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GIS, Process Innovation, and Small Businesses. Jerry Platt May 2007. Outline of Talk. SBA Grant 4 Small Businesses 10 Differences Survival Rates GIS Opportunities NON-MARKET Valuations 23 GIS Projects as REAL OPTIONS 32. I. SBA Grant SBA Grant #SBAHQ-06-I-0046

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GIS, Process Innovation,and Small Businesses

Jerry Platt

May 2007


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Outline of Talk

  • SBA Grant 4

  • Small Businesses 10

    Differences

    Survival Rates

    GIS Opportunities

  • NON-MARKET Valuations 23

  • GIS Projects as REAL OPTIONS 32


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I. SBA Grant

SBA Grant #SBAHQ-06-I-0046

9/1/06 to 8/31/08 $987,228.00

University

of

Redlands

Redlands

Institute

School

of

Business

SBA

Inland

Empire

SMEs


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University of RedlandsSBA Grant

3.

Develop/Conduct SB/GIS

Training Workshops

@ I.E., SoCal, US level

2.

~8Case Studies of

GIS Technology Transfer

to I.E. Small Businesses

1.

Develop Center to

provide GIS Assistance

to Small Businesses

4.

Intern’l Conference

on Managing with GIS

for SB, SBA, B-Schools

5.

Develop Internet-based

Knowledge Repository

of Case Studies, etc.



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SME Criteria

Location

Sector

Industry

Size

Maturity

Objectives

Technology

Interest

Tomlinson Method

Strategic Purpose

Plan for a Plan

Technology Seminar

Information Products

Systems Scope

Data Design

Data Model

System Requirements

Assessment Metrics

Implementation Plan

~8 IE SME Case Studies


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Putting It All Together

Inland

Empire

SME

Spatial

Thinking

Business

Model

1

GIS

App(s)

Value-

Added

3

Spread

2

Sustain


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Where are the GIS Applications?

Schuurman, N. GIS: A Short Introduction, 2004, p. 135


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Early Impressions with SMEs

  • The First Law of SMEs  SURVIVAL

  • One Critical Element of Survival  Process Innovation

  • “When All You Have is a Hammer,

    Everything Looks Like a Nail”  Enterprise GIS

  • “Every Project Competes Against Itself,

    Delayed in Time”

    Real Options

  • A GIS Investment is a Portfolio of Options


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II. Small BusinessesWhat IS an SME?

http://ec.europa.eu/enterprise/

enterprise_policy/sme_definition/

sme_user_guide.pdf


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U.S. has NO single SME Definition

http://www.sba.gov/advo/laws/comments/factssba04_0629.pdf


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Why Focus on SMEs?

  • Most private non-farm workers in US are in SMEs (57.4m of 113.4m)

  • Over past decade, ~80% US net job creation has been through SMEs

  • SMEs produce 14 times as many patents per employee, and those patents are 2 times as likely to rank among 1% most cited


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How SMEs Differ fromPublicly-traded Corporationss:

  • Market Prices P0 = D1/(k-g)

  • Corp. Risk Measures ke = rf + β(rm-rf)

  • Risk Diversification σ2>> β

  • Agency Issues Owner≈ Management

  • Slack Resources Lean Operations

  • Scale and Integration Project ≈Enterprise


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Primary Threat to SMEs  SURVIVAL

After 4 years

http://www.sba.gov/advo/stats/bh_sbe03.pdf

http://www.smallbiztrends.com/2005/07/business-failure-rates-highest-in.html


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Questions for You

  • Is the Small Business Survival Rate in CA:

    • HIGHER than the US Average

    • EQUAL to the US Average

    • LOWER than the US Average

  • What Accounts for Your Answer to 1) ?

    3) What Advantage Does CA Have, Compared to most other States?


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SME BusinessTurnover Rate


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SME_Business_Turnover_RateCA Ranking (50 States + DC)

  • Fifth worst:

U.S. Total 1.15

18% of Business BIRTHS in U.S.

10% of BANKRUPTCIES in U.S.

28% of Business TERMINATIONS in U.S.


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Selective Components:SME_Risk to Survival IndexCA Rankings (50 States + DC)

  • Top Personal Income Tax Rate 51

  • Top Capital Gains Tax Rate 51

  • Top Corporate Income Tax Rate 40

  • State and Local Property Taxes 17

  • Number Health Insurance Mandates 44

  • Electric Utility Costs 44

  • Workers’ Compensation Benefits 49

  • State Gasoline Taxes 50

  • 5-yr Government Spending Growth Rate 51

  • Per Capita Government Expenditures 46


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State_Innovation_IndexCA Rankings (50 States + DC)

CONCLUSION: Technological Innovation

partially offsets the hostile environment to

soften its impact on SME failures, BUT …

CA SMEs must continue to INNOVATE,

and spatial thinking about your business

provides a set of opportunities to do so.


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Process Innovation IncreasesSME Survival Rates

N = 3,275 SMEs

Process Innovators > Product Innovators > Non-Innovators

http://icc.oxfordjournals.org/cgi/content/abstract/14/6/1167


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[For SMEs] “ … innovation acts as a vaccine,

allowing firms to increase their resistance to

the liability of newness and smallness.”

“Overall, innovation increases the survival

probability of firms by 11%. This effect is

comparable in scale to the effect of firm age,

which has traditionally been found to be a

key determinant of firm survival.”

