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UNIT 3: ENTREPRENEURIAL PROCESS – AN OVERVIEW

Contents
3.0 Aims and Objectives
3.1 Introduction
3.2 The Entrepreneurial Process
3.2.1 Pre-Start-Up Stage
3.2.2 Start-Up Stage
3.2.3 Early Growth Stage
3.2.4 Later Growth Stage
3.3 Summary
3.4 Key Terms
3.5 Answer Your Progress Questions

3.0 AIMS AND OBJECTIVES

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


 understand the different stages of an entrepreneurial process
 identify the basic activities and objectives in the pre start-up stage
 identify the basic activities of the post-start-up stage
 define objectives of the start-up stage

3.1 INTRODUCTION

This unit is discussing about the entrepreneurial process in general. The entrepreneurial
process can be viewed in the four stages: pre-startup stage, start up stage, early growth stage
and latter growth stages. The start-up stage can be further divided into four stages: Identifying
opportunities, evaluating opportunities, feasibility study and developing business plan. These
stages of the startup will be discussed in the units following this.

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3.2 THE ENTREPRENEURIAL PROCESS

The entrepreneurial process includes more than just problem solving in a typical management
position. An entrepreneur must find, evaluate and develop opportunities by overcoming the
strong forces that resist the creation of something new.

However, there are no perfect models on how to succeed as an entrepreneur outside or inside
an organization. Taking an idea, working with it, and eventually turning it into a business or
product usually is not an orderly process. The steps through the process are often unplanned,
are outside the entrepreneur’s total control and usually occur haphazardly. The
entrepreneurship process is simply frenetic, often unpredictable, challenging, and exciting all
at the same time. The sequence of events is different for each product or service or each
entrepreneur.

An idea’s movement form something a person thinks up to a functioning business can be


thought of as a four-stage model. The four-stage growth model consists of categories of
distinct activities essential for a new venture to progress from an idea to a substantial
enterprise. The four are pre-start up, start up; early growth and later growth stages. Halt’s
concise, informative model high lights activities in each of these growth stages.

The four-stage growth model Figure 3.1

Pre-start up stage Startup stage Early growth stage Later growth stage

The period during The initial period of A period of often rapid The evolution of a venture
which entrepreneurs business when the development and growth into a large company with
plan the venture and the entrepreneur must when the venture may active competitors in an
preliminary work of position the venture in a undergo major changes in established industry when
obtaining resources and market and made markets, finances and professional management
organizing prior to start- necessary adjustments resource utilization. may be more important
up to assure survival. than entrepreneurial
emotions.

3.2.1 Pre-Startup Stage

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During this initial phase, ideas evolve from a creative process to the point of being
consciously perceived as commercial endeavors. Entrepreneurs have already begun to believe
that their ideas are feasible and they become fascinated by visions of their enterprise.
However, many of them will haphazardly plunge into business, without much considerations
taken with the ambition of “finding a gap and filling it”. This lack of preparation too often
leads to early failure. Having a gap and filling it are important, but seldom sufficient for
success.

More conscious entrepreneurs will begin by asking questions about the actual potential of
their products or services. They will try to answer questions about production, operations,
markets, competitors, costs, financing, and potential profits. And they will try to resolve
questions about their own abilities to start business. Depending on the complexity of the
proposed enterprise, the range of pre-start-up activities can be quite extensive, but there are
four activities common to all now ventures. These are shown in Figure 3.2

Figure 3.2

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Four Essential Pre-Start-Up Activities

What is the purpose of the business?


Business Concept What does the entrepreneur want to
Defined accomplish with the business?

Product-market Product research: is the product or


study service needed? Realistic? Market
research. Who will buy? Where are
they? What
What niche?
rich? What
What competitors
exist?

Financial projections: What cash is


needed? How will income be
Financial plan generatal? What
generatd? What expenses
expenses are
expected? What is invested?
Borrowed? What is needed to meat
operating requirements?

