Chapter 8 Business Idea Generation Techniques in this chapter, various techniques of business idea generation are presented in brief. These ideas are generated in the product/project identification stage. Business idea is @ business seed, which expands and grows into a business tree. A business idea can emerge from technical source, (within the company) or from the market source (outside the company). Souces of Business Ideas Technical Sources Market Sources Company, Internal R & D Consumers, distributors, suppliers Figure 8.1 Business Idea Sources Business Ideas from Technical Source Generally, new ideas are generated within the company. They are generated ~ (g) By the scientists working in the Research and Development department, (b) by the engineers working in the production department; and (c) also by the field staff who may get new ideas while solving problems. Generally, these ideas relate to the (a) new methods to be adopted for production, (b) new product design; and (c) new machinery, etc. Besides, new ideas generated by market sources also reach the scientists for development. Business Ideas from Market source There are various methods of generating ideas from market sources. We shall discuss each one of them in brief below: 1, Focus Groups Inthis method, a group of consumers is interviewed. A moderator leads a group of people through an open, in-depth discussion rather than simply asking Questions to solicit participants’ response. The moderator focuses the discussion of the group on the new product area in either a directive or a non-directive manner.7 ‘Vel Mente F he celeath PMR) ad deve bl pret iden uf n rmvb ned. Ve selection ofthe group meme he done carefully even imight become auneless exercise te Shouly method enn leo be used for not only generating new business idee This screening idens and concepts, The participants are given smal gif ie PU foe 34 hours. Pari 2. Brainstorming In this method also, a group of consumers is selected, Th focus on a market or product area. Freewheeling discussion i encouraged to pena ies Prinsorming tenis to enerate aot of ideas. Greater then th more will be the likelihood of usefil ideas emerging. In this method, the gre encdliFaged to combine various ideas and the improvement of these ides tonew ideas. Criticism and negative comments are Prohibited, In brainstorin there are no experts present dominating the discussion. While MOSt Of the i . generated by the group will have no basis for further development, frequently ‘one or two very good ideas emerge. This technique is Probably the most well known and widely used technique for business idea Bencration and Creative problem solving. It is an unstructured process for generating all possible ‘ideas about a problem within a limited time frame through spontaneous Contributions of participants. A good brainstorming session starts with a Problem statemen that is neither too broad (which would diversify ideas too greatly, so that nothing specific would emerge) nor too narrow (which would tend to confine responses), Once the problem statement is Prepared, 6 to 12 individuals are selected so txt # wide range of knowledge is Tepresented, All ideas, no matter how: illogical, must be recorded. 3. Reverse Brainstorming Reverse brainstorming is similar to brainstorming, except that eriticism 8 allowed here. In fact, his technique is based on finding fault by asking questions Such as, “In how many ways can this idea fail 2". Since the focus ison the negate Sspect, cure must be taken to maintain the group's morale, Reverse brainsoraist Can be effectively used prior to other creative techniques to stimulate ee thinking. The process most often involves the identification of one With an idea, followed by a discussion of ways to overcome these probe 4. Rawlinson Brainstorming vill i Rawlinson brainstorming gets round the problem of group ve having the group interact individually with the leader rather than with isok “This For example, the group leader will hold up a pen and say to the OUP we pen, What is it?’ And the group is encouraged to produce a seriesea pusiness Idea Generation Technique: 83 Usa midget space rocke back scratcher, it's earplugs. These answers seize me aspect of the pen ~ its shape, its colour, its sharpness or its ability to n $0) we marks and so on. JnRawlinson brainstorming, once the problem is defined, all the ideas are fed directly to the chairperson, with very little interaction between the participants. Rawlinson brainstorming session will be very effective, provided there are gufficient people to capture and write up all the ideas as they emerge. Rawlinson jga good technique for untrained people to generate a lot of ideas quickly. 