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COMM 103 (179)
Chapter 15

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Queen's University
COMM 103
Gary Bisonnette

Chapter 15: Analyzing New Business Ventures - Assessing the financial and market risk associated with a venture is critical to the overall evaluation process of a business - Key to assessment approach lies in the search and identification of “fatal flaws” which could potentially derail a venture in its early stages 1. Eg. Inadequate pricing models, undercapitalization, weak management competencies, insufficient marketing research initiatives, poor understanding of industry configuration and market segmentation, or the absence of a well-focused execution strategy - Uncertainty associated with the commencement of a business venture is unavoidable - The less an existing business and its structure can be leverages in support of the new opportunity, the higher that uncertainty becomes - Utilization of a proven business model or turnkey operation, such as a franchise, can assist in mitigating risk - Absent of any proven business model, exposes entrepreneurs to the greatest risk and uncertainty - It is true that with success there is a considerable reward - Mitigating uncertainty and risk is all about planning - New venture assessment focuses on, first, the development of a business plan, and then assessing the viability of the plan to work and to meet its identified objectives - 5 “Rules of the Road” what a business plan needs to deliver 1. Know your customer 2. Know why you will win 3. Know how you will win 4. Know what it will take to win 5. Demonstrate why others should believe in you - Successful venture have three common characteristics 1. Possess a sound understanding of their markets and competitors 2. Create a realistic business plan which frames the strategy to be undertaken 3. Utilize a defined set of short-term and long-term health and performance metrics by which to assess their progress Market Analysis - Focuses on the assessment of the risk and uncertainty associated with entry into the targeted market space - Success factors depend on whether we are 1. Creating new market space as a first mover 2. New entrant in an existing market 3. Launching a product line extension - Market analysis is about assessing the legitimacy of the perceived opportunity which the manager or entrepreneur sees for the organization - Four ways to assess the opportunity 1. Current market environment (PESTEL) 2. Market sector or industry within which we will be competing (PORTER’S, SWOT) 3. Draw conclusions relating to the actual customers we hope to attract 4. Can we provide a valid solution to the problem that we are trying to solve Value Analysis - Closely integrated with market analysis - About fully understanding “market fit” and validating that we do have a definitive competitive advantage or uniqueness around which we can develop a “positioning” campaign - Ability to fully develop and communicate why the product is unique, why it is important in solving the target market’s problem and what its underlying value proposition strengths are Financial Analysis - 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 organization, the length of time needed to ensure financial stability and the cash requirements applicable to the cash operating cycle - Depth of the investment required, the expected returns , level of affordable loss which could be absorbed should financial projections not be met, risk/ reward tradeoff associated Revenue Model Assessment - Validating the legitimacy of where revenue is going to come from and how it will be generated 1. Number of potential revenue streams 2. Initial size of revenue streams 3. Growth potential of revenue 4. Interdependency of new revenue source on existing sources - Upside and downside boundaries of the level of revenue anticipated (optimistic/pessimistic forecast) - Being able to define the revenue sources and the anticipated revenue stream, particularly in the early stages of a new venture launch, is a first step in determining the financial viability of a business opportunity Cost Driver Assessment - Cost estimates are projected and or anticipated 1. What does the overall cost structure look like? 2. What costs are anticipated to be reoccurring versus those felt to be non- reoccurring 3. What type of built-in expense creep do we anticipate within these cost areas? 4. Will market volatility, such as commodities, impact our expense lines? 5. Do we feel that our cost base, as it is estimated, yields a competitive advantage Assessing Benchmark Requirements - Assessment of key indicators which will assist us in better understanding the various outcomes which would materialize, given the estimates which we have made and the operation
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