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 –
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To know the fatal flaw well in time
 If answer is positive : to embrace their opportunity
with renewed passion
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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
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7 DOMAINS
THE MARKET/ INDUSTRY
DISTINCTION
What’s a market?
 What’s an industry?
 These are frequently confused
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MARKET DOMAIN :-MACRO
LEVEL
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Size of the Market
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Number of Customers
Aggregate money spent
Number of units bought annually
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Growth prospects of the Market
Recent historical data – on market growth and
available forecasts of the future
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Broad Macro-Environmental Trends
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Demographic
Socio-cultural
Economic
Technological
Natural
INDUSTRY DOMAIN :-MACRO
LEVEL
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Industry Attractiveness - Porter’s Five Force
Model
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Threat of Entry
Buyer Power
Supplier Power
Threat of Substitutes
Competitive Rivalry
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Future changes in the Industry
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Collection of Primary Data
MARKET DOMAIN – MICRO LEVEL
 Naïve
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 customer’s 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
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First-hand experience in the industry makes all
the difference
Partner ?
 Network?
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Such answers cannot be found on the internet
 Micro factor are more important to evaluate
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CAN THE TEAM DELIVER?
•
Management- single most important factor
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The 3 Domains
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Opportunity and team’s 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
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Growing fast
 Shrinking digital divide
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Industries
Low entry barriers
 Differentiation difficult to establish
 Hard to sustain competitive advantage
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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
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PUTTING THE 7 DOMAINS MODEL
INTO ACTION
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Secondary Data
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Primary Data
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Trade & Business Publications in Library/Internet
Government Reports
Interviews
Observations
Focus Groups
Surveys
Market Experiments
Interpretation
WHY WON’T 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
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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
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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
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NEW VENTURES
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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 founder’s and management
team and market place along with attractive risk
reward balance.
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SUMMARY
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.
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SPAWNERS AND DRIVERS
OPPORTUNITIES
OF
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
– Moor’s law of computer chips power, gene
mapping, cloning, nanotechnology, biotechnology,
internet, etc.
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EVALUATING
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Criteria for evaluating venture opportunity
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Industry and market
Economics
Harvest issues
Competitive advantage issues
Management team issues
Personal criteria
Strategic differentiation
1. INDUSTRY & MARKET
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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
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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
costs- up 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
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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.
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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.
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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 entrepreneur’s net worth, the opportunity
becomes unattractive
 Opportunity cost: of time, experience, resources
used in the venture
 Desirability
 Risk/ reward tolerance
 Stress tolerance
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STRATEGIC DIFFERENTIATION
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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 aren’t simply found on
their resumes or in assessing their
entrepreneurial character.
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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.
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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.
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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
other’s way?
 Macro level market assessment such as size of
the market, growth rate, demographic, sociocultural, 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
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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
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SEVEN DOMAINS OF ATTRACTIVE
OPPORTUNITY
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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 HawkinsPalm 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’.
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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.
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