Chapter 3 THE IDENTIFICATION AND DEVELOPMENT OF BUSINESS IDEAS

CONTENTS PAGE

3.1 LEARNING OUTCOMES 408

3.2 KEY CONCEPTS

3.3 A MIND MAP FOR CHAPTER 3

3.4 OVERVIEW

3.5 THE THREE STAGES IN CREATING AN ENTERPRISE

3.6 CULTIVATING A CREATIVE ATTITUDE

413 3.6.1 What is creativity?
414 3.6.2 Divergent and convergent thinking
415 3.6.3 Methods of cultivating a creative attitude 6
416 3.6.4 Techniques to enhance the creativity of teams

3.7 GENERATING BUSINESS IDEAS

3.8 THE DEVELOPMENT AND EVALUATION OF BUSINESS IDEAS

419 3.8.1 The development of business ideas
3.8.2 The evaluation of business ideas 21

3.9 THE FEASIBILITY OF BUSINESS IDEAS

422 3.9.1 What is feasibility?
423 3.9.2 Why do we do a feasibility study? 4
424 3.9.3 How do we do a feasibility study?
425 3.9.4 The difference between feasibility and viability

3.10 SUMMARY 427

3.11 SELF-ASSESSMENT

3.12 SUGGESTED SOLUTIONS TO THE SELF-ASSESSMENT QUESTIONS

429
 3.1 LEARNING OUTCOMES

When you have worked through chapter 3, you should be able to

 list and explain the three stages in creating an enterprise

 define creativity
 distinguish between divergent thinking and convergent thinking and
explain why both these abilities are essential for creative output
 list and explain the five methods that can be used to cultivate a creative
attitude
 list and discuss the five approaches that can be followed to generate
business ideas
 explain what a feasibility study is
 explain the purpose of using a bow-tie diagram
 list the four questions that must be answered when you conduct a
feasibility study
 explain the difference between a feasibility study and a viability study

3.2 KEY CONCEPTS

You will need to master the following key concepts to achieve the learning outcomes
for this chapter:

 idea stage
 planning stage
 implementation stage
 creativity
 creative attitude
 divergent thinking
 convergent thinking
 feasibility study
 viability study
 bow-tie diagram
3.3 A MIND MAP FOR CHAPTER 3

Actively seek Write ideas Break Different Explore grey

ideas down routine perspectives areas

CULTIVATE A CREATIVE ATTITUDE

Skills Everyday
Common Existing Other
Expertise activities
needs problems sources
Aptitudes

GENERATE BUSINESS IDEAS

DEVELOP BUSINESS IDEAS

Bow-tie diagram

EVALUATE BUSINESS IDEAS

FEASIBILITY STUDY

3.4 OVERVIEW
Chapter 3 deals with the idea stage, the first stage in the creation of an enterprise.
The idea stage focuses on identifying, developing and evaluating feasible business
ideas. As a prospective entrepreneur, you have probably already thought of possible
business ideas, or you may still be looking for a good idea. In this chapter you will
get the opportunity to identify and develop various ideas.

Since identifying business ideas is a creative process, you must be able to assume a
creative attitude. We will explain how you can apply divergent and convergent
thinking in order to become more creative, and we will introduce you to different
techniques to help you to cultivate a creative attitude. We will also discuss the
different approaches that you can use to generate business ideas.
Only one of the ideas that you have generated can be converted into an enterprise.
You must therefore be familiar with the methods you can use to develop and
evaluate your business idea. We will explain how you can use a bow-tie diagram to
develop your idea, and a feasibility study to evaluate your idea. We will also explain
the difference between a feasibility study and a viability study.

3.5 THE THREE STAGES IN CREATING AN ENTERPRISE

The creation of an enterprise can be divided into three main

stages:
* the idea stage (chapter 3)
* the planning stage (chapters 4 and 5)
* the implementation stage (chapter 6)

These three stages form the theme of the rest of the module.
The idea stage
Definition: Identifying and generating feasible business ideas. During this stage, the
entrepreneur cultivates a creative attitude, identifies opportunities, generates and
develops business ideas, chooses a suitable idea and tests the feasibility of this
idea.

