13 Topic 8 Evaluation of Entrepreneurial Opportunities.
INTRODUCTION
The number of new ventures have been increasing in the past few years. There
are several reasons for entrepreneurs starting up new ventures. As ideas develop
into new ventures, the real challenge is for these companies to survive and grow.
What will make you a successful entrepreneur? Have you ever thought of the
necessary aspects that you should be familiar with? In order to face the real
challenges in the world of entrepreneurship, you need to have a very deep
knowledge and understanding of the common pitfalls in selecting a new venture.
This topic will help you to identify critical factors for new venture development
and underlying factors of venture success. We will also discuss an effective
evaluation process for new ventures.
Topic 8 Evaluation of Entrepreneurial Opportunities.
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Review six common pitfalls in the selection of new-venture ideas;
2. Explain eight critical factors involved in new-venture assessment;
3. Describe three major factors that underlie venture success;
4. Analyse four evaluation process methods; and
5. Outline the specific activities involved in a comprehensive feasibility
evaluation.
PITFALLS IN SELECTING NEW VENTURES
The stage of transition from an idea to a potential venture can be the most critical
for understanding new venture development. Below are six common pitfalls that
an entrepreneur may encounter in the process of selecting a new venture
(see Figure 8.1).
Figure 8.1: Six pitfalls in selecting new ventures
Okay, now let us look at a brief description of each pitfall.
(a) Lack of Objective Evaluation
Many entrepreneurs lack objectivity and do not realise the importance of
the careful examination they should do for their work. All ideas should be
studied and investigated to avoid this pitfall.
(b) No Real Insight into the Market
(i) The importance of developing a marketing approach as the basis for a
new venture is often ignored. According to Levitt (1960), „they show
managerial short sightedness‰.
(ii) They fail to take into account the life cycle of a new product/service.
(iii) Entrepreneurs must realise that timing is crucial. Projecting the life
cycle of new products is important as well as introducing the products
at the right moment.
(c) Inadequate Understanding of Technical Requirements
(i) Before initiating a new venture, entrepreneurs should conduct a
thorough study of the project.
(ii) Technical problems often arise, taking up a lot of the entrepreneur's
time, thus resulting in costly issues.
(d) Poor Financial Understanding
(i) Costs are often ignored by entrepreneurs. They might also not
conduct proper planning.
(ii) Underestimation of development costs by huge margins is not
unusual.
(e) Lack of Venture Uniqueness
(i) Concepts with special designs and characteristics will attract
customers to a venture. Entrepreneurs would not be able to attract
customers if there is no uniqueness in their ventures.
(ii) Product differentiation is the best way to create awareness among
customers of differences between rival's products and their own.
(f) Ignorance of Legal Issues
(i) Major problems can arise if legal issues are overlooked.
(ii) Examples of legal requirements are creating a safe working
environment, ensuring quality control of products and services and
having copyrights and patents to protect one's products and creations.
Name two world-renowned firms that have failed in their „new‰
business ventures. What could have been their problems? Share this
information with your tutor and friends during a tutorial session.
ACTIVITY 8.1
CRITICAL FACTORS FOR NEW VENTURE DEVELOPMENT
Another thing we must consider in new venture development is the critical factors.
Vesper (1990) stated that an entrepreneur should use a checklist of new venture
ideas which covers eight areas as shown in Figure 8.2.
Figure 8.2: Eight areas to be considered in new venture development
Describe six pitballs in selecting new ventures.
EXERCISE 8.1
Table 8.1 shows a checklist of new venture ideas that an entrepreneur should
consider in the assessment of a new venture.
Table 8.1: A Checklist of New Venture Ideas
No. Area Assessment Question
(a) Basic Feasibility of the Venture
• Can the product or service work?
• Is it legal?
(b) Competitive Advantages of the Venture
• What specific competitive advantage will the product or service offer?
• How are the competitors likely to respond?
(c) Buyer Decision in the Venture
• Who are the customers likely to be?
• How much will each customer buy and how many customers are there?
(d) Marketing of the Goods
and Services
• How much will be spent on advertising?
• What share of the market will the company
capture?
• Who will perform the selling function?
