The Ultimate Opportunity Framework

Introduction

Every successful business gets built around a good opportunity.1 A Master Entrepreneur must
learn to assess opportunities because neither hustle nor clever deal-making can create a profitable
business out of a “bad” opportunity.

From an investor’s perspective, an attractive opportunity is a venture with a high probability of

producing much more in cash flow than it requires in investment, and of generating these profits
quickly and with little risk.

If you are ever in doubt when analyzing an opportunity, always go back to Bill Sahlman’s Four
Rules of Cash:

• More cash is better than less cash;

• Cash sooner is better than cash later;
• Less risky cash is better than more risky cash; and above all else
• Never run out of cash!

Moreover, for an opportunity to be attractive to you as an entrepreneur, it must also fit well with
your skills, risk preference, patience, values and aspirations.

Even with your self-knowledge and Sahlman’s simple rules, however, opportunity analysis can
be overwhelming at first. For any given opportunity you have an almost infinite set of choices
with regard to customers, cost structure and competitive positioning, all within an ever-changing
context. Only by examining these choices discretely, and experimenting with different
combinations, can you choose the arrangement likely to give you the most money, for the
smallest investment, in the least time, with the lowest risk.

The Ultimate Opportunity Framework – a subset of the FIT Framework introduced in Acton’s
Entrepreneurial Journey Course – is a sequence of questions that replicates the thought process
of a skilled entrepreneur assessing an opportunity. This Framework will guide your analysis as
you prepare cases in OPP and help you lay out your arguments in class discussion. With
practice, you’ll come to apply the Framework questions skillfully and reflexively. With more
practice, you’ll internalize the skilled entrepreneur’s “expert system.”

The Ultimate Opportunity Framework follows the same three-stage process that a thoughtful
entrepreneur follows when evaluating an opportunity:

1 Amar Bhide’s research at the Harvard Business School suggests that most successful and sustainable businesses
start by copying or slightly modifying another firm’s strategy, hustle until they can sell a few key customers, and
then eventually find a defendable strategy with a business model that is scalable.
Copyright © 2009 by the Acton Foundation for Entrepreneurial Excellence. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form – without the written permission of the Acton Foundation for Entrepreneurial Excellence.

The AFEE curriculum is used in its entirety at the Acton School of Business, based in Austin, Texas, an intense one year program taught
exclusively by successful entrepreneurs. To learn more, visit www.actonmba.org.
 (1) Basic Analysis: Explore the elements of the opportunity – Customers, Costs,
Competition and Context.

(2) Strategy Selection: Choose a particular combination of the elements to create a specific
venture – which customers, which production method, which competitive strategy and
when is the best time to launch? Identify the Key Success Factors of the venture – the
three or four tasks you must execute better than anyone in order to succeed. Determine
the people and resources you’ll need and the minimum commitment of time and money
required.

(3) Expected Outcome: Estimate the cash flows to the firm of your proposed venture.
Compare expected cash flow with patterns from other businesses. Imagine what it would
be like for you to run this business.

While even an exceptionally thorough analysis cannot ensure your success, it will greatly shift
the odds in your favor. But use this framework with care! A checklist can never substitute for
curious questioning or original thinking.

Basic Analysis

A thorough analysis of any opportunity starts by examining its discrete parts:

Customers, Costs, Competitive Positioning and Context.

An entrepreneur must start with an unsatisfied customer need and look for a way to satisfy it.

The Customer

Ted Levitt of the Harvard Business School once said: “The purpose of a business is to create and
retain customers.” You must understand exactly what a customer wants, what they are willing to
pay, and how many customers will purchase the product (and how many units) over what period
of time.

Imagine your customer’s life before they had your product. What was missing? What
frustrations did they have? How did they manage before your product arrived? Put yourself in
the customer’s shoes. Feel what the customer is feeling.

Now imagine how the arrival of your product has changed their life. What did the customer have
to sacrifice (or pay) to buy your product? Was it worth it?

