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CHAPTER 2. Creativity, Opportunity, AND Testing Business Concept and Models. Understand the nature of entrepreneurial opportunity through discovery and creation. Discuss creativity, its challenges, and how to develop creative skills.

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learning objectives

Understand the nature of entrepreneurial opportunity through discovery and creation.

  • Discuss creativity, its challenges, and how to develop creative skills.
  • Explain problem solving as it relates to creativity and entrepreneurship.
  • Understand types of innovation and the innovation process.
  • Explain what a business model is and what it accomplishes.
  • Discuss the process for developing a business model.
  • Explore the testing of a business model through feasibility analysis.
Learning Objectives
creativity what it means

Enables entrepreneurs to differentiate their businesses from competitors

  • Is the basis for invention
  • Is fundamental to problem solving
  • Is a critical skill for recognizing or creating opportunity in a dynamic environment
Creativity: What It Means
creativity themes

Figure 3.1

Creativity Themes

Source: Adapted from Isaksen, S.G., Stein, M.I., Hills, D.A. & Grayskiewicz, S.S. (1984). “A Proposed Model for the Formulation of Creativity Research,” Journal of Creative Behavior, 18: 67–75.

creativity what it means cont d

Four stage creative process:

  • Preparation: looking at a problem from a variety of perspectives
  • Incubation: letting the problem lie in the subconscious for a time
  • Illumination: the discovery of a solution
  • Verification: bringing the idea to an outcome
Creativity: What It Means (cont’d)
the seven stage dynamic of the creative process

Figure 3.2

The Seven Stage Dynamic of the Creative Process

Source: Adapted from Norman Seeff Productions.

challenges to creativity

No time for creativity

  • No confidence

“Confidence is the expectation of success.”

Challenges to Creativity
developing creative skills

Design an environment to stimulate creativity

    • Minimize distractions
    • Devote time daily to quiet contemplation
    • Spend time in the places that best promote your creative thinking
    • Spend time with people in different fields of interest and move out of the comfort zone
Developing Creative Skills
developing creative skills cont d

Log ideas

  • Put the familiar into a new context
  • Take advantage of a personal network
  • Return to childhood
Developing Creative Skills (cont’d)
creativity and problem solving

Define the problem

    • Restate the problem so as to uncover the real problem
    • Identify the pros and cons for potential solutions
    • Develop a decision tree
Creativity and Problem Solving
creativity and problem solving cont d

Generate ideas for sources of the problem and potential solutions

    • Quantity over quality initially
    • Capture every idea
    • Piggyback on ideas and create new combinations and modifications
Creativity and Problem Solving(cont’d)
creativity and problem solving cont d1

Other techniques for generating ideas:

    • Brain writing
      • Getting ideas down on paper and then organizing ideas and creating themes
    • Connecting unrelated concepts
    • Attribute identification
    • Restating the problem
Creativity and Problem Solving (cont’d)
focus on problem definition

Use affirmative judgment

  • Use a set of predefined criteria
  • Effective problem statement contains:
    • A “how” question
    • Identification of responsible party
    • Action verb, representing positive course of action
    • Targeted or desired outcome
Focus on Problem Definition
developing solutions

Use same techniques used to generate and focus ideas

  • Criteria plays critical role in solution identification
    • Explicit: time limits, budgets, constraints
    • Implicit: considerations such as intuition, team culture, preferences, prejudices, etc.
Developing Solutions
innovation

Joseph Schumpeter identified five categories of innovation:

    • A new product or substantial change in an existing product
    • A new process
    • A new market
    • New sources of supply
    • Changes in industrial organization
Innovation
the business model

Peter Drucker’s 5 questions form the basis for development of the business model:

    • What is our mission?
    • Who is our customer?
    • What does our customer value?
    • What are our results?
    • What is our plan?
The Business Model
why business models fail

Flawed logic

  • Limited strategic choices
  • Imperfect value creation and capture assumptions
  • Incorrect assumptions about the value chain
Why Business Models Fail
developing a concept for a new business

A business concept is a concise description of an opportunity that contains four essential elements:

    • The customer definition
    • The value proposition
    • The product/service
    • The distribution channel
Developing a Concept for a New Business
the value proposition

The benefit that the customer derives from the product or service

    • It is often intangible.
  • Entrepreneur needs to identify the need or “pain” the customer is experiencing
The Value Proposition
the customer definition

The customer is the one who pays for the solution.