(e) Production of the Goods
and Services
• Will the company make or buy what it sells?
• Are sources of supplies available at
reasonable prices?
(f) Staffing Decision in the
Venture
• How will competencies in each area of the
business be ensured?
• Who does the hiring?
(g) Control of the Venture • What records will be needed? When?
• Will any special controls be required?
(h) Financing the Venture • How much will be needed for development?
• How much is the working capital?
• Who will provide the financing? At what cost?
ACTIVITY 8.2
What are the critical factors that need to be considered for the
development of a new venture?
WHY NEW VENTURES FAIL
Many newly established businesses vanish within a year or two. Only a small
percentage are successful. According to Bruno et al (1987) and Karakaya and
Kobu (1994), there are three major causes that contribute to the failure of new
ventures as you can see in Figure 8.3.
Figure 8.3: Three major factors that contribute to the failure of new ventures
Meanwhile, Table 8.2 below describes the causes of failure.
Table 8.2: Causes of Failure
No Causes of Failure Factors
(a) Product/market problems
• Poor timing
• Product design problems
• Inappropriate distribution strategy
• Unclear business definition
• Over-reliance on one customer
(b) Financial difficulties
• Initial undercapitalisation
• Assuming debt too early
• Venture capital relationship problems
(c) Managerial problems
• Concept of a team approach (e.g. hiring and promotions
based on nepotism rather than qualifications; poor
relationships with parent companies and venture
capitalists; founders who focus on their weaknesses
rather than their strengths; incompetent support
professionals).
• Human resource problems (e.g. kickbacks and
subsequent firings; deceit on the part of the venture
capitalist; verbal agreements not honoured; protracted
lawsuits).
8.3
THE EVALUATION PROCESS
A critical task of starting a business enterprise is conducting solid analysis and
evaluation of the feasibility of the product/service idea. Entrepreneurs might
later discover that a proposal contains many fatal flaws if the initial analysis was
not properly conducted.
Figure 8.4 illustrates the evaluation process provided by Kuratko and Hodgetts
(2004).
Figure 8.4: Evaluation process
The evaluation process comprises the following steps.
(a) Asking the Right Questions
Many important evaluation-related questions should be asked. Examples of
questions that entrepreneurs should ask themselves are as follows:
(i) Is it a new product/service idea? Is it proprietary? Can it be patented
or copyrighted?
(ii) Has a prototype been tested by independent testers who try to blow
the system or rip the product to shreds? What are the weak points?
Will it stand up?
(iii) Has it been taken to a trade show? If so, what reactions did it receive?
Were there any sales made?
8.4
(iv) Is the product or service easily understood by customers, bankers,
venture capitalists, accountants, lawyers and insurance agents?
(v) What is the overall market? What are the market segments? Can
the product penetrate these segments? Can any special niche be
exploited?
(vi) Has market research been conducted? Who are the competitors?
(vii) What distribution and sales methods will be used?
(viii) How will the product be made? How much will it cost?
(ix) Will the business concept be developed and licensed to others or
developed and sold away?
(b) Profile Analysis
A single strategic variable seldom shapes the ultimate success or failure
of a new business venture. In most instances, a combination of variables
influences the outcome. It is important to identify and investigate these
variables before new ideas are put into practice. The results of such a profile
analysis enable the entrepreneur to judge the business potential.
(c) Feasibility Criteria Approach
This approach was developed as a criteria selection list from which
entrepreneurs can gain insight into the viability of their venture. According
to Kuratko and Hodgetts (2004), the feasibility criteria approach asks the
following questions:
(i) Is it proprietary?
(ii) Are the initial production costs realistic?
(iii) Are the initial marketing costs realistic?
(iv) Does the product have potential for very high margins?
(v) Is the time required to get to market and to reach the break-even
point realistic?
(vi) Is the potential market large?
(vii) Is there any initial customer?
(viii) Is the cost of development and calender time realistic?
(ix) Is it a growing industry?
(x) Can the product and the need for it be understood by the financial
community?
(d) Comprehensive Feasibility Approach
It refers to a more comprehensive and systematic feasibility analysis that
incorporates external factors.
