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Chapter 15

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Department
Commerce
Course
COMM 103
Professor
Gregory Libitz
Semester
Fall

Description
Chapter 15: Analysing New Business Ventures Analysing Business Ventures  One of the most important skills a manager can learn is how to analyse a business venture  Whether it’s a new opportunity or expanding an existing business, the ability to assess the financial and market risk of the venture is critical to the overall evaluation process  The analytical process associated with new ventures can be best thought of as a methodology fir recognizing the degree of financial and market risk the opportunity faces, and then assigning a “GO/ NO GO” to the project  The six phases associated with venture analysis are as follows o Market Analysis, Value Advantage, Financial Analysis, Operations Analysis, Management Competency Analysis, and Exit Options o A key to this approach lies in the search and id of “fatal flaws” which could derail a venture in its early stages – by identifying them, managers can determine if these barriers can be overcome or whether there is too much uncertainty Life in the “Uncertainty” Lane  Uncertainty, to some extent, is unavoidable for new ventures – success is never certain o The less an existing business and its structure can be leveraged in support of the new opportunity, the higher that uncertainty becomes – harder to define the risks  Companies initiating business ventures around existing product lines have some knowledge of competitors, market dynamics, cost structure, and revenue potential o Despite all this knowledge, many still do not succeed  With new businesses that do not have any experience and competencies, the risk/certainty profile is even more forbidding – using a proven business model can help mitigate risk  For those who are entering a market with no proven business model, the risk is great, if, however, the company is successful, the reward will be great Offsetting the Uncertainty – The Business Plan  Orgs should create a planned path as to how to navigate through risk and uncertainty & define how to respond to the critical make or break issues which will challenge them  New venture assessment focuses on the development of a business plan, and then assessing the viability of the plan to work and to meet the identified objectives  In reviewing the business plan, we look to assess the viability of the economic base, validate the size of the target market, assess the competitive landscape, drawing conclusions on the level of saturation which already exists in the market, determine the validity of the cost estimates and capitalization requirements, and ensure that we understand how the business will connect with, and acquire, customers  Upon reading a business plan, should be able to determine who customer is, why business will be successful in reaching these customers, what it will take to get the job done, and why the org or venture capitalist should believe in the management team/entrepreneur Business Plan – “Rules of the Road”  Rule #1 – Know you customer  Rule #2 – Know why you will win  Rule #3 – Know how you will win  Rule #4 – Know what it will take to win  Rule #5 – Demonstrate why others should believe in you  Successful ventures have three common characteristics o They possess a sound understanding of their markets and competitors o They created a realistic business plan which framed the strategy to be undertaken o They utilized a defined set of short-term and long-term health and performance metrics to assess the progress, thereby ensuring successful plan execution Six Phases of Business Plan Assessment Market Analysis  Market analysis is focused on the assessment of the risk and uncertainty associated with entry into the targeted market space  Trying to draw reliable conclusions to verify that the plan will get the anticipated market penetration & will obtain sufficient market share to ensure sustainability for the org  Market analysis is all about assessing the legitimacy of the perceived opportunity which the manger sees for the org which needs to be analysed in four ways o Analyse the current market’s environment – PESTEL, timing, sustainability o Need to look at the industry which were competing in – P’s 5, opportunity for disruption, industry growth cycle, barriers to success o Need to draw conclusions relating to the customers – Need identification and alignment, customer identification, adoption cycle, value curve disruption o Is the market a true fit? – Valid solution position, competitive advantage, will communication strategy deliver on profile, awareness, & preference requirements Market Analysis Success Factors First Mover – New Market New Entrant – Exiting Market Extension – Existing Market  Need/demand identification  Innovation  New revenue opportunity and alignment  Superior customer  Degree of cannibalization  Profile of need solution and relationship model to  Validation of segmentation company target market stretch opportunity  Proper deployment of  Disruption of consumer  Degree of channel capital adoption process involvement in demand  Driver of the consumer  Proper deployment of stimulation adoption process capital in support of the  Strength of brand extension business initiative  Proper deployment of capital Value Analysis – Refer to chart on pg 546 for Litmus Test  Value analysis is closely integrated with the Market Analysis phase o Value analysis is about fully understanding the “Market Fit” & validating that we have a definitive competitive advantage which to develop a positioning campaign  We are attempting to draw three conclusions from value analysis o Does business plan demonstrate we can create a customer habit of buying our p/s? o Does the business plan demonstrate that we can build an association with our targeted customer base and that our p/s provides a credible solution for them? o Does the business plan demonstrate that we can get customers to care more about our p/s than those of our competitors? Financial Analysis  The need to assess the financial requirements required to support the business venture  To be successful, managers and entrepreneurs need to develop a valid estimate of the capital needs of the org, the length of time needed to ensure financial stability, and the cash requirements applicable to the cash operating cycle  Defining and understanding these fundamentals will tell mangers the investment required, the expected ROI,& the level of affordable loss if projections are not met  Financial analysis should be assess the financial potential of the venture and the risk/reward trade-off associated with it across five key areas o Revenue model, cost structure & drivers, capitalization well, margin requirements, and the cash operating cycle Revenue Model Assessment  This is really about validating the legitimacy of where revenue is going to come from  Focuses on a number of potential revenue streams which the org is adding, the sources within each stream, the initial size of these streams, and the growth potential of streams o Trying to determine the anticipated revenue inflow, its projected growth, and external forces which may impact the growth o It is a good idea to develop a range of potential outcomes to be better prepared Cost Driver Assessment  Just like in other businesses, new ventures must understand their cost base o The difference with new ventures is that they have no historical record to look at to determine potential sales – the result is that everything is an estimate  A number of key factors need to be reviewed when assessing an org’s cost base o What does the cost structure look like? What is relationship of product costs and operating expenses? What key cost centres drive major portion of org’s cost base? o What costs are anticipated to be reoccurring versus non-reoccurring? o What type of built-in expense creep do we anticipate within these cost areas? o Will market volatility impact our expense lines? If so, by how much? o Do we feel that out cost base, as it is estimated, yields a competitive advantage? Assessing Benchmark Requirements  Focuses on an assessment of key performance indicators which will assist us in better understanding the various outcomes which could materialize  Two key benchmarks are understanding the point at which an org becomes cash flow
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