5, Problem Inventory Analysis This method uses individuals rather a group to generate new product ideas. Instead of | ‘generating the ideas themselves, participants are provided with a list of problems for a Product category. They are then asked to identify and discuss jucts in this category that have a particular problem. This method is often very effective as it is easier to relate known products to suggested problems and give at a new product idea than to generate an entirely new product idea. This method can be used to test a new product idea. For example, using this approach, it is possible to develop an exhaustive list of problems, such as weight, taste, appearance and cost of a product. Once a complete list of problems is developed, individuals can associate products with each problem. Results from problem inventory analysis must be carefully evaluated as they may not actually reflect anew business opportunity. To ensure best results, problem inventory analysis should be used primarily to identify product ideas for further in-depth study. 6. Synectics Synectics is a creative process that forces individuals to solve problems through one or four analogy mechanisms — personal, direct, symbolic and fantasy. At first, the problem owner and a carefully chosen group of people are brought together, who might bring alternative perspective to the problem. Strangeness is eliminated by acceptable familiar perspective, seeing the problem through fresh eyes. Once the strangeness is eliminated, participants engage themselves in the second step, making the familiar strange through personal, direct, or symbolic anzlogy, which ideally results in a unique solution being developed. 7. Gordon Method The Gordon method, unlike many other creative problem-solving techniques, gins with a group of members not knowing the exact nature of the problem. S ensures that the solution is not clouded by pre-conceived ideas and habit Patterns. The entrepreneur starts by mentioning a general concept associated With the problem, The group responds by expressing a number of ideas. Then a Concept is developed followed by related concepts, through guidance by the epreneur. The actual problem is then revealed, enabling the group to make '88estions for implementation or refinement of the final solution.84 8. Checklist Method eckit method ane ideas developed through aig Ofteated ig In a An entrepreneur ean use a list of questions or tga as 7 ide the dtetion of developing entirely new ideas or Concentrating o, fo gui Speci "ie ren. The chess ay akeay form ane of any eng gi PittoGiher tes modify, magnify, minimise, substitute, ge combine, et, 9. Free Association One of the simplest, yet the most effective method that 1 to generate new ideas is free association. This technique is helpful in developing an entirely new slant to aproblem. First, a word or Phrase related to the Problem is written down, .then another and another, with each new word attempting to add something new to the ongoing thought processes, thereby Creating a chain of ideas with a new Product idea emerging, 10. Forced Relationships Forced relationshi; ips, as the name implies, tries to force relat Some product combinations. It isa technique ‘ATTANBE, reverse Mtrepreneurs can u 2. Find the relationship between these elements 3. Record the Telationship inan orderly form 4. Analyse the Tesulting telationshi 5: Develop new ideas from these 1 Collective Notebook Method Inthe collective notebook method, a small Notebook that easily fits in ashi Pocket is prepared, It includes a Statement of the Problem, blank pages, and a peep background data, Seleanes individuals consider the problem and “1 Hesibe solutions recording ideas at least once but preferably three times ad Ate ‘Pi ofemonthalistofthe ben ideas is developed, along with suggestions thera nique can also pea With a group of individuals who ay ta ana Biving their notebook ‘0a central coordinator who Sal creative fon Sal the materiale re summary becomes the topic of af i CUS group discussion by the 8roup participants, ip to find ideas or Patterns Patterns~~ chapter zs Identification of Business Opportunities ‘Aner the generation of various business ideas, the next step would be to seen them for identifying the business opportunities. An entrepreneur should see ability to spota business opportunity among the various business ideas. He/she hould recognize ideas which can become entrepreneurial opportunities. He/she should have the capacity to see what others do not. Before we proceed further, let us understand the difference between a business idea and a business opportunity: Difference between business idea and business opportunity All business ideas generated may not be business opportunities. Finding a good jdea is nothing more than a tool in the hands of an entrepreneur. It is the fist step in the task of converting an entrepreneur’s creativity into an opportunity. Good ideas are not necessarily good opportunities. If an idea is not an ‘opportunity, then what is an opportunity? An opportunity has the qualities of being attractive, durable and timely and is anchored in a product or service which creates or adds value for its buyer or end user. Opportunities are created or built, using ideas and entrepreneurial creativity. They are situational. Apart from what is discussed in the previous chapter, there are other sources of identification of business opportunity. Various SOURCES OF BUSINESS IDENTIFICATION OPPORTUNITY There are 3 other sources through which we can identify a business opportunity; They are through (1) Systematic innovation as advocated by Peter Drucker (2) through Trade Fairs and Exhibitions; and (3) by a using a tool known as ‘Positioning’. We shall discuss each of them in brief below. 