Business Development, Entrepreneurship and Innovation

BUSINESS DEVELOPMENT, ENTREPRENEURSHIP AND INNOVATION

2016 HANDOUT 3 (GBS 751)

1. VALUE ANALYSIS – TURNING IDEAS INTO OPPORTUNITIES

Ideas into Business

An idea does not become a business opportunity until it passes two tests:

a)  Is it a business opportunity? That is, does it have the potential to be profitable?

i.  Marketing: Can the product(s) or service(s) be successful in the market place?

ii.  Production: Can you produce the required volume and quality at a profitable margin?

iii.  Financial: Can financial goals be satisfied? Return on investment/target profitability?

b)  Does it satisfy your personal constraints?

Initial Evaluation of Your Idea

a)  It must be worth the effort. A rough estimate of the time, effort and costs involved must be done and compared to the potential payoff to determine if there is enough profit potential to motivate you into action.

b)  Set minimum goals and personal constraints for yourself. Minimum goals may be the desirable hourly wage or annual income. Perhaps you should have an idea of the amount of funds available for investment and the returns expected on them.

c)  Comparing costs to income and effort to determine if the venture is worth the effort.

Total Costs vs Total Income

Total Costs + Time + Effort vs Profit potential (Payoff)

These are the sorts of questions one would be asking in the initial evaluation of any business idea.

Example: Balloons, Inc.

You notice a local 2-day festival will be held soon in Kitwe and wonder what could you sell at the festival that may earn you a good amount of money. In your creative mood, you come up with a long list of ideas from roasted maize to toys and settle on the fact there has not been anyone selling balloons at the festival for a few years, thus there may be an opportunity to do

(a) A little investigation reveals that the average cost of an aluminium balloon is K1 with the cost of helium gas at 50n. Such balloons tend to sell from K5 to K8. It is estimated that about 10,000 people will attend the festival, of which a third will be children. You feel you may be able to sell at least 500 balloons during the two days of the festival. You will have to work two 12-hour days. Is it worth your effort?

(b) If you only sell for K5, you will realize about K2.50n per balloon (ignoring the cost of the string and shrinkage)

K2.50n margin x 500 = K1, 250 for the effort.

It is K1, 250 for 2 long days of work = K625/day.

Or K1,250 / 24 = K52.08n/hour (less time for running to the suppliers).

(c) Is it worth the effort to you? Well, it is better than remaining idle.

Personal Constraints

(d) Always look at personal constraints after you have a good glimpse of the potential profit in a business opportunity, as the profit potential may override many of your personal constraints.

(e) You may wish to impose some personal constraints in your evaluation of an idea to determine further if it is worth your time and effort. Perhaps the idea does not fit with your idea of something you would wish to do.

For the Balloons, Inc. example, assume you have set the following personal constraints and that it satisfies them:

Ø  It can be started in my spare-time, i.e. part-time.

Ø  It will be fun.

Ø  I want to earn at least K20 per hour.

Ø  Low financial entry (requirements).

Ø  Will be legal.

Ø  Large market potential.

Ø  Within my skills.

At this point, it may be worth the effort to investigate a little further to see if you have the ability to finance the venture.

You would have to rent helium cylinders and a valve and purchase the balloons.

You can make an arrangement to return unused balloons and helium for credit and pay when you return the helium gas cylinder and valve, but you must come up with K200 as a deposit. Can you raise K200? Is it still worth the effort?

Market Research

If you think it is still worth the effort, it would be time to get down to serious market research to see if a close look will continue to confirm your profit estimates and help to refine a technique (develop a Business Plan for how to run the business) as you learn more about how the business is run. Your market research may take you to observe others selling balloons at events in other districts. Close questioning of potential suppliers will also help you to learn about the trade. You may be able to interview a vendor or even work for someone else to learn the little skills that increase the chances of success.

Action

It then remains for you to make the big step and reserve the gas cylinder, valve and balloons and get permission to sell at the festival. Once the festival occurs and your plan turns into action, you have the planning phase to use as a guide to your degree of success.

Will you sell as many as planned? What is your wastage? Are you using too much helium? How much money are you making? Once the fair is over, you have to tidy up and return the helium cylinder, valve and unused balloons for credit and settle your account.

Then, you can count your profits or losses!

Basic Cycle

This is basically the cycle for planning and running a business. You should always evaluate your idea by a quick calculation of possible profitability, effort and personal constraints, then, if attractive financially, it is time to dig deeper. A preliminary look at an idea is valuable, as you may be able to quickly see a serious flaw before you spend too much time and effort. It is not uncommon to make major revisions to an idea as you dig deeper into it. Always start with a quick look at the competition and try to estimate market size and profit potential. From there, if things still excite you, you can take a more organized approach, such as proceeding through the elements of a business plan as this will force you to think out all the little details.

An Idea File

When you are feeling creative, it is best to make a long list of business ideas and opportunities for yourself. Ideally, you should strive to have a list of 50 opportunities for which you have listed the top 10 which best fit your personal constraints and are ripe for exploitation. This way, when you start to dig deeper into an opportunity and discover it is no longer attractive, you have a reserve supply of other opportunities to fall back on.

Protecting Your Business Idea

Good ideas tend to get borrowed. You must be careful who you talk to, and how much you reveal. It may be prudent to create a confidentiality form on which you could make people sign before you discuss the idea with them. If you are producing an original idea such as a work of art, always sign it and date it. It would help to have the signing / dating witnessed by a reliable person. If you have created a prototype, it may be valuable to see a notary and have a dated statement (with photographs) that they have seen the prototype.

