Version française/French version: LINK
We have developed a simple and robust method for evaluating your core business as well as potential new ventures. This approach, which facilitates communication with your associates and advisors, allows for the comparison of different projects using an overall score. The proposed example identifies several nearly prohibitive criteria, questioning the relevance of risky diversification at the expense of strengthening existing activities. This methodology involves sequentially evaluating four dimensions: the market and the new offer, the activity and competitive advantages, financial data, and management and human resources.
E. Krieger
How to evaluate your activity and potential development projects? Is it possible to compare different projects using an overall score?
Without substituting for an in-depth analysis, the approach proposed here constitutes a framework that will facilitate discussion with your associates and advisors. It is the transposition of a tool used by the management and the board of directors of a publicly traded SME to evaluate diversification projects.
Each criterion family includes five items whose importance you can weight while adding other parameters if necessary. This method provides a relative score for each family of criteria as well as an overall score.
Diversify or not: some food for thought
To illustrate this approach, let’s consider the company Choc2Luxe, which produces and markets premium chocolates in the « individuals » and « businesses » segments.
Given the success of its creations, the company’s founder is considering launching an activity of chocolate and macaron creation courses, accompanied by tasting the products created. These courses would be conducted by renowned artisans.
Before embarking on such a diversification project, the manager evaluates this project with his associates using the above methodology.
Market and new offer
Regarding the analysis of the market and this new offer of chocolate creation courses, the entrepreneur believes he has identified the need corresponding to such an offer well, between the conviviality of the courses and the pleasure of creating premium chocolates. The score assigned to this criterion is 9 out of 10.
A series of interviews with the chocolate shop’s customers, complemented by a market study, shows that the value of such an offer is clearly perceived by a young, urban clientele seeking creative leisure activities. Therefore, the manager opts for a score of 8.
He also believes that the clients of such an offer are easily accessible, partly being the clientele of his Parisian chocolate shop and, eventually, shops opened in the provinces, hence a score of 9 out of 10, even though our chocolatier is aware that part of the clientele will need to be reached via the Internet. However, the current market size is relatively small (score of 3 out of 10), but its growth potential is high, given the growing success of similar formulas combining creativity and conviviality.
In the end, the weighted score for this « Market and new offer » section is 61 out of a maximum of 80, which is equivalent to a score of 7.6 out of 10, see diagram below.
.
Activity and competitive advantages
The manager then analyzes the activity and competitive advantages of Choc2Luxe in this new product/market combination. Competition is low as few peers offer such an offer. Barriers to entry in this sector are relatively low, even though it is necessary to set up a space suitable for this type of workshop. But the additional investment remains marginal for our chocolatier whose laboratory is spacious.
The possibilities to differentiate from competitors are also numerous, notably by having access to leading figures in chocolate and macaron creation.
The accessible market share is, however, average because such an offer mainly addresses a local audience. Moreover, our entrepreneur believes he will not be able to quickly develop in the main French cities. Finally, regulatory constraints and risks are significant, as they are related to hosting the public.
The weighted score for this section is 6.8.
.
Economic and financial data
The manager then analyzes the economic and financial data of this new project. He estimates that the margin on direct costs will be around 35%, but due to the importance of promotional costs, the net result in the medium term will be difficult to exceed 5%. Furthermore, the break-even point will only be reached by the 3rd year.
Financial profitability is also low, both due to the modest net result in the medium term and the high amount of equity required to launch and develop this activity.
Finally, the financial value of such an activity also remains modest, if we apply the valuation multiples specific to a training company.
In the end, the weighted score for this section is 3.
.
Management and human resources
The manager of Choc2Luxe finally examines the « Management and human resources » dimension of this new development project. While the project is compatible with the company’s technical profiles, the manager believes, however, that the person in charge of marketing and sales will need to train to promote this new offer.
The logistics and purchasing skills are sufficient to ensure the launch of such a project, and the manager believes he has the capacity to manage this launch by relying notably on his associates and advisors.
Such a project is also compatible with the company’s culture, although a training activity requires developing a stronger service culture.
The weighted score for this section is 8.
.
Diversify or strengthen the existing?
In the end, the evaluation of this project results in an overall score of 6.3 out of 10, hampered by the low expected profitability of a « training » activity. This leads the manager and his associates to question the relevance of such diversification compared to developing the « businesses » segment, whose profitability is excellent.
.
A catalyst for strategic exchanges
This method is robust enough to allow you to refine your own criteria and their respective weights and to benefit from an effective screening grid.
However, this method mainly aims to serve as a catalyst for a strategic discussion: exchanges with your associates are more important than the final score.
Moreover, it is better to evaluate several projects to select the « best » one … or to decide to focus on your core business, which is often the best decision before considering all-out diversification.
Good luck with this collective evaluation of your core activity and development projects!