1) Systematic Innovation According to Peter Drucker, systematic innovation means monitoring seven Sources of innovative opportunities. The first four sources of innovative pportunities given below lie within the enterprise. The second set of three Sources given subsequently refer to changes outside the enterprise or industry. Inthe following paragraphs, we shall study about the seven sources of innovative Pportunities."~ ” Entrepreneuriay Deve el oo anal Sours of Innovative Opportunit : Unexpected Success and Unexpected Failure The Uni he Unexpected Success: No other area offers rich 9, oy se than an unexpected success. Yet, unexpectey vist innovation aan neglected. Unexpected success forces Us to ask “a ahs es are now appropriate. for this organisation in the way it dene sane? Its technology? Its market?”. If these questions’ are forced, oy unexpected success is likely to open up most rewarding and least ryote innovative opportunities. ef b) The Unexpected failure: Failures, unlike success, cannot be reje, FE) rarely go unnoticed, but they are: seldom seenas symptoms Of opportunities, 7 with unexpected failure, executives, especially in large organisations, tend I for more study and more analysis. This, according to Drucker, isa ‘Wrong re; He feels that unexpected failures demand that you go out, look. around and lise, Failures should always be considered as symptoms of an innovative Opportunity and taken seriously as such. A competitor’s unexpected success or failure equally important. In either case, one takes the event seriously as a Possible symptom of innovative opportunity. One does not just ‘analyse’. One oes out to investigate. It is precisely because the unexpected jolts us out of oy preconceived notions, our assumptions and our certainties. Hence, unexpected success or failure should be regarded as a fertile source of innovation, i Incongruity An incongruity (meaning inconsistency) is a discrepancy, between what is and what ‘ought’ to be, or between what is and what everybody assumes ittobe. ‘We may not understand the reason for it, Still, an incongruity is a symptomofm Opportunity to innovate. It speaks of an underlying ‘fault’ which is an invitation to innovate. It creates an instability in which quite minor efforts can move lage masses and bring about a restructuring of the economic or social configuratio. However, incongruities do not, easily manifest themselves in figures oF repos executives receive or Pay attention to, They are qualitative rather than quantitate in nature, (iii) Process Need i . ive According to Drucker, ‘process need’ is an important source of innovati ee not vague or general but quite concrete. It is task-foousel i itis ee It perfects a process that already exists, rep! ae Soncanc Ply ©xisting old process around newly available kno ” makes possible a process by supplying the ‘missing link’rr tification of Business Opportunities 93 W ‘change inthe industry's structure offers exceptional opportunities. Drucker ._agints four near certain and highly visible indicators of impending changes in ss structure: (@ The most reliable and the most easily spotted of these indicators is rapid growth of industry. If an industry grows significantly faster than nation’s economy or its population, it can be predicted with high probability that its structure will change drastically — at the very latest, by the time it has doubled in volume. ) Bythe time an industry growing rapidly has doubled in volume, the way it perceives and services its market are likely to become inappropriate. (©) Another development that will predictably lead to sudden changes in ‘industry’s structure, is the convergence of changes that hitherto were seen as distinctly separate. For example, — JCE (Information, Communication and Entertainment) which were seen as distinct industries, converged into one. (® Anindustry is ripe for basic structural change, if the way in which it does the business is changing rapidly. External Sources of Innovative Opportunities () Demography Demography refers to the study of population. Of all the external changes, changes noticed in population — in its size, structure, composition, employment, educational status and income are the clearest. They are unambiguous. They have ‘hemost predictable consequences. A population study will bring out many facts achas what will be bought, by whom, and in what quantities etc. So, a changing demography offers a highly productive and dependable innovative opportunity, (i Changes in Perception have now Changes in Perception create substantial innovative opportunities. When a “ae* Perception takes place, the facts do not change, their meaning does. A tical problem in perception-based innovation is timing. In fact, timing is the "Ssence of exploiting changes in perception. (i) New Knowledge te basic characteristics of knowledge-based innovation are that they have di Ongest lead time of all innovations. They are based on the convergence of. “tent kinds of knowledge. Knowledge-based innovation requires careful fall the n lecessary factors, whether knowledge i i i er s ige itself, or