Chapter 12 – Opportunity Analysis
Learning Objectives
- Determine when an idea becomes a recognized opportunity
- Create a SWOT analysis for an entrepreneurial venture
- Develop a Business Model Canvas based on the nine building blocks
recognizing and Verifying the Entrepreneurial Opportunity
Whether you start your own business, buy an existing business, or purchase a franchise, researching the industry, your target market, and examining the economic and funding options are all part of performing due diligence. Due diligence is the process of taking reasonable steps to verify that your decisions are based on well-researched and accurate information. It means thoroughly researching potential pursuits, asking detailed questions, and verifying information.
One of the more common questions entrepreneurs must ask is whether now is a good time to start a business. This question of timing is addressed in the investigation to determine whether the idea is merely interesting or fits the criteria of being an entrepreneurial opportunity.
An idea can move to a recognized opportunity when the following criteria are met. The figure below shows these three factors:
- Significant market demand
- Significant market structure and size
- Significant margins and resources to support the venture’s success
Significant market demand means that the idea has value by providing a solution to a problem that the target market is willing to purchase. This value can result from a new product or service that fills an unmet need, a lower price, improved benefits, or greater financial or emotional value. This value can also result from capitalizing on “nonconsumption.” For example, in the 1980s, the Disney Corporation realized that it was losing an opportunity to entice visitors to come to their theme parks from 9 p.m. to 9 a.m. when they were closed. So the company started having “school nights” when schools and students could use the parks at a discount.
Significant market structure and size involve growth potential and drivers of demand for the product or service. Barriers to entry are manageable, meaning that entering the industry or creating a new industry is not exceptionally difficult. If the industry already exists, there must be room within the industry for your venture to gain market share by providing a value that creates a competitive advantage.
Significant margins and resources involve the potential for achieving profit margins at a high-enough level that the work of starting the venture (including the entrepreneur’s time and energy) is worth the risks involved. If the operating costs are too high and the profit margin is too low, it is important to analyze whether the idea is truly feasible. Significant margins also include the capital requirements—how much money is needed to start the venture—as well as the technical requirements, the complexity of the distribution system, and similar resources. Determining whether an idea has significant market demand, significant market structure and size, and significant margins and resources to support the venture’s success represents the most basic concerns when screening a business idea as an entrepreneurial opportunity.
Using SWOT Analysis to Evaluate Entrepreneurial Opportunity
One way to evaluate a business idea is to prepare a SWOT analysis (see figure below). You may be familiar with a SWOT analysis from other classes through analyzing an organization’s strengths, weaknesses, opportunities, and threats. However, a SWOT analysis for a new business venture differs slightly because we are not only looking at the organization, we are also looking at the entrepreneur who will run the organization. Note that strengths and weaknesses are internal to the entrepreneur, while opportunities and threats are external factors. Strengths are capabilities and advantages of the entrepreneur, including education, experience, and personal or professional contacts. Weaknesses are disadvantages of the entrepreneur, which could include lack of knowledge or experience. Opportunities are positive events that the entrepreneur can develop to their benefit. This could include development of new technologies, changes in consumer tastes and preferences, market growth, and new laws and regulations. Threats can be anything that could potentially harm the business or prevent the business from becoming successful such as competition, negative changes in economic conditions, and new laws or regulations.
Business Model Canvas
Once an entrepreneur has conducted an opportunity analysis and feels strongly about moving forward with an idea, the next step is to create a business model. A business model is a plan for how venture will be funded; how the venture creates value for its stakeholders, including customers; how the venture’s offerings are made and distributed to the end users; and the how income will be generated through this process. The business model refers more to the design of the business, whereas a business plan is a planning document used for operations.
Each business model is unique to the company it describes. A typical business model addresses the desirability, feasibility, and viability of a company, product, or service. At a bare minimum, a business model needs to address revenue streams (e.g., a revenue model), a value proposition, and customer segments. In non-jargon English, this means you want to address what your idea is, who will use it, why they will use it, and how you will make money off it.
A canvas is a display that would-be entrepreneurs commonly use to map out and plan different components of their business models. There are several different types of canvases, with the business model canvas and the lean canvas being the most commonly used.
As developed by Osterwalder and Pigneur, the business model canvas has nine components, as shown in the figure below.
