Unit2 - Subjective Questions
ERT425 • Practice Questions with Detailed Answers
Define Environment Scanning and explain its significance for an entrepreneur.
Environment Scanning is the process of gathering, analyzing, and dispensing information for tactical or strategic purposes. The environment scanning process entails analyzing the internal and external factors that affect a business.
Significance for an Entrepreneur:
- Identification of Opportunities: It helps in finding new business avenues and market gaps.
- Formulation of Strategy: It assists in creating strategies that align with the changing business environment.
- Early Warning System: It helps in identifying threats (like new competitors or regulatory changes) early.
- Resource Management: It aids in the optimal utilization of resources based on market trends.
- Adaptation: It ensures the business remains relevant by adapting to technological and social changes.
What is Need Assessment? Discuss the steps involved in assessing the needs of a potential market.
Need Assessment is a systematic process for determining and addressing needs, or "gaps" between current conditions and desired conditions or "wants".
Steps in Need Assessment:
- Identification of the Target Market: Defining who the potential customers are (demographics, psychographics).
- Data Collection: Gathering information through surveys, interviews, or observation regarding customer pain points.
- Analysis of Data: Interpreting the data to understand the magnitude and frequency of the need.
- Gap Analysis: Comparing the current market offerings with what customers actually want.
- Prioritization: Ranking needs based on urgency and feasibility to address them.
Elaborate on the PESTLE framework used for analyzing the macro-environment of a business opportunity.
The PESTLE framework is a strategic tool used to analyze the external macro-environment factors that impact a business:
- P - Political: Government policies, tax policy, trade restrictions, tariffs, and political stability.
- E - Economic: Economic growth, interest rates, exchange rates, inflation, and disposable income of consumers.
- S - Social: Cultural trends, demographics, population analytics, and lifestyle changes.
- T - Technological: Technological advancements, R&D activity, automation, and technology incentives.
- L - Legal: Discrimination laws, consumer protection laws, antitrust laws, employment laws, and health and safety laws.
- E - Environmental: Weather, climate, environmental policies, climate change, and pressures from NGOs.
Distinguish between Primary and Secondary sources of information for business opportunity assessment.
Primary Sources:
- Definition: Data collected firsthand for a specific purpose.
- Examples: Surveys, focus group interviews, direct observation, customer feedback.
- Pros: Highly relevant, up-to-date, specific to the problem.
- Cons: Expensive and time-consuming to collect.
Secondary Sources:
- Definition: Data that has already been collected by someone else for a different purpose.
- Examples: Government census reports, industry journals, competitor annual reports, internet articles.
- Pros: Inexpensive, easily accessible, quick to obtain.
- Cons: May be outdated, not specific enough, or lacking context.
Explain the concept of Resource Assessment and list the key resources an entrepreneur must evaluate.
Resource Assessment involves evaluating the means available to an entrepreneur to carry out a business activity effectively. It determines if the idea is actionable based on available assets.
Key Resources to Evaluate (The 4 Ms):
- Men (Human Resources): Availability of skilled and unskilled labor, management expertise, and technical staff.
- Material: Availability of raw materials, components, and supplies required for production.
- Money (Financial Resources): Capital requirements, sources of funds (equity, debt), and cash flow projections.
- Machinery (Physical/Technological Resources): Equipment, technology, land, and building infrastructure required for operations.
Calculate the Break-Even Point (BEP) in units and explain its significance in assessing project viability. Use the notation: for Fixed Costs, for Selling Price per unit, and for Variable Cost per unit.
The Break-Even Point (BEP) is the level of sales where total revenue equals total costs, resulting in zero profit and zero loss.
Formula:
Where:
- = Total Fixed Costs (costs that do not change with production level, e.g., rent).
- = Selling Price per unit.
- = Variable Cost per unit.
- is known as the Contribution Margin per unit.
Significance:
- It helps determine the minimum sales volume required to avoid losses.
- It assists in setting sales targets and pricing strategies.
- It is a crucial indicator of the financial risk associated with the project.
Discuss the criteria for the selection of a viable project opportunity.
Selecting a viable project requires filtering ideas through specific criteria:
- Investment Size: Does the capital requirement match the entrepreneur's capacity?
- Location: Is the location suitable regarding raw materials, market access, and labor?