social, economic “eptual factors,94 2) Trade Fairs and Exhibi Trade fairs and exhibitions are used bot business ideas as well as for domestic and over ions 7 tion, of ting, and exhibitions are used interchangeably, However, the site Say rms ist describe a general and large international event offering a Wide tang. § “ed py while the term exhibitions connotes a national event ora Specialised Trade fairs and exhibitions offer Opportunities for Meetin, : different countries at one place, and exchanging views on business aoe fon They help to acquire the latest Processes, production technology Ponte, Entrepreneurs may pick up some new busi iness ideas isiti Pair for it in Germany for Cosmetics and . ‘Was established in 198) » infrastructure i loped i i Maidan to hold these fairs, icture is devel loped in Pragati 3) Positioning : Positioning is a ‘ool which helps in identificari ness iti si PS in identification of the busine consattes, Positioning isthe Position of the product/brand in the minds rsumers With the help of marketing le : Tesearch, it is possible to quantify ands tual map Which shows the 8aps in the market,Ident cation of Busi Opportuni 5 Quality High Price High Low % denotes existing brands in Perceptual Map Figure 9.1 — Perceptual Map For example, in the perceptual map shown above, the existing brands are plotted using the dimensions of quality and price. We can see that all the existing brands are of high quality and high price. The map shows the gap in the market: for high quality, low price and low quality— low price brands. Entrepreneurs can develop a product and occupy the place. This is known as product positioning. Through market research, gaps in the distribution or pricing can also be identified and products can be developed. An example of distribution positioning is when Hindustan Machine Tools, (HMT) introduced electric bulbs in the market. They sold them through ‘petty shops’, paan shops, etc. Such outlets were identified on the basis of consumer behaviour. Research had revealed that consumers did not keep spare bulbs at home; so when a bulb fused, a consumer had to go in search ofan electrical shop, which usually sold bulbs. From this, an idea emerged that electric bulbs could be made available in the nearest outlet and that would spur sales. Similarly, when the currently available brands of a product are arranged in tenns of price, a gap may be observed. For example let us say, soaps. The existing market has soaps ranging from Rs. 2 to 4 and 6 to 8. Price ranging from Rs. 4 to 6 isthe gap that is waiting to be filled. Using such analyses, a project is identified. Thus, the project identification stage ends here, The opportunities thus identified have to be evaluated before product introduction. For example, let us take the story of “Pan Parag”, the pan masala. The founder of the company used to travel from one village to another by cycle. Ofien he used to take rest under the shade of a big tree, Whenever he felt like ‘ving a paan, he used to go to the nearest paan shop. He often saw that quite a “People were waiting when the shopkeeper was preparing paan and they hadChapter 10 Marketing Feasip ty ty of the business, A feasi is the evaluation of a business idea. The evaluation can be done e a At, entrepreneur himself or by professional consultants appointed by hi project identification, project appraisal, is done. For such an appraisal ey research tool is largely used by the entrepreneur or by his consutans and re-check a business idea. Information is collected through primay secondary sources of information for determining market feasibility, Importance of Marketing Feasibility In this chapter, we shall discuss how to test a business i marketing angle. After a business idea is generated, marketing Studies are conducted to find out the feasibility of the idea. In earlier chapters, we have seen that one of the weaknesses of small scale industries is marketing, In the mate, with increasing competition, the rate of new Product introductions bas accelerated. In a survey, itis found that about 80% of the products do not meet the expectations of the customers and such products are only a failure. They attain premature death in the market. For example, Hindustan Lever has sets. objective of Tivo new brands/products Per Month. New product introductiss are both expensive and risky. However, they have become quite necessary ft survival and growth of an enterprise. A large number of products that promi superior benefits to customers are introduced every year. The cost of developt anew product and introducing it in the market with the requisite promoivel effortis extremely high. Besides, there is no certainty thatthe product ntod Will be successful. Inthe light of this, study of marketing feasibility site significance, It is extremely useful for strategy formulation, if doneinas aa and scientific manner. It is usually done in combination with the £2 feasibility study. Stages in New Product ‘Development There are eight stages in the new product development Process. These are : idea, purely frome toe St and introd 1, Idea generation 2 — Screening 3. Concept Development and Evaluation 4, Business analysis0 