The planning stage

Definition: Investigating the profitable exploitation of the idea and drawing up a
business plan. This is the decision-making stage where the entrepreneur tests the
viability of the idea by investigating the market and profit potential of the idea. The
entrepreneur has to decide on the products he or she wants to offer and determine
the potential consumers, target market and expected market share. He or she has to
calculate the total cost per unit, decide on the selling price and determine the profit
potential of the idea. If the entrepreneur is satisfied with the results of the viability
study, he or she has to draw up a business plan.

Implementation stage
Definition: Put the idea into practice by starting the enterprise. This stage entails all
the actions that the entrepreneur has to take to start the enterprise. The
entrepreneur has to register the form of enterprise, comply with legal requirements
and implement the eight functions of the enterprise.

Refer to the figure in the figure 3.1 above for an illustration of this three
stage process.

3.6 CULTIVATING A CREATIVE ATTITUDE

In chapter 1 we mentioned that creativity is one of the personal characteristics of an
entrepreneur. An innovative business idea can be very satisfying, but it can also
become a huge headache. You must convince people that there is a need for your
product or service and therefore you should try to provide specialised or exceptional
products or services to distinguish your enterprise from other competitive
enterprises. To be able to do this, you must act creatively.

3.6.1 What is creativity?

Creativity is the ability to consider a topic in various ways and come up with
something new or identify new ideas.

We could also define creativity by saying that it is seeing the same thing as
everybody else but thinking of something different. You must be able to generate
new possibilities or alternatives.

3.6.2 Divergent and convergent thinking

Creative thinking can be divided into divergent and convergent thinking. It

is important that you study the definitions of both of these concepts in the
prescribed textbook. Both of these abilities are essential for creative
output.

Divergent thinking
 the ability to think of many original, diverse and elaborate ideas
 essential to the novelty of creative products
 right brain dominant – see things in a perceptual manner

Convergent thinking
 the ability to logically evaluate and choose the best idea from a selection of ideas
 essential to the appropriateness of the products
 left brain dominant – see things in an analytical manner
3.6.3 Methods of cultivating a creative attitude

Activity

We sometimes wonder if creativity is a given.

Try to answer the following question: Are you born with creativity or is it
possible to develop and improve your creative abilities?

Feedback

Some people are born with the gift of being creative, and it is possible to
develop and improve your creative abilities. Creativity is just as much an
attitude as it is a manner of thinking. You can think of new ideas by getting
used to being creative.

You can cultivate a creative attitude using the following

methods:
* actively seeking ideas
* writing your ideas down
* viewing a topic from another person’s perspective
* breaking your routine
* exploring grey areas

These methods will be full discussed during lectures.

3.6.4 Techniques to enhance the creativity of teams

Read the discussion on the techniques and tools that can be used to
enhance team creativity.

3.7 GENERATING BUSINESS IDEAS

The techniques for generating business ideas can be divided into five
broad approaches. You must be able to explain these approaches and to
give examples of each of them.

The entrepreneur’s skills, expertise and aptitudes

 Skills refer to manual work and can be learned. Skills can be gained through
training and formal studies.
 Expertise is based on knowledge acquired by experience.
  Aptitudes refer to born talents.

Common needs
 Try to satisfy a need among various people for the same product, by grouping
people with the same need together.

Existing problems
 Make a list of your problems, or a list of problems that other people
experience.

Everyday activities
 Be aware of activities that you perform every day, such as going shopping,
looking at advertisements or talking to other people.

Other sources
 Consider the use of sources such as the Yellow Pages, business publications,
inventors’ associations, expired patents, advertisements and trade shows.

3.8 THE DEVELOPMENT AND EVALUATION OF BUSINESS IDEAS

3.8.1 The development of business ideas

It is important to realise that although you were encouraged not to limit your creativity
in the previous section, not all of these creative ideas will work. Only one of your
ideas can be converted into an enterprise on its own or in combination with one or
more of the other ideas on your list.

Before you can evaluate your business idea, you must be

clear about the following two matters:
* What are the main business activities?
* Who are your consumers?

What are the main business activities?

The main business activities may be one or more of the
following:
 the manufacturing of a product
 the provision of a service
 the selling of other people’s products or services
462
Who are your consumers?
The consumers may be either or both of the
following:
 individuals
 organisations
3.8.1.1 The bow-tie diagram

The bow-tie diagram is illustrated in the during lectures.

