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CC530 Entrepreneurship & Biz. strategy CHAPTER 2. Opportunity and the Biz. summary Professor. Taeyong Yang 1. Identifying the opportunity 2.Determining the entrepreneur’s capabilities and interests 3. Evaluating the opportunity 4. Deciding to act on the opportunity or look elsewhere

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CC530

Entrepreneurship & Biz. strategy

CHAPTER 2. Opportunity and the Biz. summary

Professor. Taeyong Yang


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1. Identifying the opportunity

2.Determining the entrepreneur’s capabilities and interests

3. Evaluating the opportunity

4. Deciding to act on the opportunity or look elsewhere

5. Writing a summary of the concept

6. Testing the summary and the concept with potential customers and investors

Figure 2.1 six steps to acting as an entrepreneur.


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Opportunity Identification

Good Opportunities

- are usually disguised.

- emerge from personal experience(need).

Opportunity pull : AIDS

Capability push : Digital TV, CISCO

Founders of new industry capitalize on opportunity pull to create disruptive innovations : Apple

Apple sales: $7.8M in 1978; $117M in 1980; $5B+ in 2001

CISCO sales: $22B in 2001

farmer’s pain →reaper by McCormick (1834)


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Table 2.1 Nine categories of opportunity.

  • Increasing the value of a product or service. winemaker: higher Q, better T, Lower P

  • New applications of existing means or technologies.credit card (magnetic) → hotel door card

  • Creating mass markets.disposable camera

  • Customization for individuals.Dell computer


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Table 2.1 Nine cat of opportunity. (cont)

  • Increasing reach.Schwab (using Internet)

  • Managing the supply chain.Wal-Mart; Dell

  • Convergence of change.E-Trade (brokerage → banking & insurance)

  • Process innovation.FedEx

  • Increasing the scale of the firm.Blockbuster; Hollywood video rental


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  • Entrepreneurship IS a Contact Sport

    $

  • Time for New Tech to Reach 25% of US Population

    • Household electricity (1873) 46 years

    • Telephone (1875) 35 years

    • Automobile (1885) 55 years

    • Radio (1906) 22 years

    • TV (1925) 26 years

    • VCR (1952) 34 years

    • PC (1975) 15 years

    • Cellular phone 13 years

    • WWW 7 years

Spontaneity,

Opportunism

Discipline,

Processes


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  • Role of Ideas

    A good idea is nothing more than a tool in the hands of an entrepreneur.

    Finding a good idea is the first step (entrepreneur’s creativity  an opportunity); however, the importance of the idea is most often over­rated, usually at the expense of underemphasizing the need for products or services, or both, which can be sold in enough quantity to real customers.


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  • Opportunity

    • An opportunity has the qualities of being attractive, durable, and timely and is anchored in a product or service which creates or adds value for its buyer or end user.



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Trial-and-error iterations, or repetitions

Howard Head made 40 different metal skis before he finally made the model that worked consistently.

Products built around totally different products than those originally envisioned.

  • Polaroid: Polarized head lamp  Instant photography

  • IBM: Wire and cable  computer

    Ralph Waldo Emerson: “If a man can make a better mousetrap than his neighbor, though he builds his house in the woods the world will make a beaten path to his door.” - The Great Mousetrap Fallacy

    The truth of the matter is that ideas are inert and, for all practical purposes, worthless. (1-3% financed)


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Great mousetrap fallacy: psychological ownership

  • Not an attachment to a business

  • Weaken realistic assessment of the other crucial business.

    (prerequisite for a new business, the fatal flaw due to narrow focus)

    Focal point: building of the business

    “We concentrated on making seats that would sell at a profit, rather than just making a better and better seat. Our company today is profitable.” – Canadian Entrepreneur (truck seat maker)

    Having the best idea first by no means is aguarantee of success.

    UNIVAC (initially lead over IBM)

    VisiCalc (first with the spreadsheet software)


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Railroad

  • 1850: started, improved on-time rates

  • 1860:expanded the reach (9K miles)

  • 1870: completed the transcontinental railroad (70K miles)

  • 1880: employed 450K workers

  • 1900: 5 major railroad companies (down from 1000s)

    Scott Cook (Intuit) –http://www.intuit.com

    “a problem well stated is a problem half solved.”

