It is high time to evaluate your activity and your projects!

A simple and robust method for evaluating your activity and possible development projects has been created. Facilitating discussions with your partners and advisors, this approach allows you to compare different projects based on an overall score. The proposed example identifies several almost prohibitive criteria, questioning the importance of dangerous diversification at the expense of strengthening the existing activity. This methodology consists of a gradual evaluation of four dimensions: market and new offer, activity and competitive advantages, financial data as well as management and human resources.

How to evaluate your activity and potential development projects? Is it possible to compare different projects based on the overall score?

Without replacing in-depth analysis, the approach suggested here provides a framework to facilitate discussion with your partners and your advisors. It is a transposition of a tool used by the management and board of directors of a listed SME to evaluate diversification projects.

Each of the criteria families has five items that you can consider for importance and add additional parameters if necessary. This method provides a score against each group of criteria as well as an overall score.

For fun or not: food for thought

To illustrate this approach, consider a company Choc2Luxewhich produces and sells prestigious chocolates in the “individual” and “business” segments.

Due to the success of his creations, the founder of the company plans to launch a chocolate and macaron making course, accompanied by a tasting of the created products. These courses would be taught by renowned craftsmen.

Before starting such a diversification project, the manager evaluates this project with his partners using the above methodology.

Market and new supply

Regarding the market analysis and this new offer of chocolate-making courses, the entrepreneur believes that he has clearly identified the need for such an offer, between the hospitality of the courses and the pleasure of making prestigious chocolates. The score assigned to this criterion is therefore 9 out of 10.

A series of interviews with customers of the chocolate shop, supplemented by a market study, shows that the value of such an offer is clearly perceived by a young, urban clientele looking for creative hobbies. The manager therefore decides on a score of 8.

He also believes that the customers of such an offer are easily accessible, partly referring to the customers of his Paris chocolate factory and finally to the stores opened in the provinces, therefore rating 9 out of 10. he realizes that some of the clientele will have to be reached via the Internet. The size of the current market, on the other hand, is relatively small (score 3 out of 10), but its growth potential is high due to the growing success of similar formulas combining creativity and user-friendliness.

Finally, the weighted score for this “Market and New Supply” section is 61 out of a maximum of 80, corresponding to a score of 7.6 of 10, cf. diagram below.

Activity and competitive advantages

The manager then analyzes Choc2Lux’s activity and competitive advantages in this new product/market pair. Competition is reduced because few partners offer such an offer. Barriers to entry into this sector are relatively low, although it is necessary to provide space suitable for this type of workshop. However, additional investments remain marginal for our chocolate factory, whose laboratory is spacious.

There are also many opportunities to differentiate yourself from your competitors, especially with access to the big names in the chocolate and macaroon industry.

The accessible market share, on the other hand, is average, as such an offer is primarily aimed at a local audience. However, our entrepreneur believes that he will not be able to develop quickly in the main French cities. Finally, regulatory constraints and risks are significant because they are associated with public welcome.

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 close to 35%, but given the importance of promotional costs, the net result will hardly exceed 5% in the medium term. Furthermore, the tipping point (tipping point) can only be reached after the 3rd year.

Financial profitability is also low, both due to the modest medium-term net profit and the high equity capital required to start and develop this business.

Finally, the financial value of such activity also remains modest if we use valuation multiples specific to the educational company.

Finally, the weighted score for this section is 3.

Management and human resources

Choc2Luxe director finally explores the “Management and Human Resources” dimension of this new development project. However, if the project is compatible with the technical profiles of the company, the manager believes that the person responsible for marketing and sales will need to be trained to ensure the promotion of this new offer.

The logistics and purchasing skills are sufficient to ensure the launch of such a project and the manager believes that he has the capacity to manage this launch, particularly by relying on his associates and advisors.

Such a project is also compatible with the corporate culture, even if the educational activity requires the development of an increased culture of service.

The weighted score for this section is 8.

Diversify or strengthen what already exists?

Finally, the evaluation of this project resulted in an overall score 6.3 out of 10, burdened by the low expected profitability of “training”. This leads the manager and his associates to doubt the relevance of such diversification in relation to the development of the “business” segment, the profitability of which is excellent.

A catalyst for strategic exchanges

This method is robust enough to allow you to specify your own criteria and their respective weights and use an efficient raster grid.

However, the goal of this method is primarily to serve as a catalyst for strategic discussion: the exchange of ideas with your collaborators is more important than the final score.

It is also better to evaluate several projects in order to choose the “best” one… or decide to focus on your core business, which is often the best solution, rather than thinking about overall diversification.

Good luck in this joint work of evaluating your core business and your development projects!

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