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In some ways, technological change is similar to evolutionary change. Some technologies are simply eclipsed by other technologies and fade or die away, such as in the case of the horse and buggy giving way to the Model T and analog TVs succumbing to digital TVs. Sometimes, technologies evolve through subtle differentiation such as the case with cell phones, GPS devices, and operating systems. There are instances where major mutations take place when two different technologies are combined such as in the case of the merging of GPS, cell phones, MP3 players, and Web 2.0 social networking.
In many instances, technology does not just die out or become obsolete, it just becomes part and parcel of a new technology. One of the early partitioning and time-sharing and operating systems, IBM’s VM370, was developed in the 1960s and 1970s. The concepts developed for the VM370 operating systems are the foundation for many existing operating systems, including UNIX, Linux, and all of Microsoft’s products, as well as the current crop of the so-called virtual machine applications. The cloud-computing concept is actually an extension of the IBM’s VM370 architecture. Thin client computing, where a significant part of the processing is done on a central server, was touted as the next big technology in the early 1990s. It faded for a while and then has reemerged as an important concept with the emergence of cloud computing.
1.12: There is Power in Numbers- Network Effects and Metcalfes Law
Metcalfe’s law states that the value or utility of a network is proportional to the number of user’s of the network. At one time, Metcalfe indicated that utility was a square function (utility = n2). For example, a phone network with 10 people has a utility of 100 and a network with 100 people has a utility value of 10,000. He has since scaled that back and the utility of a network is based on a log function (utility = n × log(n)).VC MIKE (2010). The log model is presented in Figure 1.7 "The Size of the Network Increases the Value of the Network". Thus, for a 100-user network, this would translate to utility = 100 × 2 = 200 or 200 utility units. The equation is not the important issue. It is the idea that if you have more people using a phone, a fax, railroad, a Web 2.0 application or whatever, your network will become more attractive and attract even more users. Consider the choice to go with a local cable TV network or a satellite TV network. If individuals take into account what network other people are choosing, then there is a network externality or a network effect that influences the decision.
In the economics literature, a network effect typically refers to a change in the positive benefit that a consumer receives from a good, when the number of consumers of the good increases.Liebowitz and Margolis (1994). Network effects are not limited to phone, wireless, and telecommunications networks. They can also include the following:
• Transportation networks such as roads, railroads, and flight paths.
• Communication systems such as the postal service, express mail services, and pony express.
• Communication media such as books, printed materials, schools, and universities, because they disseminate ideas and knowledge and those ideas have greater utility.
• Social networks involving a social structure between individuals or organizations with similar interests. They include political, cultural, religious, sports clubs, social clubs, volunteer groups, family, friends, industry trade groups, and market segments. Facebook, Twitter, and Web 2.0 social-networking applications.
Figure 1.7 The Size of the Network Increases the Value of the Network
Economists also talk about network failures. That is a situation where the technology or network selected is not the best technology, thus leading consumers and business down a path that is not optimum. In reality, consumers are often very aware of the trade-offs in performance that exists between competing technologies. Take the case of the success of the VHS recording format over the Beta format. The success of VHS is often touted as an example of network failure. The picture quality of the VHS format was, in fact, reasonably close to the quality of the Beta format.Liebowitz and Margolis (1994). In addition, the VHS tapes had a greater capacity and cost less than the Beta tapes. It was not a failure of the market to recognize the superiority of Beta; it was rather that consumers revealed their preferences for certain features by purchasing the VHS format.
The best of all worlds is when the stars are aligned properly and an organization can realize network effects and take advantage of Moore’s law by increasing the performance of a product while reducing or maintain costs. The net result is to spur hypergrowth in the diffusion and sales of a product or service. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/01%3A__Concepts_in_the_Context_of_Monopolistic_Competition/1.11%3A_Technologies_Do_Not_Necessarily_Fall_Into_the_Abyss-_They_Become_Embedded_in_New_Technology.txt |
The objectives of R&D are to develop existing and new core competencies, to further existing and new products, and to develop existing and new business processes through invention and innovation.Matheson and Matheson (1998). The R&D process is the engine that drives product and process differentiation. Innovation is typically defined as the ideas, the products, the services, or processes that are perceived as being new and different and they have been implemented or even commercialized.
Research and development are usually thrown together as one concept, but in reality they are somewhat distinct processes.Annacchino (2006). Research is typically considered to be science-oriented whereas development is the mechanism for translating the science into commercial products and services. Basic science can be thought of as the engine for pushing new discoveries and ideas into society. This is in contrast to the concept of market pull. Market pull is essentially the process of translating the basic science into products and services in order to satisfy customer needs, wants, and demands. The interaction between science push and market pull creates a very powerful feedback loop that spurs on the development and diffusion of new products and services.Schmoch (2007).
As noted earlier, the diffusion and awareness of technologies typically follows an S-curve. In the early stages of the S-curve, there are very few people aware of the technology. Market research is not important at this stage because there are few untapped wants because of the lack of awareness. As a technology matures and begins to take off, there is a propagation of awareness with increased insight of the possibilities of a technology.Goldenberg and Mazursky (2002). It is at this stage that market research becomes viable. It is also at this stage that many similar products begin to emerge because of the surfacing of a kind of group aha because of the interconnectedness of businesses and research groups. This group aha occurs because market research by producers and product development laboratories leads to the same conclusions about consumer wants. Once consumers begin to use products and have had the opportunity to experience a product, they also begin to identify areas of deficiencies in the product and areas where a feature might be added. And this is where market research is very effective because market researchers are very adept at identifying changes in consumer wants.
As the market matures, the demand for the products also begins to decline with the emergence of substitute products and technological obsolescence. It is then necessary to re-prime the pump and reload science. This is done by working with new science and new technologies in order to identify new opportunities for developing products and services. Figure 1.8 "Push, Pull, and Reload" illustrates the concepts of science push and market pull and how they relate to diffusion and awareness.
Figure 1.8 Push, Pull, and Reload
1.14: Push Pull and Reload can go on Forever
Some individuals believe that there is a limit on the ability of innovative activities to bring new products to the market. This suggests that differentiation cannot go on forever. This line of reasoning is similar to the idea attributed to someone in the U.S. patent office that: “Everything that can be invented has been invented.” There is good news, however, from the patent office. Research has shown that companies can keep innovating and still contribute to the bottom line because it appears that, in general, there are no diminishing returns to scale for R&D expenditures.Madsen (2007). In essence, continued investment in R&D yields rewards, revenues, and profits. Even though a particular technology may have a performance limit, advances in R&D and in basic science along with customer pull will start the process anew. Moore’s law continues to work for Intel because they continuously re-prime the pump. They have gone from focusing on the clock rate of their CPU, which is constrained by thermodynamic considerations, to exploring multiple CPU cores and restructuring the overall microarchitecture of their chips.
