Opportunity Seeking, Screening, and Seizing PDF

# Chapter 2: Opportunity Seeking, Screening, and Seizing ## Trends - Macro environment - Industry - Market - Micromarket - Consumer ## Opportunities ## Threats - ## 2.2 OPPORTUNITY SCREENING After opportunity seeking comes the rigorous process of Opportunity Screening. Because of the many opportuni...

# Chapter 2: Opportunity Seeking, Screening, and Seizing ## Trends - Macro environment - Industry - Market - Micromarket - Consumer ## Opportunities ## Threats - ## 2.2 OPPORTUNITY SCREENING After opportunity seeking comes the rigorous process of Opportunity Screening. Because of the many opportunities possible for the entrepreneur, it is important to come up with a short list of a few very promising opportunities, which could be scrutinized in detail. ## The Personal Screen In screening opportunities, the entrepreneur first has to consider his or her preferences and capabilities by asking three basic questions: 1. Do I have the drive to pursue this business opportunity to the end? 2. Will I spend all my time, effort, and money to make the business opportunity work? 3. Will I sacrifice my existing lifestyle, endure emotional hardship, and forego my usual comforts to succeed in this business opportunity? If "YES" is your answer to all of the above, then you can begin your earnest pursuit of that opportunity. At the simplest level, the entrepreneur may want to make a risk-return grid (Table 2.2.) shown as follows: ## Table 2.2. Risk-Return Grid for Screening Opportunities | Return | Risk | |---|---| | High Return | Low Risk - Best | | Medium Return | Low Risk - Good | | Low Return | Low Risk - Fair | | High Return | Medium Risk - Good | | Medium Return | Medium Risk - Fair | | Low Return | Medium Risk - Bad | | High Return | High Risk - Fair | | Medium Return | High Risk - Bad | | Low Return | High Risk - Worst | A more complex screening grid uses twelve criteria for screening opportunities. ## The 12 Rs of Opportunity Screening 1. Relevance to vision, mission, and objectives of the entrepreneur. The opportunity must be aligned with what you have as your personal vision, mission, and objectives for the enterprise you want to set up. 2. Resonance to values. Other than vision, mission, and objectives, the opportunity must match the values and desired virtues that you have or wish to impart. 3. Reinforcement of Entrepreneurial Interests. How does the opportunity resonate with the entrepreneur's personal interests, talents, and skills? In effect, the faster you are able to earn back the money invested, the better it is for the entrepreneur and the more attractive the business opportunity becomes. There is also the return on sales (ROS) ratio where the entrepreneur calculates how much profit the enterprise is earning for each peso sold. The formula is as follows: ## RETURN ON SALES = NET PROFIT AFTER TAXES / SALES Substituting the variables into ABC Company's estimated figures: ## RETURN ON SALES = 500,000 / 5,000,000 = 10% Furthermore, if the entrepreneur is interested to know the return on the investments made, which come in the form of assets, then he or she can compute for the return on assets (ROA) or return on investments (ROI) shown by the formula: ## RETURN ON ASSETS or RETURN ON INVESTMENTS = NET PROFIT AFTER TAXES / TOTAL ASSESTS/INVESTMENTS Again, substituting the variables using ABC Company's estimated figures: ## RETURN ON ASSETS = 500,000 / 1,500,000 = 33% The above ratios are but a few of the frequently used financial measurements. Should the resulting figures for all three ratios be favorable, this means that the business opportunity is quite promising. ## The Feasibility Study For bigger projects that entail millions of pesos worth of investment, a full-blown feasibility study might be required more than the pre-feasibility study. As compared to a pre-feasibility study, a feasibility study is more comprehensive and detailed. It requires a more rigorous approach. A feasibility study is prepared to convince bankers and investors to put money into the business opportunity. In writing the feasibility study, the entrepreneur should take into consideration the following: 1. A more in-depth study of market potential to ensure that the business proposal will reach the forecasted sales figures. 2. Proof that the product or service being offered has the right design, attributes, specifications, and preferred features. ## Table 2.5. Balance Sheet of Mang Juan's Manufacturing | ASSETS | LIABILITIES | |:---|:---| | **Current Assets** | **Current Liabilities** | | Cash - P100,500 | Accounts Payable - P150,000 | | Accounts Receivable - P370,200 | Income Taxes Payable - P20,500 | | Inventory - P405,350 | Wages Payable - P75,000 | | **Fixed Assets** | Short Term Debt - P125,000 | | Land - P422,100 | **Long Term Liabilities** | | Building - P200,000 | Long Term Debt - P777,650 | | Vehicles - P150,000 | **STOCKHOLDERS' EQUITY** | | **TOTAL ASSETS** - P1,648,150 | Capital - P350,000 | | | Retained Earnings* - P150,000 | | | **TOTAL LIABILITIES & EQUITY** - P1,648,150 | * Retained Earnings are the accumulated profits or losses of the enterprise over the years, which have not yet been given back to investors as dividends. ## Financial Ratios and Measurements In any business endeavor, the investor or the entrepreneur himself or herself will always be interested in knowing the payback period or how long will it take for him or her to get back what he or she has invested in the enterprise. However, payback period is just one of the many financial