If the item is patentable, apply for a patent as quickly as possible. If the item can be copyrighted, do so as quickly as possible.

2. STARTING YOUR OWN BUSINESS – QUICK-START METHODS

Introduction

Sometimes, it is desirable to start a business in a fast manner so as to earn money as quickly as possible at the earliest time possible. Such businesses would include Franchises, turn-key or packaged businesses, multi-level marketing schemes and buying an existing business. We shall discuss the features, advantages, limitations and guidelines for evaluating these.

A.FRANCHISES

Franchise is a commercial concession by which a retailer is granted by a company the generally exclusive right of retailing (selling) its goods or providing its services in a specified area, with use of the company’s expertise, marketing or trademark, etc. It is the right or privilege to use an established business system and/or be an exclusive agent for a product. Franchisee, also known as owner-operator, is the person who acquires the franchise. Franchisor is the person or company which gives the right to a franchise.

Scope and Range

One can find a franchise in any type of business. Consumable items such as food and beverage, cosmetics, ready-made dresses, selling of automobiles, TV, DVD and music systems, computers, computer training system, machinery and equipment, and real estate are some of the examples where franchise is possible and available.

Important Features of Franchises

a)  Franchises are popular, and survive better, on average, than other business start- ups.

b)  Franchises are attractive and popular to middle-aged people who seem less willing to take the full risk of starting their own business.

c)  Franchisors choose franchisees or owner-operators through a careful process.

d)  Franchise are rigid in the method of operation and follow quality and service standards of the franchisor.

e)  Benefit from the reputation of the granting company

f)  Benefit from mass advertising, centralised purchasing, product research and development, quality control and other assistance.

Ø  Charging of franchisee continuous royalty fee.

Pros and Cons of becoming a Franchisee

There are many advantages (Pros) and limitations (Cons) to be considered by a person interested in becoming a franchisee. They are:

Advantages / Disadvantages
Quick, easy start; Low-cost entry to new territory; Control over process, service or product. / Rigid system and no room for deviation
Start-up assistance for market research and site selection. / High cost of entry for successful operations
Training provided to owner and staff; Owner-operators highly motivated. / Requires extensive communications.
Less control than if handling employees.
Proven method; Cash up front to boost cash flow. / Expenses for training and supervisory personnel on locations.
Large-scale advertising / Compulsory participation in some advertising and promotion activities.
On-going business assistance.
Group buying advantages: Economies of scale for purchases. / Group buying may be uneconomical
Financing assistance (sometimes) for plant and equipment and credit for accounts receivable. / Franchisee may grow beyond need for assistance.
Potential income better than wages.
On-going income from royalties. / Profits shared with franchisor (royalties)
New product development (sometimes).
Captive market for product, supplies, etc. / Franchisor may not keep up with market trends.

Evaluating a Franchise

Since there are certain advantages as well as limitations of a franchise, one must have a careful and unemotional system for evaluation, before deciding on whether to become a franchisee or not. The following checklist is one such system.

Checklist for Evaluating a Franchise

This will help an interested person to evaluate a proposal for becoming a franchisee. The items can include issues to do with the product or service, the franchise, existing franchises, why other franchises have failed, franchises in local market area, growth/expansion in product offering, competition, ownership of existing franchises, franchise distribution pattern, franchise operations, details of the franchise company, financial and legal aspects, training, marketing, and home office support.

TURN-KEY OR PACKAGED BUSINESS

Overview

With a turn-key or packaged business, a firm will offer to teach you how to operate a business using their equipment, ingredients or moulds. These are complete where everything is made ready for you to step in and take over. Location, marketing, and operating methods etc may be in place, and the business may be in actual operation and profitable, ready for the purchaser to be trained to take over.

Difference between Franchise and Turn-Key Business

The important difference between the two is that there is no after-purchase royalty arrangement or franchisor’s responsibility in case of the later, once the business is purchased. There is usually no long-lasting relationship between the vendor or supplier and the buyer or purchaser.

Important Features of Turn-Key Business

a)  The vendor or supplier is usually interested in attracting buyers for his products by demonstrating to them how to set up a business through skilled hype (extravagant publicity for promotion of a product creating, in some cases, an element of cheating) and slick marketing presentations.

b)  It is to the Supplier’s advantage to avoid exclusive territories in order to sell more of the same ventures.

c)  Usually turn key business packages have low cost and ease of entry.

d)  Good turn-key businesses usually sells at a premium.

Some Aspects of Evaluation

Just like any business, turn-key or packaged businesses can be good, and bad. One should not be carried away by the skilled hype and slick marketing presentations of the vendors.

Evaluation Check List

a)  Do adequate market research to determine viability and to come down off the emotional high of the sales pitch.

b)  Consider the competition.

c)  The demand of the goods involved

d)  Suitability of the business to your ambitions and goals

e)  Profitability of the business

MULTI-LEVEL MARKETING SCHEMES

This is a get-rich-quick method that has swept North America in waves of new ventures since the 1950’s. It is the process of multi-level marketing where a product, such as soap, cosmetics, jewellery or vitamins, which have a high profit margin allowing room for a lot of splitting of profit is organized to be sold door-to-door by local agents. The process and many of the North American products have spread successfully to several countries.