- Customer segments
- For whom are we creating value?
- Who are our most important customers?
- Mass market; niche market; segmented; diversified; multi-sided platform.
- Value propositions
- What value do we deliver to the customer?
- Which one of our customer’s problems are we helping to solve?
- What bundles of products and services are we offering to each customer segment?
- Which customer needs are we satisfying?
- Characteristics: newness; performance; customization; “getting the job done”; design; brand/status; price; cost reduction; risk reduction; accessibility; convenience/usability
- Channels
- Through which channels do our customer segments want to be reached?
- How are we reaching them now?
- How are our channels integrated?
- Which ones work best?
- Which ones are most cost-efficient?
- How are we integrating them with customer routines?
- Customer relationships
- What type of relationship does each of our customer segments expect us to establish and maintain with them?
- Which ones have we established?
- How are they integrated with the rest of our business model?
- How costly are they?
- Examples: personal assistance; dedicated personal assistance; self-service; automated services; communities; co-creation
- Revenue streams
- For what value are our customers really willing to pay?
- For what do they currently pay?
- How are they currently paying?
- How would they prefer to pay?
- How much does each revenue stream contribute to overall revenues?
- Types: asset sale; usage fee; subscription fees; lending/renting/leasing; licensing; brokerage fees; advertising
- Fixed pricing: list price; product feature dependent; customer segment dependent; volume dependent
- Dynamic pricing: negotiation (bargaining); yield management; real-time-market
- Key resources
- What key resources do our value propositions require?
- Our distribution channels?
- Customer relationships?
- Revenue streams?
- Types of resources: physical; intellectual (brand patents, copyrights, data); human; financial
- Key partners
- Who are our key partners?
- Who are our key suppliers?
- Which key resources are we acquiring from partners?
- Which key activities do partners perform?
- Motivations for partnerships: optimization and economy; reduction of risk and uncertainty; acquisition of particular resources and activities
- Key activities
- What key activities do our value propositions require?
- Our distribution channels?
- Customer relationships?
- Revenue streams?
- Categories: production; problem-solving; platform/network
- Cost structure
- What are the most important costs inherent in our business model?
- Which key resources are most expensive?
- Which key activities are most expensive?
- Is your business more: cost driven (leanest cost structure, low price value proposition, maximum automation, extensive outsourcing); value driven (focused on value creation, premium value proposition).
- Sample characteristics: fixed costs (salaries, rents, utilities); variable costs; economies of scale; economies of scope
According to Osterwalder, et al. (2010), the things we typically teach people in business school are geared to helping people survive in larger, ongoing businesses. What is taught—including organizational structures, reporting lines, managing sales teams, advertising, and similar topics—is not designed to help students understand how a start-up works and how to deal with the volatile nature of new ventures. The Business Model Canvas idea is meant to help us understand start-ups.
The Business Model Canvas tool is intended to be applied when business operations can be started on a small scale and adjustments can continually be made until the evolving business model ends up working in real life. This is in contrast to the more traditional approach of pre-planning everything and then going through the set-up and start-up processes and ending up with a business venture that opens for business one day without having proven at all that the business model it is founded upon will even work. These traditional start-ups sometimes flounder along as the owners find that their plans are not quite working out and they try to make adjustments on the fly. It can be difficult to make adjustments at this time because the processes are already set up. For example, sales teams might be in the field trying to make sales and blaming the product developers for the difficulty they are having, and the product developers might be blaming the sales teams for not being able to sell the product properly. The real issue might be that the company simply isn’t meeting customers’ needs and they don’t have any good mechanism for detecting and understanding and fixing this problem.
Project Focus – Business Model Canvas
Now that you have completed your secondary and primary research, you can finalize your Business Model Canvas.
Attribution
This work builds upon materials originally developed by the following:
OpenStax in their publication “Entrepreneurship,” which is licensed under CC BY 4.0.
Lee Swanson in their publication “Entrepreneurship” and Innovation Toolkit” which is licensed under CC BY-SA 4.0
the process of taking reasonable steps to verify that your decisions are based on well-researched and accurate information
a plan for how venture will be funded; how the venture creates value for its stakeholders, including customers; how the venture’s offerings are made and distributed to the end users; and the how income will be generated through this process