“ … we are able to detect that there is a

significant difference between product and process innovators. Firms that introduce

new products do not have higher chances

of survival, [whereas] firms that can

introduce process innovations do.”


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GIS: An IT Process Innovation

“In most organizations the introduction of

a GIS brings with it a period of change.

This is in common with other IT

applications, and other innovations

that change working practices.”

An Introduction to GIS

Heywood et al, 3rd Ed., p. 351


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III. Non-Market ValuationsFirst, Market-Derived Event StudiesRandomize Away Confounding Variables

Same Event, Multiple Firms,

Multiple Real-time Event Dates


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Passive NPV Calculations

NPV = Sum of EXPECTED Cash Flows, Discounted at RADR

Expected Net Cash Flows at t:

RADR = (1 + Rf + Risk Premium)

Rf = Riskfree Rate

CEQ = Sum of CEQ Cash Flows, Discounted at Riskfree Rate

CEQ Net Cash Flows at t:

α * Expected Net Cash Flows at t

0 ≤α≤ 1


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Accounting-DrivenGIS Project Cashflows

  • Benefits:DCosts:

    Improved Productivity Purchases & Training

    Improved Efficiency Data Collection

    Expansion of Revenues Database Design

    Value of Assets Communications

    Customer Satisfaction Customer Expectations

    Other Other


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Estimating SME Discount Rates

Annualized Survival Rate = p; 1 + k = (1 + R f) / p if d = 0


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Example: NPV v. CEQ

Equivalent iff:

α = 1+Rf /

1+RADR

Ben. = 26.42

Cost = 23.68

Rate = 0.00

NPV = +2.74

RADR

NPV at “Corresponding RADR”




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Passive NPV Analysis of GIS

  • INSTRUCTIONS:

    Slide, stretch and shrink bar until your best guess is equally likely inside as outside bar

  • Considering all GIS net benefits and costs, estimate net value as a percent of sales:

    First Year: 0% 100%

    Later Years: 0% 100%

  • Estimate the firm’s survival probability for one year:

    Current Year: 0% 100%

Best

Estimate

Value-

Added =

$447,382

Likelihood

Value-Added

Positive = 82%


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http://www.ibm.com/developerworks/rational/

library/nov05/mckenna/index.html


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IV. GIS Projects as REAL OPTIONS

“ … a well-planned implementation can

start out as a project and grow, or scale,

into a full-blown enterprise system.”

“ … GIS tend to evolve over time.”

Introduction

Thinking About GIS

Roger Tomlinson

Expires

Single

GIS

Project

SCALE

Option

?

Enterprise

GIS

Exercised


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The Case for ROA of IT (GIS)

http://web.gsm.uci.edu/kzhu/PDFfiles/

Papers_Abstract/ICIS01_RealOptions_panel.pdf


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GIS creates REAL OPTIONS

“Managing risk within significant GIS projects requires at least two appraisals:

  • a sound investment appraisal before commitment is made to proceed

  • a risk appraisal to identify the significant factors which may go wrong in implementation of the project.”

Geographical Information Systems and Science

Longley, Goodchild, Maguire and Rhind

Second Edition page 444


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The REAL OPTIONS Approach

Traditional,

Passive NPV

( ≈ B / C Ratio )

+

Active

NPV

=

Managerial

Flexibility to

React as

Uncertainties

Are Resolved

OR right



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Basic Logic of a REAL OPTION


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GIS Examples of REAL OPTIONS

  • DELAY OPTION, to implement a full GIS later

  • SCALE OPTION, to expand toward enterprise GIS after cultural acceptance and in-house expertise established

  • FLEXIBILITY OPTION, to switch platforms, or to accelerate/decelerate GIS

  • EXIT OPTION, to abandon GIS as a “sunk cost”

  • LEARNING OPTION, to attain otherwise unattainable information


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OPTION Valuation Models

  • Black-Scholes OPM

  • Binomial OPM, …

REAL OPTIONS

Done Right


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From Financial to REAL OPTIONS

Financial

Option

Embedded

GIS

Option



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Projects as REAL OPTIONS



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Uncertain Outcomes

μσ

~ 1 Die3.50 1.71

~ 1 Flip of 1 Coin

~ Double * (1 Die)7.00 3.42

~ Sum (2 Dice)7.00 2.42

{1:6} w Pr = 1/6

{0:1 ~ 1:3 v. 4:6} w Pr = 1/2

{2,4,6,8,10,12} w Pr = 1/6

{2:12} w Pr 1/36, 2/36, …, 6/36, … , 2/36, 1/36


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What Happened?

  • A Business Services Firm

  • RADR = 27%

  • RiskFree = 4%

  • OPTION = 3 Years Out;

    Let Expire Unless

    Initial Projects Payoff = {$4, $5, $6}


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What’s Next

Identify SME

Case Studies

In I.E. with:

GIS Enterprise

Aspirations

+

Embedded

GIS Options

Passive

NPV

of Initial

Investment

Formulate

Stages of

GIS

Implementation

Active

Management

and

Valuation

Of Options

Wide Dissemination of Results


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Basic Premise

  • SME Objective Function

  • = SURVIVAL

  • =f(PROCESS INNOVATION)

  • GIS =

  • A Process Innovation

  • An Enterprise Strategy

  • A Portfolio of Options



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