SMALL BUSINESS MANAGEMENT

1
SMALL BUSINESS MANAGEMENT

• Chapter 3
• Evaluation of a Business Opportunity

2
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.
• 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.

3
Non-Quantitative Assessment of Business
Opportunities Wikes case

• Goals
• Financial and occupational status
• Content of Work
• Lifestyle
• Capabilities
• Good health, management fundamentals, financial
  base
• Experience
• IE Sunblush Technologies
• Wikes Video Case How are above factors
  illustrated in his case

4
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

5
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

6
Collection of Information

• Sources of Information
• Secondary data
• Primary data
• observations
• surveys
• mail surveys, telephone surveys, personal
  interviews, focus groups
• test marketing

7
Design a simple mail questionnaire to assess
demand for a carpet cleaning business in your
city.
8

• Once the Qualitative analysis is done ------?
  do _________ analysis
• Is it _________ feasible?????
• Beermits case how to determine _________

9
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

10
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

11
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

12
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.

13
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.

14
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.

15
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.

16
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.

17
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.

18
Petite Shop A B
19
Self Assessment for a Small Business Opportunity

• Personality
• Nature
• Abilities
• Experience
• Financial base
• Feasibility

20
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?

21
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?

22
PETITE SHOP "A"

• Using the information provided, prepare an
  estimate of the market potential for the target
  market Alice Wood is aiming at.
• What portion of this market potential could Alice
  expect for Petite Shop's market share?
• What non quantitative considerations should be
  brought into this analysis?

23
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?