Getting ready to start: The


entrepreneur must find resources,
Pre startup purchase beginning inventory, hire
implementation those needed at startup, and obtain
necessary licenses, premises leases,
facilities, and equipment.

A. Business concepts Identified /Identify opportunities


Entrepreneurs must first conceptualize their business. This conceptualization may occur as a
natural extension of the creativity process in which new ideas are shaped into visions of useful
products or services. It also may occur in a conscientious plan developed around a perceived
“gap” that an entrepreneur might “fill”. The critical question to be answered is “what do I
want to accomplish with this enterprise?

The entrepreneur identifies as many good opportunities as possible. They have to answer
these questions.

What is the purpose of the venture? What does the entrepreneur want to accomplish with the
business? Does this thing exist already? If it doesn’t can it be made? Who would buy it? Why

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would they want it? Where are these customers? Am I the person to make this thing? Am I the
one to sell it? Why would I want to do this?

The business concept may not be fully developed until most of these questions are answered.

B. Product-market study /Evaluating opportunity


Once an entrepreneur has determined that a product or service is feasible, and that he or she
might be capable, the next set of activities involves pragmatic research. This is crucial
because entrepreneurs often jump to early conclusions based on intuition that, under close
scrutiny, reveal fatal flows in their plans. Research is necessary in at least two areas: product
development and marketing. The entrepreneur makes a quick initial assessment of the best
opportunities to select the one, which he/she will try to develop.

Product research requires actual research and development to design the item, investigate
development costs, evaluate materials and explore methods of manufacture. In this regard the
following questions must be raised and properly answered by the entrepreneur such as: can it
be done? Can it be done at a cost that could generate profits? How is it to be done? Who will
do it?

Product research involves in answering the following questions. Who will buy the product or
service? What will they be willing to pay? How can I attract them to my business? If this
venture is a big success what will prevent competitors from overwhelming me? Who are my
competitors? Can I establish a niche in the market? What are my options for long-term
growth?

These questions are critical to pursue in concert with product research efforts for several
important reasons.
1st. The product itself is usually modified by feedback from initial market research.
2nd. How a product is marketed often determines how it is designed, manufactured and
packaged.
3rd. A product is often commercially viable only when markets can be protected against strong
competitors.

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The initial stage of marketing research is often rudimentary. Typically, entrepreneurs will
confide in close friends or family members to get reactions to their ideas. This feedback is
useful but often misleading. As they do not want to hurt his heart, they may positively react or
in the contrary not to see someone close losing in the process, they may refuse, even without
objective evaluation. Hence, entrepreneurs should get a professional help to objectively
evaluate its business idea.

C. Financial Planning/Feasibility Study


Although new ventures are usually secured by personal savings, cash influences are needed as
the business begins to grow. Early cash flow is usually acquired through a combination of
short-term loans, home mortgages, and family investments. As the venture evolves further,
more cash is needed and entrepreneurs have to attract capital through sophisticated loans and
knowledgeable investors. Attracting capital requires careful planning and documentation
about products, services, markets, and the entrepreneur’s expectations.

Financial planning during the pre-startup stage will not necessarily be extensive, but it does
have to be based on verifiable information. For example, if an entrepreneur projects a million
dollars in sales during the first year, there should be more than intuition behind the forecast.
Using product and market information, the entrepreneur should be able to justify cos-price
relationships, how sales were estimated, and what will be required in overhead expenses.
Using this information, the entrepreneur can forecast profits and cash flow, the two major
pieces of information required by bank loan officers and investors.

D. Pre-start-up Implementation
If we define the pre-start-up stage as a period that precedes any attempt to generate sales, then
it is a stage similar to that of an Olympic sprinter preparing for a race. The sprinter, like the
entrepreneur, plans, trains, develops strategies, and gets physically and mentally prepared to
run. Just before the race is to begin, the sprinter gets into the starting blocks to await the gun.
Like the sprinter, an entrepreneur must commit to action and do certain things before the
event.