aot Feasibility ‘Product Development and Evaluation F Development and Evaluation of Marketing Mix 7, Test Marketing ¢ Commercialisation of the product 102 te following diagram depicts the product planning and development process, Commercialization stage Product life cycle Figure 10.1 ~ The Product Planning and Development Process Source: Robert Hisrich , Michael Peters, Products, 1991, Macmillan, pl6S \ldea generation For any product effort, an attractive idea for a new Product is the starting Point. Such ideas for a new Product can come from almost anyone, although they woe fom (1) competitors who might have introduced or are planning to » vuCe a new product, (2) customers who may give suggestions or express we (3) company sales force and members of distribution channels who tig, ty in touch with the market, (4) research and development section deve way see new product opportunities in scientific and technological sine and (5) company executives who are concerned about their foal mene See? thinking about better and new products. It is possible to use wiods for generating new ideas which were discussed inthe previous Ut from ewes that are constantly in search of new product ideas can benefit Senn Using such methods. lishiens 1S hi, Ps . Seng tlikely that all new product ideas that have been generated will "'8 and worth pursuing, Besides, a company cannot afford to pursue Marketing decisions for new and matureEntreprencurig| Dey, 103 —— ly. The ~ | ie most promising idea otal the new product idea? iy | cra a detailed evaluation is neither possible nor warranted, 7y¢ Mt subjective, but well informed, judgement ofrelevant individuals and ne a rei ged to sreen ideas. Some companies USE systematic appr 8 o Ive obtaining ratings of executives and others op Sty ‘ning which invol A nly used i ace ! ful i s tritera or requirements. These devices are only 8 Bids in the procs, 2 obtaining judgement. 3, Concept Development and. Evaluation Product ideas are mere expressions, often in functional terms of py possibilities. They need to be developed into product concepts before evalu their worth and initiating product development. A product concept is funy, complete ‘offering’ that a company presents to consumers for possible adopticy, Therefore, a product concept must address the following- * Target consumer Specific needs of the consumers it aims to satis, * Formorthemanner in which the need is to be satisfied (¢.g,, liquid taba, | powder, cream) The primary benefit it offers to consumers; and * The price (both monetary and non-monetary) that a consumer has to pay to receive these benefits. | Product concepts must be evaluated using relevant criteria, that include: sales and profit potential, product line completion, utilisation of ‘manufacturing end marketing infrastructure capacities, etc. It is useful to explore these conceptsto target consumers to obtain their reactions for the purpose of evaluation. ‘An important decision that is related to concept development and evaluat is product positioning. Positioning a product in the product (or brand) sp involves targeting it to deliver a configuration of benefits while keeping in' those delivered by other products in the market, For example, a product come?) fora tooth pastecan be developed that aims to deliver the benefits of ‘goadla. and ‘good for gums’ and thus position itself on the product map in aslot"™ currently unoccupied because existing brands are either good for gums 0" good, but not both, 4. Business Analysis At this stage, it is useful to undertake a fairly detailed apprai fl pri pos, involving financial analysis, By this time, suficien! os we Potential product are known for a detailed evaluation and YO gis clemegg commitment in product development has not taken place be at | ements ofthis appraisal are estimating future sales, costs, profits 8 of investment required. Since many of these cannot be accurately ¢S sal of theMarketing Feasibility 104 this stage. seful approach i (0 apply cut off criteria for returns, sales, etc., and evaluate the project using di ferent sets of assumptions about sales, costs and fits. This kind of sensitivity analysis can indicate the acceptable range of formance for the product and the tikelihood of achieving different levels of » performance. This step is a combination of economic and marketing feasibility, §, Product Development and Evaluation Once the product concept has passed the business analysis stage, work can pegin to physically develop the product ie. convert the concept into concrete juct. Usually, this is a long drawn and costly process, necessitating a close coordination between marketing and research departments. An acceptable prototype must be developed and subjected to evaluation including consumer tests. It must meet the desired cost constraints and deliver the promised benefits. Companies often rely on consumer testing and field trials to obtain guidance in the development process, 6, Development And Evaluation of Marketing Mix Concurrent with product development, other elements of marketing mix such as packaging, brand name, final price, channel and promotional strategies have to be planned. Some of these may also be evaluated through consumer testing either individually or in conjunction with other elements. 