ENTREPRENEURSHIP

SESSION 8 & 9

Opportunity Identification & Evaluation

INTRODUCTION
Three traits of Entrepreneurs : Passion !
Conviction ! Tenacity !
Entrepreneurs daily question Why will this
new business work when most will fail ?
Reason to ask the above question

To

know the fatal flaw well in time

If answer is positive : to embrace their opportunity
with renewed passion

INTRODUCTION
Serious Entrepreneurs run road tests of the
opportunities they consider.
Not about success story of one Entrepreneur or a
method to get rich quick
Map for opportunity-assessing, opportunity
shaping process
Useful framework the 7 domains-to lay the
foundation on which to build a B-Plan

7 DOMAINS

THE MARKET/ INDUSTRY DISTINCTION

Whats a market?
Whats an industry?
These are frequently confused

MARKET DOMAIN :-MACRO

LEVEL

Size of the Market

Number of Customers
Aggregate money spent
Number of units bought annually

Growth prospects of the Market

Recent historical data on market growth and available
forecasts of the future

Broad Macro-Environmental Trends

Demographic
Socio-cultural
Economic
Technological
Natural

INDUSTRY DOMAIN :-MACRO

LEVEL

Industry Attractiveness - Porters Five Force

Model

Threat of Entry
Buyer Power
Supplier Power
Threat of Substitutes
Competitive Rivalry

Future changes in the Industry

Collection of Primary Data

MARKET DOMAIN MICRO LEVEL

Nave

entrepreneurs say We have no

competition
Prudent ones, ask these questions:
Is there a customer segment willing to pay a
price for the a compelling benefit/resolution
of a pain
Are these benefits clearly differentiated in
the customers mind? better/faster/cheaper
Size and growth rate of segment?
Will entering this segment allow entry in
related segments?

INDUSTRY DOMAIN MICRO LEVEL

Is

the business model of the entrant sustainable ?

Barrier to imitations
Proprietary elements : Trade secrets?
Patents?
Organizational capabilities?
Economically Viable Business model : ASSESS
RISK
Revenue w.r.t investment
Costs to acquire and retain customers
Contribution margins and their adequacy
Operating cash cycle characteristics (WCM)

MICRO- ANALYSIS

First-hand experience in the industry makes all

the difference
Partner

?
Network?

Such answers cannot be found on the internet

Micro factor are more important to evaluate

CAN THE TEAM

DELIVER?

Management- single most important factor

The 3 Domains

Opportunity and teams business mission, personal

aspirations and risk propensity How big ? How soon
Ability to execute on the critical success factors
Response across the value chain
Competencies - experience & industry knowhow
Connectedness Up & down the value chain

Benefits of assessing themselves in the

three team domains

LIVE EXAMPLES

DOTCOM CRASH
Markets? Or Industries?
Markets

Growing

fast
Shrinking digital divide

Industries
Low

entry barriers
Differentiation difficult to establish
Hard to sustain competitive advantage

Introduce both old and new paradigm people on

the team

NIKE WINS AT MICRO LEVEL

Running shoes for distance runners
Lighter, better cushioning, better lateral stability
Micro perspective
Similar successes in other sharply targeted
footwear niches

PUTTING THE 7 DOMAINS

MODEL INTO ACTION

Secondary Data
Trade

& Business Publications in Library/Internet

Government Reports

Primary Data
Interviews

Observations
Focus

Groups
Surveys
Market Experiments

Interpretation

WHY WONT THIS WORK?

Finding the major flaw that cannot be resolved
If found, abandon the opportunity
If not, two outcomes:

Best

Case: resource providers identify the flaws and

refuse you the resources needed
Worst Case: you secure the required resources and
start the business only to discover the flaws later

WHY WILL THIS WORK?

Opportunities can be shaped & developed in many
ways
Fatal flaws can be fixed
A different target market can be chosen
The offering can be adapted
Opportunity can be pursued at a different level in the
value chain
Additional individuals can be found

HOPE THIS WILL BE USEFUL TO YOU

THANKS!

