SMALL BUSINESS MANAGEMENT Starman Kinetic energy Bikers Campground SMALL BUSINESS MANAGEMENT Chapter 3 Evaluation of a Business Opportunity Beer mits Mukluks WIKES Fou Fou

CHAPTER OBJECTIVES 1. To review the nonquantitative aspects of evaluating business opportunities. 2. To introduce the methods by which an entrepreneur can enter a market with a product or service. 3. To discuss the types of information available to assist in the quantitative analysis to select a small business and illustrate how that information can be used. 4. To discuss ways that the entrepreneur can develop a strategic competitive advantage. 5. To provide a systematic way to quantitatively assess an industry and evaluate the financial feasibility of a specific small business opportunity.

Entrepreneurial Process The process of starting a new venture can be referred to as the Entrepreneurial Process Identification and evaluation of opportunity Development of a business plan Determination of the resources required Management of the business Occupations Work experience, whether current or prior, is the most common source of new business ideas Entrepreneurs have the greatest chance of being successful if they start a business in which they have some past experience, it makes sense to seize opportunities from your work experience Observations Entrepreneurs should continually pay close attention to potential customers Informally observing consumers to identify gaps in the market Monitoring potential ideas and needs Formally arranging for consumers to have an opportunity to express their opinions Copyright © 2014 McGraw-Hill Ryerson. All rights reserved.

Entrepreneurial Process Ideas All businesses start with one thing—an idea. Without ideas there would be no businesses or entrepreneurship Copyright © 2014 McGraw-Hill Ryerson. All rights reserved.

Entrepreneurial Process Sources of New Ideas Occupations Hobbies Drawing from Experience Observations – NY Fries Existing Products and Services Deliberate Searches Focus groups, brainstorming

Non-Quantitative Assessment of Business Opportunities Goals Financial and occupational status Content of Work Lifestyle Capabilities Good health management fundamentals financial base Experience Fou Fou --How are above factors illustrated in his case Show Wikes Video Fou Fou

Breaking Into The Market Three Ways offer a totally new product bright lights offer an existing product to a different market mukluks offer a product or service similar to those existing in the same market Oil change specialists How did they break into the market ? Java nook, barman, Fou Fou, Bread man American Clothing, bright lights Mukluks

Developing a Strategic Competitive Advantage the right industry Owners attention to daily operations Contact with employees Demand is small or local Require flexibility More labor less capital Govt. encouragement the right business Growth areas ----------------------- >>>> the right aspect of the business Flexibility, innovation, location , price etc the right industry Owners attention to daily operations Service business Contact with employees Custom made service or manufacturing Demand is small or local Require flexibility High growth rates or perishable products More labor less capital Govt. encouragement the right business Growth areas the right aspect of the business Flexibility, innovation, location , price etc

the right business Growth areas Health Care Services for small business Mobile Business Services that appeal to parents with children Green Products and services Top 10 business ventures in Canada from profit magazine Growth areas Organic foods Consulting Wireless products Products that cut energy us & pollution Anti aging products Computer interface products Home products for seniors Technology training International marketing consulting Products that promote health

Collection of Information Sources of Information Secondary data Appendix 3A Agencies such as BDC Govt appendix 3B Universities Professionals incubators Primary data observations surveys mail surveys, telephone surveys, personal interviews, focus groups test marketing Do question 6 in text There are two general types of information available to aid a potential small business owner in selecting a small business. The first and most inexpensive method is collecting secondary research on a potential market. There are many government documents and other sources that can provide valuable secondary data. When there is a lot of money at stake or no current secondary data the prospective small business owner can collect primary data to help determine the feasibility of his business. Primary data is information that is collected through one's own research. Although it is usually more costly, it can be more relevant and current to the analysis. There are three general methods of doing primary research: observation, survey, and experimentation. Surveying seems to be the most commonly used method for small businesses.