Customer Need

2
 • What exactly does your target customer need or desire?
• How compelling is the need?
• How does a customer measure satisfaction? In what units? (What is the “unit of
desire”?)
• What specific product will satisfy the need?
• What other customers have needs that your product could satisfy?
• How quickly and accurately can a customer judge the value of your product? Which
sense – smell, taste, sight, etc. – has the greatest influence on their judgment?
• If your product is a component of your customer’s end product, how does its value and
price affect your customer’s margins?
• What is the reward for success (or the cost of failure) for the company and the individual
making the purchasing decision?
• Will the customer buy your product only once, or many times? How often?
• How will you get timely and accurate feedback from your customers?

Substitutes

• What substitutes are available to meet the same need for a given set of customers?
• How much is the customer paying for the substitute to satisfy the same “unit of desire?”
• How well does your product satisfy the need compared to the substitute? What are the
trade-offs? How much more (or less) than the substitute is your product worth?
• Considering the available substitutes, how much will a given customer be willing to pay
for your product?

Demand

• How many potential customers are there?

• At any given price, which customer groups will purchase your product instead of a
substitute?
• How quickly will they purchase the product?
• How many units will each customer buy? How often?
• How can you cheaply and accurately test demand?
• What is the ultimate size of the market?
• How long will it take to reach this level of sales, one customer at a time?

Pricing

• What price per unit should you charge?

• Should you price high (bigger margin) to “skim” or low (greater volume) to “penetrate?”
• Can you effectively charge different prices to different groups of customers?
• If you have multiple products, should you offer special prices for “bundles?”
• If customers might purchase the product more than once, should you offer volume or
“loyalty” discounts?
Costs

3
Once you can precisely define the customer’s “units of desire” and have some idea of how many
units customers will buy in total, you can begin estimating the primary sunk investment required
and the total cost of producing each unit. The crucial question: Can you make and deliver your
product or service at a sufficiently low cost to make a profit? Key questions:2

Processes

• What sales process will you use to find customers, make sales, and fulfill orders?
• What product specifications will you give the people who manufacture your product?
• What process will you use to make your specific product?
• What is the one task you must do repeatedly to make and deliver the “units of desire” that
all of your products have in common and every customer wants?
• What infrastructure will help you to deliver this common element more reliably and
economically?
• How large an infrastructure investment is required to produce your target sales volume?
• Will you run a customized process, a job shop, or a continuous process?

Unit Economics

• How much do you have to invest to build the capacity (infrastructure) to produce and sell
the “right” number of units?
• What is the variable (per-unit) cost at this level of output?
• What are the fixed period costs at this level of output?
• What is the total cost per unit of your projected output?
• How does the total cost per unit vary with output? What does it cost to make
o One unit?
o A thousand units?
o A million units?

At this point, you’re exploring the following logic chain:

Customer NEED → “Unit of Desire” BENEFIT → Product SPECIFICATION → COST

For any customer need, you must create a product or service that delivers a particular benefit and
describe the product in measurable terms so that someone on the shop floor knows what to make.
Once you’ve described the production process, you can calculate the cost of production.

For any combination of customer group and production process you can ask:
• Do you make money (contribution) on each unit sold?
• Can you sell enough units to breakeven on fixed period costs?
• How long until you expect to pay out your primary sunk investment?
• In total, how much in profits is this venture likely to generate?

2 For a more detailed description, see Note on Unit Economics.

4
Also ask: Is this a simple opportunity or a complex one? A simple opportunity is one where you
aim to sell better or to manufacture better than some existing business. A complex opportunity
is one where you try to improve both sides of the equation at once.

As you work through these questions, you will start to form an impression about which group of
customers you can most profitably serve. Pick some promising combination of customers and
process. You’re now ready to consider competition as well as the business environment in which
you will operate.

Competitive Positioning

As soon as you start making an incremental profit on each unit sold, the competition begins.
Customers will try to force you to lower your prices, suppliers will try to increase your costs, and
competitors and new entrants will try to steal your customers. Analyzing the intensity of
competition will tell you how quickly your margins will shrink and how low they will fall.