A bow-tie diagram can be used to illustrate the possible business activities

and consumers of an enterprise, and to help the entrepreneur to develop
his or her business idea.

The bow-tie diagram provides six options for your business:

 manufacturing products for individuals
 providing services for individuals
 selling other people’s products or services to individuals
 manufacturing products for organisations
 providing services for organisations
 selling other people’s products or services to organisations

The bow-tie diagram can be used to develop your business

idea in terms of
* the essence of the idea
* the possible combination of ideas
* taking a new direction with the idea
3.8.2 The evaluation of business ideas

Activity

How do you choose the right business idea?

Feedback

Evaluate each of the ideas on your list by means of a feasibility study.

3.9 THE FEASIBILITY OF BUSINESS IDEAS

3.9.1 What is feasibility?

Activity

How would you define a feasibility study? Can you explain the focus of this study?

Definition of a feasibility study

A feasibility study is a general examination of the potential of
the idea to be converted into an enterprise. This means the
entrepreneur has to determine whether it would be practically
possible to convert the idea into an enterprise.

Focus of a feasibility study

This study focuses on the ability of the entrepreneur to convert the idea
into an enterprise. This means the entrepreneur has to determine whether
he or she has the skills and expertise to convert the idea into an
enterprise, and whether the idea matches his or her aptitudes.

To be feasible, it must be practically possible to convert the idea into

an enterprise.

3.9.2 Why do we do a feasibility study?

We do a feasibility study to determine the

* potential of the idea to be converted into an enterprise
* ability of the entrepreneur to convert the idea into an
enterprise
3.9.3 How do we do a feasibility study?

We do a feasibility study by answering the following four

questions:
* Do I want to do what the idea suggests?
* Is there a market for my idea?
* Can I meet the needs of my consumers?
* Can I get the idea to my consumers?

To understand, interpret and apply these questions. It provides a detailed

explanation of how a feasibility study is done.

3.9.4 The difference between feasibility and viability

Although feasibility and viability are two different concepts, they are easily confused.
We have already explained that a feasibility study entails a general examination of
the potential of the idea to be converted into an enterprise and that it focuses on the
ability of the entrepreneur to convert the idea into an enterprise.

Activity

How would you define a viability study? Can you explain the focus of this study?

Definition of a viability study

A viability study is an in-depth investigation of the market and
profit potential of the idea.

Focus of a viability study

This study focuses on the market and profit potential of the idea. This
means the entrepreneur has to determine whether consumers would buy
his or her products and whether the expected market share would be
sufficient. The entrepreneur has to determine a competitive selling price
that covers the cost per unit and would still generate enough profit.

To be viable, the enterprise has to generate enough cash over the

short term, as well as sustainable profits over the long term.

467Important: Remember that you can only proceed to the viability stage if your
idea turns out to be feasible. If your idea is not feasible, you have to identify, develop
and evaluate new ideas.
 You have now reached the end of chapter 3.

3.10 SUMMARY

In this chapter you have learnt the first step in the creation of an enterprise, namely
identifying, developing and evaluating feasible business ideas. We explained the
importance of creativity, how to apply creativity techniques, as well as the
approaches to generate business ideas. We also paid attention to developing and
evaluating the feasibility of business ideas.

We hope you have gained the necessary knowledge to do a feasibility study so that
you can evaluate your business ideas. It is important to remember that, if your idea
turns out not to be feasible, you cannot continue to the next stage in the creation of
an enterprise. You will then have to identify new ideas, develop them and test the
feasibility of these ideas again.

If your idea is feasible, you can move on to the first part of the planning stage, the
viability study, which we will discuss in chapter 4.

3.11 SELF-ASSESSMENT

To test and assess your knowledge of this chapter, Complete the self-assessment
questions on chapter 3 below. Remember: The only way you can test your knowledge
is by answering the questions.

Read the case study below and answer all the questions that follow.

