chapter 4 opportunity recognition evaluation. learning outcomes on completion of this chapter you...
TRANSCRIPT
Learning Outcomes
On completion of this chapter you will be able to: • Understand the foundations for opportunity evaluation• Explain the role of cognitive biases and heuristics in opportunity
evaluating• Understand the different criteria used by venture capitalists to evaluate new venture proposals• Identify the characteristics of successful products and services• Determine how new ideas can be analysed to filter out those that
are obviously not feasible or marketable;• Assess the viability of product and service ideas; and• Develop and implement a screening guide that can be used to establish which product or service ideas should be pursued.
Valuable business opportunity defined
A perceived means of generating economic value that has not
previously been explored and are not currently being exploited by
others and meets a need or desire
Central characteristics to opportunity
• Potential economic value: potential to generate profit.
• Newness: including a product, service or technology that did not exist
before.
• Perceived desirability: moral and legal acceptability of the new
product and or service in society
Foundations of opportunity recognition and evaluation
In developing a viable business opportunity, the entrepreneur will
have to use their cognitive abilities (cognitive approach), develop
objectivity (the ability to let go of their personal biases, likes and
dislikes) in order to be able to recognise and deal with risks in their
pursuit of the most viable opportunity
Cognitive approach
The entrepreneur’s preferred way of gathering, processing, and
evaluating information
Cognitive biases and heuristics
• Opportunity evaluation needed to choose opportunity to be exploited
• The evaluation criteria reflect values influencing expectations,
personal goals, and effort exerted
• Entrepreneurs tend to exhibit cognitive biases and overestimate
chances of success
• Cognitive biases are common types of mental shortcuts used to
make judgments about opportunities and the business
Role of cognitive biases and heuristics
• Risk perception and biases such as
• Overconfidence
• Planning fallacy
• Believe in the law of small numbers
• Illusion of control
Entrepreneurs evaluation of ventures
• Ability to react well to potential growth in the target market
• Demonstrated market acceptance
• Ten times return on assets in the next five to ten years
• The entrepreneur’s risk
Venture capitalist evaluation
• Experience and a good management team• Proprietary product or service• Marketability• Personal commitment and involvement of the entrepreneur• Openness and honesty• Knowledge and experience• Realistic financials• Exit plan• Return rate on investment• Intellectual property
Characteristics of successful products/services
• Fulfils a need or want• Have either a niche or mass-market appeal• Render an income and profit• Should often be replenished or repurchased by the customer• Compatibility with existing attitudes and beliefs and a drastic change in
the buyer's behaviour should not be necessary• Simple so that the buyer will understand it. • Be easy to communicate the results or benefits to potential users.• Should be made available to potential customers to try out without a
large risk. • Should be readily available once the buyer decides to make the
purchase
Feasibility of products or services
• Products or service screening questions
• Skills of the entrepreneur/ venture team
Marketability • Customers: who and where are they and what are their needs,
habits and preferences
• Competitors: mere fact that there are competitors could be an
indication that the market is large enough to absorb a new product
• Suppliers: can play a vital role at the start-up stage of a new
business venture
• Marketing of products/services
Entrepreneur/ Entrepreneurial team
• Personality and personal preferences
• Skills
• Traits/attributes
• Relevant experience
• Synergy
• Exit plans
Resources • Accessibility of resources
• Optimising resources
• Sustainable advantage
• Type and nature of Industry
• Capital Requirements
Idea screening guide
The idea-screening guide is an instrument that can be used for
choosing between different ideas to find the one or two that can be
pursued.