1.15: R and D for Start-Ups and Small Businesses
For the entrepreneur, there is significant overlap related to research, product development, and the actual production of products and services. Many organizations are just too small to become involved in basic research and they have to rely on combining existing and emerging technologies in creative ways. Entrepreneurs view R&D as interdependent processes that are intertwined and not very distinct. For the entrepreneur, research and product development includes:
1. generating an idea for a product or services;
2. gathering and synthesizing information on the idea;
3. designing the product or services;
4. developing a prototype of the product or service;
5. developing a production process for the product or service;
6. producing the product or service.
Our focus in this book is primarily on the first four steps including idea generation, gathering information, preliminary design, and prototyping. From the standpoint of the entrepreneur, these steps are the essence of R&D. Steps 5 and 6 are part of product engineering and they will not be discussed in depth. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/01%3A__Concepts_in_the_Context_of_Monopolistic_Competition/1.13%3A__The_Role_of_R_and_D_Process_in_Innovation.txt |
In addition to generating new knowledge, conducting R&D leads to smarter organizations because the knowledge these organizations already have helped understand new information when it becomes available. The best way to conduct R&D and to improve the organizational innovation and creativity is to learn-by-doing and to engage in search activity. In this section, we will discuss searching for ideas first and we will discuss learning-by-doing later.
Learning-about, or the search process, involves reading magazines, books, and technical articles, attending schools, observing the competition, one-on-one discussion, interacting with customers, and attending symposia and conferences. It involves acquiring knowledge and integrating and synthesizing that knowledge. This is the first step in developing individual and organizational knowledge structures. Learning-about in its basic form is search and synthesis. It is too expensive in terms of time and resources for organizations to build every product and service that is conceived. Many companies therefore learn-about an idea by reading, interacting with experts, and also by attending symposia and conferences related to an emerging technology. The goal is to gain insight and understand the potential of an emerging technology or a new idea.
It is our thesis that book learning, lectures, and even homework are usually beneficial. This is essentially the learning-about process. Search plays a key part in the learning-about process. This is particularly true when an organization searches outside the organization for ideas related to product innovation. Search can be classified in terms of the breadth and depth of the search.Laursen and Salter (2006). The breadth of the search refers to the number of outside sources used and consulted. The depth of search refers to the intensity of the relationship between the searcher and the external sources. Table 1.1 "External Sources of Information" lists potential sources of external information that can be used by entrepreneurs and product developers when engaging in an innovative activity.
As illustrated in Figure 1.9 "Breadth and Depth of Search and Innovative Activity" (adapted from Laursen and SalterLaursen and Salter (2006).), it appears that the breadth of search is important for incremental improvements innovation and that both breadth and depth of search are important for new and radical innovation. In terms of the breadth of the search, it appears that the sweet spot is about eleven sources plus or minus two sources (see Figure 1.10 "Breadth of Search and Innovative Performance", adapted from Laursen and SalterLaursen and Salter (2006).). This is a rather useful finding upon further reflection. When searching for new information, it is often difficult to determine how much information to gather and the number of sources for collecting information in order to avoid information overload. The point is that you have to seek out a variety of sources of information in order to improve the chances of introducing a successful innovation.
Table 1.1 External Sources of Information
Sources of information from the market
Suppliers of equipment, materials, components, or software
Clients or customers
Competitors
Consultants
Commercial laboratories/R&D enterprises
Sources of information from institutions
Universities or other higher education institutes
Government research organizations
Other public sectors, e.g., business links and government offices
Private research institutes
Sources of information from the profession
Professional conferences and meetings
Trade associations
Technical/trade press and computer databases
Fairs and exhibitions
Sources from specialized places
Technical standards
Health and safety standards and regulations
Environmental standards and regulations
Source: Laursen and Salter (2006).
Figure 1.9 Breadth and Depth of Search and Innovative Activity
Figure 1.10 Breadth of Search and Innovative Performance | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/01%3A__Concepts_in_the_Context_of_Monopolistic_Competition/1.16%3A_Search_and_the_Role_of_Learning-About_in_Developing_Ideas_for_New_Products_and_Services.txt |
Learning-by-doing means that the organization or entrepreneur makes and builds things, conducts experiments, and builds prototypes. R&D is essentially learning by doing. Individuals and organizations benefit from learning-by-doing because it builds up absorptive capacity.Cohen and Levinthal (1990). Absorptive capacity is the result of having already developed knowledge and insight in a particular domain, for example, in medicine, baseball, networking, or memory chips. Having absorptive capacity means that prior knowledge facilitates the learning of new knowledge. Developing absorptive capacity is synonymous with developing insight. It gives an individual or an organization the ability to understand, assimilate, transfer, and exploit new knowledge and new information as it becomes available and then to apply it to solving problems and developing commercially viable products. Learning-by-doing is essentially design and development.
The key activity for innovative activity is the learning-by-doing process. Learning-by-doing means that you make and build things, try experiments, and construct prototypes. Sometimes, there is a facilitator, such as a teacher, a project manager, colleagues, a fellow student, a book, or a YouTube video, to get you started on the path to creativity.
Roger Shank is a well-known expert on artificial intelligence, learning, and knowledge. He has been on a crusade to change the way kids are taught. He wants children to learn by doing and engage in more experimentation and reflection and spend less time on being tested on the so-called “body of knowledge that everyone must know.”Schank and Cleary (1995), p. 74.
If you want to learn to throw a football, drive a car, build a mouse trap, design a building, cook a stir fry, or be a management consultant, you must have a go at doing it. Throughout history, youths have been apprenticed to masters in order to learn a trade … Parents usually teach children in this way. They don’t give a series of lectures to their children to prepare them to walk, talk, climb, run, play a game, or learn how to behave. They just let their children do these things. If he throws poorly, he simply tries again. Parents tolerate sitting in the passenger seat while their teenager tries out the driver’s seat for the first time. It’s nerve-racking, but parents put up with it, because they know there’s no better way.… When it comes to school, however, instead of allowing students to learn by doing, we create courses of instruction to tell students about the theory of the task without concentrating on the doing of the task. It’s not easy to see how to apply apprenticeship to mass education. So in its place, we lecture.
R&D is essentially learning-by-doing. Individuals and organizations benefit from learning-by-doing in the context of R&D because it builds up absorptive capacity.Cohen and Levinthal (1990). Absorptive capacity is simply a function of having previously developed knowledge structures in a particular domain (e.g., domain knowledge in medicine, baseball, networking, or memory chips). It gives an individual or an organization the ability to understand, assimilate, transfer, and exploit new knowledge and information and then to apply it to solving problems and developing commercially viable products.
1.18: The Role of the Supply Chain and the Brand in Product Differentiation
Differentiation should be the engine driving the business, but businesses must also attend to improving the supply chain and the brand in order to succeed. Improving the supply chain and improving the brand image are also methods for product differentiation. They contribute to the unique bundle of perceptions that customers have towards a business.
The supply chain is the connected activities related to the creation of a product or service up through the delivery of the product to the customer. It includes the upstream suppliers as well as downstream activities such as wholesalers and distribution warehouses and after sales support.In general, the terms value chain and supply chain can be used interchangeably, although the value chain is rooted in the strategic planning literature whereas the supply chain is linked to the work in the operations management area. Key activities for improving the supply chain are to reduce transaction costs to improve business processes. Consumers often perceive efficient and responsive supply chains as an attribute or a product feature.
