UNIT 4: IDENTIFYING OPPORTUNITIES AND EVALUATING OPPORTUNITIES

Content
4.0 Aims and Objectives
4.1 Introduction
4.2 Meaning of Opportunities
4.3 Ways of Entering Business
4.3.1 Starting a new Business
4.3.2 Acquisition
4.3.3 Franchise
4.3.4 Inheriting an Existing Family Business
4.3.5 Management Buyout
4.3.6 Joint Venture
4.4. Measuring the Size of the Opportunity
4.5. Determine the Amount of Investment
4.6. Determine the Likely Return
4.7. Measure the Level of Risk
4.8. Entrepreneurial innovation

4.0 AIMS AND OBJECTIVES

At the end of this unit, you are expected to:

 understand the meaning of an opportunity
 identify the sources of business ideas
 identify the methods of idea generating
 understand the different ways of entering into a business.
 understand how the size of an opportunity can be measured
 determine the investment required for a particular project

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  identify the key areas used to measure the likely returns of a project understand how to
measure the risk associated with an investment

4.1 INTRODUCTION

This unit is designed in such a way that the student understands the following points: the
meaning of opportunities, the sources of business ideas and the ways of entering into a
business.
Not all opportunities are equally valuable. A business with limited resources cannot pursue
every opportunity with which it is faced. It must select those opportunities which are going to
be the most rewarding. The key decisions in screening and selecting opportunities relate to the
size of the opportunity, the investment necessary to exploit it, the rewards that will be gained
and the risks likely to be encountered. Specifically, the entrepreneur’s decision should be
based on the answers to the basic question raised under each item. This will be discussed in
this unit.

4.2 MEANING OF OPPORTUNITIES

As it is already defined earlier in unit 1, opportunity can be defined as “a chance of doing

things both differently from and better than how they are being done at the moment.” It is also
defined as a “gap in the market”. Differently means offering a new product or of organizing
the company in a different way. Innovation is involved and better means the product ability to
offer a utility in terms of an ability to satisfy human needs, that existing products do not.

Opportunities lead to business ideas. An individual who is able to identify opportunities can
come up with a business idea which may be a modified one or new ones. (See unit one about
business ideas).

4.3 WAYS OF ENTERING BUSINESS

An entrepreneur may enter into business through different methods. Among the most popular
are: starting a new business, inheriting an existing family business, buying business, buying a
franchise, management buy out and joint venture.

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4.3.1 Starting a New Business

This is a risky way to enter a business because there is uncertainty, and generally a lack of
market information. Unfortunately many start-ups fail because of one factor or a combination
of factors. The most cited reasons for failure include:
- Inadequate market research
- Improper pricing
- Not enough funds to operate
- Poor management
- Lack of inventory control
- Poor credit control
- Underestimation of competition
- Inadequate flow of supplies

Still many start-ups succeed. The usual case of success involves careful market analysis,
realistic goals and decisions about resources needed, hard work, long hours work and seizing
the opportunity at the right moment.

a) Sources of Business Ideas

As entrepreneurs start up a new business, they could get the idea of business from different
sources. There are many possible sources of ideas. Some of the more useful ones are
consumers, existing companies; distribution channels, the government and research and
development units.

i. Customers: - Entrepreneurs are paying increasing attention to what should be the focal
point of the idea for a new product or service in the eyes of the customer. This can take
the form of monitoring ideas mentioned on an informal basis or formally arranging for
consumers to have an opportunity to express their opinions.
ii. Existing companies: - Entrepreneurs should also establish a more formal method for
monitoring and evaluating the products and services being offered by existing or new

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 companies. Frequently this analysis uncovers ways to improve on these present
offerings, resulting in a new venture being formed.
iii. Distribution channels: - Members of the distribution channels are also excellent sources
for new ideas. Because of their familiarity with the needs of the market channel members
frequently have suggestions for completely new products. These channel members can
also be a source of help in marketing the new idea once it is developed by the
entrepreneur.
iv. Research and Development units: - The largest source for new ideas is the
entrepreneur’s own research and development department, whether this is a more formal
endeavor connected with current employment or an informal lab at home. Of course the
more formal research and development department is often better equipped to produce
successful new product ideas.
v. Government: - New product ideas can come from government regulations. In addition,
governments that have patent offices provide a good source of new ideas to
entrepreneurs. Although the patents themselves may not be feasible for new product
introductions, they can frequently suggest other, more marketable, new product ideas.

b) Methods for Generating Ideas

i. Brainstorming: - It is often assumed that entrepreneurs are graced with some special
kind of insight that enables them to see opportunities and the way in which they might be
exploited while creativity is certainly important, the view that entrepreneurs work purely
by inspiration undervalues the extent to which they are rewarded for the hard work
involved in actively seeking out and evaluating new opportunities.

