The evaluation of a potential business
Thinking about a specific opportunity that you have considered, critically assess the prospects for this opportunity. You should consider the market, the risks, the isolating mechanisms that will enable you to sustain competitive advantage, your customer focus and value proposition. Develop business models and consider the ways to the financial aspects including cash.
Marks will be awarded for critically evaluating the process and suggest how your approach fits with the existing ways of approaching this task.

MAXIMUM WORDS ALLOWED: 3500

INCLUDED IN WORD COUNT:
Abstract
Embedded references/citations
Tables
Diagrams
Charts
Figures
Formulae
Footnotes
Images (e.g. photographs which include words, images)

NOT INCLUDED IN WORD COUNT:
Reference list
Bibliography
Appendices
List of contents

FRAMEWORK FOR WRITING ASSIGNMENT
ALL POINTS MUST BE INCLUDED

THE BUSINESS PLAN FORMAT
1. Cover page:
2. An executive summary
3. The table of contents:
4. The idea, the vision and the company:
5. The market:
6. The product and method of supply:
7. Marketing and promotion:
8. Finances:
9. Risk:
10. Managerial resources:
11. Appendices:

CHARACTERISTICS OF A GOOD OPPORTUNITY
1. The first critical variable is the potential profit margin.
2. The second critical variable is the magnitude of the opportunity.
3. The third variable to consider is where exactly the profit is created, sometimes labelled the business economics (Muzyka 2000).
4. The fourth variable to note is the length of time an opportunity is anticipated to last.

BUSINESS PLAN
We deal with three issues:
1. Minimum efficient scale. Minimum efficient scale (MES) defines the smallest size a firm can be in order to have a chance of competing with larger competitors. What is the long-run sustainable number of firms in an industry? Thus, we need to be aware of a number of the causes which affect the size of MES. These include:
• Economies and diseconomies of scale
• Economies of scope
• Learning by doing economies of scale
2. Barriers to entry.
Pure economics barriers to entry
• Switching costs refer to the costs to switch from one product to another.
• Advertising and goodwill:
Impure economics barriers to entry
• Uncertainty:
• Financial constraints:
• Note that an entrant without financial constraints finds economies of scale a barrier to entry only if they involve sunk costs.
3. The competitive process and business shakeouts. How will an industry evolve in terms of entry, exit, survival and growth?

PORES analysis (Please use this)
PORES stands for Profit Opportunity Recognition and Exploitation Strategy.

PORES analysis

MARKETS AND COMPETITION
1. The consumers
Do you know the size of the market?
Is this related to the target geographic market?
Do you know the profile of customers and their preferences for particular product characteristics? Are key customers identified and interviewed where possible?
Does the plan use competitors’ price, sales, size, product variety and service to reveal information about the potential market (in other words, benchmarking)?
Does it use substitute suppliers and parallel firms in other markets for the same purpose (benchmarking again)?

2. The competition
Does the business plan contain an assessment of competitors’ ability to compete against the product or service?
What is the core of their competitive advantage?
What is the core of the venture’s competitive advantage?
How are they likely to respond to the venture’s exploitation strategy?

3. Shakeouts
A shakeout occurs when an industry becomes rapidly concentrated and in the process many firms either exit or are bought out. In effect, the weaker firms are shaken out of the market.
There are two forms of shakeout: overshooting, and seismic shift.
Overshooting
The first is due to an overshoot of the supply of entrepreneurs relative to the level of opportunities available. In other words, too many firms try to exploit the same market opportunity.
Thus, there are two features to look out for: a) factors encouraging heavy market entry; and b) factors which cause the sustainable number of firms to decline.
a. Factors encouraging heavy market entry
• New high growth and booming markets
• Low barriers to entry
• Potential entrants are nearly all new

b. Factors which cause the sustainable number of firms to decline
• Downturn in industry growth projections.
• Obsolescence
• Scarce resources/increased input costs reduce the sustainable number of firms

Seismic shift
A change of a factor capable of altering industry structure
Deregulation: Competitive forces are freed up, which may increase industry concentration if minimum efficient scale (MES) is larger than average firm size.
Globalization:
Economic integration:
Converging cultures:
Standardization:
Competency of competitors:
Technological or factor price change,

4. Timing
When is the right time to enter a market?

5. The resource-based view (RBV) of the firm
1. Each firm is a cluster of resources and capabilities, both tangible and intangible.
2. Each firm has a heterogeneous (dissimilar) distribution of resources.
3. Resources are ‘sticky’ – it is costly to transfer resources.

6. The tool: a VRIO analysis of resources (Please use this)
1. Value: Does the resource help to increase sales or decrease costs?
2. Rareness: Is the resource rare enough to enable you to charge more than competitors who lack the resource?
3. Inimitability: Can we ensure that the competition cannot imitate the resource? Are we sure that the competition cannot hire people with the expertise that gives your firm the edge?
If you answered yes to all these questions then:
4. Organisation: Can the firm make use of the resource to increase sales or decrease costs? Firms might have the ability to lock in rare resources but they also need to act on it.

FINANCES
1. Managing share allocation at start-up
2. Defining a break-even point
3. Cash flow management
4. Sources of finance and choosing financial structure
5. Debt
6. Equity finance
7. Types of equity

VALUATION OF BUSINESS
Four valuation models
1. Revenue earnings: This method, as well as the price-to-earnings ratio method, in effect uses valuation of firms in financial markets to proxy for the value of the new venture.
2. Price-earnings ratio
3. Asset based assessment
4. Discounted cash-flow analysis