There are two major factors involved in a comprehensive feasilibility study
of a new venture (see Table 8.3).
Table 8.3: Two Major Factors Involved in a Comprehensive Feasibility Study
of a New Venture
Technical Feasibility Marketability
It means identifying the technical
requirements for producing a product or
service that will satisfy the expectations
of potential customers.
The important criteria for the
requirement are as follows:
• Functional design of the product and
attractiveness in appearance.
• Flexibility, for example, permitting
ready modification of the external
features of the product to meet
customer demands or technological
and competitive changes.
• Durability of the materials from
which the product is made.
• Reliability, for example, ensuring
performance as expected under
normal operating conditions.
It means how saleable the product or
service is in the market and what is the
demand like. Three major areas in this
type of analysis are:
• Investigating the full market potential
and identifying customers for the
goods or services.
• Analysing the extent to which the
enterprise might exploit this potential
market.
• Using the market analysis to
determine the opportunities and risks
associated with the venture.
To address these areas, a variety of informational sources must be found and
used. For a market feasibility analysis, general sources would include the
following:
(a) Trends in the general economy (various economic indicators etc.);
(b) Market information (customers, customer demand patterns);
(c) Pricing information (range of prices for similar, complementary and
substitute products; base prices and discount structures); and
(d) Competitive information (major competitors and their competitive
strength).
C New venture selection may foresee a few pitfalls such as insufficient objective
evaluation of the venture, lack of market potential knowledge, little
understanding of the technical requirements, insufficient financial
understanding, lack of unique ideas and being unaware of legal issues.
• Major factors that may cause the failure of new ventures are insufficient
market knowledge, faulty product, ineffective sales and marketing strategy,
lack of awareness of competitive pressure, timing problems and insufficient
capital.
C By asking the right questions, making a profile analysis and carrying out a
feasibility criteria study, the feasibility of an entrepreneur's product or
service can be assessed.
State the main reasons why new ventures fail.
EXERCISE 8.2
Critical factors
Customer availability
Legal requirements
Marketability
Product availability
Product differentiation
Profile analysis
Technical feasibility
Uniqueness
INTRODUCTION
The number of new ventures have been increasing in the past few years. There
are several reasons for entrepreneurs starting up new ventures. As ideas develop
into new ventures, the real challenge is for these companies to survive and grow.
What will make you a successful entrepreneur? Have you ever thought of the
necessary aspects that you should be familiar with? In order to face the real
challenges in the world of entrepreneurship, you need to have a very deep
knowledge and understanding of the common pitfalls in selecting a new venture.
This topic will help you to identify critical factors for new venture development
and underlying factors of venture success. We will also discuss an effective
evaluation process for new ventures.
Topic 8 Evaluation of Entrepreneurial Opportunities.
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Review six common pitfalls in the selection of new-venture ideas;
2. Explain eight critical factors involved in new-venture assessment;
3. Describe three major factors that underlie venture success;
4. Analyse four evaluation process methods; and
5. Outline the specific activities involved in a comprehensive feasibility
evaluation.
PITFALLS IN SELECTING NEW VENTURES
The stage of transition from an idea to a potential venture can be the most critical
for understanding new venture development. Below are six common pitfalls that
an entrepreneur may encounter in the process of selecting a new venture
(see Figure 8.1).
Figure 8.1: Six pitfalls in selecting new ventures
Okay, now let us look at a brief description of each pitfall.
(a) Lack of Objective Evaluation
Many entrepreneurs lack objectivity and do not realise the importance of
the careful examination they should do for their work. All ideas should be
studied and investigated to avoid this pitfall.
(b) No Real Insight into the Market
(i) The importance of developing a marketing approach as the basis for a
new venture is often ignored. According to Levitt (1960), „they show
managerial short sightedness‰.
(ii) They fail to take into account the life cycle of a new product/service.
(iii) Entrepreneurs must realise that timing is crucial. Projecting the life
cycle of new products is important as well as introducing the products
at the right moment.
(c) Inadequate Understanding of Technical Requirements
(i) Before initiating a new venture, entrepreneurs should conduct a
thorough study of the project.