    • This may or may not be the end user of the product or service being offered
  • The customer determines all the other components:
    • What the entrepreneur will offer
    • What the value proposition is
    • How the benefit will be delivered to the customer
The Customer Definition
the solution being offered

A solution to the problem the customer is facing

    • Most businesses produce both products and services.
The Solution Being Offered
the distribution channel

How do you deliver the benefit to the customer?

  • Must create a clear and concise concept statement (or “elevator pitch”)
    • Not difficult but requires ability to parse words
The Distribution Channel
the entrepreneur s story

A compelling story has a beginning, middle, and end.

    • How they identified or created the opportunity
    • Challenges they overcame
    • Where they are now
The Entrepreneur's Story
building a business model

What are the size and importance of the revenue streams that the business model can generate?

  • What costs most affect the model, and what is their size and importance to the model? In other words, what are the cost drivers for the business?
  • How much capital is required to execute the business model and what is the timing of the cash needs?
  • What are the critical success factors to achieving the goals of the business model?
Building a Business Model
building a business model cont d

Changes may occur in several ways:

    • Incrementally expand the existing model
    • Revitalize an established model
    • Take an existing model into new areas
    • Add new models via acquisition
    • Use existing core competencies to build new business models
    • Reinvent the business model
Building a Business Model (cont’d)
building a business model stages

Stage 1: Identify position in value chain

    • The value chain consists of all the companies that contribute to the development and distribution of a good.
    • Upstream is the top of the value chain and upstream from manufacturers (e.g. supplier/producer of raw materials).
    • Downstream refers to the intermediaries such as distribution and retailers, and are “downstream” from the manufacturers and assemblers.
    • Location of the company within the value chain normally reflects the entrepreneur’s capabilities and risk-taking propensity.
Building a Business Model—Stages
building a business model stages cont d

Stage 2: Calculate how to create value for the customer

    • Rely on market research
  • Stage 3: Identify revenue sources
    • Subscription or membership
    • Volume or unit-based
    • Licensing and syndication
    • Transaction fee
    • Advertising
Building a Business Model—Stages (cont’d)
building a business model stages cont d1

Stage 4: Determining expenses and cost drivers

    • Marketing or advertising cost structure
    • Inventory cost structure
    • Office or retail space cost structure
    • Support centered cost structure
    • Direct cost structure
Building a Business Model—Stages (cont’d)
building a business model stages cont d2

Stage 5: Develop the competitive strategy

    • Effective competitive strategy either:
    • Differentiates the new venture from existing ventures
    • Creates a niche in the market that other companies are not serving
    • Has access to other resources that others in the industry do not
  • Stage 6: Test the model through feasibility analysis
Building a Business Model—Stages (cont’d)
analyzing the feasibility of a business model

All opportunities involve uncertainty, which is characterized by varying degrees of risk.

  • Risks to be reduced are associated with:
    • Customer, size of the market, technical feasibility of the product, and ability of the founding team to successfully execute the venture
  • Risks can be identified and dealt with.
  • Uncertainty means outcomes are unknown so subjective probabilities must be applied.
Analyzing the Feasibility of a Business Model
feasibility and the business plan

Split view amongst entrepreneurs on the value of the business plan.

  • Investors moving away from written business plans of past to brief, well-constructed executive summary or an effective pitch.
Feasibility and the Business Plan
the outcomes of feasibility analysis

Determination of whether the business model appears feasible

  • Entrepreneur looks at the forecasted outcomes in four ways:
    • What is the probability a change in the forecast will occur
    • What is the magnitude of the change if it occurs
    • What is the impact of the change on the business
    • What can be done to mitigate the change or reduce the impact substantially
The Outcomes of Feasibility Analysis
preparing for feasibility analysis

Three critical success factors:

    • Is there a customer and market of sufficient size to make the concept viable and able to grow?
    • Do the capital requirements to start and operate to a positive cash flow make sense?
    • Can an appropriate startup or founding team be assembled to effectively execute the concept?
Preparing for Feasibility Analysis
the feasibility tests

Areas to be analyzed:

    • Industry and market/customer
    • Product/service
    • Founding team
    • Financial needs assessment
The Feasibility Tests
quick screen for multiple options

Quick screen ideas before undertaking a thorough feasibility study on any one of the concepts:

    • Start with a concept statement
    • Examine the industry
    • Identify the market – customer & competitors
    • Identify how the product/service benefits the customer
    • Examine founding/management team capabilities
    • List all resources needed by the business
Quick Screen for Multiple Options