The entrepreneur must establish vendor relations with suppliers, establish a business location,
hire essential personnel, arrange for initial promotions, and set up administration systems. The

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entrepreneur, in addition, must final resources, purchase beginning inventory, hire those
needed at start up and obtain necessary license, permits, leases, facilities and equipment.

3.2.2 Start-Up Stage

It is the initial period of business. For companies with products or services to sell, it is the first
stage into revenue-generating activity. The start-up stage has no definite time frame and there
are no models to describe what a business does during this stage: however, there are two
benchmark considerations.
1st Meeting operating objectives
Ideally the venture will generate projected sales or do slightly better. If sales are
significantly below projections the venture risks of running out of cash and closing. If
sales are substantially wider than projections the firm may find itself equally in distress
and unable to either finance growth or replenish inventory. This risk is often overlooked
because most people automatically assume that a higher sales volume means higher
profits. Unfortunately, the only time this assumption is true is when an entrepreneur sells
everything for cash and has an unlimited supply of inventory. Meeting operating
objectives does not necessarily mean making a profit. To the contrary most new ventures
operate at a loss for several years. They “break-even” only with carefully monitored
controls but they should be able to structure the business so that variable costs are covered
and cash flow is positive. Does the business have enough cash or financial resources to
cover variable and fixed costs? This is a crucial question. If either condition cannot be met
the enterprise is not viable.
2nd. Positioning the Enterprise
Every successful business starts with a pre conceived business idea, which includes a
concept of the product or service, markets and growth potential. However, entrepreneurs
often find that reality is quite different from what was envisioned. Two conditions are
important here; (1) The business must survive in the short run, and (2) The business must
be positioned to achieve long-term objectives.
From a survival viewpoint the start-up stage is crucial period when adjustments of prices,
inventory, debt structure, etc are made. From a long-term perspective the business concept

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must coincide with realistic prospects for growth. This means that the enterprise must be
positioned to take advantage of growth markets.

Positioning may be made to the product or service the entrepreneur can offer to the market.
Service positioning is the process of organizing the enterprise to provide expertise to a
particular client. Products are positioned by placing them for sale in a particular market
niches.

Start-up operating objectives

Sales To attain monthly sales volume as projected at prices projected in feasibility


plan
To achieve projected sales mix of products and services as summarized in
feasibility plan.
Revenue To achieve cash flow with in budget based on sale volume and price
projections
To meet targets above variable costs with appropriate operating margins
Growth To realize incremental growth within seasonal pattern of forecasts
To maintain balance of growth with ability to underwrite inventory materials
and human resources
Position To solidify a long-term position in appropriate markets as a result of adaptation
during start-up.
To identify market strategy for niches or opportunities in new products,
services or markets during start-up.

3.2.3 Early Growth Stage

Once the venture is positioned, successful businesses will experience a stage of early growth.
This is a period of intense monitoring, and growth can occur at different rates along a long
continuum, ranging from slow growth through incrementally higher sales to explosive growth
through quantum changes in consumer demand.

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This change is illustrated in the following figure

Very slow Perceived comfort zone Very rapid

Sales increases slowly Incremental growth is Sales increases rapidly


because of the nature of within a comfort zone as new products gain
the product or the of the venture’s wide acceptance in new
limited market resources and owner’s markets.
resources and owner’s
profit objectives

Figure 3-3 Continuum of early growth

At the low end of the continuum, entrepreneurs find that they compete in slow-growth
markets. At the end of the continuum; the entrepreneur find a high-growth sales. Between
these extremes, a majority of entrepreneurs find a “comfort zone” of expansion. Their
ventures may have growth potential, but founders restrain expansion to coincide with personal
objectives. Interesting things can happen to a new venture during this stage. If the
entrepreneur has a unique product or lucrative patent, the business may be actively courted by
larger firms. Such courtships can result in very profitable buyouts or licensing agreements.
Mergers are also common, as companies with complementary strength combine to form a new
company positioned for more rapid growth. Many businesses also experience early growth but
find that the enterprise has severe limitations. In this case, an entrepreneur may simply
recognize that the future holds little growth potential and reposing the venture as a small
business.