(ii) Technical problems often arise, taking up a lot of the entrepreneur's
time, thus resulting in costly issues.
(d) Poor Financial Understanding
(i) Costs are often ignored by entrepreneurs. They might also not
conduct proper planning.
(ii) Underestimation of development costs by huge margins is not
unusual.
(e) Lack of Venture Uniqueness
(i) Concepts with special designs and characteristics will attract
customers to a venture. Entrepreneurs would not be able to attract
customers if there is no uniqueness in their ventures.
(ii) Product differentiation is the best way to create awareness among
customers of differences between rival's products and their own.
(f) Ignorance of Legal Issues
(i) Major problems can arise if legal issues are overlooked.
(ii) Examples of legal requirements are creating a safe working
environment, ensuring quality control of products and services and
having copyrights and patents to protect one's products and creations.
Name two world-renowned firms that have failed in their „new‰
business ventures. What could have been their problems? Share this
information with your tutor and friends during a tutorial session.
ACTIVITY 8.1
CRITICAL FACTORS FOR NEW VENTURE DEVELOPMENT
Another thing we must consider in new venture development is the critical factors.
Vesper (1990) stated that an entrepreneur should use a checklist of new venture
ideas which covers eight areas as shown in Figure 8.2.
Figure 8.2: Eight areas to be considered in new venture development
Describe six pitballs in selecting new ventures.
EXERCISE 8.1
Table 8.1 shows a checklist of new venture ideas that an entrepreneur should
consider in the assessment of a new venture.
Table 8.1: A Checklist of New Venture Ideas
No. Area Assessment Question
(a) Basic Feasibility of the Venture
• Can the product or service work?
• Is it legal?
(b) Competitive Advantages of the Venture
• What specific competitive advantage will the product or service offer?
• How are the competitors likely to respond?
(c) Buyer Decision in the Venture
• Who are the customers likely to be?
• How much will each customer buy and how many customers are there?
(d) Marketing of the Goods
and Services
• How much will be spent on advertising?
• What share of the market will the company
capture?
• Who will perform the selling function?
(e) Production of the Goods
and Services
• Will the company make or buy what it sells?
• Are sources of supplies available at
reasonable prices?
(f) Staffing Decision in the
Venture
• How will competencies in each area of the
business be ensured?
• Who does the hiring?
(g) Control of the Venture • What records will be needed? When?
• Will any special controls be required?
(h) Financing the Venture • How much will be needed for development?
• How much is the working capital?
• Who will provide the financing? At what cost?
ACTIVITY 8.2
What are the critical factors that need to be considered for the
development of a new venture?
WHY NEW VENTURES FAIL
Many newly established businesses vanish within a year or two. Only a small
percentage are successful. According to Bruno et al (1987) and Karakaya and
Kobu (1994), there are three major causes that contribute to the failure of new
ventures as you can see in Figure 8.3.
Figure 8.3: Three major factors that contribute to the failure of new ventures
Meanwhile, Table 8.2 below describes the causes of failure.
Table 8.2: Causes of Failure
No Causes of Failure Factors
(a) Product/market problems
• Poor timing
• Product design problems
• Inappropriate distribution strategy
• Unclear business definition
• Over-reliance on one customer
(b) Financial difficulties
• Initial undercapitalisation
• Assuming debt too early
• Venture capital relationship problems
(c) Managerial problems
• Concept of a team approach (e.g. hiring and promotions
based on nepotism rather than qualifications; poor
relationships with parent companies and venture
capitalists; founders who focus on their weaknesses
rather than their strengths; incompetent support
professionals).
• Human resource problems (e.g. kickbacks and
subsequent firings; deceit on the part of the venture
capitalist; verbal agreements not honoured; protracted
lawsuits).
8.3
THE EVALUATION PROCESS
A critical task of starting a business enterprise is conducting solid analysis and
evaluation of the feasibility of the product/service idea. Entrepreneurs might
later discover that a proposal contains many fatal flaws if the initial analysis was
not properly conducted.
Figure 8.4 illustrates the evaluation process provided by Kuratko and Hodgetts
(2004).
Figure 8.4: Evaluation process
The evaluation process comprises the following steps.