There are a variety of techniques that can be of help in this search. They are discussed as
follows:
The most well-known and widely used technique. This method is based on the fact that
people can be stimulated to greater creativity by meeting with others and participating in
organized group experience.
The entrepreneur can gather a group of people to discuss and generate new ideas. When
using this method, the following four overall rules need to be followed: -
1. No criticism is allowed-no negative comments

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 2. Free wheeling is encouraged – the wild the idea the better
3. Quantity of idea is desired – the greater the number the more likelihood of useful
ideas emerging.
4. Combinations and improvements of ideas are encouraged – ideas of others can be
used to produce still another new idea.

ii. Creative groups: - An entrepreneur does not have to rely on his or her own creativity.
The best entrepreneurs are active in facilitating and harnessing the creativity of other
people too. A creative group consists of a small number of potential customers or
product experts who are encouraged to think about their needs in a particular market area
and they consider how these needs might be better served. The customers may be the
ultimate consumers of the product or service or they may be industrial buyers.

iii. Product blending: - This technique involves identifying the features which define
particular products. Instead of just changing individual features, new products are created
by blending together features from different products or services.

iv. Gordon Method

The Gordon method, analyze many other creative problem-solving techniques, begins
with group members not knowing the exact nature of the problem. This ensures that the
solution is not concluded by preconceived ideas and habit patterns. It follows the
following steps:
- The entrepreneur starts by mentioning a very general concept to the problem
- The group responds by expressing a number of ideas
- Then a concept is developed, followed by related concepts through guidance by the
entrepreneur.
- Then the actual problem is revealed, enabling the group to make suggestions for
implementation or refinement of the final suggestion.
v. Check List Method

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 A new idea is developed through a list of related issues or suggestions. The entrepreneur
can use the list of questions or statements to guide the direction of developing entirely
new ideas or concentrating on specific “idea” area.
vi. Scientific Method
It consists of principles and processes, conducting observations and experiments and
validating the hypothesis used in any rigorous investigation. The approach involves the
entrepreneur defining the problem, analyzing the problem, gathering and analyzing data
developing and testing potential solutions and choosing the best solution.
vii. Big Dream Approach
The entrepreneur dream about a problem and its solution-thinking is big. Every
possibility should be recorded and investigated. This should continue until an idea is
developed into a workable form.

c) Product Planning and Development Process

Once ideas emerge from idea source or creative problem solving, they need further
development and refinement into the final product or service to be offered. This refining
process-the product planning and development process-is divided into five major stages: Idea
stage, concept stage, product development stage, test marketing stage, and commercialization
stage.
i. The idea stage: -
The suggestions for new products or services are obtained and screened to determine
which are good enough to receive more detailed evaluation. Screening criteria must be
established that reflect the entrepreneur’s strengths, weaknesses and resources.
ii. The concept stage: -
Once ideas pass the initial screening stage, they are developed into a more elaborate
concepts by considering the needs of potential buyers. A tentative business plan
describing the product features and the needed marketing program should be developed.
Whenever possible, a sample of potential buyers should evaluate the concept.
iii. The product development stage
The technical and economic aspects of the new product are assessed by assigning the
necessary specifications to members of research and development. Unless the need for
excessive capital expenditures makes it impossible, laboratory-tested products should be

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 created and produced on a pilot-run basis to allow for production control and product
testing.

iv. Test marketing state

While the results of the product development stage provide the basis of the final marketing plans a market
test can be done to increase the certainty of successful commercialization. This last step in the evaluation
process – the test marketing stage – provides actual sales results, which indicate the acceptance level of
consumers. Positive test results indicate the degree of probability of a successful product launch and
company formation.
v. Commercialization stage
At this stage the product will be offered for the market and hereafter the product may pass
through additional four stages: Introduction, growth, maturity and decline.

Commercialization stage

Idea Concept Product Test

stage stage Dev’t marketing
stage stage

Introduc Growth Maturity Decline

tion

4.3.2 Acquisition

Another way to start an entrepreneurial career is by acquiring an existing business. An

acquisition is the purchase of a company or a part of it so that the acquired company is
completely absorbed and no longer exists as a business entity. An acquisition can take many
forms, depending on such factors as the goals and position of the parties involved in the
transaction, the amount of money involved and the type of money.

In some cases buying an already existing business is the proper course of action. An
advantage of buying out a business is that better forecasts can be made because there is a
history to review. An infrastructure is in place that includes policies, credit lines, human
resources, reward systems, and objectives. These can be reviewed, retained, modified and/or

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discarded. There is also the firm’s goodwill or reputation. This, of course, can be assessed
before deciding to buy. It is also possible to buy a business for less than it would take to
duplicate the business.