The brand is the image of a product or service in the marketplace. Consumers essentially perceive the brand as being a feature of the product and, in many instances, it is viewed as the avatar for the product. Images and visions are immediately invoked when mentioning Apple, or Amazon, Google, Wal-Mart, and Disney. Our focus in this book will be on the process of innovation and differentiation, but we also recognize that successful companies must attend to improving the supply chain and developing a strong brand.
1.19: Conclusion
In this chapter, we have introduced many of the fundamental concepts related to understanding differentiation and the diffusion of innovations within the context of monopolistic competition. The key points are the following:
• Monopolistic competition involves many buyers and sellers of products that are closely related, but not identical where entry and exit are easy. It is the dominant form of competition.
• Entrepreneurship is the best method for competing in monopolistically competitive environments. Entrepreneurship involves engaging in a risky endeavor with continuous creation and re-creation of a new enterprise, a new product, or a new idea.
• Radical innovation tends to replace existing ideas, products, services, and processes. Incremental innovations involve smaller improvements in ideas, products, services, and processes.
• Technology life cycles and the product life cycles are used to understand the diffusion of technologies and products.
• Diffusion is the acceptance, adoption, and awareness of a technology or a product by individuals.
• The diffusion of a technology usually lags the performance of a technology and this can be understood using Moore and Metcalf’s laws.
• The Bridge model is a useful way to understand discontinuities in the technology life cycle where problems can occur.
• R&D activities are present in large and small organizations, they are just implemented differently.
• Learning-about involves searching, reading, inquiry, and synthesis. Learning-by-doing involves making and building things. Learning-about and learning-by-doing are the foundation of R&D.
• Developing a strong supply chain and a strong brand through marketing are critical for delivering differentiated products and services.
This chapter has illustrated the foundational concepts for competing in the current marketplace. Subsequent chapters will build on this foundation and present additional details on how to accomplish differentiation and innovation through product and services versioning. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/01%3A__Concepts_in_the_Context_of_Monopolistic_Competition/1.17%3A_Building_Things_and_the_Role_of_Learn-By-Doing_in_Developing_Ideas_for_New_Products_and_Servi.txt |
The typical demand curve has the price on the y-axis and the quantity demanded on the x-axis and is downward-sloping. A demand curve can be represented as a linear mathematical formula with quantity or price as the dependent variable. A demand curve is a very useful diagram for describing the relationship between the price level and the quantity demanded at each price level. In general, as the price of a product increases, the demand for the good decreases. Similarly, as the price of a product decreases, the demand for the good increases. The next section of the chapter discusses how the demand curve can be used to identify the optimal price and quantity for selling just one version of a product.
2.02: First-Degree Price Discrimination- Personalized Pricing
First-degree price discrimination has been around ever since people began bartering and exchanging goods.Lipsey and Chrystal (2007). It is simply an attempt to charge different prices to different customers for the same product. Figure 2.1 "Need a Way to Capture Additional Revenue" presents an example of an aggregate demand curve for a cord of wood in a small town. In an ideal world, from the producer’s perspective, one producer could identify each consumer’s willingness-to-pay function and set prices accordingly (cf. Varian 1996). Let us assume that one company owns all of the timber in the area and is therefore a monopoly. Instead of charging \$40 to each consumer, the monopolist charges a different price to each consumer depending on their ability and willingness to pay for the cord of wood. This is essentially personalized pricing, where the selling price is customized for each buyer. This is a good strategy for a monopolist because they can generate more revenue than just picking a single price point. Each consumer is thus charged a different price for the same product.
Figure 2.1 Need a Way to Capture Additional Revenue
This strategy is also known as perfect price discrimination. Personalized pricing is very difficult to implement in practice for four reasons. First, it is difficult to identify the willingness-to-pay functions for each consumer. Second, customers often get upset when they find out that another consumer has paid less for a product or service than they have paid. The third reason that personalized pricing causes problems is that perfect price discrimination can lead to arbitrage, where opportunistic buyers purchase the product at a discounted price in one market and then sell it at a profit in another market. The fourth and final reason that it is difficult to implement is that, in certain instances, it is illegal. This issue will be dealt with at the end of the chapter.
Though personalized pricing is difficult to implement, it can be accomplished and is in fact embraced by some companies. Amazon, for example, presents their customers with personalized product recommendations using past search and buying behavior, and large supermarkets use their scanner data to configure promotions tailored to their customers.
Personalized pricing requires the effective measurement of consumer preferences. The supplier must in some way conduct market research to determine individualized pricing strategies. This can be accomplished by using technology to analyze historical buying patterns. Online retailers, such as Amazon, can very easily analyze transactions using historical data. Offline retailers have to collect and sort the data from a variety of sources unless their customers participate in a rewards program or a customer discount program that incorporates a mechanism for gathering customer transaction information. Amazon has participated in many of types of personalized marketing and pricing schemes because they have the infrastructure in place to gather and analyze behavior. Companies such as Amazon use some form of collaborative filtering to determine product recommendations for books, videos, and many other products.
Collaborative Filtering
There are many ways to implement collaborative filtering. Collaborative filtering goes something like this. John likes audio books by David Sedaris. Other people who have bought audio books by David Sedaris also bought books by George Carlin. Therefore, the so-called recommender system at Amazon or at Audible books would make a recommendation to John that he should buy a book by George Carlin. Collaborative filtering systems can also include rating systems; in fact, Amazon and a number of other online retailers will try very hard to get you to help them by asking you to rate a product you have just bought. They will use the ratings to develop an entire web of recommendations to many of their customers and to retarget you with similar products. Here is another example of collaborative filtering in action: John bought and gave his new Kindle e-book reader a five star rating. He and many other buyers of the Amazon Kindle also bought a leather case. The recommender system will subsequently recommend a leather case to everyone who subsequently buys the Kindle.
Collaborative filtering can also involve price differentiation and price personalization. If the person who buys the Kindle does not buy the leather case at the same time, then the recommender system will send an email indicating that the leather case is on sale or wait until the Kindle customer logs back onto the system and then presents the customer with a discounted price on the leather case.
Auctions are also a form of personalized pricing. Theoretically, an auction participant will bid up to their reservation price or their willingness-to-pay level for a product. Figure 2.2 "Revenues Derived by Selling a Product at a Single Price" illustrates that the revenue generated by offering a product at a single price of \$30 will generate \$900 in revenues. As illustrated in Figure 2.3 "Auctions Can Be Used for Personalized Pricing", the use of an auction could theoretically generate revenues of \$1,400. Auctions permit sellers to price discriminate according to the customers’ willingness-to-pay. Some individuals will bid \$10 or \$20 and others will bid \$30, or \$40 or more. As a result, a seller could theoretically generate additional revenues of \$500 by offering multiple units of a product at an auction. The next chapter will illustrate in detail how this revenue is generated using versioning.
