ENTREPRENEURSHIP

Opportunity Evaluation

INTRODUCTION Three traits of Entrepreneurs : Passion !

Conviction ! Tenacity ! Entrepreneurs’ daily question – “Why will this

new business work when most will fail ?” Reason to ask the above question –

To know the fatal flaw well in time If answer is positive : to embrace their

opportunity with renewed passion

INTRODUCTION Serious Entrepreneurs run road tests of the

opportunities they consider. Not about success story of one Entrepreneur

or a method to get rich quick Map for opportunity-assessing, opportunity

shaping process Useful framework – the 7 domains-to lay the

foundation on which to build a B-Plan

7 DOMAINS

THE MARKET/ INDUSTRY DISTINCTION

What’s a market? What’s an industry? These are frequently confused

MARKET DOMAIN :-MACRO LEVEL• Size of the Market

• Number of Customers• Aggregate money spent• Number of units bought annually

• Growth prospects of the Market• Recent historical data – on market growth and available

forecasts of the future

• Broad Macro-Environmental Trends• Demographic• Socio-cultural• Economic• Technological• Natural

INDUSTRY DOMAIN :-MACRO LEVEL• Industry Attractiveness - Porter’s Five Force

Model• Threat of Entry• Buyer Power• Supplier Power• Threat of Substitutes• Competitive Rivalry

• Future changes in the Industry

• Collection of Primary Data

MARKET DOMAIN – MICRO LEVEL Naïve entrepreneurs say “We have no

competition” Prudent ones, ask these questions:

Is there a customer segment willing to pay a price for the a compelling benefit/resolution of a “pain”

Are these benefits clearly differentiated in the customer’s mind? – better/faster/cheaper

Size and growth rate of segment?Will entering this segment allow entry in

related segments?

INDUSTRY DOMAIN –MICRO LEVEL Is the business model of the entrant

sustainable ?Barrier to imitations

Proprietary elements : Trade secrets? Patents?

Organizational capabilities? Economically Viable Business model : ASSESS

RISK Revenue w.r.t investmentCosts to acquire and retain customersContribution margins and their adequacyOperating cash cycle characteristics (WCM)

MICRO- ANALYSIS First-hand experience in the industry makes

all the difference Partner ? Network?

Such answers cannot be found on the internet

Micro factor are more important to evaluate

CAN THE TEAM DELIVER?• Management- single most important factor

• The 3 Domains• Opportunity and team’s business mission, personal

aspirations and risk propensity – How big ? How soon

• Ability to execute on the critical success factors• Response across the value chain• Competencies - experience & industry knowhow• Connectedness – Up & down the value chain

• Benefits of assessing themselves in the three team domains

LIVE EXAMPLES

DOTCOM CRASH Markets? Or Industries? Markets

Growing fast Shrinking digital divide

Industries Low entry barriers Differentiation difficult to establish Hard to sustain competitive advantage

Introduce both old and new paradigm people on the team

NIKE WINS AT MICRO LEVEL Running shoes for distance runners Lighter, better cushioning, better lateral

stability Micro perspective Similar successes in other sharply targeted

footwear niches

PUTTING THE 7 DOMAINS MODEL INTO ACTION Secondary Data

Trade & Business Publications in Library/Internet Government Reports

Primary Data Interviews Observations Focus Groups Surveys Market Experiments

Interpretation

WHY WON’T THIS WORK? Finding the major flaw that cannot be

resolved If found, abandon the opportunity If not, two outcomes:

Best Case: resource providers identify the flaws and refuse you the resources needed

Worst Case: you secure the required resources and start the business only to discover the flaws later

WHY WILL THIS WORK? Opportunities can be shaped & developed in many

ways Fatal flaws can be fixed A different target market can be chosen The offering can be adapted Opportunity can be pursued at a different level in

the value chain Additional individuals can be found

HOPE THIS WILL BE USEFUL TO YOU THANKS!