Good buy out candidates are hard to find. Locating the right candidate will require a through
analysis of the company (size, annual sales, expenses, profit), location, type of business and
its market niche, management team, financial condition, lawsuit history, asset values, cash
flow values and good will. These and other similar factors need to be thoroughly studied and
all of the possible legal ramifications must be considered.
a) Evaluating the acquired business
There are two widely used valuation approaches that the entrepreneur can use to determine
the worth (or value) of an acquisition candidate. They are
i. Asset valuation method
Here the entrepreneur is valuing the underlying worth of the business by its assets.

ii. Cash flow method

This is particularly relevant for an entrepreneur who is attempting to appraise a return on
investment as well as a return on time. There are several different cash flows that can provide
value to the entrepreneur positive cash flows, negative cash flows, and terminal value. The
final cash flow value-the terminal value – is a source of cash when the entrepreneur sells the
business.

4.3.3 Franchise

A franchise is a business whose entrepreneur (the franchisee) provides a product or service

under a legal contract with the franchise owner (the franchiser). The franchiser provides the
business’s distinctive elements (eg. Name, signs, facility design). The franchisee pays the
franchiser a fee or a share of the earnings to operate the business. The franchisee is then able
to operate using the franchiser’s trade name. The Franchisee is part of a chain and uses the
company’s logo, layouts, equipment, standard product, business system, and is supported with
organizing, training, merchandising and management from the franchiser. The franchise types
of business offers the franchisee an established product, company advertising, and image.
This lowers the risk of failure. But the franchise can severally limit a person’s freedom and

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way of doing business. A franchiser can dictate minute details of the business: the color of the
store layout, the receipt, price and royalty rate.

There are three basic types of franchising

a) Trade name franchising: - It is related with a brand name. The franchisee purchases
the right to become identified with the franchiser’s trade name without distributing
particular products exclusively under the manufacturer’s name.
b) Product distribution franchising: - It involves licensing the franchisee to sell specific
products under the manufacturer’s brand name and trade mark through a selective;
limited distribution network.
c) Pure/Comprehensive/business format franchising: - It involves providing the
franchisee with a complete business format, including a license for a trade name, the
products or services to be sold, the physical plant, the methods of operation, a
marketing strategy play, a quality control process, a two way communications system
and the necessary business services.

4.3.4 Inheriting an Existing Family Business

As an entrepreneur inherit an existing family business, and innovate, change, modify and
improve it so as to produce something different and better than before, he/she can make it an
entrepreneurial business. But all inheritors are not entrepreneurs. So to be an entrepreneur,
he/she should be able to innovate the business.

Such businesses have already existing customers, suppliers, competitors, line of relationship,
etc. If the inheritor uses these things constructively it will help to minimize the possible risks
associated with new businesses. However, like buy out businesses, they might have some
negative associations like: poor goodwill, poor performance history, illegal activities, etc.

Therefore the inheritor should identify all the advantages and disadvantages inherited with the
existing family business.

4.3.5 Management Buyout

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Here the entrepreneur would not own the business. He/she is buying only the management of
the business on contract bases. As responsible to the management of someone’s business the
entrepreneur can introduce innovation in to the business so that the business becomes more
efficient and effective, produce more quality product or service, and generally to increase its
capacity and efficiency in the business.

4.3.6 Joint Venture

This is a business undertaking in which foreign and domestic companies share the costs of
building, production or research facilities in foreign countries. It may sometimes be the only
way to enter certain countries where by law, foreigners cannot own business.

It also helps companies pool technological knowledge and share the expense and risk of
research that may not produce marketable goods. It is the participation of two or more
companies in an enterprise in which each party contributes assets, owns the equity to some
degree and shares the risk or in other words it is a partnership between a domestic firm and a
firm in a foreign country.

4.4 MEASURING THE SIZE OF THE OPPORTUNITY

In order to measure the size of an opportunity identified, one should raise the following
questions and get the right response.

- How large is the market into which the innovation is to be placed? In order to answer
this a question you should further see the following questions independently.
- What products will it compete with? - analyze the available goods and services in
the market.
- What is the total value of their sales?- analyze the volume of the market where
these goods and services will be sold.
- What share of the market is likely to be gained? In order to answer this question you
should further ask the following questions.
- How competitive will it be against existing products? Identity the strength of your
product over your competitors.