computations one can take a look at in considering a particular business opportunity. But this will only be possible if the entrepreneur can come up with financial statements. The income payback period can be computed as follows: ## PAYBACK PERIOD = TOTAL INVESTMENT / ANNUAL NET INCOME AFTER TAXES To compute for the income payback period based on ABC Company's financial statements, which specify investments of P1,500,000 and net income after taxes of P500,000 a year, we can conclude that it would take around 3 years for the company to recover the investment. ## INCOME PAYBACK PERIOD = 1,500,000 / 500,000 = 3 years In the Cash Payback Period, the entrepreneur should add back the non-cash deductions from the income statement, which is the depreciation expense. Thus, if the depreciation expense is P250,000 a year, the net income after taxes plus depreciation would amount to P750,000 a year. This would then represent a cash payback period of two years only. subtracted to derive the net profit after taxes. If the enterprise has non-operating revenues and expenses, these should be added or subtracted from the operating profit before the taxes are computed. An example of a simple income statement is shown in Table 2.4. ## Table 2.4. Monthly Income Statement of Mang Juan's Manufacturing | | | |:---|:---| | Gross Sales | P 750,600 | | Less: Cost of Goods Sold* | P 468,487 | | Gross Profit/Margin | P 282,113 | | Less: Operating Expenses | P 166,145 | | Operating Profit/Margin | P 115,968 | | Less: Taxes | P 21,392 | | Net Profit After Taxes | P 94,576 | * Note that cost of goods sold refers to the materials, labor costs, and overhead of making a product. For service establishments, the entrepreneur can compute the costs of servicing the customers directly as cost of services rendered. ## Balance Sheet Creating the balance sheet is a bit more complicated because one has to look at three different things: assets, liabilities, and equities. Assets represent all the investments in the enterprise including the initial investments that you considered in the pre-feasibility study (investment requirements). These include cash (on hand and in bank), accounts receivable, inventory of goods, equipment and machinery, facilities, vehicles, etc. Financing the assets or investments are the liabilities and equity. Liabilities represent the enterprise's debts to suppliers, to banks, to government, to employees, and other financiers. Stockholders' equity represents the investors' investments in the stock (or shares) of the business. The balance sheet equation is: ## ASSETS = LIABILITIES + EQUITY The above equation means that the resources invested into the enterprise in the form of liabilities and stockholders' equity must be equal to the total value of the assets or the enterprise itself. An example of a simple balance sheet is shown in Table 2.5. ## b. Rent and lease expenses ## c. Utilities ## d. Transportation ## e. Fees and licenses ##. f. Commissions ## g. Office supplies, etc. In effect, this part of the pre-feasibility study asks two questions: 1. Do I have enough resources to cover the necessary investments? 2. Would my sales estimates be significantly higher than my monthly production/ service costs in order to produce profits? ## Financial Forecasts and Determination of Financial Feasibility Upon completing the first three parts of the pre-feasibility study, the entrepreneur should now be able to proceed in constructing his or her enterprise's financial forecasts for the business. The financial forecasts refer to the monetary transactions that the business is expected to engage in. Ultimately, the end result of the financial forecasts will indicate the feasibility of the enterprise. Financial forecasting calls for the creation of the four critical financial statements: namely, (1) income statement; (2) balance sheet; (3) cash flow statement; and (4) funds flow statement. The marketing strategy and action program should translate into revenue or sales forecasts. The operations strategy and the production or service delivery program should translate into forecasts of costs of goods produced. The rest of the Enterprise Delivery System should translate into forecasts of operating and non-operating expenses. Together, they comprise the income statement forecasts. The resources mobilized and held by the enterprise are translated into forecasts of the balance sheet (which show the investments in the form of assets and their corresponding financing in the form of liabilities). The flow of resources should be translated into funds and cash flow statements. For a better understanding, this discussion will concentrate on preparing a simple income statement and balance sheet. ## Income Statement The income statement is a financial statement that measures an enterprise's performance in terms of revenue and expenses over a certain period. Simply put, the formula is: ## REVENUES - EXPENSES = INCOME OR PROFIT (LOSS) From revenues forecasted (quantities sold times the prices they are sold for), the entrepreneur must subtract the estimated cost of goods sold corresponding to the forecasted sales. This should give the gross profit. From the gross profit, the operating expenses must be deducted to arrive at the operating profit. Then, the taxes due are ## Technology Assessment and Operations Viability In order to get the enterprise going, the entrepreneur must go through the intricacies of detailing the operations that would be required by the business, which also includes technology assessment. By going through this process, the entrepreneur would be able to determine whether the product or service offering will meet customer demand or not. There are at least four target customer expectations affecting the scale and complexity of an enterprise's operations: 1. **Quantities demanded.