3.2.4 Later Growth Stage

If the enterprise proves successful in the early growth stage and has momentum, it can find
itself in competition with larger companies. This is the later growth stage, when the rate of
growth may be slower and the industry has attracted competitors. Companies reaching this
stage often “go public” with stock offerings. Family fortunes turn into corporate equity
positions, private investors convert their holding into publicly traded securities, and
management teams replace the entrepreneurial cadre. In many instances, founders lose the
personal identity they had with their firms, and if they are not ready to adapt to corporate

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management, they leave. Those who do adapt enjoy the benefits of corporate management and
the profits of being major stockholders. A few ventures become large without losing control or
going public. Their founders continue to manage their corporations, finance growth through
earnings and avoid the complexities of publicly traded stock.

Understanding the Four-stage growth paradigm

Sequential stages of new venture development represent intervals that focus on different sets
of circumstances. During the pre-start-up stage, the focus is on product, service, and market
planning. The start-up stage requires entrepreneurs to focus on implementation and early
positioning. During the early growth stage, they are concerned with rapid changes in sales and
resources. And during the later growth stage, they must make a successful transition from
personally managed enterprises to professionally managed companies.

Check Your Progress Exercise

1. What are the main activities performed under the pre-start-up stage? What is a business
concept?
……………………………………………………………………………………………
……………………………………………………………………………………………
2. Discuss the purpose of product and market search?
……………………………………………………………………………………………
……………………………………………………………………………………………
3. Why financial planning at the pre-start-up stage?
……………………………………………………………………………………………
……………………………………………………………………………………………
4. What are the objectives of a start-up stage?
……………………………………………………………………………………………
……………………………………………………………………………………………
5. What is market positioning? How can an entrepreneur can achieve?
……………………………………………………………………………………………
……………………………………………………………………………………………

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6. Does huge sales means higher profit? Does it guarantee success of a business?
……………………………………………………………………………………………
……………………………………………………………………………………………

3.3 SUMMARY

Once an individual decides to be an entrepreneur, he/she is expected to go through four stages


of the entrepreneurial process. The four-stages of the entrepreneurial process involves pre-
start-up, early growth, and later growth. The pre-start up stage involves planning, organizing
and obtaining resources. The start-up stage focuses on positioning the venture and meeting
operating objectives. In the early growth stage adjusting to challenges and appropriately using
resources are important. During the later growth stage professional managers are often needed
to handle the usually slower rate of growth.

3.4 KEY TERMS

- Pre-start-up stage - Financial planning


- start-up stage - Feasibility plan
- early growth stage
- later growth stage

3.5 ANSWERS TO CHECK YOUR PROGRESS

1. Refer 3.2.1
2. Refer 3.2.1 (A & B)
3. Refer 3.2.1 (C)
4. Refer 3.2.2
5. Refer 3.2.2
6. Refer 3.2.3

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UNIT 4: IDENTIFYING 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 Summary
4.5 Answers to Check Your Progress

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.

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.

4.2 MEANING OF OPPORTUNITIES

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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 may be divided as: small value and Big value opportunities. Opportunities are
said small value when the revenue potential may be small but the costs and risks may be too
high. Whereas opportunities are said big values when the revenue potential may be high the
cost and risks may be law.

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, buying out an existing business, inheriting an existing family
business, buying business, buying a franchise, management buy out and joint venture.