Case study: Power for the Nation

Power cuts have become a real problem for all Botswana Citizens, as we suddenly
have to schedule our daily lives around BPC’s load shedding. This situation also has
a serious effect on the business sector – without power, no manufacturing, trading or
service can take place. Businesses have to choose to either close their doors for the
period of load shedding and, as a result, suffer losses of thousands of Pula, or to
provide their own power by means of their own generators.
However, the old proverb that “one man’s death is another man’s breath” also
applies to the above situation. When BPC announced its plans for load shedding,
Winston Leatile immediately identified an opportunity to sell generators to
households and small businesses. After speaking to some of their acquaintances
and shop owners in Francistown, Leatile and his wife, Kimberly, came to the
conclusion that the biggest demand would be for small generators that could meet
the basic power needs of an average household for at least four hours, and slightly
bigger generators for small businesses.

Leatile and Kimberly decided to import generators from China and started their own
enterprise, Light up the nation. They registered the enterprise as a partnership. As
they only needed some office space and could use their garage to store the
generators, they decided to run the enterprise from their home in Francistown. They
invested P100 000 of their savings in the enterprise and applied for vehicle financing
of P200 000 to buy a small second-hand truck. They also applied for a loan of P90
000 to finance the import of their first consignment of generators. Since Winston and
Kimberly decided to place orders according to the orders they had received from
their clients, they would have a guaranteed income at the end of each transaction.
Clients would have to pay for the generators as soon as they had been delivered and
installed, so that Light up the nation could have enough cash to pay for the next
consignment from China. They found a supplier in China that agreed to manufacture
the generators on an order basis. The supplier would then use a shipping agent to
load a container to be sent by ship to Botswana harbour in Namibia. From there the
generators would be transported by road to Francistown by an independent transport
agency.

The first consignment was sold out within the first week, and Light up the nation
already had a waiting list of clients who had placed orders. The prices of their
generators were slightly higher than those of their main competitors. Since big
hardware stores and chain stores such as Builders Warehouse and Game could
order in bulk, they could charge lower prices. The competitive advantage of Light up
the nation, however, was that their selling price included the cost of delivery and
installation. Leatile would deliver the generators personally to the clients and do the
installation, should the need arise. As Leatile was a qualified electrician, he went to
China for training in servicing and repairing the generators. An ordinary generator
needs to be serviced after every 1 000 hours. Part of the purchasing agreement with
the manufacturer in China entailed that Leatile would receive free spare parts equal
to 10% of the monetary value of each consignment of generators.

Since Leatile and Kimberly started importing these generators six months ago, the
enterprise has grown to such an extent that they had to rent a warehouse in an
industrial area to store the generators. The need for alternative power will definitely
not decline within the near future, since BPC has already indicated that there is no
short-term solution to the electricity shortage in Botswana. However, Leatile and
Kimberly are aware of the fact that if they want to survive over the long term, they will
have to extend their target market to other suburbs as well.

MULTIPLE-CHOICE QUESTIONS
480
1. Winston Leatile identified the opportunity to sell generators to households and
small businesses during the ... stage in the creation of Light up the nation.
481 1) idea
482 2) planning 483
483 3) viability
484 4) implementation
48
52. Leatile and Kimberly invested P100 000 of their savings in the enterprise during
the ... stage in the creation of Light up the nation.
486 1) idea
487 2) planning 488
488 3) viability
489 4) implementation

03. Leatile and Kimberly decided to import generators from China during the ...
stage in the creation of Light up the nation.
491 1) idea
492 2) feasibility 493
493 3) planning
494 4) implementation
495
4. To come up with creative ideas, Leatile and Kimberly had to apply divergent and
convergent thinking. Divergent thinking …
496 a) entails the ability to evaluate ideas logically.
497 b) is essential to the novelty of creative ideas.
498 c) entails the ability to think of many original ideas.
499 d) is essential to the appropriateness of the products.
500

501 Choose the correct option:

502 1) a, b 2) b, c 3) c, d 4) b, d
503 5
5. If Leatile and Kimberly judged everything they observed on the strength of the
ideas they could develop from it, they would have ... as a method to cultivate a
creative attitude.
506 1) actively sought ideas
507 2) written their ideas down
508 3) viewed the topic from another person’s point of view
509 4) explored grey areas
510

6. If Leatile and Kimberly used the breaking of their routine as a method to cultivate
a creative attitude, they would have ...
511 a) taken note of how they performed their everyday activities.
512 b) started conversations with strangers.
513 c) done things that they had never done before.
514 d) explored the grey areas between right and wrong.
515