** This would determine the needed capacity of operations. 2. **Quality specifications demanded.** This would dictate the following: (a) quality of input or raw materials; (b) quality assurance process in transforming input to output; (c) quality output that meet the operations, standards set; and (d) quality outcomes for the customers who will be looking for specific results. 3. **Delivery expectations.** Knowing how much, how frequent, and when to deliver to customers. 4. **Price expectations.** The selling price of the product or service would be evaluated by the customers according to the value they would receive (in terms of quality, delivery, and quantity) and this value added should be matched against competitors. ## Investment Requirements and Production/Servicing Costs Now comes the challenging part, the entrepreneur needs to determine how much money is needed to start the business opportunity with consideration to the technologies and operating levels required. In this respect, there are three investments that need to be funded: 1. **Pre-Operating Costs.** These are the costs related to the preparation for the launch of the business. These include the pre-feasibility study, in-depth feasibility study, market research, product development, organizational development, and initial promotional costs. 2. **Production/Service Facilities Investment.** This refers to the long-term investment for the actual business establishment, including investment in land, buildings, machinery, equipment, computers, software, furniture, vehicles, etc. If the business would be renting or leasing space, the leasehold improvement (or renovation) would also be part of the facilities investment. 3. **Working Capital Investment.** This includes the investment needed to operationalize the business, composed of cash, accounts receivable, and inventories (raw materials, work-in-process, and finished goods). The entrepreneur must see to it that he or she has enough cash to cover the inventories to be purchased (or manufactured), the accounts receivable to accommodate customers, and the operating expenses to be incurred. These operating expenses would include the following: - Employee salaries, wages, and benefits ## Estimating Market Share and Sales After estimating the number of potential target market or segment, the next thing that the entrepreneur should assess is the potential market share he or she can attract. Conservatively, the entrepreneur can go for a small market share unless the entrepreneur has a very superior product or service that can immediately command a large market share. In a pre-feasibility study, the most important task is to quantify the market potential in a systematic way. The first thing that the entrepreneur must do is to define the market coverage or reach he or she wants to serve. The area could be as big as a country (or even a continent) and as small as a neighborhood. The area would define the total population being targeted. Second, the entrepreneur must determine the broad market segments within this area or total targeted population. In a first level attempt at quantifying the market, the entrepreneur could select such broad categories like gender, age, and income class. In the assessment of market potential, the entrepreneur should evaluate the relative strength of the various suppliers or competitors in the marketplace by asking the following questions: - Who has dominance? - Who has greater bargaining power? - Which segments of the total market are saturated and over served and which ones are relatively underserved? - Are there market segments which are more attractive than others for the entrepreneur, either because of past expertise in the segment or weaker competition in the segment? The final task of the entrepreneur in this portion of the pre-feasibility study is to determine what slice or share of the targeted market segment he or she wants to carve out. Without a very definite product formulation or service proposition, this requires some "educated guessing" or intuitive insightfulness. Alternatively, the entrepreneur could work out the other portions of the pre-feasibility study first (such as the investment requirements and costs of production) and then ask himself or herself what market would be necessary to earn a decent return on the product or service. Given this market share threshold, the entrepreneur could assess whether this would be achievable based on the study of the market potential. Having determined the forecast or derived market share, the entrepreneur should then estimate potential sales. The sales forecast can be computed using the following formula: (Estimated Sales Volume x Estimated Price). ## Assessing Competition Market potential is also affected by the number of establishments supplying and serving your target customers. This process would determine how saturated the market is in the given area of coverage. The more suppliers and competitors there are within a confined area, the greater the level of saturation. On the one hand, it would be best for the entrepreneur to keep out of a market where competition is fierce. On the other hand, some entrepreneurs prefer to enter the biggest, richest, and most competitive markets in order to achieve high visibility and growth