Figure 2.2 Revenues Derived by Selling a Product at a Single Price
Figure 2.3 Auctions Can Be Used for Personalized Pricing
Developing personalized pricing is an idealized goal for producers because the potential opportunities for revenue generation are exceptional. However, because it is difficult to accomplish in practice, producers often turn toward second- and third-degree price discrimination to generate additional revenues. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/02%3A_Fundamentals_of_Product_and_Price_Differentiation/2.01%3A_The_Demand_Curve.txt |
As noted by Varian and Shapiro in 1998, the idea behind versioning is to engage in differential pricing by offering different versions of a product. Figure 2.4 "Second-Degree Price Discrimination" illustrates the versioning concept. Ideally, the different versions should be perceived as having different levels of quality. We also maintain that the number of versions should be related to the number of distinct market segments. In many instances, it is difficult to identify the optimum number of market segments, and it is also difficult to develop products for each market segment. Goldilocks pricing is a rule of thumb that suggests that you should start out with three price levels. The idea behind Goldilocks pricing is that 1 product is too few, 10 products too many, and 3 is just the right amount.One of my colleagues says that 2 is the perfect number because many consumers will delay purchase when there are more than two choices because of the excess demands on cognitive processing. There is evidence that having too many choices places a significant cognitive and emotional burden on the ability of individuals to make decisions.Schwartz (2003). It is my experience that somewhere between two and four versions should be offered. A subsequent chapter will illustrate how Goldilocks pricing has been implicitly or explicitly implemented by a variety of companies. The key to versioning is to try to anticipate customer’s needs and then to try and develop organizational competencies for delivering those products and services.
Figure 2.4 Second-Degree Price Discrimination
As noted earlier and illustrated in the next chapter, versioning also leads to increased revenues and profits. You will leave money on the table if you do not have a high-end product for consumers who are not price-sensitive. In addition, you will not sell any product to customers who are very price-sensitive. There are several additional compelling reasons for versioning. By having several products, you can experiment and watch economic behavior as consumers will focus on the features and products that are most desirable. This sort of experimentation is the basis of monopolistic competition and the mechanism that allows the entrepreneur to successfully compete. Product versions can be generated in a variety of ways, including distinct product features, product design, and product promotions such as product rebates and product availability, for example, when the product is delivered.
In this book, we will refer to three foundational versions of products. The high-end product is referred to as a Midas version and it is targeted toward nonprice-sensitive consumers. Midas products are extravagantly engineered and contain advanced features and attributes. Hermes products are targeted toward price-sensitive consumers and are frugally engineered and designed with basic features. Atlas products are designed for the middle ground or the mainstream. They not only have basic features, but also have several advanced features, and are priced between Midas and Hermes versions. More details on the motivation behind the three versions will be presented throughout the book.
An example of versioning is found in the airline industry. Airline companies usually provide two or three levels of seats, such as economy class seats, business class seats, and first-class seats. The first-class tickets are the most expensive and they offer customers the highest quality service. Consumers who are willing to pay for the extra services will purchase the first-class ticket. On the other hand, customers who purchase the economy-class ticket receive a lower level of service. But they are not willing to pay for the extra services and features offered to the first-class and business-class customers. As illustrated in the hypothetical example in Figure 2.5 "Revenues Generated by Only Offering Economy Seats", if an airline offers only an economy ticket at a set price of \$300, then the revenues generated would be \$36,000. However, as illustrated in Figure 2.6 "Versioning Airline Seats Generates Additional Revenue", if the airline offers an economy ticket at \$300, a business-class ticket for \$600, and first-class tickets for \$800, then the company could potentially generate additional revenues of \$22,000.
Bundling is a special type of versioning that often involves information content that is in a digital format. Online and offline newspapers, encyclopedias, and magazines are examples of information bundles. Software in addition to having versions is also bundled. Examples include the so-called office bundles containing word processing, presentation, and spreadsheet software and the tax software bundles that include electronic filing, state filing, as well as additional tax preparation features.
Figure 2.5 Revenues Generated by Only Offering Economy Seats
Bundling strategies frequently appear in markets for informational goods. As you can imagine, the marginal cost of information goods is theoretically close to zero. Let us imagine four consumers who are interested in buying two computer games such as the Football Madness game and the Soccer is My Life game. Suppose also that the four customers (Bob, Carol, Ted, and Alice) are willing to pay \$18, \$10, \$8, and \$2, respectively, for Football Madness. Suppose also that Bob, Carol, Ted, and Alice have different reservation prices for the Soccer is My Life game. Bob would pay \$3 for the game, Carol would pay \$16, Ted would pay \$17, and Alice would pay \$19 for the soccer game. If the retail cost of both games is \$16, then none of these individuals would buy both games. In this case, Bob would only buy Football Madness and Carol, and Ted and Alice would only buy Soccer is My Life. In this scenario, the seller would only obtain \$64 in revenues (4 × \$16). However, if the seller bundles the two titles together and sells the total package for \$20, then the seller could generate \$80 in revenues. The bundled product price is under what each individual was willing to pay for the two games (Bob: \$21, Carol: \$26, Ted: \$25, and Alice: \$21). In this case, the seller is better off and the four consumers are happy because of the bundling strategy. Bundling is particularly useful with digital goods because the cost to reproduce digital copies is trivial.
Figure 2.6 Versioning Airline Seats Generates Additional Revenue
2.04: Third-degree Price Discrimination- Group Pricing
Groups are the collection of customers with some common characteristics. The idea behind group pricing is to establish different prices for different groups or customer segments. Usually, the groups are segmented because one group is price-sensitive and the members of the group have a lower-willingness-to-pay function. Examples of such groups include retired seniors versus the nonretired, business travelers versus tourists, and students versus the general public. These groups are targeted by using senior discounts, student discounts, rewards programs, frequent-flyer programs, and buying clubs.
For example, statistical software companies, such as SAS and SPSS, sell their product to students at a much lower price than they do to commercial businesses because the student customer segment is price-sensitive and not willing to pay the high price for the statistical software. Statistical software is usually very expensive costing over \$1,000, but often the student edition is around \$100. By charging a lower price, companies can extract revenues from segments that are price-sensitive and not willing to pay for the product. As illustrated in the Figure 2.7 "Revenues Generated by Set Price for Statistical Software", a hypothetical company offering statistical software could generate \$5,000,000 in revenues by selling their software to individuals and businesses at a price of \$1,000. However, if the statistical software company also sells a nonsupported version to students through academic institutions, then they could theoretically generate an additional \$2,000,000 in revenues (see Figure 2.8 "Group Pricing and Additional Revenues").
One objective of having products for price-sensitive groups, such as students, is to acquire them as customers by trying to get them locked-in to using a product. They may eventually become customers for high-end products and services. In addition, it is better to have them as paying customers, rather have them engaged in copying the software. Group pricing is a common form of price discrimination, which is illustrated in Figure 2.9 "Third-Degree Price Discrimination: Group Pricing".
