4 Steps to evaluate business opportunity
Identifying an opportunity is only the first step in the entrepreneurial process. The next is evaluation whose purpose is to reveal the scope and details of the perceived opportunity.
To be systematic in your evaluation follow these steps:
Begin with a thorough examination of the market for the businesses product or service by asking the following customer and market questions:
- How will it benefit customers?
- How many people stand to benefit? In other words, what is the size of the market?
- Is the market stable or growing? If it is growing, at what annual rate?
- What % of the total market could the product (service) reasonably hope to capture over the next few years?
- Is another product or service from competitors available to fill part of this demand?
- Are potential customers aware of their need for the product, or is the need latent – that is an uncovered need?
- Who exactly are the potential customers? Can you name them? Can you describe them? If you cannot perhaps your business opportunity is strictly theoretical.
- How can you reach the potential customers and make a transaction – directly, through distributors or through retail stores?
- What is the utility for the product/service relative to substitutes?
- Assess the current and anticipated level of competition and define the strategy that would give you an edge by answer the following:
- How are customers currently satisfying the need you’ve identified?
- What are the strengths and weaknesses of the main competitors?
- How would a smart competitor respond to your entering the market?
- Are the barriers to market entry high or low? Low barriers to entry usually means that it is quite easy to enter the market, resulting in an increasing number of competitors, which means lower profit margins. However, if entry barriers are high, how will you surmount them?
- Have current competitors shown themselves to be agile and responsive to customer needs and technical change?
- What is the single worst thing that a competitor could do to your business prospects (e.g drop the price by 20%?). When you have answered this question think about how the worst thing would affect your prospects for success and how you would respond. What strategy on pricing, promotion, service, distribution, or product features would give you a sustainable competitive advantage?
- Look at the economics of the opportunity – low price high volume, or high margins? Please answer the following:
- Will the business be the one setting the price in the marketplace or following the pricing strategy of competitors? What are the constraints on pricing what the business sells?
- What is the supply/demand situation relative to your product
- Is demand elastic or inelastic – that is would a price increase by you dramatically reduce buyer demand (elastic) or the opposite in the short run?
- What substitutes do prospective customers have for your product or service?
- Will the business be dominated by fixed or variable costs?
- To what extend can suppliers and employees enforce cost increases on the proposed business?
- Consider the financial and human capital resources required for success.
Use the above process to systematically evaluate the promising opportunities so you can consider the market, the current and anticipated level of competition, the underlying economics and the resources required for success.
Post originally published via ICAEW Business Advice Service – click here