How Entrepreneurs Should Evaluate New Ideas

After an entrepreneur generates ideas, identifying each idea’s potential is essential. For this, the entrepreneur must see if an idea;

  1. Is it a good business opportunity?
  2. Does the idea have marketing potential?
  3. How is the production potential?
  4. How good is financial potential?
  5. Risk potentials of the idea.

How Entrepreneurs Should Evaluate New Ideas

Business Opportunity

An idea will be a business opportunity if it does have the potential to be profitable. It is assessed by estimating its marketing, production, financial, technical, and risk potentials.

Marketing potential

Marketing potential refers to the adequacy of the market. “The size of the present market must offer the prospect of adequate sales volume.

Further, there should be a potential for growth and a reasonable return on investment. To judge the adequacy of the market, the following factors have to be examined.

  • Total present domestic market.
  • Competitors and their market shares
  • Export markets
  • Quality-price profile of the product vis-a-vis competitive products.
  • Sales and distribution system.
  • Projected increase in consumption.
  • Barriers to the entry of new units.
  • Economic, social, and demographic trends favorable to Increased consumption
  • Patent protection.

Production potential

Production potential refers to the availability of inputs required for Tor the production that must be reasonably assured. To assess this, the following questions need to be answered:

  • Are the capital requirements of the entrepreneurial venture within manageable limits?
  • Can the technical know-how required for the venture be obtained?
  • Are the raw materials required for the project available domestically at a reasonable cost? If the raw materials have to be imported, will there a problem?

Is the power supply for the venture project reasonably obtained from external sources and captive power sources?

In many countries like India, Nigeria, Bangladeshi, the business has been traditionally faced with;

  1. shortage of certain inputs like power, foreign exchange, important raw materials, and
  2. fluctuating supplies of agricultural raw materials like Colton, jute, and oilseeds.

The situation is still not satisfactory.

Financial potential

Financial potential refers to the reasonableness of cost and the profitability of the venture ideas.

The cost structure of the venture ideas would enable the entrepreneur to realize an acceptable profit at a competitive price.

The materials cost, labor cost, factory overhead, general administrative overhead, selling and distribution overhead, and the cost of service along with economies of scale arc the elements to be considered to assess the financial potentials of the venture idea.

The costs must lie reasonably.

The investment analysis such as Net Present Value (NPV). Internal Rate of Returns (IRR), Payback period, and Profitability index (PI) along with Return on Investment (ROI) should be calculated 10 test the financial viability of the venture idea.

This process of assessing the financial feasibility of an entrepreneurial venture or project is capital budgeting. It is discussed separately in another lesson.

The technical potentiality of feasibility potential or feasibility refers to operational aspects of the venture idea.

Every new product or service must be subjected to technical analysis and testing to see if prospective customers’ expectations are met. Some of the more important technical requirements are these:

  1. The best and by far the number one technical requirement is this: KEEP IT SIMPLE STUPID (acronym KISS). Please keep it simple to build; keep ii simple 10 transport; keep it simple to maintain; and above ill, keep it simple to use
  2. Make it flexible.
  3. Build a product that will work and not fail. Consumers want products (that are durable, reliable, safe, and easily maintainable. Moreover, those products must be modularly designed with standard, interchangeable parts.

If a product or venture idea ‘does not meet these basic technical requirements, it should be redesigned or scrapped.

Risk potentials

Risk potentials refer to the desirability of the venture on the risk characteristics.

In assessing risk, the vulnerability of the venture idea to business cycles to technological changes, competition from substitutes, competition from imports, and government control over price and distribution should be considered.

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