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MGT601 - SME Management - Lecture Handout 16

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Evaluation of New Venture Opportunities

A crucial task in starting a new business enterprise is the systematic analysis and evaluation of its feasibility and long term profitability. Since a number of variables enter the calculations, the exercise is quite a cumbersome one, a US study relating to the reasons for failure of new ventures has found that most of the factors underlying the failure lie within the control of entrepreneur. Following have been listed as the reasons for failure of new ventures:

  1. Inadequate market knowledge regarding demand potential, the present and future size of market, the market share, appropriate methods of distribution
  2. Faulty product performance due to hastily taken shortcuts in production, development, quality control etc
  3. Ineffective marketing and sales efforts
  4. Inadequate awareness of competitor’s reactions e.g. price cuts, special discounts.
  5. Rapid product obsolescence due to rapid technological advances in case of certain industries
  6. Poor timing of starting a new venture e.g. introducing the product before the market has successfully matured
  7. Undercapitalization, unforeseen operating expenses, excessive investments and related financial difficulties.

Hence, there is the need to undertake a comprehensive feasibility study in the following five areas. Dealing with the technical and marketing feasibility of the identified project

  1. Technical Feasibility
    It covers the following:
    • Identification of critical technical specifications comprising
      • The functional design of the product.
      • Adaptability to the new customer demand.
      • Durability
      • Reliability of performance.
      • Safety
      • Reasonable utility (i.e. acceptable level of obsolescence)
      • Standardization (i.e. elimination of unnecessary variety)
    • Examination of product Quality-Cost Relationship
      In making this investigation, the entrepreneur must understand that there are trade offs between technical excellence and associated cost i.e. a positive relationship exists between technical quality and costs. It is possible through an increase in the technical excellence of a product to that level at which marginal product quality equals marginal cost. This level is reached where slope of product quality and product cost curves are equal. Quality enhancement should not be carried beyond a particular point because it would cause cost increase and lead to decrease in total market demand (except where the product has a snob value). Thus entrepreneur should avoid unnecessary gold plating when market situation does not justifies it.
    • Product testing, which includes?
      • Engineering studies relating to machines, tools, instruments work flow etc.
      • Product development through blueprint, models, prototypes.
      • Product testing through laboratory testing and field-testing.
  2. Market Feasibility
    The following process may be adopted to assure the market opportunities of a product.
    • Identifying the Market Potential
      It involves an estimation of both the current demand of the product and projection of future market trends. The prospective entrepreneur will do well to identify
      • Specific end users,
      • Major market segments, and
      • Potential volume of purchases within each market segment. Some statistical yardstick may be of quite help in accomplishing this work. To illustrate, a potential manufacturer of helmets may find out the annual production of two wheelers, percentage of helmet users and proportion of demand already met.
    • Estimating Cost-volume Relationship to ascertain how various price levels may affect total sales volume
      The price must reflect the value of the product. The entrepreneur may not adopt a uniform price structure to take care of the sensitivity of the buyer to price changes. The cost-volume analysis would also facilitate the determination of appropriate economies of scales i.e. optimum size of enterprise, which has lowest average per unit cost of production and distribution.
    • Sources of Market Information
      Relevant data for market analysis can be gathered from two main sources vise
      • Primary sources such as interviews, mailed questionnaire, survey etc and
      • Secondary sources like government agencies, trade unions, chambers of commerce etc. Whereas the former is costly, the latter may not meet the requirements of the entrepreneur.
        The following kind of data matrix may be quite helpful:
        • Data relating to general economic trends as revealed by various indicators such as new orders, house activity, inventories consumer spending.
        • Market data relating to demand pattern, seasonal variation etc
        • Pricing data i.e. range of prices for same, complementary and substitute products; base price; discount structure etc.
        • Channels of distribution both wholesale and retail
        • Data relating to competitors (To obtain this data, the entrepreneur may either conduct his own survey or approach a consultant).
    • Market Testing
      It is an important method of establishing the overall feasibility of a new venture, significant market-testing methods include:
      • Displaying the product at trade fairs,
      • Test marketing to analyze the receptivity of the product, and
      • A market test can provide following information.
      • Likely sales volume and profitability
      • Sales volume at different price levels
      • Soundness of chosen market strategy
      • Unknown weakness that need attention
        The drawbacks of this technique are:
        • Delay in implementation
        • Premature exposure to competitors and
        • Expensiveness

Books References

  1. Entrepreneurship and small business management by Hans and Kuriloff and Arthur H.
  2. New product decision an analytical approach by Pessemeir, Edgah A

Book recommended

Entrepreneurship and small business BY C L Bansal

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