As noted by Phillips, there is not a clear line that distinguishes versioning from group pricing.Phillips (2005). Indeed, most approaches contain elements of group pricing and versioning. The Midas, Atlas, and Hermes categories are also product versions, but they are also targeted at Midas, Atlas, and Hermes groups according to their price sensitivities and their willingness-to-pay. As noted above, additional details on the motivation behind the three versions and the willingness-to-pay segments will be presented in later chapters.
Figure 2.7 Revenues Generated by Set Price for Statistical Software
Figure 2.8 Group Pricing and Additional Revenues
Figure 2.9 Third-Degree Price Discrimination: Group Pricing | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/02%3A_Fundamentals_of_Product_and_Price_Differentiation/2.03%3A_Second-Degree_Price_Discrimination-_Versioning.txt |
Price discrimination has a negative connotation because monopolies and oligopolies sometimes use their market power to unfair advantage and engage in predatory pricing schemes. Predatory pricing, however, is rare in markets characterized by monopolistic competition because there are many sellers and the products are largely substitutable, even if only slightly differentiated. In some ways, price discrimination is the rule rather than the exception in contemporary commerce transactions. Here are several relevant guidelines on price discrimination from the FTC (Federal Trade Commission):
A seller charging competing buyers different prices for the same “commodity” or discriminating in the provision of “allowances”—compensation for advertising and other services—may be violating the Robinson-Patman Act. This kind of price discrimination may give favored customers an edge in the market that has nothing to do with their superior efficiency. Price discriminations are generally lawful, particularly if they reflect the different costs of dealing with different buyers or are the result of a seller’s attempts to meet a competitor’s offering.
… There are two legal defenses to these types of alleged Robinson-Patman violations: (1) the price difference is justified by different costs in manufacture, sale, or delivery (e.g., volume discounts), or (2) the price concession was given in good faith to meet a competitor’s price.Federal Trade Commission (n.d-a.).
… Can prices ever be “too low?” The short answer is yes, but not very often. Generally, low prices benefit consumers. Consumers are harmed only if below-cost pricing allows a dominant competitor to knock its rivals out of the market and then raise prices to above-market levels for a substantial time. A firm’s independent decision to reduce prices to a level below its own costs does not necessarily injure competition, and, in fact, may simply reflect particularly vigorous competition. Instances of a large firm using low prices to drive smaller competitors out of the market in hopes of raising prices after they leave are rare. This strategy can only be successful if the short-run losses from pricing below cost will be made up for by much higher prices over a longer period of time after competitors leave the market. Although the FTC examines claims of predatory pricing carefully, courts, including the Supreme Court, have been skeptical of such claims …Federal Trade Commission (n.d-b.).
There is a significant amount of latitude in the way that firms can use price discrimination, yet still remain on the right side of the law. Here are a few guidelines, derived from the FTC pronouncements, which can be used to assist in determining whether versioning strategies and group pricing strategies are legal.
• Guideline 1: You may be able to legally charge different prices for a product (price discrimination) if you differentiate your product, by way of features and services.
• Guideline 2: You may be able to legally charge different prices for a product (price discrimination) to different groups if you can demonstrate that there are different price sensitivities between the groups.
• Guideline 3: You may be able to legally charge different prices for a product if the price discrimination reflects the costs of dealing with different buyers or it reflects an attempt to meet a competitor’s offering.
In general, a versioning strategy may be legal if a product is differentiated by way of features and services. It can be inferred that a practice is probably not price discrimination if you can segment people into different income groups according to their price sensitivities and their willingness-to-pay. Groups such as seniors and youth are price-sensitive. It is sometimes ok to charge differential prices to groups that are underrepresented in a market. For example, women are often charged less when they attend happy hour. The key to avoiding charges of predatory practices is to set the price above the marginal cost to produce the product. Selling a product at a price that is lower than the variable costs to produce the product can lead to charges of dumping. This strategy is illegal, but many companies use it in subtle and not so subtle ways in international markets to gain market share. The final key is to always seek legal counsel if there is any doubt that a business practice is predatory, illegal, or both.
2.06: Conclusion
The primary reason for engaging in product differentiation is to avoid some of the ruinous effects of price competition.Anderson (2008). Producers are involved in a never-ending process of introducing new products and services and then observing economic behavior. By having several products, producers can experiment and watch economic behavior as consumers will focus on the features and products that are most desirable. The benefits of being a monopolist via differentiation are short-lived, however. Just as cattle are attracted to water, producers are attracted to excess profits.Research on cattle using global positioning system devices has shown that water is a more powerful draw than salt in attracting cattle to new grazing ground. See Ganskopp (2006). As long as profit potential makes it feasible, competitors will enter the market and begin to drive profits to zero.Becerra (2009).
In this chapter, we have illustrated that there are three approaches to price discrimination and product differentiation. Each pricing strategy is employed under various contexts in practice. The key takeaways include the following:
• First-degree price discrimination, also called personalized pricing, involves charging different prices to different customers for the same product.
• It is difficult to implement first-degree price discrimination because of the difficulty in measuring each consumer’s willingness-to-pay, because some consumers may be irritated when they find out they paid more for the same good, because of arbitrage issues and finally because of the potential legal issues.
• Second-degree price discrimination is referred to as product versioning and bundling.
• Versioning involves offering a high-end product for nonprice-sensitive consumers, and a low-end product for price-sensitive consumers.
• Bundling is a special form of versioning in which two or more products are offered as a package at a single price.
• According to Goldilocks pricing, three versions may be just right. The key is to make the versions different enough so that consumer groups can be segmented.
• Third-degree price discrimination involves setting different prices for different groups of consumers such as seniors and students and other groups. It is often based on the price sensitivities of the groups.
• In some instances, price discrimination can be illegal. If there is any doubt that a business practice is in violation of laws, legal counsel should be sought. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/02%3A_Fundamentals_of_Product_and_Price_Differentiation/2.05%3A_Legal_Issues_Related_to_Price_Discrimination_and_Product_Differentiation.txt |
Joan’s Handcrafted Jewelry Boxes
Joan started out as a tinkerer in her garage. She had a band saw and a table saw and started making wooden toys for her kids. She then decided to make a jewelry box for her daughter. Her daughter and husband were so impressed that she showed the box to all of her family and friends. Word started to get around and soon Joan was getting calls to make the jewelry boxes for numerous customers. She sold the jewelry box for a flat price of \$40. It costs Joan about \$20 for the wood, the fasteners, and decorations. Joan made a tidy little profit of \$20 per box. She enjoyed being a craftsperson and enjoyed the extra income.
Joan worked as an economist for the city government and decided she would like to start a side business making jewelry boxes. She named her business Joan’s Handcrafted Jewelry Boxes. Joan subsequently started applying her economic training to launching her jewelry box business.
She knew that understanding how much consumers are willing-to-pay for different products and services was critical to running any business. Over the course of several years, Joan had offered the jewelry box at several different prices and, as a result, she had a good feel for the demand for her jewelry boxes at different price levels. She also had many discussions with her customers and potential customers on the amount they would be willing to pay for a jewelry box. She would actually ask her friends and customers how much they would be willing to pay for pearl inlays, exotic woods, and gold-plated hinges. Joan would sometimes send out questionnaires to customers who bought her jewelry boxes asking them what they liked and did not like about their jewelry box.