Design a simple mail questionnaire to assess demand for a carpet cleaning business in your city. 1. How often do you normally have your carpets professionally cleaned? If your answer is never, end of questionnaire. If answer is yes, fill out the rest of the questionnaire. Never _____ Less than once a year _____ Once a year _____ Twice a year_____ Three times a year _____ More than three times a year_____ 2. The last time you had your carpets cleaned, what was the approximate cost? 3. Are you going to have your carpets cleaned again in the near future? Yes _____ No _____ Demographic Information:

Once the Qualitative analysis is done ------ do quantitative analysis Is it financially feasible????? Beermits case – how to determine feasibility This method most appropriate for new business but could be used for buying an existing business Build up Method -- start with daily sales and work up Breakdown method – sale forecasting using secondary information Beer mits

Quantitative Assessment of Business Opportunities Preparing the Feasibility Analysis Step One - Calculate the Market Potential Step Two - Calculate the Market Share Step Three - Calculate the Net Income and Cash Flow Dunn and bradstreet

Step One - Calculate the Market Potential Determine the market area and its population Obtain revenue , (sales) statistics for the product or service in the area Adjust the market potential total as necessary potential revenues for the total market =

Step Two - Calculate the Market Share Retail Firm Estimate the total amount of selling space in the market devoted to the merchandise the new business will sell 2. Estimate the size of the proposed store 3. Calculate the market share based on selling space 4. Make adjustments to reflect any competitor strengths and weaknesses regarding the proposed store 5. Multiply the revised market share percentage by the market potential estimate obtained in step 1. Our Market Share %

X = Market share in $ Our Market Share % Market Share in $ Total market Potential ( step 1 ) X Market Share in $ =

Step Three - Calculate net income and cash flow Market Share in $ Subtract cost of goods sold gross profit percentages; cash operating expenses; interest and depreciation = net income (Projected for 1st year) We get these cost from secondary data or actual observation or survey

Bikers Campground (t

Pharmacy example ( in Text )

Pharmacy example ( in Text )

Pharmacy example ( in Text )

PETITE SHOP "A" Using the information provided, prepare an estimate of the market potential for the target market Alice Wood is aiming at. What portion of this market potential could Alice expect for Petite Shop's market share? What non quantitative considerations should be brought into this analysis?

Self Assessment for a Small Business Opportunity Personality Nature Abilities Experience Financial base Feasibility WIKES

Step One - Calculate the Market Potential Determine the market area and its population Obtain revenue , (sales) statistics for the product or service in the area Adjust the market potential total as necessary potential revenues for the total market = Bikers Campground

Step Two - Calculate the Market Share Retail Firm Estimate the total amount of selling space in the market devoted to the merchandise the new business will sell 2. Estimate the size of the proposed store 3. Calculate the market share based on selling space 4. Make adjustments to reflect any competitor strengths and weaknesses regarding the proposed store 5. Multiply the revised market share percentage by the market potential estimate obtained in step 1. Our Market Share %

X = Market share in $ Our Market Share % Market Share in $ Total market Potential ( step 1 ) X Market Share in $ =

Step Three - Calculate net income and cash flow Market Share in $ Subtract cost of goods sold gross profit percentages; cash operating expenses; interest and depreciation = net income (Projected for 1st year) We get these cost from secondary data or actual observation or survey

PETITE SHOP "B" Question 1. Using the information presented in Petite Shop "A" and this case prepare an estimated income statement and return on investment calculation for Petite Shop's first year of operation. Question 2. What areas has Alice overlooked in her investigation? Question 3. Given your analysis, what would you recommend to Alice?

Sales Estimation Methods Industry or Association Data Market Potential/Market Share Customer Counts Similar Business in Similar Location Indicator Variable ( sq ft ) Sales of Existing Competitors Costs and Break-Even Starman Kinetic energy

Concept Checks 1. What non-quantitative factors should be considered in the selection of a small business? 2. What are three ways of entering the market? 3. What are two methods of collecting information? In what situations would they be most useful?

Concept Checks 4. What are the three methods of collecting primary data? Which is the most relevant to a small business? 5. What steps are involved in determining the financial feasibility of a retail store?