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PORES analysis

The entrepreneurial evaluation process: assessing the merit of a business idea and a means of exploiting it.

PORES analysis stands for Profit Opportunity Recognition and Exploitation Strategy. It involves both components of entrepreneurship, namely the ability to recognise a profit opportunity and the capability to exploit it. PORES analysis is aimed at providing a means of ensuring that entrepreneurs address the analytical issues that underpin the completion of a rigorous business plan. It forces entrepreneurs to address core analytical issues, namely to provide evidence to support the claim that a market gap exists (with associated quantitative revenue projections) and to justify/find an optimal strategy to exploit it. It is not intended as a ‘must do’ template. Some students, through other means (alternative frameworks or independent thought processes) will be able to provide satisfactory answers to all the questions posed in a PORES analysis. For these students, PORES can provide a useful checklist in order to ensure that they have not overlooked any core analytical issue relating to the viability of a venture. At the other extreme, students may want to use PORES more intensively by working through the sequential analytical process inherent in PORES. Of course, a combination of both approaches is feasible and the most popular approach among the students.

We begin at the point where we think we might have a good idea for a new venture. Presumably we have undertaken some cursory assessment of the nature of the market and the resources necessary to supply it. We now want to reduce the risk of failure and maximise profit potential by rigorously assessing the credibility of the new venture idea. Furthermore, even if the new venture is viable, we also need to consider whether we would still be better off by cooperating with an existing firm. Thus the evaluation also entails a comparison of all career options see Figure 3.1.

Our initial starting point provides us with the option of an income A from our current occupation/best alternative venture and an uncertain (denoted by ‘?’) reward from the business idea. We want to examine how one assesses the viability of the venture. There are two stages to the evaluation process.

Stage 1: Identify key assumptions and check that they are correct. What are the key assumptions (no other supplier in the market, access to key resources such as a patent, shop location, lack of competitors) which signal the viability of the venture? Have we verified that these are correct? After this process we should re-estimate the viability of the venture. The viability depends on whether a market exists and whether the venture can supply it with a suitable product at a competitive price. The procedure involved in assessing this is time consuming and hence we do not want to embark on such a task if one or two key facts can immediately rule out (in?) its viability. A good starting point is to calculate a breakeven point for the venture (which includes a satisfactory income for the founder). This will define the level of price and volume of sales that are necessary in order for the venture to survive. Can these be quickly ruled out as unrealistic? Similarly, can you access all the resources necessary for supply? For example, a new retail outlet may require a unique form of renovation/construction of an existing building which requires district planning permission. The venture may discover that the local council is not willing to provide approval and hence the project is immediately non-feasible if this specific location is pivotal to viability.

Stage 2: If the key assumptions appear to be accurate or any revision of them still permits scope for a viable venture, it is then time to evaluate each aspect of the profit opportunity and develop a strategy to exploit it.

We now refer back to Figure 3.1. Initially, an individual has the option of an income from their current occupation and the alternative uncertain income (and possible loss) from the development of the new venture. It is not clear as yet whether the new venture will entail a new independent firm start-up or a joint venture with an existing firm.

The first issue is to assess whether a market exists or not. If there is a negligible market gap then there is little point in trying to figure out a means of supplying it. This entails an assessment of the size of the market. How many buyers are there, how much will they buy and what are they willing to pay? There is also the issue of identifying the unique selling points (USPs) product characteristics which will motivate consumers to buy the product. It may be necessary to do this on two levels. The first is to identify the entire market and the second is to assess what proportion of this will be taken by competitors. This should start to give an indication of a feasible price band. It is also key in this process to have the ability to name customers. Thus, research should also entail approaching customers to gain an insight into their demands and also approaching competitors (or similar suppliers in other markets) to assess their price and product characteristics. One must also keep an eye on dynamics. Namely, how is demand in the market likely to change over time? Issues include the stage of the product life cycle, demographics, legal change and the business cycle. By the end of this process you should be able to identify price, volume of sales and hence revenue projections. They are preliminary because we have yet to factor in the impact of competitors’ response to the venture. In addition, assessment of the market identifies unique selling points

which in turn define the need for key specific resource requirements for the venture.

Obviously, if a market does not exist then the venture is not viable and, in terms of income, the prospective entrepreneur would be better off sticking with their current career or look for an alternative business idea/venture and there is no need to proceed with further with this current investigation. Alternatively, if a reasonable market does exist they will now want to examine their personal capability to supply a product that meets consumers’ desires in terms of characteristics and price. Therefore, they will now proceed to the issue of supply capability.

