Market opportunity evaluation - Practical case of the Business Opportunity Evaluation Method

Appendix 3. Practical case of the Business Opportunity Evaluation Method

9. Market opportunity evaluation

This stage analyses the opportunity in the areas of finance, resources and experience of managers.

9.1. Financial

The financial aspect of a new business opportunity cannot be analysed in detail until the opportunity is actually executed. However, some estimates will be made about necessary investments, probably break-even time, risk of the investment and possible exit routes.

In order to create an idea of the investment aspect during the first years of the operation, three scenarios describing three years of the business opportunity were made in which major costs were attempted to be mapped. Assumptions are based on conversations with colleagues, mostly calculators, who have experience in calculating costs, margins and profits of projects in the electrical engineering. The purpose of the model is not to get a detailed financial picture, but rather to find out what major costs and investment might arise if the opportunity is executed.

Table 36: Financial estimations of first three years All amounts are in euro's, unless otherwise stated

Assumptions Scenarios:

Education budget (first year only) € 10.000 Negative Neutral Positive

Interest 0,04 Marketing costs to obtain first project € 10.000 € 5.000 € 2.000

License costs per year € 1.000 Year 1 : 1 project

fist project € 0 € 20.000 Year 2: 2 projects First project € 0 € 0 € 20.000 Second project € 0 € 20.000 € 20.000 Year 3: 3 projects first project € 0 € 0 € 20.000 second project € 0 € 20.000 € 40.000 third project € 20.000 € 20.000 € 40.000

Marketing costs to obtain first project ‐€ 10.000 Marketing costs to obtain first project ‐€ 5.000 Marketing costs to obtain first project ‐€ 2.000

Personnel Personnel Personnel

Education ‐€ 10.000 Education ‐€ 10.000 Education ‐€ 10.000

Development Development Development

License costs ‐€ 1.000 License costs ‐€ 1.000 License costs ‐€ 1.000 Software development IDE ‐€ 1.000 Software development IDE ‐€ 1.000 Software development IDE ‐€ 1.000 possible certification ‐€ 1.000 possible certification ‐€ 1.000 possible certification ‐€ 1.000

Other Other Other

branche organisation (optional) ‐€ 1.750 branche organisation (optional) ‐€ 1.750 branche organisation (optional) ‐€ 1.750 Marketing costs ‐€ 5.000 Marketing costs ‐€ 5.000 Marketing costs ‐€ 5.000

Projects Projects Projects

First project (loss due to learning curve)

€ 0 First project (break-even) € 0 First project (positive) € 20.000 Loss / profit year 1 ‐€ 29.750 Loss / profit year 1 ‐€ 24.750 Loss / profit year 1 ‐€ 1.750

Development Development Development

License costs ‐€ 1.000 License costs ‐€ 1.000 License costs ‐€ 1.000

Other Other Other

Projects Projects Projects

First project (Neutral) € 0 First project (break-even) € 0 First project (positive) € 20.000 Second project (neutral) € 0 Second project (positive) € 20.000 Second project (positive) € 20.000 Loss / profit year 2 ‐€ 7.750 Loss / profit year 2 € 12.250 Loss / profit year 2 € 32.250 Cumulative ‐€ 37.500 Cumulative ‐€ 12.500 Cumulative € 30.500

Positive Neutral

Negative

Year 1

Year 2

95 / 109

Table 37: Financial estimations of first three years (continued)

Although these numbers are largely educated guesses based on interviews with colleagues of the calculation department of Moekotte, some useful statements can be deducted about the first three years of the project.

The major costs of the first year will resolve around marketing of the new subsidiary. Once a first project actually is found, there is no reason for the project to have negative returns. This is due to the nature of projects within the electrical engineering industry (of which the building automation industry is a part). Projects can be divided into two major costs; material (often hardware) and personnel costs. These can both be sold with a minor margin, resulting in a relatively high safety of projects. The only probable way in which projects can become unprofitable is through the miscalculation of required hours for development (personnel costs).

Initial return rates will very strongly depend on the time it will take to find an initial project. This is because as discussed in the previous point, major costs of the initial phase of the business opportunity will resolve around marketing costs. Once a first project is found, return rates will probably start becoming more positive.

The first year will very likely not be profitable. Return time is probably at least longer than one year, but more likely closer to more than two years (assuming linear income throughout the second year). This is based on the assumption that in the first year, some major costs have to be made which include marketing and image building, education of personnel, obtaining software development licences and possible certification.