SESSION PLAN
Moving from Ideas to Opportunities
How to assess opportunities
Seven domain framework to evaluate
opportunities
Evaluation process
Creating, shaping, recognizing and seizing
opportunities

NEW VENTURES

Fundamental realities
Success is highly situational, depending on time, space,
context, and stakeholders
The best entrepreneurs specialize in making new
mistakes only
Starting a company is much harder than it looks, or you
think it will be; but you can last a lot longer and do
more than you think if you do not try to do it solo

WHEN IS AN IDEA AN
OPPORTUNITY?
They create or add significant value to a
customer or end user.
They do so by solving a significant problem or
meeting a significant want or need
They have a robust market, margin that will
create a substantial value to potential
stakeholders
They are good fit with founders and management
team and market place along with attractive risk
reward balance.

SUMMERY
In short , a superior opportunity has the qualities
of being attractive, durable and timely and is
anchored in a product or service which creates or
adds value for its buyers or end users usually by
solving a very painful or serious problem.
Opportunities always start with customers and
marketplace want.

SPAWNERS AND DRIVERS OF

OPPORTUNITIES
Changes in business environment & ability to
anticipate these changes
Use of IT, microcomputers, MIS and computer
networking in routine business
Regulatory changes such as deregulation of telecom,
airlines, insurance, financial services, banking,
pension fund management, etc
Emergence of service industries higher focus on
customer service
Sea changes technology, market & societal eg
Moors law of computer chips power, gene mapping,
cloning, nanotechnology, biotechnology, internet, etc.

EVALUATING

Criteria for evaluating venture opportunity

Industry

and market
Economics
Harvest issues
Competitive advantage issues
Management team issues
Personal criteria
Strategic differentiation

1. INDUSTRY & MARKET

Market: identifying a market niche for a product or a
service that meets an important need of the customer
Market structure: number of sellers, differentiation in
the product or service, conditions of entry & exit,
number of buyers, cost conditions, sensitivity of
demand to changes in price, income, etc.
Marker size & growth rate
Market capacity: a demand that existing suppliers
are not able to meet
Potential market share
Cost structure: whether economies of scale is possible

ECONOMICS
Profit after tax: high & durable gross margins result in at
least 10 to 20 % profits after tax.
Time to breakeven & positive cash flow: within two to
three years
ROI potential: more or up to 25 % per year.
Capital requirement
Internal rate of return potential: Is the risk reward
relationship attractive? if 5 to 10 times of original
investment in 5 to 10 years
Free cash flow characteristics: capital requirement of fixed
& working capital, capacity to serve external capital, etc
Gross margin: unit selling point direct & indirect costsup to 40 % leads to healthy growth.

HARVEST ISSUES
Value added potential: ventures based on
strategic value in an industry are more attractive
than those having less or no strategic value. Eg.
Proprietary technology, contractual rights,
geographic coverage, etc.
Exit mechanism & strategy: realising capital
gains from sale or IPO or exit from the industry
Capital market context: proper timings for entry
& exit

COMPETITIVE ADVANTAGES ISSUES

Variable & fixed costs: potential for being lowest
cost producer eg- electronic goods like calculators
Degree of control: moderate to strong over prices,
costs, channels of distribution, etc.
Entry barriers: proprietary protection,
regulatory advantage, contractual advantage,
advantage in lead time/ response in technology,
product innovation, people, location, etc. create
entry barriers.

MANAGEMENT TEAM ISSUES

Entrepreneurial team
Industry & technical expertise
Integrity
Intellectual honesty
Fatal-flow issues: an opportunity is rendered as
unattractive if it suffers from one or more fatal
flows such as high cost of entry, inability to
produce at competitive prices, etc.