Using Michael Porter’s Industry and Competitive Analysis framework, ask:

• Which of the five forces (customers, suppliers, substitutes, new entrants and industry
participants) is the biggest threat to this business? Why?
• When will competitors enter the market?
• How quickly will your margins erode?
• What actions can you take to neutralize this force? How can you keep your prices up and
costs down?
• What barriers can you erect against potential competitors?
• How much will each barrier cost?
• How long will each barrier allow you to maintain your margins?
• Is the additional cash flow worth the cost of building the barrier?

Context

Often an entrepreneur gets so caught up in the details of starting a business that he or she will fail
to appreciate the outside forces that affect the business. You must ask: Is now the right time to
start this venture?

• Which factors beyond your control influence your prices, sales volumes and costs?
• What assumptions are you making about each of these factors?
• What if you’re wrong? What if things change?
• How might consumer demographics or tastes affect demand for your product?
• How might changes in raw materials prices or technology affect your costs of
production?
• What new substitutes could replace your product?
• How could changes in the strength of the overall economy affect your business?
• How could changes in interest rates or currency prices affect your business?

5
 • How could government action affect your business?
• To what extent is this venture “speculative?”
• Is this business based on trends? Business cycles?

At this point, you can revisit your back-of-the-envelope financial projections for the proposed
venture:

• What are the forecasted revenues?

• What are the forecasted costs?
• How will margins change over time as competitors enter and the context shifts?
• Are you likely to recover the initial investment?
• What are the total expected cash flows to the firm over time?
• Which of Bhide’s Opportunity Archetypes does this business most resemble?
• What is the discounted net present value of expected cash flows?
• What is this business worth?

Based on this preliminary analysis, you may rule out your first proposed combination of
customers and processes. Try a second combination and a third, ruling out any that don’t make
money.

Strategy Selection

You have analyzed various combinations of Customer, Costs, and Competition in your given
Context. Now you need to pick a strategy that maximizes the potential of the opportunity given
the risk you are willing to take – that is, given the commitment you are willing and able to make.

Choosing the right combination of customers, costs and competitive positioning is perhaps the
most difficult decision an entrepreneur faces as he or she stands between the chaotic wishes of
different customers who define demand and the multitude of production processes that could
supply the right products.

This puzzle is ultimately a set of simultaneous equations with far too many variables to solve.
An entrepreneur must, nonetheless, choose the subset of customers he or she can serve best while
maximizing the return on his or her investment.

In the end, “trial and error” is the best approach – always in the analysis, and often in real life,
too. By trying different combinations, and using tools like Unit Economics to forecast the likely
cash flows, you will often discover the arrangement that makes the most money for the least
investment and risk.

Of course, you will always face trade-offs between what may be the best theoretical strategy,
the best people available, and the level of commitment that you are willing or able to make. In
this section, you ask questions that help balance these trade-offs before you select your “final”
strategy and decide whether to invest.

6
Compete on Price or Quality?

All businesses must decide whether to give a smaller set of customers exactly what they want, or
to standardize production and delivery processes to serve a larger number of customers at a
lower price. Businesses that try to execute both strategies at once are almost always beaten by
competitors who specialize in one or the other.

• Should you choose a “low cost” (low margin/high volume) strategy that tries to satisfy
the largest number of customers at the lowest price; or
• Should you choose a “differentiated” (lower volume/higher margin) strategy that offers a
more customized product to fewer customers at a higher price?

How fast must we move?

Another fundamental trade-off is the speed of the roll out. Should you move fast or slow?

• Do we have time to experiment or must you move quickly to thwart competition?

• Do we seek customers first or build capacity first and hope customers will come?