    TurboTax; Quicken

    Serendipity: discovery by accident

    Microwave Oven – chocolate melting

    Quick Frozen Food – ice fishing


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Table 2.2 Sources of discontinuities.

Parkinson’s disease

Alzheimer’s disease


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Fig. 2.2 Finding a spec biz opportunity

Applications

Specific

business

opportunity

Customer

segment

Technologies and

competencies


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Table 2.3 Trends and Opportunities.

EX: Starbucks; Häagen-Dazs; Mondavi; Borders



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Convergence of technologies functions of life.

  • Genetic engineering

    electro microscopy

    + micromanipulation

    + supercomputing

  • computing & communications

  • handheld computer & cell phone



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www.SFGate.com opportunities.

Monday, March 14, 2005

Korea Speaks In MegabitsSiliValley firms rush to try out the latest gadgets in the world's most wired society. ChronicleLazarus: Fees from overseas revisitedPender: Bay's economy still strongOn the record: VC Tim Draper


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  • South Korea is the most wired country on the planet. Some South Koreans can get up to 20 megabits of data per second -- breakneck speed by today's standards. Americans are lucky if they get 4 Mbps.

  • While South Korea leads in the rollout of broadband, the United States -- supposedly the world's technology leader -- comes in no better than No. 13, according to experts. About 76 percent of households have broadband in South Korea. The figure is 30 percent in the United States.

  • Broadband widens the digital data pipeline to allow complicated files, including pictures, graphics and video, to be downloaded at near-instant speed. Experts consider the development of broadband networks to be the single most important step for expanding digital technology and bringing cutting-edge computer applications directly into people's lives.

  • While broadband is usually associated with computers, wireless phones are also an important part of the picture. Here the situation is similar to computers. Some 75 percent of South Koreans have a mobile phone, compared with 60 percent of Americans. And South Koreans generally do more and cooler things with their phones.



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Table 2.8 Successful entrepreneurs entrepreneurs.

  • Bezos, Jeff Amazon.com 31 1995

  • Carpenter, Jake Burton Burton Snowboards 23 1977

  • Cohen, Ben, J Greenfield Ben&Jerry’s Ice Cream 27 1978

  • Cook, Scott Intuit 31 1983

  • Dell, Michael Dell Computer 19 1984

  • Dubinsky, Donna Palm Computing 37 1992

  • Gates, William Microsoft 20 1976

  • Hewlett, William Hewlett-Packard 27 1939

  • Johnson, Robert L. Black Entertainment TV 33 1980

  • Blank, Arthur Home Depot 36 1978

  • Rowland, Pleasant Pleasant Company 45 1986

  • Schultz, Howard Starbucks 34 1987

  • Smith, Fred Federal Express 29 1973

  • Stemberg, Tom Staples 36 1985


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Entrepreneurial Attractiveness entrepreneurs.

  • U = f(Y,I,W,R,O)

    • Y: income; I: Indep; W: work effort; R: risk

  • EA = ∫(w1Y+w2I-w3W-w4R)dt

    = .25[(Y+I)-(W+R)] x N

    where wi = .25


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Selecting Good Opportunities entrepreneurs.

  • Only 1 or 2 needed in a lifetime

  • Calculate Prob of L-return in 4 years

  • Do not consider H-priced sale of your firm

  • Solid Analysis

  • If unfavorable, possible abandon with minor losses?

  • Potential for L-term success?

  • Customer?


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Table 2.10 Summary of the entrepreneur’s analysis. (two year period)

New venture: (Y+I) – (W+R) = 8 – 7 = +1

Existing job: (Y+I) – (W+R) = 5 – 6 = -1



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  • Scott Jordan, 39, founded Scott eVest in 2001 opportunity.

    • Vests and jackets with 16 ~ 22 pockets for cell, PDA..

    • Sells for $80 ~ $120

    • Meet the needs of people on the go

  • John & Alice Olson

    • Internet-based survey (simple 4 questions)

    • Sell ad space on the website to local movie theaters

  • Kemmons Wilson

    • Holiday Inn founder

  • Electric Automobile? (p.42)


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Fig. 2.6 Decision matrix. opportunity.