The mission here is to assess whether the entrepreneur has the ability both to acquire resources and to do so at a reasonable cost. Our usage of the term ‘supply’ refers to all the activities necessary to sell the product to the consumer and receive payment. It therefore entails technology, production, distribution, marketing, promotion, financial management, administration and after-sales service. Ensuring that all these activities are executed in a way that maximises profits will also define the type and structure of the firm.

Strategy will play a major role here as a venture will often attempt to trade supply cost with quality in a manner that generates the best profit from market demand (which has now been identified). This also entails constructing strategy within the confines of the entrepreneur’s own constraints, namely financial, limitations on key personnel (and their skills and business contacts), and the ability to secure technology, equipment, premises and suppliers. The dynamic dimension of strategy will play a role here as these constraints are likely to vary across time. Usually, this implies more modest strategies at start-up with more ambitious strategies employed when firm performance boosts resources and hence relaxes these constraints. These decisions will have ramifications which will affect the form of the firm (sole trader, limited company, etc.), strategic alliances (with suppliers and consumers), management structure, key managerial personnel, financial structure (loan versus equity, enterprise support). Furthermore, they cannot be viewed as static decisions, the choice of resources, firm structure and indeed product will usually change as the firm grows, products advance in the life cycle and market conditions change.

We now need to consider the incentives facing other firms in the market. In other words, we must put ourselves in the shoes of actual and potential competitors. Who are they? At first glance this may appear to be the firms who are already in the industry. However, this is not always the case. The opportunities facing these firms may be such that they will not be interested in exploiting ‘our’ profit opportunity. Similarly, the new venture is likely to face competition from existing firms in other markets and the arrival of new firms. So, how do we get some idea of sources of competition? Competitors must have two features. First, like the venture, they must have the capability to supply the market. Therefore, having just worked out the resources necessary to do this we can forge an idea of who else has access to the same resources and hence the number of potential

competitors. It should now be immediately apparent why scarcity of these resources plays such a big role in the existence of a profit opportunity.

Fortunately, not all firms who have the capability to exploit the opportunity will choose to do so. They may have more promising profit opportunities elsewhere, which may constrain their ability to exploit the opportunity or may only permit them to do so at a prohibitive cost. Alternatively, they might appear to have an incentive to do so, but by not entering ‘our’ market niche they give us a signal that ‘they will not touch our market if we don’t touch theirs’ – of course such an approach is likely to be in breach of competition law when ‘shaming’ markets in this manner is against public interest. A multitude of possibilities exists. The key point here is that we must examine the relative rewards facing potential competitors. The attractiveness of our market is relative to the profit opportunities available to these firms elsewhere. Similarly, if they do enter how will their supply capability compare to that of the new venture? They will be less likely to enter if the new venture has large cost or quality advantages.

Having evaluated likely competition we may then decide to re-evaluate strategy and indeed the profit opportunity itself. This then defines the final entrepreneurial strategy. For example, we may decide to sacrifice a market segment in order to avoid head-on competition. This way we may hope that our market niche will be more secure. If we fear that potential competitors have a better supply capacity than us, we may seek to form an alliance with a potential competitor where they supply a large component of the final product or service. This outsourcing may alleviate the fear of competition if joint interests dominate. In the extreme we may decide that start-up is no longer viable in the face of potential competition. Alternatively, with the profit opportunity and strategy well researched, we may decide the best option is to approach an existing firm with the idea and seek to initiate a joint venture. The entrepreneur may already be working with this company (most profit opportunities are identified from our own experience of the market and hence existing employers are very often potential competitors).

With these outcomes identified to the best of the entrepreneur’s ability, one can now choose between independent firm start-up, joint venture/alliance and an existing career. Thus arriving at a final entrepreneurial strategy is a sensible prerequisite in order to be able to choose between various career options (when one of these options is entrepreneurship). If firm start- up is not viable and the prospect of intrapreneurship is poor, then the decision should be easy, namely stick with employment.1 As we know, many individuals do not choose the most financially attractive option and may choose to go into firm start-up even though there are greater financial rewards available from intrapreneurship and/or their current occupation. These entrepreneurs may be stimulated by a desire for independence possibly to reduce effort, decide their own working hours, or to pursue a dream career or philosophy. These quasi-profit-orientated firms pose serious policy issues for enterprise policy. Namely, in many cases economic

performance would be greater if the individual did not choose to become self-employed but chose intrapreneurship or their current occupation.

Of course, PORES analysis is not a once-only static analytical process. Since the market will evolve over time and since the firm’s capabilities and market understanding will change with business experience, it follows that profit opportunities will evolve over time too, thus requiring ongoing venture evaluation. Thus, PORES analysis must be a dynamic process it must begin again almost as soon as it has finished.

If the prospective entrepreneur decides to start a new firm or pursue intrapreneurship, then the next stage is to write up the PORES analysis in business plan form.