- Technology: Is the required technology accessible, proven, and affordable?
- Return on Investment (ROI): Does the project promise an adequate rate of return compared to the risk taken?
- Market Potential: Is the market size sufficient and growing? Is there a demand-supply gap?
- Legal Restrictions: Is the project compliant with local laws and environmental regulations?
- Competition: Can the business survive against existing and potential competitors?
Compare viable project opportunities in the Manufacturing Sector versus the Service Sector.
| Feature | Manufacturing Sector Opportunities | Service Sector Opportunities |
|---|---|---|
| Nature of Output | Tangible goods (e.g., textiles, electronics). | Intangible acts/performances (e.g., consulting, tourism). |
| Capital Requirement | Generally high (machinery, raw material inventory, factories). | Generally lower (office space, software, human capital). |
| Scalability | Harder to scale initially due to physical constraints. | Often easier to scale, especially digital services. |
| Inventory | Requires inventory management. | No inventory (services are produced and consumed simultaneously). |
| Examples | Food processing, Automobile parts, Garment manufacturing. | IT services, Healthcare, Education, Event management. |
What is Market Feasibility? What key components are analyzed under it?
Market Feasibility is the assessment of the marketability of a product or service. It determines if there is sufficient demand to sustain the business.
Key Components Analyzed:
- Market Size and Growth: Total Available Market (TAM) and expected annual growth rate.
- Target Audience: Demographics, preferences, and purchasing power of potential customers.
- Competition Analysis: Identification of direct and indirect competitors, their market share, and weaknesses.
- Sales Projection: Estimating the potential sales volume over a specific period.
- Marketing Mix: Viability of the proposed Product, Price, Place, and Promotion strategies.
Describe the concept of Technical Feasibility in the context of a new project.
Technical Feasibility focuses on the engineering and logistical requirements of a project to determine if it can be physically implemented.
Aspects covered:
- Technology Selection: Choosing the right technology that is modern yet proven.
- Plant Location and Layout: Analyzing the site for logistics, utilities, and workflow efficiency.
- Raw Materials: Availability, quality, and proximity of essential inputs.
- Machinery and Equipment: Specification of equipment required and their suppliers.
- Waste Disposal: Technical methods for treating effluents and waste management compliance.
Explain Financial Feasibility and the importance of Net Present Value (NPV) in this assessment. Provide the formula for NPV.
Financial Feasibility assesses whether the project is financially viable, meaning it can generate enough cash flow to cover costs and provide a profit.
Net Present Value (NPV):
NPV is a capital budgeting tool that compares the present value of cash inflows with the present value of cash outflows over a period of time. A positive NPV indicates a profitable project.
Formula:
Where:
- = Net cash inflow during the period
- = Total initial investment costs
- = Discount rate (or required rate of return)
- = Number of time periods
Importance: It accounts for the time value of money, making it a superior method to simple payback period for long-term projects.
What is SWOT Analysis and how is it used in Environment Scanning?
SWOT Analysis is a strategic planning technique used to identify:
- Strengths (Internal): Characteristics that give the business an advantage (e.g., proprietary technology, skilled team).
- Weaknesses (Internal): Characteristics that place the business at a disadvantage (e.g., lack of capital, weak brand).
- Opportunities (External): Elements in the environment that the business could exploit to its advantage (e.g., emerging markets, competitor failure).
- Threats (External): Elements in the environment that could cause trouble for the business (e.g., changing regulations, negative press).
Usage in Environment Scanning:
It synthesizes the findings from internal (resource) and external (PESTLE) assessments into a matrix, allowing the entrepreneur to strategize by matching strengths with opportunities and converting weaknesses into strengths.
Define Porter’s Five Forces and explain how it helps in assessing the viability of a project opportunity.
Porter’s Five Forces is a framework for analyzing a company's competitive environment.
The Five Forces are:
- Threat of New Entrants: How easy is it for others to enter the market? (Barriers to entry).
- Bargaining Power of Suppliers: Can suppliers drive up prices or reduce quality?
- Bargaining Power of Buyers: Can customers drive down prices or demand more value?
- Threat of Substitutes: Are there alternative products that satisfy the same need?
- Rivalry Among Existing Competitors: How intense is the competition?
