privacy Issues
Market
Shift
Will these factors continue?
For how long?
What is the market size, growth and outlook?
Will this lead to another opportunity?

Where Ideas for Opportunities
Originate
Improving
Existing
Technology,
Product, or
Service
15%
Vision of
Opportunity
11%
Present Work
Environment
47%
Secondary
Sources:
Brainstorming,
Trade
Publications,
Commerce
Business Only,
Idea Brokers,
Venture Capital
Firms,
Technology
Transfer
Agencies
27%

Questions to Evaluate the
Business Opportunity
• What are the indicators that lead to this idea
and opportunity?
• What are the conditions that permit the
opportunity to occur?
• How will the future of this new product or
service change the idea?
• How great (in terms of time) is the window of
opportunity?

Evaluating the Opportunity
Does the Opportunity:
Fill a need?
Show evidence of product
acceptance?
Show that a market
exists now?
Reflect that yours is better
than the competitions?
Show an upside gain potential?
Describe the cost to achieve
this potential?

Time Horizon
• A window of opportunity is a time horizon
during which opportunities exist before
something else happens to eliminate them.

Opportunity Costs
• Opportunity costs are the value of benefits
lost when one decision alternative is
selected over another.
• For example, a software company refuses to
deliver a software program, because writing
the software code will require the company
to miss a major deadline for another
company.

Opportunity Costs
• The order for the software program would
generate revenue of $25,000 and $14,000 of
additional costs.
• Then the opportunity cost and the net
benefit lost associated with the software
deadline is $11,000 (i.e. $25,000 -
$14,000).

Framework for Evaluating an
Opportunity
Market Issues:
Criterion Stronger Opportunity Weaker Opportunity
Need Identified Unclear
Customers Reachable; receptive Unreachable or loyalties
established
Payback to user/customer Less than one year Three years or more
Product life cycle Long; recover investment Short; recover investment
Industry structure Competition or emerging Aggressively competitive
Potential market size $100 million sales Less than $10 million sales
Market growth rate Growing at 30% to 50% Contracting less than 10%
Gross margins 30% to 50% Less than 20%; volatile
Market share attainable (year 5) 20% or more Less than 5%

Opportunity
Financial and Harvest Issues:
Profits after tax 10% to 15% or more; durable Less than 5%; fragile
Time to:
Break-even
Positive cash flow
ROI potential
Under 2 years
Under 2 years
25% or more per year
More than 3 years
More than 3 years
Less than 15-20% per year
Value
Capital requirements
High strategic value
Low to moderate; fundable
Low strategic value
Very high; unfundable
Exit mechanism Present or envisioned harvest
options
Undefined; illiquid
investment

Opportunity
Competitive Advantage Issues
Fixed and Variable Costs
Production, marketing
distribution
Lowest Highest
Degree of Control
Prices, channels of
resources/distribution
Moderate to strong Weak
Barriers to Entry
Proprietary protection
Response/lead time
Yes
6 months to one year
None
None
Legal contractual advantage Proprietary of exclusivity None
Sources of differentiation Numerous Few or none
Competitors mindset and
strategies
Live and let live; not self
destructive
Defensive and strongly
reactive

Opportunity
Management Team and Risk Issues:
Management team Existing, strong, proven
performance
Weak, inexperienced,
lacking key skills
Contacts and networks Well-developed; high
quality; accessible
Crude; limited; inaccessible
Risk Low High
Fatal Flaws None One or more

- Ask preliminary questions
- Prepare data collection.
- Execute a study to get answers.
- Analyze the data.
Investigate the need Through
Market Research

Where to Find Information
Visit Experts in Field
Internet Searches
Library Research
Questionnaire Surveys
Existing Research
Trade Associations
Market Research Firms
• Contact well known entrepreneurs to get
advice.
• Visit web sites on companies and new
products or technologies
• Use college libraries to access references
and specialized bibliographies
• Use mail, phones, Internet, or professional
interviews. Write and prepare questions
to give you the right data.
• Use investment banking firms, advisory
services, or consulting firms to gather
data and ask to receive findings.
• Visit trade shows, read trade publications.
• Hire a firm to prepare a report on market
survey for the proposed idea.

