Risk, Return, Product Design

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# Risk, Return, Product Design - PowerPoint PPT Presentation

Risk, Return, Product Design. Risk & Uncertainty. “Failure is the opportunity to begin again, more intelligently.” Henry Ford Regret – the amount of loss a person can tolerate A Game of Chance :. Regret Function. V = U – l R U = upside U > l R R = downside or regret

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### Risk, Return, Product Design

Risk & Uncertainty
• “Failure is the opportunity to begin again, more intelligently.” Henry Ford
• Regret – the amount of loss a person can tolerate

A Game of Chance :

Regret Function
• V = U – l R U = upside

U > l R R = downside or regret

• Entrepreneur can forgo one year income (\$50,000) and willingly invest savings (\$60,000), then regret is \$110,000
• For l = 1, we are neutral. For l = 2, we are risk averse.
• If, l = 2, required upside is U > 2(110,000)

> \$220,000

Risk
• Value of potential losses
• Uncertainty of those losses

(Lottery Variations)

• SBA – ½ of all small businesses are acquired by another firm or leave the market within four years
Question
• What might be the sources of uncertainty for a new venture ?

### Risk

video

Sources of uncertainty
• Market uncertainties
• ???
• Organization / Management uncertainties
• Product / Process uncertainties
• Regulation / Legal uncertainties
• Financial uncertainties
Sources of uncertainty
• Market uncertainties
• Customer
• Market size / growth potential
• Competitors
• Organization / Management uncertainties
• Product / Process uncertainties
• Regulation / Legal uncertainties
• Financial uncertainties
Sources of uncertainty
• Market uncertainties
• Organization / Management uncertainties
• Capabilities
• Talent
• Strategies
• Product / Process uncertainties
• Regulation / Legal uncertainties
• Financial uncertainties
Sources of uncertainty
• Market uncertainties
• Organization / Management uncertainties
• Product / Process uncertainties
• Cost
• Technology
• Design
• Regulation / Legal uncertainties
• Financial uncertainties
Estimating Risk / Reward
• Describe most likely scenario, expected reward and estimated probability
• Describe worst case scenario, expected loss and estimated probability
• Describe best-case scenario, expected reward and estimated probability
• Determine how much the entrepreneurial team (investors) can afford to lose.
Estimating Risk / Reward
• A leading aircraft manufacturer, you wish to bid on a new jet trainer for the dept. of defense. Specs call for front-back seating, mach 2.0 at 400 ft. To even hope to bid, you will have to develop a new avionics package with forward looking radar and hire 100 new engineers. Estimate the risk / reward.

Cost

per

Unit

Economies of Scale

Diseconomies of Scale

qm

Scale and Scope
• Scale – the extent of the activity of a firm as described by its size
• Scalability – how big a firm can grow in various dimensions to provide more service.
No FEAR
• Tom Peters & FEAR
Scale and Scope
• Scope – the range of products offered or distribution channels utilized
• Economies of Scope
• Google – economies of scale
• Amazon – economies of scope
• Wal-Mart – economies of scale and scope
Network Effects
• Network economies – arise in industries where a network of complementary products is determinant of demand
• PC software PC
• Others ??
Product Design / Development
• IDEA: locate and describe new ideas without binding users too closely to the old ways of doing things.

Entrepreneurs must find the balance between novelty and familiarity, between impact and acceptance

(Palm Pilot docking cradle – PDA extension of PC)

Research

& Development

(Concept Develop)

Product

Design

Build

Prototype

Test

Prototype / Market

Satisfactory

Finalize

Design

Yes

No

R&D

Establish Product

Goals and Attributes

Identify components &

parameters available

Identify set of physical

and social constraints

Write Performance

Specifications

Write Performance

Specifications

Write Performance

Specifications

Write Performance

Specifications

Product Development
• Usability – measure of the quality of user’s experience when interacting with product
• Ease of learning
• Efficiency of use
• Memorability
• Error frequency
• Satisfaction

(VCR, DVD – poor usability)

Product Development
• Dominant Design – single architecture that establishes dominance in a particular class

IBM _PC compatible

VHS

Disruptive Applications
• Disruptive Application – a new product that establishes an entirely new category and dominates that category

Email

Sony Walkman

Question
• Why hasn’t the digital video recorder (DVR) become a hit product? DVRs are similar to videocassette recorders, except that they record onto a hard drive instead of tapes. Users browse a listings grid on the TV and press a record button to select each show they want to record. How would you design a DVR to sell widely and reach a mass market?