Entrepreneurshipfor MBA Students Proving the Business Concept Lecture 4
Introduction • The world of possibilities is unlimited but the world of ideas is even larger • Some ideas are ready to be turned into a growing profitable business immediately. Some have to wait till critical technological problems are overcome • Some ideas are practical while most of ideas are not. • This lecture discusses the process of opportunity screening • It discusses systematic ways of discarding unfeasible ideas, and identifying unfeasible aspects of otherwise practical ideas
Introduction • This lecture will assist the entrepreneur of avoiding unfeasibility before committing him/herself to investing time needed to produce a complete business plan and long before the entrepreneur or anyone associated with him commits money or other significant resources into an attempt on the impossible
Introduction • As part of this screening process, you will need to make projections of revenue and marketing expenses of your venture
The stylized map of the enterprise creation process SMECP Idea Project Concept development Plan evaluation Plan Development Problem Commercial feasibility screen Concept Enterprise The Innovation Track
Ideas • Every innovation starts with an idea, but only a few ideas become innovations • Some inventors are profoundly reluctant to allow their concept or prototypes to be examined in detail by experts; as a broad generalization, an entrepreneur or investor who backs a product so secret that a reputable consulting engineer cannot be trusted to examine it and prepare a confidential report is putting their money at high risk
Screening for Practicability • The starting point for every new enterprise is the problem and the idea for solving it • Every idea is the product of human’s imagination and some ideas are bound to stay there • Ideas must be tested for fatal flaws before they can be set out as a concept • A concept is a combination of an idea for resolving a problem and a practical proposal in an outline form at least, for delivering that solution • A concept may address a real problem and be technical feasible and commercially unfeasible
Screening for Practicability • Developing a complete business plan takes time and effort and it is disappointing to get to the end of the process and discover that the concept cannot be turned into a commercial proposition • The less invested in a flawed idea, the less psychological pain involved in abandoning it
Points to be Pondered… • What is a Feasibility Study? • What is a Business Plan? • How do they differ? • What Resources are available to help develop each?
What is a Feasibility Study? • A feasibility study is an analysis of the viability of an idea through a disciplined and documented process of thinking through the idea from its logical beginning to its logical end. • A feasibility study provides an Investigating function that helps answer “Should we proceed with the proposed project idea? Is it a viable business venture?” • A feasibility study should be conducted to determine the viability of an idea BEFORE proceeding with the development of a business.
Levels of Feasibility Assessment • A feasibility study of an idea is conducted at three levels • Operational Feasibility • “Will it work?” • Technical Feasibility • “Can it be built?” • Economic Feasibility • “Will it make economic sense if it works and is built?” • “ Will it generate PROFITS?”
Feasibility Study • Fatal flaws are facts about an opportunity that make it impossible for a new enterprise based upon it to succeed
1 The Strategic Management Process Identify Current Mission, Objectives & Strategy 2 3 Analyze Environment Note Threats and Opportunities 6 Reassess Mission 7 & 8 Strategies Analyze Resources 4 Note Weaknesses and Strengths 5 Evaluate Results 9
Strengths Opportunities Threats SWOT Analysis Weaknesses
Traditional Manager Entrepreneur Primary motivation Corporate rewards Independence Time orientation Short-term goals 5-10 year growth of business Activity Delegation Direct involvement Risk tendency Low Moderate View toward mistakes Avoidance Acceptance Comparison: Entrepreneurs and Traditional Managers
Project Management Process Identify activities and resources Define objectives Establish sequences Determine project completion date Compare with objectives Estimate time for activities Determine additional resource requirements
Further Feasibility Studies • If this list was routinely consulted before people put their time and money into a new venture, a lot of pain may be avoided: • Marketing feasibility: does anyone want it? Has the product any features that would persuade someone to choose it ahead of currently available products? • Fundamental legality: is it legal?
Why doing a Feasibility Study? • Provide a thorough examination of all issues and assessment of probability of business success • Give focus to the project and outline alternatives • Narrow business alternatives • Surface new opportunities through the investigative process • Identify reasons NOT to proceed • Enhance the probability of success by addressing and mitigating factors early on that could affect the project • Provide quality information for decision making • Help to increase investment in the company • Provide documentation that the business venture was thoroughly investigated • Help in securing funding from lending institutions and other monetary sources
Data Sources for a Feasibility Assessment • Data required for a feasibility study can come from primary or secondary sources • Primary data can include formal interviews and surveys • Collection of primary data can be expensive and time consuming • Secondary data can include industry and trade publications, statistics of industry associations, and government agency reports
Is it legal? • Visitors to Thailand may be surprised that there are no T-Shirts bearing caricatures of the King • No one in Singapore publishes a popular newspaper of magazine disrespectful of the Prime Minister • Americans don’t like to make any misuse of the “Stars and Stripes” • Some Americans are surprised at the bureaucratic hurdles in the way anyone wishing to sell or buy handguns in other countries • There are many products that are freely available in some countries and strictly banned in others • Many types of business may only be conducted in premises that have been approved by one of more levels of the government • Very strict standards backed up by severe penalties apply in many countries to facilities where food is prepared or stored • Appliances that are connected to the water, gas or electricity supplies, or to the telecommunications network, must meet strictly enforced standards • If laws and regulations block an opportunity, the entrepreneur can plan to secure an exemption or lobby to have the regulations amended. In the absence of an exemption or deregulation, such a proposal is fatally flawed
Does anyone want it? • Specialists and experts often fall into the trap of doing something because they can and assuming that other people will want the result while prospective users can’t see the point at all. • Marketing legends tell the tale of a pet food company in England, whose technicians discovered a new way to, process dog food. The product seemed to be a certain winner and the company invested in substantial advertising and negotiated extensive distribution. The first few days’ sales were fantastic: the product ‘walked off the shelves’: the company stepped up production and waited for the repeat orders, but none ever came. Dogs loathed the stuff!