SESSION PLAN Moving from Ideas to Opportunities How to assess opportunities Seven domain framework to evaluate

opportunities Evaluation process Creating, shaping, recognizing and seizing

opportunities

NEW VENTURES Fundamental realities

Success is highly situational, depending on time, space, context, and stakeholders

The best entrepreneurs specialize in making “new mistakes” only

Starting a company is much harder than it looks, or you think it will be; but you can last a lot longer and do more than you think if you do not try to do it solo

WHEN IS AN IDEA AN OPPORTUNITY? They create or add significant value to a

customer or end user. They do so by solving a significant problem

or meeting a significant want or need They have a robust market, margin that will

create a substantial value to potential stakeholders

They are good fit with founder’s and management team and market place along with attractive risk reward balance.

SUMMERY In short , a superior opportunity has the

qualities of being attractive, durable and timely and is anchored in a product or service which creates or adds value for its buyers or end users usually by solving a very painful or serious problem.

Opportunities always start with customers and marketplace want.

SPAWNERS AND DRIVERS OF OPPORTUNITIES Changes in business environment & ability to

anticipate these changes Use of IT, microcomputers, MIS and computer

networking in routine business Regulatory changes such as deregulation of

telecom, airlines, insurance, financial services, banking, pension fund management, etc

Emergence of service industries – higher focus on customer service

Sea changes – technology, market & societal – eg – Moor’s law of computer chips power, gene mapping, cloning, nanotechnology, biotechnology, internet, etc.

EVALUATING Criteria for evaluating venture opportunity

Industry and market Economics Harvest issues Competitive advantage issues Management team issues Personal criteria Strategic differentiation

1. INDUSTRY & MARKET Market: identifying a market niche for a product or

a service that meets an important need of the customer

Market structure: number of sellers, differentiation in the product or service, conditions of entry & exit, number of buyers, cost conditions, sensitivity of demand to changes in price, income, etc.

Marker size & growth rate Market capacity: a demand that existing suppliers

are not able to meet Potential market share Cost structure: whether economies of scale is

possible

ECONOMICS Profit after tax: high & durable gross margins result in

at least 10 to 20 % profits after tax. Time to breakeven & positive cash flow: within two to

three years ROI potential: more or up to 25 % per year. Capital requirement Internal rate of return potential: Is the risk reward

relationship attractive? – if 5 to 10 times of original investment in 5 to 10 years

Free cash flow characteristics: capital requirement of fixed & working capital, capacity to serve external capital, etc

Gross margin: unit selling point – direct & indirect costs- up to 40 % leads to healthy growth.

HARVEST ISSUES Value added potential: ventures based on

strategic value in an industry are more attractive than those having less or no strategic value. Eg. Proprietary technology, contractual rights, geographic coverage, etc.

Exit mechanism & strategy: realising capital gains from sale or IPO or exit from the industry

Capital market context: proper timings for entry & exit

COMPETITIVE ADVANTAGES ISSUES Variable & fixed costs: potential for being

lowest cost producer eg- electronic goods like calculators

Degree of control: moderate to strong over prices, costs, channels of distribution, etc.

Entry barriers: proprietary protection, regulatory advantage, contractual advantage, advantage in lead time/ response in technology, product innovation, people, location, etc. create entry barriers.

MANAGEMENT TEAM ISSUES Entrepreneurial team Industry & technical expertise Integrity Intellectual honesty Fatal-flow issues: an opportunity is rendered

as unattractive if it suffers from one or more fatal flows such as high cost of entry, inability to produce at competitive prices, etc.

PERSONAL CRITERIA Goals & Fit: good match between

requirement of business & what the founders want out of it.