Key Success Factors (KSFs)

As you make these important decisions, and your strategy comes into clearer focus, you’re ready
to identify the three or four tasks3 that you must execute better than anyone else in order to
capitalize on your opportunity. Typically, Key Success Factors involve: Customers –
convincing the customer to buy; Costs – making and delivering the product in the right way at
the right cost; and Competition – preventing others from copying your business

• What are the three or four tasks you must execute better than anyone else to convince
customers, make and deliver the product right, keep competitors out, and capitalize on
this particular opportunity?
• What are the minimum skills required to make this venture a success?
• Do you have at least some of these skills yourself?

People

With a clear picture of your venture’s KSFs, you’re ready to put together the team needed to
make it succeed. Different strategies require different skill sets to execute. As you think about
the people you want to involve in the business, keep asking: Do you have the right team for your
chosen strategy?

Key Success Factors

3 KFSs must be tangible, concrete and measurable. Vague KSFs are a sure sign of a flawed strategy.

7
 • Do key team members have skills that directly match the KSFs for this venture?
• Does the team have deep knowledge of the industry and good contacts?
• Do you have someone who can raise enough money quickly enough to supply the needs
of your business?

Motivation

• Do you have direct evidence that key team members have integrity, intelligence and drive?4
• What career alternatives do team members have? Is the proposed venture in their best
interests?
• How could the family situations of key team members affect their performance?
• Is there good chemistry between the team members?
• Can you tie compensation directly to the KSFs and making money?

New Hires

• What skills do you need early in the life of the venture?

• Should you hire less talented people now or spend more to hire more talented people in
anticipation of growth?
• How much of the company will you have to give up to attract the right people?

With these questions, you’re exploring the following logic chain:

OPPORTUNITY → KSFs → PEOPLE → DEAL

The specific strategy you choose for capitalizing on the opportunity determines the three or four
tasks where superior execution is critical. You need people with the right skills and motivation
to get the job done better than any competitor.

How big a commitment does this strategy require?5

Different strategies require different levels of investment. The question is whether the additional
cost and risk is worth it.

• What’s the minimum amount of money it will take to “bootstrap” this opportunity?
• How much cash will you be losing in the early months and years (“burn rate”)? How
much cash do you have? How much time does this give us to establish positive cash flow
(“fume date”)?
• How much more money would you have to invest to grow the business more
aggressively? How will you recover this investment?
• How much of the investment (if any) are you likely to recover if your venture fails?

4 Warren Buffet holds that the last two attributes without the first is a dangerous combination.
5 You’ll get different answers to the following questions depending on whether you price high or low, move fast or
slow.

8
How do you change the odds in your favor?

While some decisions require real trade-offs (zero sum decisions), often there are ways to lower
the investment required, reduce the risk or increase the payout (make the pie bigger). Many
times, the difference between success and failure is your ability to creatively “change the odds.”

To change the odds, ask:

• Can you find investors who bring more than money – investors with spare production
capacity for your product or special access to customers?
• Can you borrow or rent non-critical assets in order to preserve cash?
• Can you design incentives that attract the right people (and deter the wrong people) and
encourage everyone to work harder?
• Can you get each participant in the deal what he or she values most? Who will take more
risk for a bigger share of the profits? Who wants non-monetary compensation? How can
you divide anticipated gains so that you “make the pie bigger?”
• Can you stage the investment? What’s the smallest investment that will resolve your
biggest uncertainties? Can you arrange to learn what you need to know by “failing on the
cheap?”

Expected Outcomes

Having decided on your particular customers, cost structure, competitive positioning and level of
commitment, determined your Key Success Factors, and imagined a team and a deal; you’re
ready to calculate carefully the likely cash flows your business will produce, compare your
strategy and opportunity with patterns based on other businesses (Archetypes), and decide
whether the proposed venture fits well with your own skills and aspirations.

Cash Flows

If you have analyzed the Customer, Costs, Competition and Context, and chosen a consistent
strategy, you now have all the information necessary to estimate future cash flows. The Customer
analysis will allow you to project revenues6 over time. The Cost analysis will allow you to project
COGS7 and SG&A8 and investments in inventory and equipment. The Competitive analysis gives
you a sense of how revenues, costs and margins might be expected to change over time9.