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

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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
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

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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
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. Heuristics: - It is an integral part of creativity. The heuristics entrepreneurs call up on to


generate business ideas can be seen to involve two types.
1st - Analysis heuristics: - These are the cognitive strategies entrepreneurs adopt in order
to gain and integrate new information about the world, to understand the patterns in
this information and to spot market gaps.
2nd – Synthesis heuristics: - Synthesis involves using a cognitive strategy to bring the
ideas developed form analysis back together again in a new and creative way
generating a new perspective on customer needs and how they might be addressed.

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Analysis is about spotting opportunities; synthesis is about creating innovations that might
exploit those opportunities. These two sets of heuristics lie at the center of a process with
information as an input and new business opportunities as an output.

Information
- Market characteristics
- Buyer characteristics
- Product characteristics

Synthesis
Analysis
Redefine critical
Understand critical
relationships
relationships

New opportunities

Heuristic discovery: information, analysis and synthesis

iii. Customer Proposal: - A new opportunity may be identified by a customer on the basis of
a recognition of their own needs. Customer proposals take a variety of forms. At their
simplest they are informal suggestions of the “wouldn’t it be great if---“ type.
Alternatively, they can take the form of a very detailed and formal brief.
iv. 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 the
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.

v. Market Mapping: - It is a formal technique which involves identifying the dimensions


defining a product category. These dimensions are based on the features of the product
category. The features will differ depending on the type of product, but indicators like
price, quality and performance are quite common. The characteristics of buyers may also
be used to provide a more detailed mapping. A map is created of the market by using the
feature buyer dimensions as co-ordinates.
vi. Features Stretching: - Innovation involves offering something new. This means looking
for ways in which changes might be made. It involves identifying the principal factors

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which define a particular product or service and then seeing what happens if they are
changed in some way. The trick is to test each feature with a range of suitable adjectives
such as: bigger, stronger, faster, more often, more fun and so on and see what results
from such testing.
vii. 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. This technique is often
used in conjunction with features stretching. Both features stretching and features
blending make good team exercises and can prove to be quite good fun.
viii. Focus group: - This method consists of a moderator leading a group of
people through an open, in-depth discussion rather than simply asking questions to solicit
participative response The moderator focuses the discussion of the group on the new
product area in either a directive or a non directive manner. In addition to generating
idea, it is an excellent method for initially screening ideas and concepts.
ix. Problem Inventory Analysis
It generates ideas analogous to focus groups. However, instead of generating new ideas
themselves, consumers are provided with a list of problems form a general product
category. They are then asked to identify and discuss products in this category that have
the particular problem. This method is often very effective as it is easer to relate known
products to suggested problems and arrive at a new product idea than to generate an
ending new product idea by itself. This approach is also an excellent way to test a new
product idea. Results from product inventory analysis must be carefully evaluated as they
may not actually reflect a new business opportunity. To insure the best results, problem
inventory analysis should be used primarily to identify product ideas for further in-depth
study to determine their importance to consumers.
x. Reverse Brainstorming
It is similar to brainstorming, except that criticism is allowed. The technique is based on
finding fault by assessing the question “In how many ways can this idea fail?” Care must
be taken to maintain the group’s morale. The process most often involves the
identification of everything wrong with an idea and then a discussion of ways to
overcome these faults.

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xi. Synectics
It is a creative process that forces individuals to solve problems through one of four
mechanisms of analogy – personal, direct, symbolic and fantasy.
A group works through two steps.
1st – to make the strange familiar
This involves, through generalizations or models, putting the problem into a reality
acceptable or familiar perspective, thereby eliminating the strangeness. Once the
strangeness is eliminated, participants engage in the second step.
2nd – making the familiar strange, resulting in a novel, unique. Solution being developed.
xii. 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.
xiii. Check List Method
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.
xiv. Free Association
The technique is useful is developing an entirely new attitude to a problem. First a word
or phrase related to the problem is written down, then another and another, with each
new word attempting to add something new to the group of ideas or going thought
processes, thereby creating a chain of ideas.
xv. Forced Relationships