Actual quality of opportunity

poor

Very good

Act

Do

Not

Act



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Table 2.14 Elements of a concept summary. opportunity.

1. Explain the problem or need and identify the customer.

2. Explain the proposed solution and the uniqueness of the solution.

3. Tell why the customer will pay for the solution.


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Table 2.15 Elements of the business story. opportunity.

1. Background

2. Challenge

3. Resolution


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Table 2.16 Elements of the presentation. opportunity.

1. Explain the concept and give the story.

2. Clearly explain the problem and the solution.

3. Describe the competencies of the team.

4. Provide a picture of the competition.


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Table 2.17 Elements of an executive summary. opportunity.

1. Business concept : The problem and the solution.

2. Market, Customer, and industry.

3. Marketing and sales strategy.

4. Organization and key leaders.

5. Financial plan : Four years of summary results.

6. Financing and key allies required.


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Security Robotics Inc. (SRI) opportunity.

1. Business concept: mobile robots for clearing

2. Market, Customer, and industry: Dept of Homeland

3. Marketing and sales strategy: Gov.

4. Organization and key leaders: Morgan and Wolfe

5. Financial plan: $1.3M (05); $7.4M (06) IPO in 5 yrs

6. Financing and key allies required.

Offering: 200K shares at $400K


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AgraQuest exec summary opportunity.

1. Mission: envir. friendly natural P for pest mgmt

2. Business: natural product pesticide

3. Market need and market opportunity; $25B/yr

4. Technology: Microbial natural product

5. Competition: None

6. Company’s competitive advantage: unique K

7. Management team: Marrone, Sinibaldi...

8. Financial summary: $40M rev, IPO ($20M) in 5 yrs


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In a world where the life span of the average business model is longer than a butterfly's but shorter than a dog's, one needs the chance to regularly consider a few opportunities that are inconsistent with the current strategy.


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Talent & Opportunity is longer than a butterfly's but shorter than a dog's,

Valley workers change companies with less angst than most people change jobs within companies. Sure, they jump for money, but more than that they jump at the chance to work on the next great thing. Companies pursuing killer opportunities attract the best talent. As one venture capitalist bluntly puts it: "'A' people work on 'A' opportunities.”

Every Silicon Valley CEO knows that if you don't give your people truly exhilarating work--and a dramatic upside -- they'll start turning in their badges.


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In recent years, companies like Apple and is longer than a butterfly's but shorter than a dog's, Silicon Graphics hemorrhaged talent, while up-and-coiners like Cisco and Yahoo! have been magnets for the cerebrally gifted.

Scott Cook, the chairman of Intuit:

"I wake up every morning knowing that if my people don't sense a compelling vision and a big upside, they'll simply leave.“

Isn't it amazing that while every company has at least some kind of process for capital allocation, almost no company has a process for talent allocation -- much less an open market for talent?


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People often is longer than a butterfly's but shorter than a dog's, quit emotionally long before they quit physically. Novelty, meaning, and impact are the oxygen that gives life to the entrepreneurial spirit. Denied that oxygen, even the most talented folks are soon brain dead.

"Hey, we make all the money, we ought to have the best people." - Large Co.

But the marginal value a talented employee adds to a business running on autopilot is often a fraction of the value that individual could add to a venture not yet out of the proverbial garage.


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Talent & Opportunity is longer than a butterfly's but shorter than a dog's,

Employees have to believe that the best way to win big is to be part of building something new. - Provide additional incentives for employees who are willing to take a risk on something out of the ordinary.-Celebrate every courageous employee who abandons the security of a legacy business for an untested opportunity.

It's not enough to remove the barriers to migration - one must positively provide incentives for employees to abandon the familiar for the unconventional.


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Innovation Frontier is longer than a butterfly's but shorter than a dog's,

Opportunities are fleeting in this new world. By the time some cautious vice president decides to pull the trigger, some hot, young entrepreneur is already a billionaire. So you'd best not wait any longer to start building your own internal markets for ideas, capital, and talent.

The real competition between the old economy and the new economy is occurring not between individual companies but between remarkably different regimes: resource allocation and resource attraction.


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Innovation Frontier is longer than a butterfly's but shorter than a dog's,

Resource allocation works fine where innovation is largely incremental to the existing business model (think Cherry Coke versus regular Coke).