516 Choose the correct option:

517 1) a, b
518 2) a, c, d
519 3) a, b, c, d 519
520 4) a, b, c
521
7. As Leatile was a qualified electrician, he went to China for training in servicing
and repairing the generators. Leatile used his ... to generate the idea of
servicing and repairing the generators himself.
522 1) skills
523 2) expertise
524 3) aptitudes
525 4) natural talents
526

8. After speaking to some of their acquaintances and shop owners, Leatile and
Kimberly came to the conclusion that there was a big need for generators in
Francistown. They used … to generate the idea of importing generators from
China.
527 1) everyday activities
528 2) Leatile’s skills, expertise and aptitudes
529 3) common needs
530 4) other sources
531
9. Leatile and Kimberly would have used a … to develop their business idea of
selling generators to the residents of Francistown.
532 1) bow-tie diagram
533 2) profit analysis
534 3) feasibility study 535
535 4) viability study
536

10. Leatile and Kimberly had to conduct a feasibility study to ...

537 a) do a general examination of the idea.
538 b) determine their ability to convert the idea into an enterprise.
539 c) determine the market potential of the idea. 540
d) determine the profit potential of the idea.

541 Choose the correct option:

542 1) a, b
543 2) a, c
544 3) a, d
5454) c, d
546

3.12 SUGGESTED SOLUTIONS TO THE SELF- ASSESSMENT

QUESTIONS IN 3.11
546
1. 1
547During the idea stage the entrepreneur identifies, develops and tests the
feasibility of business ideas. Option 2 refers to testing the viability of the idea and
drawing up the business plan, option 3 forms part of option 2 and option 4 refers to
the actions that the entrepreneur has to take to convert the idea into an enterprise.
548
2. 4
550During the implementation stage the entrepreneur takes all the actions to convert
the idea into an enterprise. Option 1 refers to identifying and testing the feasibility of
ideas, option 2 refers to testing the viability of the idea and drawing up the business
plan and option 3 forms part of option 2.
551
3. 3
552The planning stage represents the decision-making stage. During this stage, the
entrepreneur has to make all the decisions concerning the proposed enterprise and
also has to decide whether the idea is viable. Option 1 refers to identifying and
testing the feasibility of ideas, option 2 forms part of option 1 and option 4 refers to
the actions that the entrepreneur has to take to convert the idea into an enterprise.
553
4. 2
554Divergent thinking entails the ability of the entrepreneur to think of many original,
diverse and elaborate ideas. This is essential to the novelty of creative products.
Options a) and d) refer to convergent thinking. Therefore, only option 2 can be
correct.
555
5. 1
556When applying this method, entrepreneurs learn to judge everything that they
read or observe on the strength of the ideas they can develop from it. Option 2
relates to putting the ideas on paper, option 3 relates to getting a better
understanding of other people’s perspectives and option 4 relates to exploring the
grey areas between right and wrong. 557

6. 4
558Option d) is incorrect, because it relates to another method of cultivating a
creative attitude. Option 1 is incorrect, because it does not include option c), which is
also an example of breaking your routine. Therefore, only option 4 can be correct.
559
7. 1
560Skills can be learned and can also be obtained from formal training. Leatile
studied to become a qualified electrician. Option 2 refers to experience. Options 3
and 4 are actually the same, as aptitudes refer to born talents.

561
8. 3
562Option 1 refers to the fact that Leatile and Kimberly have to be aware of their
daily routines. Option 2 refers to their qualifications, experience and natural talents.
Option 4 refers to the use of other sources, such as the Yellow Pages, business
publications and expired patents. Leatile and Kimberly listened to their clients and
identified that all of them experienced a need for generators.
563
9. 1
564A bow-tie diagram is used to develop ideas in terms of the essence of the idea,
the possible combination of ideas and the possibility of taking a new direction with
the idea. Option 2 refers to the profit potential of the idea and forms part of option 4,
option 3 refers to the potential of the idea to be converted into an enterprise and
option 4 refers to the market and profit analysis of the idea.
565
10. 1
566A feasibility study is a general examination of the potential of the idea to be
converted into an enterprise. This study focuses on the ability of the entrepreneur to
put the idea into practice. Options c) and d) form part of the viability study which
focuses on the market and profit potential of the idea. Therefore, only option 1 can
be correct.