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Forced relationships is another technique that asks questing about objects or ideas in an
effort to develop a new idea from the resulting new combination.
The new concept is developed through a five-step process.
1. Isolate the elements of the problem
2. Find the relationships among these elements
3. Record the relationships in an organized fashion
4. Analyze the record of relationships to find ideas or patterns
5. Develop new ideas from these patterns.
xvi.Collective
xvi.Collective Note Book Method
A notebook is prepared that includes a statement of the problem, blank pages and any
pertinent background data. The entrepreneur then considers the problem and its possible
solution, recording resulting ideas several times a day. At the end of the month, a list of
the best ideas is developed, among with any suggestions. This technique can also be sued
with a group of individuals who record their ideas, giving their notebooks to a central
coordinator who synthesizes the data and summarizes all the material. The summary
becomes the topic of a final creative discussion by the group.
xvii. Heuristics Analyze-Synthesize
It relies on the entrepreneur’s ability to discover through a progression of thoughts;
insights and learning. Heuristics is probably sued more than imagined, simply because
entrepreneurs frequently must settle for an estimated outcome of a decision rather than
an assured certainty. One specific heuristic approach is called the heuristic ideation
Technique. This involves locating all relevant concepts that could be associated with a
given product area and generating a set of all possible combinations of ideas.
xviii. 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.

xix. Value Analysis

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It develops methods for maximizing value to the entrepreneur and the new venture. To
maximize value, questions are developed such as “can this part be of lesser quality, since
it isn’t a critical area for problems?” To implement a value analysis procedure, regularly
scheduled times are established to develop, evaluate and refine ideas.
xx. Attribute Listing
It is an idea finding technique that requires that the entrepreneur list the attributes of an
item or problem and then looks at each from a variety of viewpoints. Through this
process, originally unrelated objects are brought together to form a new combination and
possible new uses that better satisfy a need.
xxi. Matrix Charting
Matrix charting is a systematic method for searching for new opportunities by listing
important elements for the product area along the two axes of the chart and then asking
questions regarding each of these elements. The answers are recorded in the relevant
boxes of the matrix. Example questions that can elicit creative new product ideas
include: What can it be used for? When can it be used?
Where can it be used? How can it be used?
Who can use it?
xxii. Big Dream Approach
The entrepreneur dream about a problem and its solution-thinking big. Every possibility
should be recorded and investigated. This should continue until an idea is developed into
a workable form.
xxiii. Parameter Analysis
It involves two aspects: parameter identification and creative synthesis
Perimeter identification: -
- Variable involved in the situation are analyzed to determine their relative
importance.
- These variables become the focus of the investigation, with other variables being
set aside.

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Creative analysis: -
The relationships between parameters that describe the underlying issues are examined.
Through an evaluation of the parameters and relationships a solution(s) is developed.

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
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.

47
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
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 nich, 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

48
There are three 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. Four
methods can be used to obtain this valuation. They are
a) Book value: - This involves obtaining the book value of the assets of the firm form
the firm’s record. This is the simplest method and is used as a starting point since it
reflects the accounting practices of the company.
b) Adjusted book value: - This is a better refinement of the figure obtained at book value
analysis. Here the stated book value is adjusted to reflect the actual market value.
c) Liquidation value: - This is employed to determine the amount that could be realized
if the assets of the company were sold or liquidated and the proceeds used to settle all
liabilities. This method reflects the specific point in time. If the company continues
operations successfully, the calculated value low compared to the contribution of the
assets. If the company encounters difficulties, a subsequent liquidation would
probably field significantly less than the amount calculated.
d) Replacement value: - This represents the current cost of replacing the tangible assets
of the business.

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.
iii. Earnings valuation method
This is frequently used. This method capitalizes earnings of a company by multiplying the
earnings by the appropriate factor (the price earnings multiple). There are two critical assets in
this evaluation procedure – the earnings and the multiple.