But where the goal is the invention of novel business models (music downloaded off the Web versus CDs bought at Tower Records),

Or the radical redesign of existing business models (Dell's build-to-order direct-selling approach), resource allocation is wholly inadequate.


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Innovation Frontier is longer than a butterfly's but shorter than a dog's,

Large companies have resources. They have a ready source of capital -- if they can learn how to supplement risk-averse resource allocation with opportunity-focused resource attraction. They often have brands and distribution assets that can give a new venture a quick start. Mighty Microsoft would still be a minnow if it hadn't found a way to tap into IBM's brand and distribution strengths.

Silicon Valley exists not because large companies are incapable of innovation but because they have been unwilling to abandon the tightly knit safety net of resource allocation.


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Criteria is longer than a butterfly's but shorter than a dog's,

Industry and market

Market:

Customers

User benefits

Value added

Product life

Market structure

Market size

Growth rate

Market capacity

Market share attainable (Year 5)

Cost structure

Economics

Time to breakeven/positive cash flow

ROl potential

Capital requirements

Internal rate of return potential

Free cash flow characteristics:

Sales growth

Asset intensity

Spontaneous working capital

R&D/capital expenditures

Gross margins

After-tax profits

Time to break-even profit and loss

Harvestissues

Value-added potential

Valuation multiples and comparables

Exit mechanism and strategy

Capital market context

Highest Potential

Changes way people live and work

Market driven; identified; recurring

revenue niche

Reachable; purchase orders

Less than one-year payback

High; advance payments

Durable

Imperfect, fragmented competition or

emerging industry

100+ million to $1 billion sales

potential

Growth at 30—50% or more

At or near full capacity

20% or more; leader

Low-cost provider; cost advantages

Under 1.5—2 years

25% or more; high value

Low to moderate; fundable

25% or more per year

Favorable; sustainable; 20—30%

or more of sales

Moderate to high (+15% to +20%)

Low/sales $

Low, incremental requirements

Low requirements

Exceeding 40% and durable

High; greater than 10%; durable

Less than two years; breakeven not

Creeping

High strategic value

Price/earnings = 20 + x$; 8—10 + x$ EBIT; 1.5—2 + x$ revenue:

free cash flow 8—10 + x$

Present or envisioned options Favorable valuations, timing, capital available; realizable liquidity

Lowest Potential

Incremental improvement only

Unfocused; one-time revenue

Loyal to others or unreachable

Three years plus payback

Low; minimal impact on market

Perishable

Highly concentrated or mature or declining

industry

Unknown, less than $20 million or

multibillion sales

Contracting or less than 10%

Undercapacity

Less than 5%

Declining cost

More than 4 years

Less than 15—20%; low value

Very high; unfundable

Less than 15% per year

Less than 10% of sales

Less than 10%

High

High requirements

High requirements

Under 20%

Low

Greater than four years; breakeven

creeping up

Low strategic value

Price/earnings 5x, EBIT  3—4x;

revenue  .4

Undefined; illiquid investment

Unfavorable; credit crunch


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Competitive advantage issues is longer than a butterfly's but shorter than a dog's,

Fixed and variable costs

Control over costs, prices, and distribution

Barriers to entry:

Proprietary protection

Response/lead time

Legal, contractual advantage

Contracts and networks

Key people

Management team

Entrepreneurial team

Industry and technical experience

Integrity

Intellectual honesty

Fatal-flaw issue

Personal criteria

Goals and fit

Upside/downside issues

Opportunity costs

Desirability

Risk/reward tolerance

Stress tolerance

Strategic differentiation

Degree of fit

Team

Service management

Timing

Technology

Flexibility

Opportunity orientation

Pricing

Distribution channels

Room for error

Lowest; high operating leverage

Moderate to strong

Have or can gain

Competition slow; napping

Proprietary or exclusivity

Well-developed; accessible

Top talent; an A team

All-star combination; free agents

Top of the field; super track-record

Highest standards

Know what they do not know

Non-existent

Getting what you want; but wanting what you get.

Attainable success/limited risks

Acceptable cuts in salary, etc.