Planning Spreadsheets • Entrepreneurial businesses must be managed, often more carefully than established ones, since there is little room for error. There are, however, no historical records from which objectives can be derived. A planning spreadsheet may be used to generate, among other things, ‘prof forma’ sales and cost projections which can serve two major purposes:
Planning Spreadsheets • They can provide a pseudo-historic base upon which objectives can be set and the performance of the organization in its early months monitored • They can provide a tool which can be used to test the financial feasibility of a proposal and refine the marketing and organization plans of a feasible one, without going to the trouble of developing a full set of operating financial projections
Steps for an Economic Feasibility Study • Identify and Estimate all Capital Expenditures • Identify and Estimate all Variable Costs related to the Proposed Business Venture • Identify People and Skills required to operate • Determine Wages, Salaries, and Benefits • Identify and Estimate Project Related Costs • Infrastructure development or improvements • Advertising and Promotion • Legal Fees • Municipal & State Development taxes • Identify and Estimate all Fixed Costs
Estimating Total Capital Requirements • Estimate capital requirements for facilities, equipment and inventories • Estimate working capital needs • Estimate start-up capital needs until revenues are realized at full capacity • Estimate other capital needs (constructions delays, technology malfunction, market access delays, etc.) • Estimate other capital needs than those listed above
Equity and Credit • Estimate Equity and Credit Needs • Identify alternative equity sources and capital availability • Producers, Local Investors, Venture Capitalists • Identify and assess alternative credit sources • Banks, Government, Grants, Local and State Economic Development Incentives • Assess expected financing needs and alternative sources • Interest Rates, Terms, Conditions, Etc.
EXPENSE REVENUE Cost-Benefit Analysis Utilize data collected to determine economic feasibility: • Estimate Expected Costs and Revenue • Estimate the Profit Margin / Expected Net Profit • Estimate the sales or usage needed to break-even • Estimate the returns under various production, price and sales levels • Benchmark against industry averages and/or competitors • Identify limitations or constraints of the economic analysis • Project expected cash flow during the start-up period • Project income statement, balance sheet when reaching full operation
What Defines Feasibility? • A feasible business venture is one where • the business will generate adequate cash flow and profits, • the business will withstand the risks it will encounter, • the business will remain viable in the long-term, and • the business will meet the goals of the founders.
What Next? • After the feasibility study has been completed and presented to the leaders of the project, they should carefully study and analyze the conclusions and underlying assumptions • Next they will decide which course of action to pursue • Potential Courses of action include • Developing a business plan and proceeding with creating and operating a business • Identifying additional scenarios for further study
?? What is a Business Plan? • A Business Plan summarizes the plan of action after a course of action has been determined through the Feasibility Study • A Business Plan provides a Planning function • A Business Plan outlines the actions needed to take the proposal from “idea” to “reality” • A Business Plan tells How your business will be created and Why it will be successful • A Business Plan provides a road map for strategic planning
Why Write a Business Plan? • Put the Pieces Together—Do the pieces fit together in a logical manner? • Create a Blueprint for Action • Focus Founders and/or Management Team • Obtain Financing • Attract Equity Investment • Attract Key Managers and Employees • Obtain Contracts • Create Joint Ventures, Mergers, Acquisitions
What is included in a Business Plan? • A Business Plan should be brief, concise & straight to the point • Main Requirements May Include • Industry Description • Market Size • Customer Base • Competitive Advantage • Business Location • Three years of Financial Projections • Monthly Tracking of First Year Financials • Management Experience and Profile • Personal Statement of Affairs • Other Sources of Cash, if any
How Effective Is the Business Plan? • How effective a Business Plan is depends on how well the following questions are answered: • Who are we? • What do we do? • What do we have to offer? • Why will someone pay for our products/service? • What resources do we have? • Where are we going? • What do we need to get there? • Why will we be successful? • Why should someone participate or invest? • How will we measure performance?
