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OUTLINE
Generation of ideas
Monitoring the environment
Corporate appraisal
Profit potential of industries : Porter model Scouting for project ideas Preliminary screening Project rating index Sources of positive net present value On being an entrepreneur
Generation of Ideas
To stimulate the flow of ideas, the following are helpful
SWOT analysis
Clear articulation of objectives Fostering a conducive environment
Business Environment
Competitor
Corporate Appraisal
Porter Model
According to Michael Porter the profit potential of an industry depends on the combined strength of the five basic competitive forces as shown below Forces Driving Industry Competition
Potential Entrants Threat of New Entrants Bargaining Power of Suppliers
THE INDUSTRY Rivalry Among Existing Firms
Suppliers
Buyers
Pioneering stage
Rapid growth stage Maturity and stabilisation stage
Decline stage
Investment in the pioneering stage, per se, may have a low return and negative NPV. However, it may create options for participating in growth.
Most products evolve through a life cycle. The broad stages and
Investment Return
Pioneering
May have negative NPV but may create options for participating in growth stage Positive NPV
NPV neutral
Decline
Negative
Experience Curve
The experience curve shows how the cost per unit behaves with respect to the accumulated volume of production
100
80
60 40
10 20 40 80
The key factors that contribute to decline in unit cost with respect to the accumulated volume of production are learning effects, technological improvements, and economies of scale
Preliminary Screening
Compatibility with the promoter Consistency with governmental priorities Availability of inputs Adequacy of market Reasonableness of cost
For each factor, multiply the factor rating with the factor weight to
get the factor score Add all the factor scores to get the overall project rating index
Economies of scale
Product differentiation
Cost advantage
Marketing reach
Technological edge
Government policy
Open-mindedness
On Entrepreneurship
An internationally acknowledged authority on development economics, Nobel Laureate Sir Arthur Lewis commented as follows on the role of entrepreneurship. I have devoted a lifetime to the study of developing economies. I have examined strategies of development, the role of foreign trade, of savings and investment, the most helpful role of government, and a myriad of other factors. I am now convinced that nothing matters more than the work ethic and entrepreneurial spirit of the population.
SUMMARY
Identification of promising investment opportunities requires imagination, sensitivity to environmental changes, and a realistic assessment of what the firm can do. To stimulate the flow of investment ideas, the following are helpful: (i) SWOT analysis, (ii) clear articulation of objectives, and (iii) conducive climate. The business environment which needs to be monitored regularly to identify investment opportunities, may be divided into six broad sectors: economic sector, government sector, technological sector, socio-demographic sector, competition sector, and supplier sector. A realistic appraisal of corporate strengths and weaknesses is essential for identifying investment opportunities which can be profitably exploited. The broad areas of corporate appraisal are: market and distribution, production and operations, research and development, corporate resources and personnel, and finance and accounting. According to Michael Porter the profit potential of an industry depends on the combined strength of the following five basic competitive forces (i) threat of new entrants, (ii) rivalry among existing firms, (iii) pressure from substitute products, (iv) bargaining power of buyers, and (v) bargaining power of sellers. Good project ideas the key to success are elusive. So a wide variety of sources should be tapped to identify them.
It is possible to develop a long list of project ideas. For the preliminary screening of these ideas, the following aspects may be looked into: compatibility with the promoter, consistency with governmental priorities availability of inputs, adequacy of market, reasonableness of cost, and acceptability of risk level. When a firm evaluates a large number of project ideas regularly, it may be helpful to streamline the process of preliminary screening by employing a project rating index. It appears that there are six main entry barriers which result in positive NPV projects: economies of scale, product differentiation, cost advantage, marketing reach, technological edge, and government policy.
Every entrepreneur must answer the following questions: Are my goals well defined? Do I have the right strategy? Can I execute the strategy?
It appears that a successful entrepreneur has the following qualities and traits: willingness to make sacrifices, leadership, decisiveness, confidence in the project, marketing orientation, and a strong ago.