SMALL BUSINESS MANAGEMENT Chapter 3 Evaluation of a Business Opportunity 11/3/20111Mrs. Shefa Eh Sagga SBM

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. 11/3/20112Mrs. Shefa Eh Sagga SBM

Non-Quantitative Assessment of Business Opportunities  Goals Financial and occupational status.  Content of Work  Lifestyle  Capabilities Good health, management fundamentals, financial base.  Experience 11/3/20113Mrs. Shefa Eh Sagga SBM

Breaking Into The Market  Three Ways 1.offer a totally new product. 2.offer an existing product to a different market. 3.offer a product or service similar to those existing in the same market.  Oil change specialists. 11/3/20114Mrs. Shefa Eh Sagga SBM

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.. 11/3/20115Mrs. Shefa Eh Sagga SBM

Collection of Information Sources of Information:  Secondary data.  Primary data. 1. Observations. 2. Surveys.  mail surveys, telephone surveys, personal interviews, focus groups. 3. test marketing. 11/3/20116Mrs. Shefa Eh Sagga SBM

Collection of Information 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. Small business owner can collect primary data to help determine the feasibility of his business. 11/3/20117Mrs. Shefa Eh Sagga SBM

Collection of Information 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: 1.observation, 2.survey, 3.and experimentation. Surveying seems to be the most commonly used method for small businesses. 11/3/20118Mrs. Shefa Eh Sagga SBM

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. 11/3/20119Mrs. Shefa Eh Sagga SBM

Quantitative Assessment of Business Opportunities  Step One- Calculate the Market Potential. 1.Determine the market area and its population. 2.Obtain revenue, (sales) statistics for the product or service in the area. 3.Adjust the market potential total as necessary. 11/3/201110Mrs. Shefa Eh Sagga SBM

Quantitative Assessment of Business Opportunities  Step Two- Calculate the Market Share.  Retail Firm: 1. 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. 11/3/201111Mrs. Shefa Eh Sagga SBM

Quantitative Assessment of Business Opportunities  Step Two- Calculate the Market Share.  Retail Firm (cont) 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. 11/3/201112Mrs. Shefa Eh Sagga SBM

Quantitative Assessment of Business Opportunities  Step Two- Calculate the Market Share.  Manufacturing Firm: 1. Estimate the total productive capacity in the market for the product to be manufactured. 2. Estimate the total productive capacity of the proposed manufacturing plant. 3. Calculate the market share based on productive capacity. 11/3/201113Mrs. Shefa Eh Sagga SBM

Quantitative Assessment of Business Opportunities  Step Two- Calculate the Market Share.  Manufacturing Firm (cont.) 4. Make adjustments to reflect competitive strengths and weaknesses the competitive plant may possess. 5. Multiply the estimated market share percentage by the market share potential estimate obtained in Step One. 11/3/201114Mrs. Shefa Eh Sagga SBM

Quantitative Assessment of Business Opportunities  Step Two- Calculate the Market Share.  Service Firm: 1. Estimate the total capacity of the service available in the market area. 2. Estimate the service capacity of the proposed business. 3. Calculate the market share based on the capacity base. 11/3/201115Mrs. Shefa Eh Sagga SBM

Quantitative Assessment of Business Opportunities  Step Two- Calculate the Market Share.  Service Firm (cont.) 4. Make adjustments similar to those made for a retail store. 5. Multiply the revised market share percentage by the market potential estimated in Step One. 11/3/201116Mrs. Shefa Eh Sagga SBM

Quantitative Assessment of Business Opportunities  Step Three- Calculate net income and cash flow. 1. Using the market share from Step Two, calculate the expenses expected.  cost of goods sold and gross profit percentages; cash operating expenses; interest and depreciation. 2. Subtract expenses from revenue to determine projected net income in the first year and subsequent years. 11/3/201117Mrs. Shefa Eh Sagga SBM

Self Assessment for a Small Business Opportunity  Personality.  Nature.  Abilities  Experience.  Financial base.  Feasibility. 11/3/201118Mrs. Shefa Eh Sagga SBM

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?. 11/3/201119Mrs. Shefa Eh Sagga SBM

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?. 11/3/201120Mrs. Shefa Eh Sagga SBM