1. Test Marketing At this stage the entire mix, including the product, is tested in selected markets todetermine the level of success v: is the objectives. While many companies skip this stage, there are very valid reasons for test marketing a product. Test marketing provides an opportunity to test the acceptability of the product and ‘he mix with minimum resource commitment and minimise the risk of failure in the large market place. Lessons learnt at this stage can be instrumental in avoiding costly mistakes, Test market process involves several decisions such as number of markets, different types of market to test the product, choice of the specific markets, duration of the test, number of alternative mix strategies to be tested, the information to be obtained, etc. Several considerations like representativeness ofmarkets, repurchase cycles of consumers and channel members, size and cost ‘resources required, competitive environment, etc. should be kept in mind while making these decisions. It is imperative that the test is properly evaluated if it is Serve its purpose, Several analytical approaches, research methods and rrentiative techniques have been developed for speedy evaluation of test market sults,_< ntreprencuria} Deve Clo 105, 8. ‘Commercialisation of t he Product reaches the commercialisation stage when it is lauy . a Pe [Lessons learnt from test marketing must be: in 1a ing modify and improve the product and the mix, Commercialisation tna mented, phased {introduced only in selected markets) or the product may be i bei in all markets simultancously, depending on the company’s plans ang Modes Marketing effort should be mounted (0 get wide trial and repeay salen, product in minimum time period. °5 for hy ‘At every stage a check and re-check is made and go /no go decis, made, OS a Decisions on modifications are also made and the product is develo, dts not necessary that all products necessarily have to pass through al fe tis siages as stated above. Confidence and courage play influential oes in decid upon the steps tobe followed. Ifthe product idea is excellent and the entepenas is confident, then he can straight away go to the stage of commercialisation ang product launch is made, skipping all the other stages. ‘There is no guarantee that if one follows all the steps, then the product wi succeed, Ford Company in U.S.A, after a lot of market research had developeda mode] of a car, named Edsel. The Company spent fortunes on development of product. Finally, when the car was introduced in the market, it failed. They hadto withdraw the model. One can only say that the probability of a successful launch is higher when it is developed through the various stages because checks ae done at every stage of product development. At every stage, market rescarchis used as a tool to collect information and analyse. Interpretations are made and then only decisions are taken. A study by Booze, Allen and Hamilton has revel that only two out of 40 originating ideas survive to the point ‘of commercialisation The following diagram shows the mortality of new product ideas. SCREENING 2 A is BUSINESS ANALYSIS 2 Oo 10 DEVELOPMENT 6 TESTING - z ar s | | COMMERCIALS pomp ‘90% 100% 20% 30% 40% 50% 60% 70% 80% CUMULATIVE TIME Figure 10.2 - Mortality of New Product Ideaser 106 osketin Feas wae 10.2 shows that at screening stage, the number of ideas failed is The Fro original ideas, only 12 ideas reached the next stage of business nigh Ft of these, 4 fell out after business analysis and the rest (8 ideas) cntt ye development stage, Then, out of the remaining 8 ideas, only 3 were ree eloped and tested. Finally only 2 ideas reached the market stage, My yen an entrepreneur does not have the necessary know-how, this activity Wimpurced’ and an advertising agency, a market research agency or a vnancy organisation conducts the study. Chapter 8 in this book has listed contaitutions which help an entrepreneur in conducting such a study. Some rrmmental agencies, on a regular basis conduct marketing feasibility studies "polish them for the benefit of the entreprencurs, Specific studies are also Se on the request of the entrepreneur at concessional rates. Letus now look at the criteria which were briefly mentioned in the business analysis stage in detail now. Product Life Cycle (PLC) Itisan analytical tool which can be used by an entrepreneur to take various stategic decisions about the product and market. Once the product is introduced intbemarke, it follows a cycle similar tothe life cycle of individuals. The following diagram depicts the various stages of product life cycle. Sales Volume Introduction Growth Maturity Saturation Decline Time Figure 10,3 - Stages of Product Life Cycle eee figure 10.3, the length and the shape of the curve varies for product ree and industries, Some products have long life cycles whereas some Someta MO" life cycles. For example, in IT industry, the PLC is very short, ~ mes as short as 3 months. The actions and decisions taken by the Preneurs dictate the shape of the curve. Entrepreneurs take the product- At the intr ets on the