SMALL BUSINESS
MANAGEMENT
Chapter 3
Evaluation of a Business Opportunity
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.

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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.
Non-Quantitative Assessment of Business
Opportunities Wikes case

Goals

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Content of Work
Lifestyle
Capabilities


Financial and occupational status
Good health, management fundamentals,
financial base
Experience

IE Sunblush Technologies

Wikes Video Case – How are above factors
illustrated in his case
Breaking Into The Market

Three Ways

offer a totally new product
 Muttluks

offer an existing product to a different market
 Earthbuddy - Israel

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, Earthbuddy, Wikes, American Clothing

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
Collection of Information



Sources of Information
Secondary data
Primary data


observations
surveys


mail surveys, telephone surveys, personal
interviews, focus groups
test marketing
Design a simple mail questionnaire to
assess demand for a carpet cleaning
business in your city.


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Once the Qualitative analysis is
done ------ do _________
analysis
Is it _________ feasible?????
Beermits case – how to
determine _________
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
Quantitative Assessment of Business
Opportunities

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
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
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.
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.
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.
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.
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.
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.
Petite Shop A & B
Self Assessment for a Small Business
Opportunity

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Personality
Nature
Abilities
Experience
Financial base
Feasibility
Concept Checks

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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?
PETITE SHOP "A"
1.
Using the information provided, prepare
an estimate of the market potential for
the target market Alice Wood is aiming
at.
2.
What portion of this market potential
could Alice expect for Petite Shop's
market share?
3.
What non quantitative considerations
should be brought into this analysis?
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?