A major direct investment is not necessary, as most costs of the first years will come from personnel expenses. As soon as a first project is encountered however, some licence costs or software development costs might have to be made.

After a couple of years, the subsidiary is likely to be profitable, provided that enough projects can be found. This is because according to colleagues (calculators) at Moekotte, it is a reasonable assumption that projects are profitable.

Development Development Development

License costs ‐€ 1.000 License costs ‐€ 1.000 License costs ‐€ 1.000

Other Other Other

Projects Projects Projects

First project (Neutral) € 0 First project (break-even) € 0 First project (positive) € 20.000 Second project (neutral) € 0 Second project (positive) € 20.000 Second project (positive) € 40.000 Third project € 20.000 Third project € 20.000 Third project € 40.000 Loss / profit year 3 € 12.250 Loss / profit year 3 € 32.250 Loss / profit year 3 € 92.250 Cumulative ‐€ 25.250 Cumulative € 19.750 Cumulative € 122.750

Totals after 3 years Net present valueReturn time (assuming linear returns)

Negative scenario ‐€ 25.250 ‐€ 22.447 > 3 years Neutral scenario € 19.750 € 17.558 2 years, 5 months Positive scenario € 122.750 € 109.124 1 year, 1 month

Year 3

96 / 109

Next to the financial costs, there are also some risks associated with the business opportunity. The most noticeable of these risks are;

Competitors may saturate the market more strongly than their present levels, leading to a low amount of projects for Moekotte.

Hiring and layoff costs of new personnel in the event of an exit of the market. These costs may be minimized by placing the new personnel in other parts of the company, something which is a viable option because software engineers often are able to switch between software development tasks. Although there are some investments associated with entering the market, possible risks and exit routes of the business opportunity appear favourable.

9.2. Resources

There are a number of resources that companies will need when entering the building automation market. Some are already obtained, others will still have to be acquired.

Knowledge about norms and values in the market is one of the major requirements. Knowledge of norms and values can include information such as the amount of after-sales service which is normal in the market. Another example is the average cost of installing a building automation system. Another required resource is personnel. To successfully execute a business opportunity, a commercial person who obtains new projects is required. At least one software engineer will also be needed to develop building automation systems is also required. Of these, the most problematic element is likely that of personnel. A trend specific to the electrical engineering and IT branches, is that of a shortage of technically educated personnel. Until 2016, the Dutch economy will have a shortage of 155.400 technically educated people (61.000 lower educated, 58.000 middle educated and 35.500 highly educated people) (Researchcentrum voor Onderwijs en Arbeidsmarkt, 2011). A network is also required for successfully executing the building automation business opportunity. Customers and suppliers are a major aspect of this category. Customers and suppliers were already discussed more detailed in the earlier market analysis stage. Moekotte already has potential customers for the building automation industry within the customer base it is currently already supplying. Suppliers are also already present; current suppliers are well able to supply Moekotte with the hardware they might need in the building automation industry.

Another possible aspect of resources are competitors with which to work together on larger projects may also be necessary. Moekotte has successfully done this in the past to spread their risks more evenly. Although initially not required, if the company has the ambition to take on larger projects, it may be necessary.

Finally, a positive image of the company or ‘goodwill’ is also required. This can only be obtained through either building the image of Moekotte by executing projects in the industry successfully or

97 / 109

by taking over an already existing organisation within the industry, something Moekotte does not consider.

9.3. Manager or entrepreneur

The manager or entrepreneur leading the new subsidiary into the business opportunity cannot be reviewed by the analyst because at the time of writing, there is no candidate for a management position in building automation subsidiary available yet.

9.4. Gate: Finance

The financial gate in the business evaluation model evaluates financial return rate after 5 years. By making a simple prediction model as described within this chapter, it is reasonable to assume that the operation will be profitable well before five years have passed.

9.5. Gate: resources

The two evaluated criteria in the resources category are; R&D alliances in the form of supplier relationships (must be already formed) and technical capabilities (familiarity with similar technologies must already exist). These two conditions are fulfilled; Moekotte already has potential customers in the present customer base and current suppliers can be used for hardware requirements. Furthermore, the company is reasonably familiar with similar technologies as those used in the building automation industry.

9.6. Gate: Manager or entrepreneur

This factor will not be reviewed by the analyst, because at the time of writing, there is no candidate for this position available yet.

98 / 109

In document Business Opportunity Evaluation : Design of a model for opportunity evaluation (Page 101-105)