basis of the analysis of the curve and their interpretations, tf roduction Stage, there are a few entrepreneurs and slowly with their Poulin tet is developed and more and more customers take to the product in the growth stage of the market. When the market grows more, other >ws surketing Feasibility - ited Nations Publicati World Economic Survey (Annual) Statistical Year Book (Annual) International Financial Statistics (Monthly) Survey of Asia and Far East (Annual Survey of Latin America (Annual) Commodity Trade Statistics (Quarterly and Annual) Year Book of International Trade Statistics Economic Bulletins for Europe, Latin America and Africa (Bi-annuals) Market Structure 10.10 Foonomic Foonomic This study is done primarily for entering the market. Whether, an industry is fragmented like the textile industry or concentrated with a few dominant players? What is the share of organised, un-organised, small, imports (grey market), export sectors? This kind of an analysis is done with a view to understand the market structure to study the scope for a new entrant to decide as to how to make an entry into the market. It also takes into consideration, the degree of brand loyalty— whether the customers are loyal to the brands, etc. If the brand loyalty is found to be high, then the entry into the market may be difficult. Market size estimation Market size is estimated to get an idea about how big is the market for a product. It represents the size of the total cake. Market is represented in the form of a ceke. For example, suppose we want to estimate the size of the bedsheet-pillow covers market in Chennai. First, the information about the number of households in the Chennai city is collected. Each household is assumed to be consisting of four family members and hence an household consists of four beds. Besides, per member per year one bedsheet and one pillow cover is consumed. So for an household, 4 bed sheets and 4 pillow covers are consumed in an year, assuming that a set consists of 2 bed sheets and 2 pillow covers. Hence, the consumption 182 sets per year per family. 2 sets x the total no. of households is the Market *2¢ per annum in terms of sets. In this way, a systematic rough estimate of the market size is forecast. Competitive Analysis Market feasibility study then identifies, the direct and the indirect competitors 24 their strengths and weaknesses. On the basis of the study, the opportunities iat teats in the market are identified. The gap in the market, if any, is also fied, Decisions on positioning are taken on the basis of competitive analysis. ae analysis also considers, one’s own cost structure as compared to the ind Pétitors. If the cost of production and marketing is lower than the existing “sty costs, then there is business opportunity. For example, in thé detergent ‘ket, Surfwas doing very well and had brand loyal customers. It was a premium«_ feasibilitys Be economic and financial feasipij, in sacome and expenses are estimated on th on iJity tests the business idea for marketin . bat nancial soundness of the idea is tested, ie uisites to establish an enterprise, The ee, 1 re-1eq ; ntreprencur prings together the labour, macht roduce the desired goods. In order to eval, 7 ability of project, the following aspects need : | | use 0) terial together 10, feasibility oT V! carefully analysed. METHODS OF EVALUATION OF FINANCIAL FEASIBILITY | and Marketing First, the cost of production ~ both short term and long term — is stimete | This depends on the selection of the technology and the size of the plant chose: | feasibility study. The determination of the size depends on demani | inthe technical 3 The costs are estimated on the overall and al and the expected market share. on per unit basis. The total costs will be the initial project cost. The fixed andite variable costs are estimated. The overhead costs, direct and indirect are all added. The entrepreneur can check for competitive cost advantage which has beet discussed in the previous chapter. Break Even Analysis os ce say helps toi dentify the minimum volume required to = tht ter isn0 i reak -even-point is the level or point of operation 1 | itis absolutly essen loss. The otal costs are equal to the total rover pint we essential that the entrepreneur knows exactly the mind break. This anal C be sold or how much sales volume must be achieved fe es eae is the relationship of costs - volume - profit: not calculated by usi imate which has to be forecast. Break even V° and y using a formula or by break even chart. Cost of Production Ajatand fgconomic Feasibilities : 12 vo! cit “ins diagram presents the technique of Break-even point using graph ec in ‘Th Net TR Profit TC Variable Cost FC Cost, Revenue, Price (Rs.) 0 Q Quantity Figure 11.1 - Break-even Chart prakEven Formula Pe Total Fixed Cost (TFC) = Gelling Price (SP)— Variable cost per unit VC/ unit = 2,50,000/ 10-450 = 2,50,000/550 = 45,454 units Itis clear now that in the above example, an enterprise has to produce and sell sninimum of 45,454 units, Above this point, there will be profit atthe rate of Rs. 550 per unit. The estimates of costs and selling price are critical. A feasibility Study has to estimate