Upside & downside issues: If downside is more than entrepreneur’s net worth, the opportunity becomes unattractive

Opportunity cost: of time, experience, resources used in the venture

Desirability Risk/ reward tolerance Stress tolerance

STRATEGIC DIFFERENTIATION Degree to fit: good fit among the driving forces &

timing given the external environment Team: execution & ability to adopt and devise new

strategies, constant learning & improvements, etc. Service management Timing Technology Flexibility Opportunity orientation Pricing Distribution channels Room for error

WHY OPPORTUNITY MAY OR MAY NOT WORK? What most new start up need to understand: A. Market & industries are not the same. B. Both macro & micro level considerations

are necessary: markets & industries must be examined at both levels.

C. The key to assessing entrepreneurs & entrepreneurial teams aren’t simply found on their resumes or in assessing their entrepreneurial character.

MTeam Domain

Mission, aspiration, risk

Ability to execute

Connectedness – up, down, across value chain

Industry Attractiveness

Market Attractiveness

Target segment benefit & attractiveness

Sustainable advantage

Micro level

Macro level

Market domain Industry domain

SEVEN DOMAINS OF ATTRACTIVE OPPORTUNITY:

1. Is market attractive? Market & Industries are different: Market consists of group of current or potential

buyers having willingness & ability to buy products.- not products.

An industry consists of sellers that offer products that are similar or close substitute for one another.

The distinction is important as the judgment about attractiveness of market can be different than attractiveness of industry. E.g – In dot.com failures while market was attractive, industry was not.- recognition came late.

SEVEN DOMAINS OF ATTRACTIVE OPPORTUNITY At micro level, one needs to see if target

consumer segment which we want to cater to is willing to pay, getting additional value, how large is this segment, is it growing, is entry in this segment provide us entry in other segments, etc.

Eg. Nike- though at macro level demand for sports shoes was stagnant, the demand for running shoes for distant runners was high, which later on spread to other specialty sports shoes.

SEVEN DOMAINS OF ATTRACTIVE OPPORTUNITY:

2. Is this a good market? Is my market large enough today to allow

different competitors the opportunity to serve different segments without getting in each other’s way?

Macro level market assessment such as size of the market, growth rate, demographic, socio-cultural, economic, technological, regulatory trends have to be assessed to see the attractiveness of the opportunity.

How can short term and long term growth be predicted?

Hero Honda: market driven company

SEVEN DOMAINS OF ATTRACTIVE OPPORTUNITY 3. Is industry attractive? Macro level: Porter 5 forces model: Threat to entry Buyer power Supplier power Threat of substitutes Competitive rivalry Eg: Pharma industry in 1980s and 2000

SEVEN DOMAINS OF ATTRACTIVE OPPORTUNITY 4. How long your advantage will last? What sustainable competitive advantage we have?

– proprietary element such as patents, trade secret, etc; presence of superior organizational processes, capabilities, resources, etc; presence of economically viable business model, etc.

Eg – Zantac, an anti ulcer medicine produced by Glaxo

5. What drives your entrepreneurial dream? An integration of organization mission, personal

aspirations and personal risk propensity Eg. Jeff Bezos of amazon.com, Phil Knight of Nike or

Howard Schultz of Strbucks

SEVEN DOMAINS OF ATTRACTIVE OPPORTUNITY 6. Can team deliver? Does the team have experience, industry know

how, to deliver the superior performance? Do you have a control over crucial success

factors required in your business? Eg: Kishor Biyani- Pantaloon; Jeff Hawkins- Palm

Computing 7. Connectedness up and down the value chain Is the team well connected up, down and across

the value chain so it will be quick to notice any opportunity or need to change its approach if conditions warrant? – people make more money in plan ‘B’ than on ‘A’.

SEVEN DOMAINS OF ATTRACTIVE OPPORTUNITY Seven domains road helps an entrepreneur

to see whether the idea can be converted into opportunity.

It also enables an entrepreneur to take the necessary mid course corrections to reshape opportunity when micro or macro indicators change.

It helps an entrepreneur to see the fatal flaws in the business plans and shows how and where attractive opportunities can be found in stagnant or otherwise unattractive markets.