The Story a Business Plan Tells… • Business Plan should be tailored to the stakeholders • Be aware of each potential stakeholder’s priorities • Make sure all priorities are addressed in a balanced manner in the business plan • If more than one version of a business plan is written, make sure each tells the SAME story only with difference emphasis
Feasibility Study vs. Business Plan • Feasibility study answers the bottom line question—Is this venture going to make money? • Feasibility study outlines and analyzes several alternatives or methods of achieving business success • Feasibility study is conducted before a business plan • Business plan is prepared only after the venture has been deemed to be feasible • Business plan deals with only one alternative or scenario that is determined to be the “best” alternative • Business plan considers the management side—goals and objectives of the planned business venture
What resources are available to help develop each? • Hired Business Consultants • Make sure an accurate assessment is given • Make sure someone is not paid to give the answer the group wants to hear • Can be costly • Third Party Unbiased • Universities and Research Centres • Centers for Economic Development • Small Business Development Center
Consumer Benefits • People do not buy products or services, they buy benefits • Hence we make purchases not for the products themselves, but for the benefits of the problems they solve or the opportunities they offer
Consumer Benefits • Consumers seek bundles of types of benefits: • Tangible benefits: e.g., a watch keeps good time; has leather band • Intangible benefits: e.g., the “reliability” reputation of the watch manufacturer; the image of the watch wearer
Customer Behavior • There are three general classes of purchasing event in the life of the relationship between a supplier and a customer: • The customer makes the first purchase to initiate the relationship: this may be indistinguishable from subsequent purchases, as when a new member joins a golf or other club and pays a joining premium • There may be ongoing transactions, such as regular servicing of a motorcar or simply routine repurchasing of a consumer good or service • There may be subsequent transactions such as the replacement of a motorcar after a period of use of the payment of annual renewal fees at a club or on an insurance policy • Often a venture that would be marginal if it could only rely on one source of income from a customer relationship and becomes profitable if more than one can be brought into play. One of the most famous examples is King Gillettes’s launch of the safety razor, where Gillette offered the handles at an actual cash loss, relying on the extremely profitable sales of blades for the prosperity of his business
Parameters that you must estimate • Marketing a new product (whether a good or service) involves asking people to pay for it. This introduces at least two constraints: • The perceived value to the buyer must exceed the price, which in turn must exceed the cost • The targeted buyers must be able to afford the product
Parameters that you must estimate • You are going to get very far with your planning if you have not developed a reasonable idea of your proposed price and associated direct costs: the price then has two roles to play, in that your revenue is that the price of the product and the number of the sales, while your market is limited to those people who can afford your product. • You will also need to estimate likely trends in prices and costs; prices unless supported by other features and improved performance levels, generally tend downwards, while hourly labor costs tend up • You need to estimate these effects in your planning and you will need to track the trends after your venture is launched to verify or adjust estimates
Defining the Market • Failure is always distressing, but failure in the pursuit of an impossible objective can be worse: you don’t just feel disappointed, you feel stupid as well • The most fundamental error anyone can make is to launch a product into a market that is simply too small to generate enough revenue to cover the venture’s operating basic costs
Defining the market • Modeling starts by quantifying the market the new venture intends to satisfy and the estimate of the size of the target market will become a key model parameter • The market for this purpose consists of the people and the firms who could gain a net benefit from using the new product, have the means and will be offered the opportunity to buy it • The market is not static but in constant change
Market Response Parameters • It is difficult to accurately estimate how many potential customers the world holds for a new product • It is even more difficult to estimate how many of these people or firms will become actual, revenue-generating customers • And once they have become customers, how long will they maintain that state
Promotional Quality • The most direct way of securing a trial is a sampling program or the equivalent • When introducing a new packaged consumer good the supplier may engage a an advertising firm to distribute free samples of the product to shoppers in the target segments
Encouraging internal influence • Internal influence is pure gold to entrepreneurs with satisfied users persuading potential ones to try the product without drawing a penny from the marketing budget • Wal-Mart, the leading American retailer, brands its discount warehouses ‘Sam’s Clubs’ to give its users a sense of being a part of the community rather than mere consumers
Consumer Decision-Making Process Problem Recognition Information Search Evaluation of Alternatives Purchase Decision Postpurchase Evaluation
Stages in the New Product Adoption Process • Adoption process: • the mental process through which an individual passes from first hearing about an innovation to final adoption • Consists of 5 Stages (These are exactly as they indicate): • Awareness • Interest • Evaluation • Trial • Adoption
New Product Adoption Rates Figure 6-5 34% Early majority 34% Late majority 13.5% Early adopters 2.5% Innovators 16% Laggards Time of adoption of innovations Source: reprinted with permission of the Free Press, a Division of Simon & Schuster, from Diffusion of Innovations, Fourth Edition, by E.M. Rugers, 1983.