Opportunity evaluation (NEF workshop)
First week of December the NEF held a 2-day workshop on Opportunity Evaluation. As per some of our similar previous workshops, this one was prepared and hosted by Chris Coleridge from UCL, but this time with assistance from his colleague Dave Chapman, Vice Dean of UCL Engineering and also Course Director for the MSc in Tech Entrepreneurship at UCL.
On the first day there were 4 key areas we looked at:
- A: What is your customer’s problem?
- B: What is the state of development of the industry you are going into?
- C: What is your field on action?
- D: What is your beachhead segment?
The overriding aim of the workshop was to explore how we go about evaluating an opportunity, that is; how do we know if an opportunity is a good one and one worth our time and effort?
Chris taught us about a concept which claims there are 7 different domains of opportunity, all of which can be grouped into one of 3 kinds:
- (about) the market (the buyers)
- (about) the industry (the sellers)
- (about) the team (assembling the right resources to execute and idea)
We spent quite some time looking at the concept of “5 Forces Analysis”. Taken in aggregate, the 5 forces can tell us how profitable a certain industry is (or how viable/lucrative an opportunity might be). If Low Forces are found to exist, then the opportunity/industry looks to be very profitable.
A breakdown of the 5 forces:
- Rivalry. Are there a lot of rivals / existing competitors already in your industry domain? Fragmentation is key. High fragmentation? Lots of rivals/competitors? A small number of competitors does not necessarily indicate high rivalry though! Take Coke and Pepsi for example, they are the dominant forces in the fizzy drinks market, but they aren’t exactly at each other’s throats – they have the market tied up and are happy to co-exists alongside one another.
- New Entrants (threat of). Are there any other new entrants to this market who might also be disrupting, innovating and establishing a foothold right at the same time as you?
- Buyer Power. A group of fewer buyers will have more buying power, and a better position from which to negotiate price with you. However if there is an abundance of buyers, then the power is with the seller, so buyer power (influence) will be low.
- Supplier Power. Works in tandem with Buyer Power, again fragmentation is key (fragmentation, number of suppliers, reliance, cost). If only few suppliers exist then there is little choice for buyers, they are reliant on the suppliers and thus Supplier Power will be high. If you are a company reliant on a small number of suppliers, then the ‘force’ in this area is high and acting against your favour.
- Substitutes. Goods that meet the need of a customer but are being produced by a different industry or for a different purpose. For example, you may sell computer games and music CDs may not be considered a direct competitor of yours; however music CDs are a viable substitute to your product since they also appeal to your customer base and offer a pastime and source of entertainment and pleasure.
To consider: if Buyer Power is low, that may well be an indicator that customers in your industry are at pain and under the heavy influence/oppression of companies they are reliant on… this may pose an opportunity for your company to come along and offer an attractive alternative.
What opportunities arise if the forces are high in your industry? If Supplier Power is high – then maybe look to find a way to bypass suppliers and get the same outcome, without being dependent on their input or service.
We also looked at an interesting graphical representation of how to position your business to make its value proposition attractive in your industry. In essence, the map split into 3 areas, or 3 approaches to take and ways in which to make profits:
- Cost leadership. Focus on volume of sales (high) offset by (low) cost of production – think Primark, Unilever and P&G products, general FMCG etc.
- Differentiation. Focus on differentiation from your competitors; offering premium or luxury products which are highly desirable – think Apple.
- Focus. Focus and be really niche. The focus strategy concerns identifying a narrow group of customer segments, but incurs little/restricted room for growth – think luxury goods companies such as Chanel, Ferrari etc.
There will always be demand for, and always a gap for – an offering which is high quality but also low cost / good value… and that’s because this strategy more often than not isn’t profitable – profit margins have to exist to sustain businesses therefore this market area isn’t attractive for business, regardless of the consistent demand.
Map out all the different players in your industry and work out where the profits are.
Competitive advantages can come from:
- Brand: a really strong brand can hold a lot of weight and loyalty amongst your customer base.
- Relationships & Eco-Systems: strong relationships with partners, suppliers and customers alike can see you weather the storm or dry spells better than your competitors.
- Processes/products difficult to imitate: you’re in a strong position is your product or service is in high demand and proves difficult for others to imitate or copy.
- Commitments: are your suppliers or customers contractually bound or otherwise committed to working with you?
- Agility/Cycle speed: can you respond quickly to changes in your market and new demands from your customers?
The major focus for the second day of the workshop was The Business Model Canvas. For those not already familiar the Business Model Canvas is a great method for either mapping out an existing business, or planning out a new one in a way which lets you break down most of the key components of your business and get to the bottom of your value proposition. It’s also a great graphical representation of how your business fits together and works (or doesn’t!) and just undertaking the exercise of completing a Business Model Canvas can be a revealing, valuable and greatly insightful piece of work.
The main components/areas on The Business Model Canvas are:
- Customer Segments
- Customer Relationships
- Value Proposition
- Revenue Streams
- Key Activities
- Key Resources
- Key Partners
- Cost Structure
A great website and video flythrough of the Business Model Canvas can be found here: http://www.businessmodelgeneration.com/canvas
What’s missing (from the Business Model Canvas)? >>
- Team, Execution (plan), Competition (identification & analysis of), Macro Drivers, Market Trends, SWOT Analysis, Customers Life Journey…
“Great Entrepreneurs don’t have better ideas – they have better processes” (Eric Ries).
Great read: The Lean Startup, by Eric Ries. Check it out here.
Developing a value proposition:
Your Positioning Template…
>> Sentence #1:
- For (target customer)
- who (statement of the need or opportunity),
- the (product/service name),
- is a (product/service category),
- that (statement of benefit).
>> Sentence #2:
- Unlike (primary competitive alternative),
- our product (statement of primary differentiation).
Book: “The Mom Test” – How to talk to customers and learn if your business is a good idea when everyone is lying to you. Great read. Check it out here.
Three key sources of Risk:
1) Product Risk – getting the product right
2) Customer Risks – building a path to the customer
3) Market Risk – building a viable business.