potential. However, this is a high-risk proposition unless the entrepreneur is very confident that he or she has a superior product or service that is at par (if not superior) to others in the marketplace. In order to assess one's strengths and weaknesses, there must be a comparison made with the closest competitors. Profiling these competitors will help the entrepreneur gauge their respective strengths and weaknesses and, therefore, enable the entrepreneur to craft a strategy. By doing so, the entrepreneur would be able to get an idea of whether he or she can compete with the existing competitors. If not, the entrepreneur should change strategy by moving to a different location or by shifting to a less competitive target segment in order to avoid competition. Alternatively, the product or service offering can be improved to enhance its competitiveness. ## 6. REACH - 1 ## 7. RANGE - 1 ## 8. REVOLUTIONARY IMPACT - 2 ## 9. RETURNS - 4 ## 10. RELATIVE EASE OF IMPLEMENTATION - 1 ## Rating | | | |:---|:---| | 1 | 2 | | 3 | 4 | | 5 | | ## 11. RESOURCES REQUIRED - 1 ## 12. RISKS - 3 ## Total Score *Rating x Weight = Score Note: Criteria numbers 1 to 10 are positive indicators; meaning, the more of them, the better. Criteria numbers 11 and 12 are negative indicators; meaning, the less of them, the better. Hence, the rating system is reversed for the negative indicators. ## The Pre-Feasibility Study The ultimate goal of doing the opportunity screening matrix is to narrow down the many opportunities into one or two most attractive ones. The next step is to conduct a pre-feasibility study to ascertain the viability of the opportunity. The idea is to focus on a few key items that could make or break the business concept. This time, the entrepreneur must go down to the details and take time to consider the following factors that are contained in a pre-feasibility study: - Market potential and prospects - Availability and appropriateness of technology - Project investment and detailed cost estimates - Financial forecast and determination of financial feasibility ## Market Potential and Prospects Market potential is based on the estimated number of possible customers who might avail of the product or service. For a more realistic number, it would help to narrow down your estimation to the relevant population or target customers in the area where you want to operate your business (micromarket). For entrepreneurs who are entering a business that caters to the basic customer needs, such as food, clothes, beverages, furniture, appliances, housing, schooling and the like, there would usually be demand and supply statistics available from government institutions, industry associations, and research firms. In addition, the entrepreneur must take note that the total market for these products is usually not the issue. Basic needs tend to be commodities or "commoditized." Customers have the luxury of choosing among many basic needs suppliers. That is why these suppliers try very hard to differentiate themselves from one another by dividing the huge market into many customer segments. ## 4. Revenues. In any entrepreneurial endeavor, it is important to determine the sales potential of the products or services you want to offer. Is there a big enough market out there to grab and nurture for growth? ## 5. Responsiveness to customer needs and wants. If the opportunity that you want to pursue addresses the unfulfilled or underserved needs and wants of customers, then you have a better chance of succeeding. ## 6. Reach. Opportunities that have good chances of expanding through branches, distributorships, dealerships, or franchise outlets in order to attain rapid growth are better opportunities. ## 7. Range. The opportunity can potentially lead to a wide range of possible product or service offerings, thus, tapping many market segments of the industry. ## 8. Revolutionary Impact. If you think that the opportunity will most likely be the "next big thing" or even a game-changer that will revolutionize the industry, then there is a big potential for the chosen opportunity. ## 9. Returns. It is a fact that products with low costs of production and operations but are sold at higher prices will definitely yield the highest returns on investments. Returns can also be intangible; meaning, they come in the form of high profile recognition or image projection. ## 10. Relative Ease of Implementation. Will the opportunity be relatively easy to implement for the entrepreneur or will there be a lot of obstacles and competency gaps to overcome? ## 11. Resources Required. Opportunities requiring fewer resources from the entrepreneur may be more favored than those requiring more resources. ## 12. Risks. In an entrepreneurial endeavor, there will always be risks. However, some opportunities carry more risks than others, such as those with high technological, market, financial, and people risks. These 12 criteria can be better managed if quantified and formed into a matrix to help the entrepreneur concretize the evidence that the chosen opportunity (or opportunities) is well worth pursuing. ## Table 2.3. Opportunity Screening Matrix | Criteria | Very High | High | Average | Low | Very Low | Sample Weight | Score | |---|---|---|---|---|---|---|---| | | Opportunity Screening Grid for each Opportunity | | | | | | | | Rating | | | | | | | | | 1. RELEVANCE | 5 | 4 | 3 | 2 | 1 | 1 | | | 2. RESONANCE | | | | | | 1 | | | 3. REINFORCEMENT OF ENTREPRENEURIAL INTERESTS | | | | | | 1 | | | 4. REVENUES | | | | | | 2 | | | 5. RESPONSIVENESS | | | | | | 1 | |