The question of earnings involves determining the appropriate earnings period as well as the
type of earnings. The earnings period can be either historical earnings, future earnings under

49
the present management and ownership, or future earnings under new management and
ownership. The type of earnings used during the selected period can be earnings before
interest and taxes, operating income, profit before tax or profit after tax. The earnings before
interest and taxes is used more frequently as it indicates the earning power and value of the
basic business without the effects of financing.

Whether asset, cash flow or earnings valuation is used, the valuation of a business, while
difficult, is vitally important in deciding whether to acquire it. There are also some other
important considerations in the acquisition decision process. They are synergy and legal
considerations.

b) Synergy
“The whole is greater than the sum of the parts” is a concept that applies to the integration of
an acquisition into the entrepreneur’s venture. The synergy reflected in this statement should
occur in both the business concept – the acquisition functioning as a vehicle to move toward
overall goals – and the financial performance. The acquisition should positively impact the
bottom line, affecting long-term gains and future growth. The lack of synergy is one of the
most frequent causes of the acquisition failing to meet the anticipated goals of the
entrepreneur. An acquisition should be carefully planned, with attention given to its
integration.

c) Legal Considerations
The legality of a particular acquisition centers around the type of acquisition and the resulting
economic impact. Acquisition activities can be classified as horizontal, vertical, and
conglomerate. The entrepreneur must carefully study any and all legal constraints before
acquiring a particular operation.

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

50
company’s logo, layouts, equipment, standard product, business system, and is supported with
organizing, training, merchandising and management from the franchiser. The franchise type
of business offers the franchisee an established product, company advertising, an image. This
lowers the risk of failure. But the franchise can severally limit a person’s freedom and 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.

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4.3.5 Management Buyout

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.

Check Your Progress Exercises

1. Identify 100 business ideas that make up a person an entrepreneur


……………………………………………………………………………………………
……………………………………………………………………………………………
2. What are the different sources of business ideas? Discuss
……………………………………………………………………………………………
……………………………………………………………………………………………
3. What is Franchise?
……………………………………………………………………………………………
……………………………………………………………………………………………

4. Define joint venture

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……………………………………………………………………………………………
……………………………………………………………………………………………
5. Discuss the term acquisition and the necessary activities related with acquisition.
……………………………………………………………………………………………
……………………………………………………………………………………………

4.4 SUMMARY

The first stage in the entrepreneurial process is spotting opportunities. Spotting the
opportunities means identifying a new opportunity in terms of the possibility of creating new
value. There are a variety of methods, both formal and informal, by which entrepreneurs can
spot new opportunities. Entrepreneurs keep themselves attuned to new opportunities.

Entrepreneurs, after identifying opportunities, will establish a business. There are different
ways an entrepreneur can enter into business such as: establishing a new business, buyout,
inheriting an existing family business, management buyout, Franchise and joint venture.

4.5 ANSWERS TO CHECK YOUR PROGRESS

1. It is your own duty


2. Refer section 4.3.1 (a)
3. Refer section 4.3.3
4. Refer section 4.3.6
5. Refer section 4.3.2

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UNIT 5: EVALUATING OPPORTUNITIES

Contents
5.0 Aims and Objectives
5.1 Introduction
5.2 Measuring the Size of the Opportunity
5.3 Determine the Amount of Investment
5.4 Determine the Likely Return
5.5 Measure the Level of Risk
5.6 Entrepreneurial innovation
5.7 Summary
5.8 Answers to Check Your Progress Exercises

5.0 AIMS AND OBJECTIVES

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


 understand how the size of an opportunity can be measured
 determine the investment required for a particular project
 identify the key areas used to measure the likely returns of a project
 understand how to measure the risk associated with an investment.

5.1 INTRODUCTION

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.

54
5.2 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.
- 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 be 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.

55
- 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.
5.3 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
repairment 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?
- 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.

5.4 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.

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- 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.

5.5 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?
- 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?

