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 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.
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)
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
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
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
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.
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.
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)
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)
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
Table 2.2 Sources of discontinuities. Parkinson’s disease Alzheimer’s disease
Fig. 2.2 Finding a spec biz opportunity Applications Specific business opportunity Customer segment Technologies and competencies
Table 2.3 Trends and Opportunities. EX: Starbucks; Häagen-Dazs; Mondavi; Borders
Table 2.4 Finding a large-impact discontinuity in the functions of life.
Convergence of technologies • Genetic engineering electro microscopy + micromanipulation + supercomputing • computing & communications • handheld computer & cell phone
Table 2.5 Social and Cultural trends that will create opportunities.
www.SFGate.com 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
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.
Table 2.7 Factors people use to determine whether to act as entrepreneurs.
Table 2.8 Successful 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
Entrepreneurial Attractiveness • 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
Selecting Good Opportunities • 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?
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
Table 2.11 Basic 5 step process of evaluating an opportunity.
Scott Jordan, 39, founded Scott eVest in 2001 • 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)
Fig. 2.6 Decision matrix. Actual quality of opportunity poor Very good Act Do Not Act
Table 2.14 Elements of a concept summary. 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.
Table 2.15 Elements of the business story. 1. Background 2. Challenge 3. Resolution
Table 2.16 Elements of the presentation. 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.
Table 2.17 Elements of an executive summary. 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.
Security Robotics Inc. (SRI) 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
AgraQuest exec summary 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
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.
Talent & Opportunity 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.
In recent years, companies like Apple and 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?
People often 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.
Talent & Opportunity 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.
Innovation Frontier 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.
Innovation Frontier 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.
Innovation Frontier 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.
Criteria 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
Competitive advantage issues 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
GameChanger 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.
GameChanger 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.