Joan took the task of understanding consumer preferences and the demand for jewelry boxes very seriously. Joan went so far as to sell her jewelry boxes with different woods and features on a local Internet auction. The Internet auction gave her very precise information on how much customers would be willing to pay for the jewelry box features. Joan had a friend who was in the jewelry business and she also asked her about market demand.
Joan took all the information, integrated it with local demographic and economic information, and developed a forecast and demand curve for her jewelry boxes in the surrounding county. There were approximately 720,000 families in the region and Joan estimated that she could, at most, sell to 0.5% of these families over the course of a year in the current economic environment. She was confident that income levels would not change dramatically over the next year. Joan then used all these information to develop a monthly demand curve for jewelry boxes.
Figure 3.1 "Demand Curve for Jewelry Box" presents a 1-month demand curve for Joan’s jewelry boxes in her county. The curve was derived after Joan determined that if she charged \$60 she could sell 100 units, at \$40 she could sell 200 units, and at \$20 she could sell 300 units. Joan also spent time examining all the costs that she would incur building the jewelry boxes in her newly remodeled garage. Her garage was now a small factory. She found that the variable and fixed costs are different for each type of jewelry box. After spending considerable time examining the costs and the revenues, Joan decided to sell only one type of jewelry box at a price of \$40.
Figure 3.1 Demand Curve for Jewelry Box
Figure 3.2 Revenue With One Type of Jewelry Box Selling for \$40
Joan determined that she could make a small profit by selling the box for \$40. The revenue generated by selling only one model of her jewelry box is illustrated in Figure 3.2 "Revenue With One Type of Jewelry Box Selling for \$40". Her fixed costs, consisting of rent, utilities, and tool maintenance, would run about \$2,000. The variable costs for the wood, fasteners, and decorations would be about \$15 when bought in bulk quantities. The monthly revenue from the business would be \$8,000 (\$40 × 200) and the profit from the business would be \$3,000. The contribution margin is the difference between the selling price and the variable cost to produce each jewelry box. The contribution margin for each jewelry box is \$25. The calculations for profit, using q as the quantity and p as the price, are as follows:
Total revenue = p × q
Total revenue = \$40 × 200
Total revenue = \$8,000
Profit = Total revenue − Total variable costs − Total fixed
costsProfit = p × qVc × qFc
Profit = \$40 × 200 − \$15 × 200 − \$2,000
Profit = \$8,000 − \$3,000 − \$2,000
Profit = \$3,000 | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/03%3A_Differentiation_in_Action/3.01%3A_Introduction.txt |
Joan really enjoyed owning a business and being an entrepreneur, but she wanted more. After rereading an interesting article on price discrimination by Hal Varian,Varian (1996). Joan decided to expand her product line. Expansion was easy because she had plenty of floor space and could hire one of her talented nephews to assist in producing the boxes. Joan understood the relationship between price discrimination and profitability and this led her to design an additional high-end version and a low-end version of her jewelry box.
Figure 3.3 Potential Revenue When Adding Versions
The fixed costs for the two new products were about the same. In addition, the variable cost for the high-end jewelry box was \$30 and the low-end jewelry box was \$10. As illustrated in Figure 3.3 "Potential Revenue When Adding Versions", this resulted in additional revenue of \$2,000 for the high-end jewelry box and \$2,000 for the low-end jewelry box. Now that there is a high-end jewelry box, 100 customers will purchase the high-end box instead of the middle-level box. There are also 100 new customers who will now be willing to pay for a \$20 jewelry box. The total revenue for the three boxes is \$12,000. The net profit with only one type of jewelry box was \$3,000. The net profit with three versions was \$4,500 as illustrated in the following calculations:
Profit = (\$60 − \$30) × 100 + (\$40 − \$15) × 100 + (\$20 − \$10) × 100 − \$2,000 ← {fixed costs}Profit = \$3,000 + \$2,500 + \$1,000 − \$2,000Profit = \$6,500 − \$2,000Profit = \$4,500
Notice that there are only 100 additional people purchasing the \$40 box because 100 customers are now purchasing the high-end jewelry box for \$60. There are also only 100 people who will purchase the low-end box. If Joan just adds the high-end box, her profit will increase from \$3,000 to \$3,500. If she just adds the low-end box, then her profit will increase from \$3,000 to \$4,000. If she adds both a low-end and high-end box, her net profit will increase from \$3,000 to \$4,500. The decision to expand and offer additional product versions is complex and will have a profound effect on her business model. She will of course examine her current operations and cost structure and make decisions on what versions, if any, that she will produce.
After considerable soul searching and analysis, Joan decides to introduce three different jewelry box versions. Figure 3.4 "Financial Structure for Three Versions of Joan's Jewelry Boxes" illustrates the financial profile for the three jewelry versions designated as the Athena, the Stryker, and the Natural. Figure 3.5 "Differentiating Features for Three Versions of Joan's Jewelry Boxes" provides an overview of how the features of each version of the jewelry box are used to differentiate each version.
Figure 3.4 Financial Structure for Three Versions of Joan's Jewelry Boxes
Figure 3.5 Differentiating Features for Three Versions of Joan's Jewelry Boxes
The Athena jewelry box is a high-end product targeted toward nonprice-sensitive consumers. It is part of what we refer to as a Midas product that was extravagantly engineered and designed. The Natural jewelry box is a Hermes product and is targeted toward price-sensitive consumers, and it was frugally engineered and contains basic features. The Stryker jewelry box is an Atlas product designed for the middle ground. The Stryker has several attractive features; yet it is still priced between Midas and Hermes versions. The Stryker is a mainstream version that appeals to the widest audience. Additional motivation behind the three versions will be presented in Chapter 5 "Examples of Product Differentiation & Versioning Curves". | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/03%3A_Differentiation_in_Action/3.02%3A_Price_and_Product_Differentiation_and_Enlightenment.txt |
It might appear obvious that the goal is to extricate as much as possible from the universe of consumers. But many large and small businesses, for reasons of simplicity, turn to the one-product, one-price solution in order to have a simplified management agenda. Adding additional product versions introduces complexity and requires additional investment in the supply chain as well as having an impact on the cost structure for each version. The one-version, one-price approach is a natural solution for the harried entrepreneur who has gazillion things to worry about. However, offering just one version is not a good strategy for several reasons.
If Joan offers only the high-end version, then the profit accrued will be \$1,000 [(\$60 − \$30) × 100 − \$2,000]. If Joan offers only the low-end version, then the profit accrued would be \$1,000. If Joan decides to offer only one product, then it makes sense to go with the middle-level product and the middle-level price, where the profit is \$3,000. However, such a strategy leaves a lot of money on the table. First, the high-end consumers would be willing to pay more for the product. Economists call this additional amount they are willing-to-pay as consumer surplus. The consumer surplus is the difference between the amount the nonprice-sensitive or affluent person would be willing to pay for the high-end product and how much they actually paid for the product. Second, price-sensitive consumers can be drawn into the market if an affordable option is made available.