57
- 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.

5.6 ENTREPRENEURIAL INNOVATION

Innovation lies at the heart of the entrepreneurial process and is a means to the exploitation of
opportunity. It may be viewed economically or entrepreneurial.
Economically: - Innovation is the combining of resources in a new and original way.
Entrepreneurially: - it is the discovery of a new and better way of doing things.
Innovation goes beyond invention. The new way does not stand on its own merits. It will only
create new value if it offers customers an improved way to approach tasks and to solve
problems. Innovation is not something that happens at some points in time. It is a process with
certain steps/stages. They are:

1st Identification of a new Opportunity


This opportunity must be evaluated both qualitatively and quantitatively.
Qualitative aspects: -
- Who are the potential customers?
- What needs do they have?
- Why are existing products not meeting these need?

58
Quantitative aspects: -
- How much would exploiting the opportunity be worth?
- What level of investment is appropriate?
2nd Designing an innovation that will fulfill customer needs
- This may involve invention, the creation of a new product or service.
- How a new product can be delivered to customers and
- How it might be promoted to them.
3rd Actual delivery of the innovation to customers. This involves delivering products where
customers are at the right time place and price and transfer a possession utility
Innovation has many degrees. Any new way of doing things is an innovation. The magnitude
may be of any order. Of the ways of understanding the type of innovation an entrepreneurial
venture is exploiting is to consider.
i) The technological base of the innovation, whether it is established or new.
ii) The venture’s ambitions in terms of market impact.

* Types of Entrepreneurial innovation


Established New
High New insight New world
Potential impact in innovation innovation
market Low Incremental Specialist
innovation 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.
Specialist innovation: - If the innovation is based on a new technology, but with limited
market ambitions and competition will be based on an appeal to a
narrow group of consumers.
New world innovation: - An innovation founded based on a new technology with high
market impact ambitions.

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Innovation is a knowledge-based process. Successful innovation is founded on knowledge in
three areas.
1. Market Knowledge: - Is concerned with customers, there 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. There are differences between the way entrepreneurs manage
innovation and the way it is progressed in the large, mature firm.

Entrepreneurial innovation

- Is driven by vision – the desire to create new world


- Is radical – it success or otherwise will have a major impact on performance
- Involves the whole business – the venture structure process will be defined around the
need for innovation
Corporate innovation

- It tends to be strategy driven is the recognition by the business that it must move
forward if it is not to be left behind
- It is more likely to be marginal success will add to the business’s performance rather
than be fundamental to it.
- Compartmentalize the management innovation within a particular function or teams.

5.7 SUMMARY

Once business ideas are identified, they have to be evaluated before actual investment so as to
determine their feasibility. Not all opportunities are feasible. Even from the feasible
opportunities, not all are equally feasible/profitable. Therefore, entrepreneurs should measure

60
the profitability or feasibility of opportunities. In order to evaluate the feasibility of
opportunities, an entrepreneur should raise question such as:
- How big/large is the opportunity?
- What investment will be necessary?
- What is the likely return?
- What are the risks?

Check Your Progress Questions

1. How do you measure the size of an opportunity?


…………………………………………………………………………………………
…………………………………………………………………………………………
2. How do you measure the capital requirement for a new business?
…………………………………………………………………………………………
…………………………………………………………………………………………
3. How do you measure the possible return of the new business?
…………………………………………………………………………………………
…………………………………………………………………………………………
4. What risks are possible to a new venture? How do you measure it?
…………………………………………………………………………………………
…………………………………………………………………………………………
5. What is innovation? And determine the following
- The type of innovation
- The stages of innovation
…………………………………………………………………………………………
…………………………………………………………………………………………

5.8 ANSWERS TO CHECK YOUR PROGRESS QUESTIONS

1. Refer section 5.2 5. Refer section 5.6


2. Refer section 5.3
3. Refer section 5.4
4. Refer section 5.5

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