Ask Preliminary Questions
• Need. Will this product be serving customers’
real needs?
• Niche/Competition. What is different about the
product or service that will cause the customer
to choose it over the competition’s product or
service?
• Proprietary Questions. Can the product be
patented or copyrighted? Is it unique enough to
get a significant head start on the competition?
Can the process be easily copied?

Ask Preliminary Questions
• Costs- How much will materials and labor time
cost? How much will be needed in the future?
Now?
• Advertisement and Packaging. What type of
advertising and promotional plans will be used
to market the product?
• Sales. What distributions and sales methods
will be used? ?

Market Research Process
Define problem
and research
objectives
Develop research
plan
Collect Information
Analyze Information
Present Findings

Assessing the Research Plan
Function Define Problem
and Research
Objectives
Develop
Research Plan
Collect Info Analyze Info
Questions to
Answer
-What is overall
objective of
research?
-What info is
needed to make
decision?
-How can I best
ascertain the
demand for my
proposed business
idea?
-What is the most
efficient plan for
gathering needed
info?
-What are the costs?
-Is the value of the
additional info
greater than the cost
of the research?
-What research
approach is best?
 Observational
 Focus Group
 Survey
Research
 Experimental
Research
-Sample size
considerations
-Use of secondary
data
-What are the best
ways to analyze to
obtain actionable
business
recommendations?
-How can I
segment my sample
to understand
micro-segments of
my potential
customer base?
-What, if any,
statistically
significant
differences occur
between segments?

Research Tool Kit
• Primary Research: Investigating
the “original source” of data,
interviewing customers/prospects
– Focus groups: gathering of 6-10
pre-selected respondents to discuss
product or service; candid
discussions encouraged; sample is
too small to be projected; objective
is exploratory
– Survey Research: Usually
randomly selected (with
parameters) sample to project to
larger population in question;
survey can contain open-ended and
closed-ended questions; objective
to learn perceptions, satisfaction
levels, etc.
• Primary Research: Continued
– Experimental Research:Most
scientifically valid; If you can
develop a version of your
product/service, select different
groups of subjects, control for
external variables and note
differences. Comparable to a
“test run” before product/service
enters market.

Secondary Research Resources
• Secondary Research: Investigating
research findings already written
• Sources - Government Publications
– Statistical Abstract of US
(demographics, economics and
social data)
– County and City Data Book
(relevant stats broken down by
county and city)
– U.S. Industrial Outlook
(projections of industrial activity
by industry including production,
sales, shipments, etc.)
– Other government publications like
Census of Population, Federal
Reserve Bulletin, Survey of
Current Business
• More Sources - Periodicals
– Standard and Poor’s Industry
Surveys (provide updated stats and
analyses of industries)
– Moody’s Manuals (financial data
and names of executives)
– Marketing journals like Journal of
Marketing, Journal of Marketing
Research, Journal of Consumer
Research
– Trade Magazines including Direct,
BrandWeek, Sales and Marketing
Management
– Business Magazines like Harvard
Business Review and The Economist

Secondary Research Resources
• Quantitative Sources - Commercial
Data
– A.C Nielsen Company Data (Data
on products sold in retail,
supermarket scanner, television
and others)
– MRCA Information Services (Data
on weekly family purchases of
consumer products)
– Simmons Market Research Bureau
(Annual reports covering verticals
by demographics and brand
preferences)
• Research Houses
– Sell data to subscribers useful to
construct models for forecasting
demand
– Audit Bureau of Circulation
– Arbitron
– Audits and Surveys
– Dun and Bradstreet
– National Family Opinion
– Standard Rate and Data Service

Determine the Resources Needed
- Start personal contacts and networking
- Perform financial requirements.
- Gather sources of technical skills

Financing Alternative Questions
– be self-financed, if necessary, and still withstand
Sufficient capital is required to sustain the company for a
specific length of time, possibly a one- or two-year period.
– .How much initial capital is needed? What resources are
available for financial support?
– .How long can the new business initial losses?
– .How long will it take to make the business profitable?
– .What kind of profit margin will eventually result from the
product or service?
– .How can the revenue and financial model be presented to
investors for their involvement in the business?

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