Role in Viability:
If these forces are high (e.g., intense rivalry, high buyer power), the industry profitability is likely low, making the project less viable. It helps the entrepreneur understand the structural attractiveness of an industry.
How does Legal and Administrative Feasibility impact project selection?
Legal and Administrative Feasibility determines if the proposed business conforms to the legal framework of the country.
Impacts:
- Registration/Licensing: Identifying if the business type requires specific difficult-to-obtain licenses (e.g., pharmaceuticals, defense).
- Labor Laws: Compliance with minimum wage, working hours, and safety standards.
- Taxation: Understanding tax liabilities (GST, corporate tax) affecting net margins.
- Intellectual Property: Ensuring the project doesn't infringe on existing patents or trademarks.
- Zoning Laws: verifying if the manufacturing unit can be set up in the desired location.
Failure to pass this feasibility check can lead to shutdowns, lawsuits, or heavy fines.
Discuss the role of Trend Spotting in identifying business opportunities.
Trend Spotting involves identifying changes in consumer behavior, technology, or society before they become mainstream.
Role in Opportunities:
- First Mover Advantage: Spotting a trend (e.g., AI, organic food) early allows entrepreneurs to establish a brand before the market gets crowded.
- Innovation: Trends often reveal unmet needs that require innovative solutions.
- Longevity: Distinguishing between a short-lived 'fad' and a long-term 'trend' ensures the business model is sustainable.
- Examples: The shift towards remote work created opportunities for Zoom and Slack; the trend towards sustainability created opportunities for EVs.
What is the Payback Period method in financial feasibility? Provide an example.
The Payback Period is the length of time required to recover the cost of an investment. It is a simple measure of investment risk and liquidity.
Formula:
Example:
If a project requires an initial investment of 25,000:
A shorter payback period is generally preferred as it means the capital is at risk for less time.
Evaluate the importance of Managerial Competence in the assessment of project viability.
Even the best business idea can fail with poor execution. Managerial Competence assesses the ability of the entrepreneur and their team to execute the project.
Key Areas of Evaluation:
- Experience: Does the team have prior industry experience?
- Skills: Is there a balance of technical, marketing, and financial skills?
- Leadership: Can the entrepreneur motivate employees and manage stakeholders?
- Adaptability: Can the management pivot strategies during crises?
Investors often quote: "I'd rather invest in a B-grade idea with an A-grade team, than an A-grade idea with a B-grade team."
Explain the Zero-Level Filtering process in opportunity selection.
Zero-Level Filtering (or preliminary screening) is the initial step where an entrepreneur quickly discards unviable ideas before investing time in a detailed feasibility study.
Common Filters:
- Personal consistency: Does the idea align with the entrepreneur’s values and goals?
- Government Policy: Is the business legally prohibited?
- Capital constraint: Is the required capital drastically higher than what can be raised?
- Raw Material: Is the core resource completely unavailable?
This saves resources by narrowing down a list of 50 ideas to perhaps the top 3-5 for detailed analysis.
Describe the Project Feasibility Report and its structure.
A Project Feasibility Report is a comprehensive document that details the findings of the feasibility study. It serves as a roadmap for the entrepreneur and a proposal document for investors/banks.
Typical Structure:
- Executive Summary: Brief overview of the project.
- Project Background: Objectives and promoters' profile.
- Market Analysis: Demand-supply gap, target market, marketing strategy.
- Technical Analysis: Technology, location, layout, capacity.
- Financial Analysis: Cost of project, means of finance, projected balance sheets, profit/loss, ROI, BEP.
- Risk Analysis: Potential risks and mitigation strategies.
- Conclusion: Final recommendation on viability.
How does Idea Generation differ from Opportunity Assessment?
Idea Generation:
- Nature: It is a creative process.
- Focus: Creating as many concepts as possible (Brainstorming).
- Output: Raw, unpolished concepts.
- Reality Check: Low. Ideas can be unrealistic.
Opportunity Assessment:
- Nature: It is an analytical and critical process.
- Focus: Evaluating ideas to see if they can become profitable businesses.
- Output: Validated business propositions.
- Reality Check: High. Involves market research, financial projections, and feasibility checks.
Essentially, an opportunity is a business idea that has been proven to be attractive, durable, timely, and anchored in a product or service that creates value.