Revenue

6 Revenues = #customers x #units/customer/time period x price per unit

7 Costs of good sold
8 Sales, general and administrative costs
9 It would be inconsistent to believe that a business with no barriers and intense competitive pressures could

maintain its margins for long.

9
• What is the price per unit?
• How many customers will you attract?
• How many items will each customer buy and over what period of time?
• How attractive are substitutes? Will they become more attractive or less attractive over time?
• How do you expect prices and unit volume to change over time?

Costs

• How much do we have to invest to build the capacity to produce the “right” number of units?
• What is the variable cost for each unit?
• What are your fixed period costs?
• Given the volumes expected, what is the total cost per unit?
• How do you anticipate these costs will change over time? How will expansion affect total
cost per unit? How will changes in input prices and other factors affect costs?

Margins

• What are your gross margins?

• What are your net margins?
• How much contribution do you receive for each unit sold?
• Given the competitive analysis, how do you expect margins to change over time?

Balance Sheet Items

• How much working capital is required over time?

• How much capital expenditure is required for recurring maintenance to maintain capacity?

Financial Measures

• What is your maximum investment?

• How many units do you have to sell per period to cover your fixed period costs?
• Given your sales estimates, how long does it take to recover your initial investment?
• How much do you forecast in total profits?

When you have answered all of these questions, you can construct a complete pro-forma for the
opportunity. You can use this pro-forma to raise money and link incentives to performance for
your employees.10

Take a look at your revised cash flow statement. Which of Bhide’s Archetypes does this
opportunity most closely resemble?

Cash Flow Archetypes

10 See Cash & Valuation Course Introduction.

10
Amar Bhide holds that there are six cash flow archetypes that fit most opportunities.11
Defining the archetype that fits your opportunity and examining the successes and failures of
other ventures with a similar archetype, will prepare you for challenges ahead.

• What does the archetypal pattern of this opportunity tell you about the risks and rewards
involved? The Key Success Factors?
• How closely does your strategy match that of other businesses with a similar pattern of
cash flows?

Personal Fit

Even if you’ve designed an opportunity that’s financially profitable for investors, it may not be a
business that’s right for you. Remember, you’re considering making this opportunity your
chosen vocation, devoting several years of your life to building it. Is it worth it?

• Do your best skills fit with the KSFs?

• Is anyone else in the world better suited to capitalize on this opportunity?
• Did you emotionally commit before you rationally analyzed the opportunity?
• Are the risk/reward trade-offs comfortable and do they suit your personality?
• What happens to you if you fail?
• Is this business aligned with your deepest values?
• Does this advance you towards your lifelong goals?

Can you design a profitable business that’s a better personal fit for you? Would another set of
choices serve you better? If so, go back to Strategy Selection and try again.

Summary

The following table outlines the Framework for the Opportunity Course:

BASIC ANALYSIS STRATEGY SELECTION EXPECTED OUTCOME

Customers Price or Quality? Cash Flows

Costs Fast or Slow? Archetype
Competition Key Success Factors Personal Fit
Context People
Commitment
Improving Our Odds

11 Niche; Revolutionary; Hustle; Institutionalized Hustle; Speculative and Syndication. See Note on Analyzing New Ventures.

11
Once you have explored a given opportunity using the Framework questions, step back.

Ask yourself:

• Is this an opportunity where investors are likely to get back far more than they invest?
• Do the risk profile and KSFs match my personality and talents? Do I feel that this is my
calling?

If you have any doubt, wait for the next opportunity. Extraordinary opportunities are very rare.
Waiting for one will test your patience. However, you are unlikely to find an extraordinary
opportunity while you are busy working in a mediocre business.

And be advised: Every opportunity evolves unpredictably as you execute it. Opportunities
change dramatically over time, and only perseverance and thoughtful decisions at key inflection
points will turn a good opportunity into a real success.

Analysis will not ensure success, but your odds are much better if you are pursuing an
extraordinary opportunity that fits well with your skills and dreams.

12