CHAPTER 9
Evaluation of a Business Concept
In this chapter we will look at new concepts and ideas, assess viability, and highlight the following:
• The critical need for a thorough evaluation of any business idea prior to implementation.
• Analysis of the viability of using technology for this new idea.
• Selecting a product or service.
• The supply–demand model.
However, as boring as it may seem and as time-consuming as it appears to be, all new business ideas, no matter how brilliant you may appear to be, must be assessed in a feasibility study to truly determine its effectiveness in the real world. As such, this chapter highlights whether your business idea can survive and prosper as a stand-alone entity within your larger organization, to become marketable and ultimately profitable. The next chapter assesses ideas through more analytical feasibilities.
Evaluating Business Ideas
Unfortunately, the truth is that not all business ideas are good, viable, or even profitable.
Many entrepreneurs know that they are risking all their private assets and reputation when they start their own businesses. While a feasibility study will not eliminate failure, it does increase the odds of success based on improved knowledge into the market, the industry, and how your specific idea fits within these variables. You will then effectively be able to make an informed decision as to what you are letting themselves in for and the likelihood of it succeeding.
Prior to discussing the feasibility studies, general pitfalls that may occur when selecting a business opportunity are discussed.
Opportunities and Pitfalls
Businesses fail for many reasons, and not all are technical or cash flow related. Inadequate turnover might be caused from economic conditions beyond your control. While declining sales could be a direct result of poor corporate and/or business strategy, it could also be owing to changing economic cycles or environmental factors such as terror attacks, natural disasters, or global political disruptions.
The most common reasons for small business failure include the following:
• Management or key staff incompetence.
• Egoism.
• Inadequate start-up capital.
• Low barriers of entry and thus too many competitors.
• Ineffectual advertising and promotion campaigns.
• Lack of cash-flow management.
• Ignoring changing market and industry trends.
• Little or no competitive edge.
• Poorly located business premises.
• Poor financial management control.
• External factors, such as economic conditions and changes in legislation.
This incompetence is often really a lack of proper training and inexperience about what constitutes effective marketing, promotional, financial, and production techniques. Consequently, The Rainmaker assesses whether you have fallen into age-old pitfalls, as follows:
• Are you subjective as to the efficacy of your business, idea, or project?
• Have you undertaken thorough market research to ensure that supply and demand weighs in your favor?
• Have you checked that your product or service will meet quality standards?
• Have you checked that your financial forecasts or budgets are realistic and are based on latest statistics and trends?
• Have you double-checked that sales forecasts are not too optimistic?
• Have you checked your competitors’ products or services to ensure that your offering is sufficiently different to make it unique?
• Do you understand all legal requirements to run your business, from a legislative, government, and corporate point of view?
• Have you appointed experts to review your strategies?
• Have you employed a team that is skilled and experienced in your selected business environment?
• Do you understand the life cycle of your product?
The aim of a feasibility study or due diligence is to assist you to identify potential problems (before they occur) for your new business or potential new product and help to find solutions to these problems.
If you are diligent in the foregoing aspects, investors will gain an incredible insight into your approach to running a business. You will have answered their critical questions before the interview even starts: Is this entrepreneur diligent, does he or she know what is going on in his or her business, does he or she pay attention to detail, is he or she serious about business, and does he or she have the necessary skills and experience to run the company successfully?
What Is Your Business Idea?
Prior to conducting an expensive feasibility study assess your idea along broader trends. You should still note these findings in a formal document, which usually forms the first step in the more in-depth feasibility studies. Here, as a starting point, we look at possibilities, socioeconomic and business conditions, and the potential profit outcome of your planned idea.
This method is important because it places management decisions on record, as these decisions could have a major impact on the company if major corporate deals are carried out, such as the purchase of a company, merger, listing the company, or moving into new markets.
Choosing Products and Services
Selecting a product or a service that is expected to be in demand in the near future is key to the success of the business as this forms part of strategy and, in particular, your business model or plan. When reviewing pricing, always remember that high-volume goods are often linked to lower profit margins. The profit as a percentage and as a dollar value on bread is much lower than on Mercedes cars. Bread is a volume-based business, and this must be reflected in the margins and the volumes.
This is best illustrated with the following diagram:
Supply–Demand Model
Explanation:
• The demand line represents the buying plans of a specific product.
• The supply line represents sellers of the product.
• Point E is the complete equilibrium between suppliers and buyers. This means that the demand for the product (quantity) lies on line Q*E and the price buyers are willing to pay is P*E. This is called the complete equilibrium between buyers and sellers.
• Now, let’s assume that buyers are not interested in the product, and the demand is Q1A. What do you think will happen to the price? Alternatively, what happens if the demand becomes Q2B?
New entrepreneurs often do not understand this relationship and then overprice consumer goods and underprice industrial goods. This too can lead to business failure, as it will impact sales negatively.
When selling consumer goods, remember that they are generally lower-cost items and will be volume driven. The sales are not one-to-one sales. They are generally one-to-many sales. The salesperson is most often a cashier who simply takes payment. The consumer carries the cost of visiting the seller in order to select and buy the product; therefore, profit margins will be lower.
Industrial goods, which are generally sold to other businesses, involve a one-to-one sales process and often require the business to send a salesperson to visit the client as part of the sales process. The seller bears the cost of visiting each client independently and will therefore tend to sell goods with higher profit margins. These two thoughts on consumer and industrial goods are generalizations but can provide a useful guide.
Rainmaker Observation: For SMEs, it is imperative that the chosen strategy is not a price-based one. This is a poorly chosen strategy, whereas a niche market strategy is the most suitable. Although there may be exceptions, this is unlikely.