Part 1: The Decision to
Start a Business
Chapter 3
Evaluation of a Business
Opportunity
Balderson 7e Copyright © 2008 by
McGraw-Hill Ryerson. All rights
reserved.
Non-Quantitative Assessment of
Business Opportunities
Goals
 Content of Work
 Lifestyle
 Capabilities

–

Good health, management fundamentals,
financial base
Experience
Balderson 7e Copyright © 2008 by
McGraw-Hill Ryerson. All rights
reserved.
Breaking Into The Market

Three Ways
–
–
–

offer a totally new product
offer an existing product to a different market
offer a product or service similar to those existing in
the same market
Developing a Strategic Competitive Advantage
– the right industry
– the right business
– the right aspect of the business
Balderson 7e Copyright © 2008 by
McGraw-Hill Ryerson. All rights
reserved.
Developing A Strategic Competitive
Advantage
The Right Industry
 The Right Business
 The Right Aspect of the Business

Balderson 7e Copyright © 2008 by
McGraw-Hill Ryerson. All rights
reserved.
Collection of Information
Sources of Information
 Secondary data
 Primary data

–
–
observations
surveys

–
mail surveys, telephone surveys, personal
interviews, focus groups
test marketing
Balderson 7e Copyright © 2008 by
McGraw-Hill Ryerson. All rights
reserved.
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
Balderson 7e Copyright © 2008 by
McGraw-Hill Ryerson. All rights
reserved.
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
Balderson 7e Copyright © 2008 by
McGraw-Hill Ryerson. All rights
reserved.
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
Balderson 7e Copyright © 2008 by
McGraw-Hill Ryerson. All rights
reserved.
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.
Balderson 7e Copyright © 2008 by
McGraw-Hill Ryerson. All rights
reserved.
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.
Balderson 7e Copyright © 2008 by
McGraw-Hill Ryerson. All rights
reserved.
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.
Balderson 7e Copyright © 2008 by
McGraw-Hill Ryerson. All rights
reserved.
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.
Balderson 7e Copyright © 2008 by
McGraw-Hill Ryerson. All rights
reserved.
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.
Balderson 7e Copyright © 2008 by
McGraw-Hill Ryerson. All rights
reserved.
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.
Balderson 7e Copyright © 2008 by
McGraw-Hill Ryerson. All rights
reserved.
Self Assessment for a Small Business
Opportunity
Personality
 Nature
 Abilities
 Experience
 Financial base
 Feasibility

Balderson 7e Copyright © 2008 by
McGraw-Hill Ryerson. All rights
reserved.
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?

Balderson 7e Copyright © 2008 by
McGraw-Hill Ryerson. All rights
reserved.
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?

Balderson 7e Copyright © 2008 by
McGraw-Hill Ryerson. All rights
reserved.