Fits with lifestyle

Calculated risk; low risk/reward ratio

Thrives under pressure

High

Best in class; excellent free agents

Superior service concept

Rowing with the tide

Groundbreaking; one of a kind

Able to adapt; commit and decommit quickly

Always searching for opportunities

At or near leader

Accessible; networks in place

Forgiving strategy

Highest

Weak

None

Unable to gain edge

None

Crude; limited

B or C team

Weak or solo entrepreneur

Underdeveloped

Questionable

Do not want to know what they do not know

One or more

Surprises, as in The Crying Game

Linear; on same continuum

Comfortable with status quo

Simply pursuing big money

Risk averse or gambler

Cracks under pressure

Low

B team; no free agents

Perceived as unimportant

Rowing against the.tide

Many substitutes or competitors

Slow; stubborn

Operating in a vacuum; napping

Undercut competitor; low prices

Unknown; inaccessible

Unforgiving, rigid strategy


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GameChanger is longer than a butterfly's but shorter than a dog's,

By late 1996, it had become apparent to Warren and some of his colleagues that E&P was unlikely to meet its earnings targets without radical innovations.

He sensed that a wealth of imagination was bottled up in Shell's employees -- imagination that might help the company find its way into new, high-growth opportunities.

The GameChanger process, as it came to be known, went live in November 1996. At first, the availability of venture funding failed to yield an avalanche of new ideas. Though bright and creative, employees long accustomed to working on well-defined technical problems found it difficult to think revolutionary thoughts.


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GameChanger is longer than a butterfly's but shorter than a dog's,

Hoping to kick-start the process, the GameChanger panel enlisted the help of a team of consultants from Strategos who designed a three-day "Innovation Lab" to help employees develop rule-busting ideas and to dole out a half million dollars of seed money.

Seventy-two enthusiastic would-be entrepreneurs showed up for the initial lab, a much larger group than the panel had anticipated. Many were individuals no one would have suspected of harboring an entrepreneurial impulse.

By the end of the second day, a portfolio of 240 ideas had been generated. Some were for entirely new businesses, and many more were for new approaches within existing businesses.


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GameChanger is longer than a butterfly's but shorter than a dog's,

The attendees then agreed on a set of screening criteria to determine which of the ideas deserved a portion of the seed money.

Twelve ideas were nominated for funding, and a volunteer army of supporters coalesced around each one.

Since the completion of the labs, the GameChanger panel has been working hard to institutionalize the internal entrepreneurial process. It meets weekly to discuss new submissions -- 320 have come in so far, many through Shell's intranet -- and its members serve as coaches and advocates for prospective innovators.


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GameChanger is longer than a butterfly's but shorter than a dog's,

An employee with a promising idea is invited to give a ten-minute pitch to the panel, followed by a 15-minute Q&A session.

If the members agree that the idea has real potential, the employee is invited to a second round of discussions with a broader group of company experts whose knowledge or support may be important to the success of the proposed venture.

Before rejecting an idea, the panel looks carefully at what Shell would stand to lose if the opportunity turned out to be all its sponsors claimed.


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GameChanger is longer than a butterfly's but shorter than a dog's,

Ideas that get a green light often receive funding -- on average, $100,000, but sometimes as much as $600,000 -- within eight or ten days. Those that don't pass muster enter a database accessible to anyone who would like to compare a new idea with earlier submissions.

Some months later, each accepted project goes through a proof-of-concept review in which the team has to show that its plan is indeed workable and deserves further funding.

About a quarter of the efforts that get funded ultimately come to reside in an operating unit or in one of Shell's various growth initiatives. Others are carried forward as R&D projects, and still others are written off as interesting but unsuccessful experiments.


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GameChanger is longer than a butterfly's but shorter than a dog's,

Of the company's five largest growth initiatives in early 1999, four had their genesis in the GameChanger process. One team was granted a charter to work with people throughout Shell to explore an entirely new business focused on renewable geothermal energy sources.

GameChanger has also had a significant impact on Tim Warren's own division. Fully 30% of E&P's 1999 R&D budget is focused on ventures that have emerged from the process.

Whether GameChanger will survive in its current form remains to be seen. But it has demonstrated that entrepreneurial passion lurks everywhere -- even deep in the canyons of a 92-year-old oil company.


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