Question

What are the theories of evaluating business opportunities? Please describe. (1000 words)

Answer 1

According to experts, opportunity evaluation is meant to assess future opportunities and identify wealth creating resources that can be controlled and utilized by the entrepreneur. An entrepreneur would like to evaluate the opportunities for his products, both goods and services, in the market. He should critically asses his business ideas for their effectiveness.

Entrepreneurs find opportunities more enticing if such opportunities match their existing skills, knowledge and capabilities. However, they may get equally strongly attracted to opportunities even if they are inconsistent with their abilities if they perceive them to be rare and profitable with least competition. When they face such conditions, entrepreneurs develop the willingness to learn something new and move beyond their existing sphere of activity.

The current research identifies the conceptual and methodological issues surrounding opportunity recognition and opportunity exploitation, and informs the academic discourse by specifying the content domains of opportunity recognition and opportunity exploitation, that is, the body of knowledge related to these concepts covering their subject area as completely as possible to allow developing reliable, valid, and distinct measures. The resulting instruments will be valuable to researchers and practitioners investigating the relationship between opportunity recognition and opportunity exploitation and, in turn, their relationships with other variables. As such, they could advance research examining the antecedents and consequences of both concepts.

To evaluate opportunities, the entrepreneur has to assess a number of factors. He should ascertain if his product/service is likely to provide a solution to a problem, who the customer is, whether the product/service can bring financial rewards, if there are any barriers to its entry into the market, competition and quality of competition, the cost involved in launching the product/service in the market, marketing strategy, time needed to break even, expected market share and investment opportunities, among other things. The major factors that need to be considered before evaluating an opportunity are the time the entrepreneur is willing to spend on a project, the preliminary investment, the working capital, the daily activities, its cash flow and profitability.

The entrepreneur may possess what appears to be an excellent idea, but whether it can be turned into a profitable opportunity has to be explored. The difference between an idea and an opportunity is whether the entrepreneur can turn it into a product/service and take it to market, whether it will attract customers’ attention and bring profits to the entrepreneur. Before pursuing an idea into a commercial opportunity, the entrepreneur must analyze it critically by bringing up all possible questions. He should try to expand his idea, brainstorm and develop it considerably. He should not just follow established rules but question and examine his assumptions and test them. He should innovate and come up with unconventional ideas.

Opportunity evaluation carried out by management experts demonstrated that such activity is future focused, indicating that the entrepreneur evaluates each opportunity as a resource and weighs the wealth that resource can create if it were utilized. Experts reckon that opportunity evaluation reflects assessment on a first-person basis. The entrepreneur’s evaluations of a potential opportunity are not based on the calculation whether the opportunity appears profitable to ‘someone’ or ‘anyone’, but whether such an opportunity is profitable to ‘me’.

While not comprehensive. our discussion of the selected models in this section provides a wide range of topics identified by entrepreneurship scholars and practitioners as important for evaluating business ideas. The Model of the Entrepreneurial Process continues to be a leading framework for evaluating business opportunities. It focuses attention on the fit among three elements critical for evaluating a start-up: the team, the resources, and the characteristics of the opportunity. Potential entrepreneurs and investors can use this model to determine if, like a three-legged stool, the business opportunity has achieved a critical balance among the three elements. further outlines a Venture Opportunity Profile, which details multiple key topic areas and specific benchmarks and yardsticks for evaluating business opportunities such as Industry and Market,
Economics, and Personal Criteria. The frameworks are designed to allow investors to evaluate a business idea against high potential and low potential venture criteria, with a goal of helping investors identify high potential opportunities while screening out low potential ones.

In the formal venture community, sources of funding such as venture capital firms, banks, and more recently, angel investor groups have access to sophisticated, often proprietary, investment analysis tools and models. They often receive thoroughly researched, even professionally prepared, business plans upon which these groups apply their analytic tools. These more formal sources of financing represent a relatively small percentage of new and small business funding, unless the business opportunity meets stringent growth or asset requirements.

The more common sources of funds for new and smaller businesses, such as family, friends, informal investors, and the entrepreneurs themselves, often do not have access to the same level of analytic tools as formal investors and may not receive thoroughly prepared business plans early on in their discussions regarding a start-up concept. Consequently, these more typical funding sources for new and small business ideas can benefit from access to systematic and easy-to-use approaches for determining initial feasibility of a business idea, short of investing the time in the full-blown business planning process. In addition, students of entrepreneurship can benefit from new pedagogical tools that allow them to easily practice opportunity evaluation and critical thinking regarding new venture concepts.

The entrepreneur may possess what appears to be an excellent idea, but whether it can be turned into a profitable opportunity has to be explored. The difference between an idea and an opportunity is whether the entrepreneur can turn it into a product/service and take it to market, whether it will attract customers’ attention and bring profits to the entrepreneur. Before pursuing an idea into a commercial opportunity, the entrepreneur must analyze it critically by bringing up all possible questions. He should try to expand his idea, brainstorm and develop it considerably. He should not just follow established rules but question and examine his assumptions and test them. He should innovate and come up with unconventional ideas.

In the final analysis, the entrepreneur must evaluate an opportunity based on the risks and rewards involved in it. He should also assess if the market is ready for the product/service. He should also ensure that his team is the right one for the assignment and the members are knowledgeable in matters related to the business. Ultimately, he has to make sure that business concept matches the objectives of the team to ensure the success of the business opportunity.