By adding two additional versions, Joan has dramatically increased the present value of her business. A very simple way to calculate the value of a business is to use the perpetual annuity formula of cash-flow/cost-of-capital. If we assume a cost-of-capital number of 10%, then having one product leads to a firm value of \$360,000 (12 × \$3000/0.10). The present value of the business with three products is higher at \$540,000 (12 × \$4,500/0.10). The business is worth \$540,000 rather than \$360,000. There is a \$180,000 difference. (Additional discussion on the time value of money and how it affects the value of the firm will be presented in a later chapter.)
From the above discussion, we can infer that offering two or more versions of a product is a better strategy than offering only one version. We believe that the best strategy is to always offer at least three different versions of a product; that is, a high-end version, a middle range version, and a low-end version. Varian refers to this type of price discrimination as Goldilocks pricing. However, the value of price and product differentiation goes above the short-term profit considerations. Versioning is critical for long-term survival of the firm because price and product differentiation puts the firm closer to consumers. Versioning helps the seller to understand what product and features are desired by consumers. Versioning is a form of experimentation that affords the seller the opportunity to conduct experiments by introducing versions of products with different features and observing how consumers react.
Price and product differentiation permits consumers to acquire goods that they want at their price point. Consumers come in a variety of sizes with different wants and satisfaction levels and different levels of discretionary income. They have different degrees of their willingness-to-pay for products and services. Price and product differentiation can not only facilitate the extraction of money from the affluent, but it can also benefit the four billion people who live on less than \$1,500 per year.Prahalad (2006). This is the so-called bottom-of-the-pyramid. Indeed, price and product differentiation is the basic strategy for selling to the bottom of the pyramid and for providing pharmaceuticals, health care, and many other products to the poor.
We are sometimes asked whether the low-end product will cannibalize the demand for the higher-priced products. That is, will affluent consumers with more money who are less price-sensitive buy the low-end product and ignore more expensive products? This can, of course, occur if the products are not perceived as being adequately differentiated with higher-end features and additional functionality. The key activity for the producer is to conduct experiments by offering differentiated products and watching economic buying behavior unfold.Traditional marketing analysis techniques such as focus groups can still be used to identify features. However, they are just part of the input used to identify product versions. The information garnered from these experiments can then be used to continually refine product offerings and understand the willingness-to-pay functions of your consumers. In essence, if the buyers flock to the low-end product, then this information can be used in future product design decisions.
3.04: Demand and Differentiation Dashboards
We have developed a spreadsheet tool that can be used to assist in product differentiation. You are encouraged to visit http://glsanders.wordpress.com/ and obtain the newest version of the spreadsheet. You are also encouraged to read the Appendix of this chapter because it contains an overview of the math for identifying the optimal price and quantity for a demand equation.
Figure 3.6 "Demand Analysis Dashboard" illustrates the demand spreadsheet for Joan’s jewelry. The demand dashboard spreadsheet is used to calculate the slope and the maximum amount consumers would be willing to pay for a product. Figure 3.7 "Differentiation Dashboard Using Demand Analysis Dashboard Input and Financial Data from Joan" presents a differentiation dashboard spreadsheet. The differentiation dashboard is used to determine the profitability due to product differentiation. The differentiation dashboard also computes an optimal solution for the demand curve when only one version is offered. The optimal price would be \$47.50 and, at that price, Joan would sell 162.5 jewelry boxes. As you can see from the solution in Figure 3.7 "Differentiation Dashboard Using Demand Analysis Dashboard Input and Financial Data from Joan", the monthly cash flow using the optimal solution yields a monthly profit of \$3,281.25, which is still not very close to the monthly net profit of \$4,500 with three versions. The value of the business would be \$393,750 if we assume a cost-of-capital value of 10% (12 × \$3,281.25/0.10). The optimal solution is very helpful for identifying a starting point for selecting a price point for one product and for identifying price points for additional versions. The differentiation dashboard is very useful for conducting sensitivity analysis and what-if analysis for differentiating up to three products and services.
Figure 3.6 Demand Analysis Dashboard
Figure 3.7 Differentiation Dashboard Using Demand Analysis Dashboard Input and Financial Data from Joan
3.05: Monopolistic Competition at Work
Monopolistic competition involves many buyers, many sellers, and easy entry and exit with one difference. The sellers in these markets sell products that are closely related, but not identical. Joan sells jewelry boxes that are similar to other jewelry boxes in function and form, but they are nevertheless different. They are differentiated from the competition. Joan’s products are unique and differentiated because of their features (handcrafted, unique words, styling, etc.) and her unique brand.
As noted earlier, a purely competitive market has many buyers and sellers and each individual firm is a price taker. In this market, the price for a product or service is determined via market interactions (buying and selling) between consumers and producers. In perfectly competitive markets, there are many sellers, many buyers, and entry into and out of the market is easy. In a perfectly competitive market, Joan would price her jewelry boxes at prevailing market prices where marginal revenue equals marginal cost. In actuality, Joan can function as a quasi-monopolist or as a near-monopolist in the short term until the competition recognizes that they can make money selling unique jewelry boxes. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/03%3A_Differentiation_in_Action/3.03%3A_Generating_Additional_Revenues-_Willingness-to-Pay.txt |
Most of the action in business involves not just the product line, but also the markets for related products and services. There are three key concepts related to product and service differentiation and the type of related goods being offered; they are independent, substitute, and complementary goods and services.
Two goods are independent if their consumption or use is not related. The use of toothbrushes, for example, is not related to the consumption or use of motorcycles. Independent goods are goods that are not dependent in any way on how the other good is used. Since demand for one does not affect the demand for the other, product differentiation has little impact on these types of product trade-offs.
Much of the interesting economic activity in terms of strategy and differentiation comes from complementary and substitute products and services. Complementary goods are typically used together. When the demand for one rises, for example, burgers, it leads to a rise in demand for the other product, for example, fries. Examples of complementary products and services include toothbrushes and toothpaste, PCs and monitors, travel services and global positioning systems, console game systems and broadband demand, and operating systems and business applications suites. In the case of Joan’s jewelry boxes, a complementary good would be an expensive wood polish to maintain the wood or perhaps a limited line of earrings that could be placed in the jewelry box as part of a gift.
Substitute goods are goods that are alike. In other words, substitute goods have an equivalent function and one substitute good can be consumed or used in place of another. They are largely interchangeable and when the demand for one substitute increases, the demand for the other good decreases. Examples of substitute services include cable systems and satellite systems. Although they work very differently, they can be effectively substituted for one another. Other examples include margarine and butter, satellite phones and cell phones, powdered and liquid laundry detergent, and CDs and MP3 files. None of these products are actually perfect substitutes because they all have slightly different features and have different performance characteristics. A perfect substitute works essentially the same way and has the same features and qualities as another technology. In practice, many competing technologies are imperfect substitutes. MP3 files are imperfect substitutes for CDs because CDs produce better sound than MP3 files. However, MP3 files are smaller and more easily copied than CDs. Butter and margarine are slightly differentiated in terms of taste and the way our bodies assimilate these two fats. In the case of Joan’s jewelry boxes, product substitutes would be any jewelry box or container that could be used to house jewelry. This would include a plastic food storage container, a vase, or even a glass.