PERSONAL CRITERIA
Goals & Fit: good match between requirement of
business & what the founders want out of it.
Upside & downside issues: If downside is more
than entrepreneurs net worth, the opportunity
becomes unattractive
Opportunity cost: of time, experience, resources
used in the venture
Desirability
Risk/ reward tolerance
Stress tolerance

STRATEGIC DIFFERENTIATION
Degree to fit: good fit among the driving forces &
timing given the external environment
Team: execution & ability to adopt and devise new
strategies, constant learning & improvements, etc.
Service management
Timing
Technology
Flexibility
Opportunity orientation
Pricing
Distribution channels
Room for error

WHY OPPORTUNITY MAY OR MAY

NOT WORK?
What most new start up need to understand:
A. Market & industries are not the same.
B. Both macro & micro level considerations are
necessary: markets & industries must be
examined at both levels.
C. The key to assessing entrepreneurs &
entrepreneurial teams arent simply found on
their resumes or in assessing their
entrepreneurial character.

Market domain
Market
Attractiveness

Macro level

Industry domain
Industry
Attractiveness

Mission,
aspiration
, risk

Ability
to
execute

Team
M
Domain

Micro level

Connectedness
up, down, across
value chain

Target
segment
benefit &
attractiveness

Sustainable
advantage

SEVEN DOMAINS OF ATTRACTIVE

OPPORTUNITY:

1. Is market attractive?
Market & Industries are different:
Market consists of group of current or potential
buyers having willingness & ability to buy
products.- not products.
An industry consists of sellers that offer products
that are similar or close substitute for one another.
The distinction is important as the judgment about
attractiveness of market can be different than
attractiveness of industry. E.g In dot.com
failures while market was attractive, industry was
not.- recognition came late.

SEVEN DOMAINS OF ATTRACTIVE

OPPORTUNITY
At micro level, one needs to see if target
consumer segment which we want to cater to is
willing to pay, getting additional value, how large
is this segment, is it growing, is entry in this
segment provide us entry in other segments, etc.
Eg. Nike- though at macro level demand for
sports shoes was stagnant, the demand for
running shoes for distant runners was high,
which later on spread to other specialty sports
shoes.

SEVEN DOMAINS OF ATTRACTIVE

OPPORTUNITY:

2. Is this a good market?

Is my market large enough today to allow different
competitors the opportunity to serve different
segments without getting in each others way?
Macro level market assessment such as size of the
market, growth rate, demographic, socio-cultural,
economic, technological, regulatory trends have to
be assessed to see the attractiveness of the
opportunity.
How can short term and long term growth be
predicted?
Hero Honda: market driven company

SEVEN DOMAINS OF ATTRACTIVE

OPPORTUNITY
3. Is industry attractive?
Macro level: Porter 5 forces model:
Threat to entry
Buyer power
Supplier power
Threat of substitutes
Competitive rivalry
Eg: Pharma industry in 1980s and 2000

SEVEN DOMAINS OF ATTRACTIVE

OPPORTUNITY
4. How long your advantage will last?
What sustainable competitive advantage we have?
proprietary element such as patents, trade secret, etc;
presence of superior organizational processes,
capabilities, resources, etc; presence of economically
viable business model, etc.
Eg Zantac, an anti ulcer medicine produced by
Glaxo
5. What drives your entrepreneurial dream?
An integration of organization mission, personal
aspirations and personal risk propensity
Eg. Jeff Bezos of amazon.com, Phil Knight of Nike or
Howard Schultz of Strbucks

SEVEN DOMAINS OF ATTRACTIVE

OPPORTUNITY
6. Can team deliver?
Does the team have experience, industry know how,
to deliver the superior performance?
Do you have a control over crucial success factors
required in your business?
Eg: Kishor Biyani- Pantaloon; Jeff Hawkins- Palm
Computing
7. Connectedness up and down the value chain
Is the team well connected up, down and across the
value chain so it will be quick to notice any
opportunity or need to change its approach if
conditions warrant? people make more money in
plan B than on A.

SEVEN DOMAINS OF ATTRACTIVE

OPPORTUNITY
Seven domains road helps an entrepreneur to see
whether the idea can be converted into
opportunity.
It also enables an entrepreneur to take the
necessary mid course corrections to reshape
opportunity when micro or macro indicators
change.
It helps an entrepreneur to see the fatal flaws in
the business plans and shows how and where
attractive opportunities can be found in stagnant
or otherwise unattractive markets.