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 - What percentage of customers can be reached? Try to measure the level of
customers satisfaction with the existing products supplied by competitors.
- What fraction will convert to the innovation? Try to understand what they highly
demanded buy do not get in the market. In addition try to find out what influence
them.
- What gross margin (revenue minus costs) is likely? In order to answer this question.
You ask the following questions.
- What price can be obtained? Here identify your pricing strategy and set the price
of your product, understand the paying ability of customers, etc.
- What is the unit cost likely to be? Estimate the possible cost of the new product
that you will likely to produce.
- Over what period can the opportunity are exploited? In order to answer this question,
you have to consider the following questions.
- How long will customers be interested? Forecast the trend of customers test,
behavior buying habit, income level, and competitors reaction pattern.
- How long before competitors move in? Determine the attractiveness of your
product and your competitors reaction pattern. Determine the amount of
investment in order to measure the amount of investment raise the following
questions.
4.5 WHAT INVESTMENT WILL BE NECESSARY IF IT IS TO BE EXPLOITED PROPERLY?

In order to answer this question, you have to raise the following questions consequentially.
- What are the immediate capital requirements? This refers to the short-term capital
requirement of the project. The capital required for different purposes such as: what
investments in people, operating assets and communication that will be required to
start the business?
- What will be the long-term and ongoing capital requirements? This is to understand
the capital requirement for
- Future investment so as to continuously exploit the opportunity
- Does the business have access to the capital required? Can he/she raise the capital
required? If so, is it from own source or credit from lenders?

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 - If the opportunity is as large as expected will the business have sufficient capacity?
The capacity of raise the capital required and the ability to manage the business?
- If not can it be expanded or be (profitably) offset to other organizations?
- What human resources will be needed? Are they available? This is in terms of number,
type of training and level of training.

4.6 WHAT IS THE LIKELY RETURN?

Determine the likely return in order to answer this question you have to raise the following
points:
- What profits will be generated?
- What will be the rates? Try to estimate the rate of return, will it be lesser than or
greater than other investment areas?
- What will costs be like? Try to measure the possible costs that will be incurred to
operate the business.
- Over what period? Estimate the length of the period over which this rate of return can
be earned. Will it be very short, intermediate or very long period?
- Is this attractive given the investment necessary? In order to answer this question,
compare the return from the project at hand with other investment areas and answer
the following questions.
- How does return on investment compare to other investment options?
- What is the opportunity cost? Opportunity cost is the gain foregone because that
investment area is not choose.

4.7 WHAT ARE THE RISKS?

Measure the level of risk. Raise the following questions and try to find out the right response.
- How sound are the assumptions about the size of the opportunity?
- How accurate were the data on markets?
- Have all competitor products been considered?
- What if customers do not find the offering as attractive as expected?
- What if competitors are more responsive than expected?
- Have all competitors been considered?

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 - How could they react in principle?
- How might they react in practice?
- To what extent is success dependent on the support and good will of intermediaries
and other third parties?
- How will this good will be gained and maintained?
- How sensitive will the exploitation be to marketing strategy (particularly in relation to:
Pricing, selling, paints against competitors, customers targeted) that has been adopted?
- Can adjustments can made to the strategy is the light of experience? How expensive
will this be?
- Can additional resources be made available if necessary?
- Will these be from internal sources or from investors?
- What will be the effect on cash flow if revenues are lower than expected?
- What will be the effect on cash flow if costs are higher than expected?
- How should investors be expired for these eventualities?
- How should future revenues be discounted?
- Under what circumstances might investors wish to make an exist? Will this be planned
or is response to a crisis?
- If so, how will they do it?
- By being paid from profit stream or
By selling their holding?

Opportunities only have meaning in relation to each other. The entrepreneur must select
opportunities not in absolute terms but after comparing them with each other. A business (like
an investor) will find an opportunity attractive only if it represents the best option in which
they have to invest for the future. Opportunities must be prioritized. They must compete with
each other for the business’s valuable resources. What matters is not so much cost but
opportunity cost, that is, not the cost of actually using the resources, but the potential returns
lost because they were not used elsewhere.

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4.8 ENTREPRENEURIAL INNOVATION

Innovation lies at the heart of the entrepreneurial process and is a means to the exploitation of
opportunity.

* Types of Entrepreneurial innovation

Incremental innovation: - Is concerned with minor improvements to an existing technology
with limited market ambitions.
New Insight innovation: - If market ambitions are higher, but still based on modifications to
existing technology, and competitions will be dependent on a
new way of using the technology.

Innovation is a knowledge-based process. Successful innovation is founded on knowledge in

three areas.
1. Market Knowledge: - Is concerned with customers, their needs, demands, likely
demand growth and what competitions are supplying.
2. Technological Knowledge: - Relates to the effective development and production of
the product or service aimed at the customers.
3. Capability Knowledge: - The venture’s understanding of what it does and why it
does it well. This includes knowledge of the informational,
cost, flexibility and human advantages the venture can call
upon to compete effectively.
All businesses, no matter how, mature, must be active innovators if they hope to maintain
their position in the market.

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