(a) Asking the Right Questions
Many important evaluation-related questions should be asked. Examples of
questions that entrepreneurs should ask themselves are as follows:
(i) Is it a new product/service idea? Is it proprietary? Can it be patented
or copyrighted?
(ii) Has a prototype been tested by independent testers who try to blow
the system or rip the product to shreds? What are the weak points?
Will it stand up?
(iii) Has it been taken to a trade show? If so, what reactions did it receive?
Were there any sales made?
8.4
(iv) Is the product or service easily understood by customers, bankers,
venture capitalists, accountants, lawyers and insurance agents?
(v) What is the overall market? What are the market segments? Can
the product penetrate these segments? Can any special niche be
exploited?
(vi) Has market research been conducted? Who are the competitors?
(vii) What distribution and sales methods will be used?
(viii) How will the product be made? How much will it cost?
(ix) Will the business concept be developed and licensed to others or
developed and sold away?
(b) Profile Analysis
A single strategic variable seldom shapes the ultimate success or failure
of a new business venture. In most instances, a combination of variables
influences the outcome. It is important to identify and investigate these
variables before new ideas are put into practice. The results of such a profile
analysis enable the entrepreneur to judge the business potential.
(c) Feasibility Criteria Approach
This approach was developed as a criteria selection list from which
entrepreneurs can gain insight into the viability of their venture. According
to Kuratko and Hodgetts (2004), the feasibility criteria approach asks the
following questions:
(i) Is it proprietary?
(ii) Are the initial production costs realistic?
(iii) Are the initial marketing costs realistic?
(iv) Does the product have potential for very high margins?
(v) Is the time required to get to market and to reach the break-even
point realistic?
(vi) Is the potential market large?
(vii) Is there any initial customer?
(viii) Is the cost of development and calender time realistic?
(ix) Is it a growing industry?
(x) Can the product and the need for it be understood by the financial
community?
(d) Comprehensive Feasibility Approach
It refers to a more comprehensive and systematic feasibility analysis that
incorporates external factors.
There are two major factors involved in a comprehensive feasilibility study
of a new venture (see Table 8.3).
Table 8.3: Two Major Factors Involved in a Comprehensive Feasibility Study
of a New Venture
Technical Feasibility Marketability
It means identifying the technical
requirements for producing a product or
service that will satisfy the expectations
of potential customers.
The important criteria for the
requirement are as follows:
• Functional design of the product and
attractiveness in appearance.
• Flexibility, for example, permitting
ready modification of the external
features of the product to meet
customer demands or technological
and competitive changes.
• Durability of the materials from
which the product is made.
• Reliability, for example, ensuring
performance as expected under
normal operating conditions.
It means how saleable the product or
service is in the market and what is the
demand like. Three major areas in this
type of analysis are:
• Investigating the full market potential
and identifying customers for the
goods or services.
• Analysing the extent to which the
enterprise might exploit this potential
market.
• Using the market analysis to
determine the opportunities and risks
associated with the venture.
To address these areas, a variety of informational sources must be found and
used. For a market feasibility analysis, general sources would include the
following:
(a) Trends in the general economy (various economic indicators etc.);
(b) Market information (customers, customer demand patterns);
(c) Pricing information (range of prices for similar, complementary and
substitute products; base prices and discount structures); and
(d) Competitive information (major competitors and their competitive
strength).
C New venture selection may foresee a few pitfalls such as insufficient objective
evaluation of the venture, lack of market potential knowledge, little
understanding of the technical requirements, insufficient financial
understanding, lack of unique ideas and being unaware of legal issues.
• Major factors that may cause the failure of new ventures are insufficient
market knowledge, faulty product, ineffective sales and marketing strategy,
lack of awareness of competitive pressure, timing problems and insufficient
capital.
C By asking the right questions, making a profile analysis and carrying out a
feasibility criteria study, the feasibility of an entrepreneur's product or
service can be assessed.
State the main reasons why new ventures fail.
EXERCISE 8.2
Critical factors
Customer availability
Legal requirements
Marketability
Product availability
Product differentiation
Profile analysis
Technical feasibility
Uniqueness
No comments:
Post a Comment