the time to break even — Whether it is within an year or thee years and so on, In case of any change in price, the BEP will change. ue profit after tax (PAT), Retum on Investment (RON), gross margins, Intemal ofRetum (IRR) are tobe forecast and estimated. The value addition aso ‘aysed in the feasibility stage. — of fixed and Working capital requirements biegetmentof the financial requirements —fixed and working capital ~need to geal made. Fixed capital is used for what are called fixed assets, viz. Lah gle faites which ae purchased once and are used again and again. alent plant and machinery are examples of fixed assets/capital. The i re of fixed assets will vary from enterprise to enterprise depending on ‘Sesing ye eetttions, scale of operations ‘and time of investment. While e financial requirement of fixed costs, architects and engineers’ fee,tallation CNATE ne ca, ot Mach: ative expenses such as market surveys, conse re-operally dered. Similarly, any expenses of remodelin "sf Bs tena Pay is tal means excess Of Current asset, ‘ vorking capital A S Over In account ts refer to those assets which can be convert im tabilites. ce vod, Current Iiabilities refer to those obligations Which arg p, “th Sa eae In short, working capital is the amount of funds vy ich: withinas! ro peda business operations. In other words, it is like ci, ia it needed in day hi to inventories and from inventories to recg; att ing from cas! n ‘ ' % er ae into cash. This cycle goes on and on. Working capita, ie snbricat for any enterprise. Itis fundamental and critical. Inadequacy of yoy." 3 ly affect the operations of the enterpri ital may not only adversely 7 ° se but bing ittoa grinding halt. Thus, the working capital requirement has to be carey id 10 or 20 % to one’s estimates of working capi assessed. It is advisable to ad ; s tobe on the safe side. There are two concepts of working capital — gross work, and net working capital. Gross working capital is the total current assets, whereay net working capital is current assets minus current liabilities. Gross Working Capital = Total Current Assets Net Working Capital = Current Assets — Current Liabilities Example The following is the Balance Sheet of ABC Pvt. Ltd. As on 31st March 2001. Capital Plant & Machinery 75,000 Profit Land & Building 50,000 Long-term Borrowings Furniture 25,000 Sundry Creditors Stock 20.00 Bills Payables Sundry Debtors 25,000 Bills Receivables 9.0 4300 Semi-finished Goods Total The Gross Working C ‘apital will be Rs. Stock 20,000 Sundry Debtors 25,000 Bills Receivables ° 9,500 Semi-finished Goods 43500 Gross Working Capital - Sa000 iTechnology analysis al Several options are available to an entrepreneur in his choice of technology Only after a careful analysis, he must take a suitable decision, as his decision yi; havea great impact on financial, marketing and legal feasibilities. For example, fo, agiven product there may be three options as follows: , I: Highly labour-intensive. II: A fine balance of labour and capital Il: Highly capital-intensive.yr egal Managerial, Locational and Other Feasibilities 122 Total Revenue ey Total Cost II & Total Cost I 70 f Total Cost III oso Ba é ee Fixed Cost III j 20 10 Fixed Cost II Fixed Cost 1 Z UW 10000 15000 0 00 Unit Figure 12.1 - Choice of Technology Infigure 12.1, option I has lower fixed cost than options II and III. Fixed cost is proportionate to the type of machinery procured and the level of automation -dssired. Usually, cost of automation is quite high. When an entrepreneur decides toselect high technology and high automation, then the fixed costs will go up. Aswe could see from the figure, the break-even point changes depending on fed costs. In option I, which is a low technology option, the break-even point is ‘telowest, while in option III it is comparatively high. Another point to be noted istht once the break-even point is reached, the profits rise higher in option III - dslowly in option I. An entrepreneur has to strike the right balance between ‘echnology and the costs. He has to go for the appropriate technology. If the feasibility study conducted by the entrepreneur indicates that the business eeivhas large a potential and the market size is vast and if an entrepreneur oi strength to serve the market, then he can select option III, which is highly labintensive, } The followin, ig diagram shows how changes in costs and price change the “ven Point,mere © ost benefit analysis cost benefit analysis has to be done, Sometimes, an entreprenen a any profit from his venture, but for a social cause, he may be rome a atusiness. Thus, economic cost and profit are not the only consideration for the sarting a new venture. Cost-benefit analysis is Very useful for any evaluation and feasibility study. It measures social cost-benefit and social profitability apart from economic analysis, The first step in this analysis is the identification of costs and benefits followed by the measurem ent of costs and benefits. The tfiect of risk, uncertainty and time are also considered. Forexample, a bridge, road, housing colony or an industrial project, they all "quire different approaches while identifying their social benefits and costs.