3.07: Price Discrimination and Price Differentiation
It is a fundamental economic principle that the way to maximize profits is to charge a price that equates to the value of the product to each consumer, instead of selling at a uniform price to all consumers. This is the idea behind price discrimination.As noted in the last reading, the terms price discrimination and price differentiation can, in general, be treated as synonymous. Companies use price discrimination to differentiate prices. Pure price discrimination involves selling the same good at different prices to different consumers. Flat pricing can have perverse consequences, because it encourages the producer to sell to the high end of the market.Varian (1996). The producer simply starts at the top price of the demand curve and then ratchets the price down. The flat price selected is a function of how the fixed costs and variable costs lead to the highest profit. Producers who understand differential pricing have a strong incentive to supply several versions of a product because they will usually make more money. Rather than sell the same exact good at different prices, the goal should be to modify a product and sell a differentiated product at different prices. This could be accomplished using the following strategies:
• Adding and subtracting product features
• Adding and subtracting convenience
• Adding and subtracting durability
• Adding and subtracting design appeal
• Adding and subtracting speed of delivery and processing
• Changing the level of customer service
• Advertising and branding and perhaps generating a cool factor and snob appeal
There are two situations that lead to very high demand for products. The first involves scarcity. When a product is scarce, it is usually in demand. Price discrimination is easy for scarce products, even though such situations are sometimes transitory (e.g., snow blowers during extended winter storms, games consoles at launch, and oil consumption in the winter). The other approach to generating high levels of demand is to design products that make people and their kids look smarter or more attractive. Products that give kids an academic edge are always in demand. Parents will flock to such products because they may be able to differentiate their children from the competition. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/03%3A_Differentiation_in_Action/3.06%3A_Independent_Complement_and_Substitute_Goods_and_Services.txt |
There are several lessons that can be learned from monopolistic behavior (and misbehavior) for those interested in engaging in monopolistic competition. The first lesson that can be gleaned relates to the behavior of the cable TV companies. Monopolies tend to take their customers for granted, as was the case with cable TV subscribers in previous decades. As soon as alternate products became available with better features, such as those provided by satellite and optical fiber carriers, consumers started to abandon the cable TV ship. They felt little allegiance to cable providers because of the years of neglect. The cable provider’s strategy was to make a profit by providing few existing and new features, keep raising subscription rates, and providing poor service. There was enduring ill will toward cable providers because they did not constantly differentiate and improve their services and they were unwilling to streamline costs. Service has improved dramatically and, in some instance, surpasses the competition, but the remnants of ill will survive.It is ironic that some of the ill will that was directed at cable companies is now being directed at satellite TV carriers. The lesson is that quality customer service and perception management are never-ending processes.
Companies have to be very cautious how they use price differentiation to personalize prices lest they incur the wrath of customers. Amazon found this out in 2001 when they started to sell their DVDs at different prices.
The price test, which ran early last week, affected dozens of Amazon’s top-selling titles. Because of the test, which assigned prices at random to customers as they shopped, some customers found DVDs at prices up to \$15 greater than other customers. Amazon spokesman Bill Curry said that Amazon would reimburse customers who ordered DVDs affected by the test for the difference between the price they paid and the lowest test price. Although Amazon has no plans to do any more pricing tests, the company guarantees that should it run another one, customers will pay the lowest test price even if they order goods at a higher price during the test.Wolverton (2000).
Personalized pricing can tick-off consumers when consumers find out that they are paying a premium for the same product or service. Some of the current ill will directed toward the airline companies is related to the wide range of prices charged for identical seats and, of course, to their very proficient use of versioning in the form of baggage surcharges, meals, early boarding, and fast tracking through security. In 1995, the average U.S. domestic price for an airplane ticket was \$292.See the Research and Innovative Technology Administration Bureau of Statistics site at: www.bts.gov/programs/economics_and_finance/air_travel_price_index/html/annual_table.html In 2009, the average airplane ticket price was \$309. This is equivalent to \$220 in 1995. The airlines turned to product differentiation in order to achieve profitability.
It is sometimes necessary for producers to use approaches that disguise personalized pricing approaches. Here are a few of the strategies used by businesses to engage in product and service differentiation; some of them are more acceptable to consumers than others:
• Charging higher prices where you have bundled other products with low variable costs with the original product.
• Charging lower prices if the customer buys a product or service that will be consumed 6 months or a year into the future.
• Permit customers to purchase products at a reduced price because they are part of a price-sensitive customer segment such as the student or senior citizen populations.
• Make a customer submit a rebate coupon in order to get a lower price.
• Offer the product at a lower price if they wait a couple of days before they receive the product. Offer the customer a lower price the next day.
• Give customers the opportunity to play a game that lets them win the product at a lower price.
• De-bundle services and charge for each service (airlines are a good example).
It should be noted that some consumers will figure out how to game these systems. They will then pass this information on and it will eventually reach a substantial number of consumers as the specter of efficient markets looms its ugly head. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/03%3A_Differentiation_in_Action/3.08%3A_Irritating_Consumers.txt |
Innovation comes in waves. It is driven by consumers in the form of demand for better products and services: “I need a smaller product with more features and capabilities at a lower price.”
Substitute and complementary products are part of the engine that drives innovation. For example, transportation has spurred the development of substitute energy sources such as steam, electric, fuel cells, and solar energy. The emergence of the automobile was the driving force behind the development of better roads, fueling stations, and diners. Demand for clearer and faster communication has been the key driver for many modern-day substitute products as illustrated in Figure 3.8 "Innovation Driven by Substitutes and Complements". This has in turn driven the development of a wide range of products to support the communication process.
3.10: Arbitrage- Producers Paradise and Consumers Dread
Figure 3.8 Innovation Driven by Substitutes and Complements
When I was a youngster in Helena Montana, I wanted to learn how to play the bongo drums like Desi Arnaz.The “I” is Sanders. I went to a local store and inquired about the cost for a set of bongo drums. I believe that they wanted \$40; this was too much money and I decided to forgo the purchase and take up the tuba because it was available through the school.I eventually got the bongos as a Christmas gift from my grandmother. She bought them from JC Penney’s for a substantially lower price. I found out a year later that the same bongos were available in a mass-market catalog for a lot less money. I possessed inferior information on the value of the bongos. Information asymmetry occurs when the seller has better information about the value of a product than the buyer. In many situations, it is the seller who knows more about the value of a product than the buyer; however, it is possible that the buyer knows more about the value of the product than the seller. Selling a product at a higher price in a market where consumers are not knowledgeable or privy to the true market price is called arbitrage. Arbitrage can lead to excess profits and inefficiencies in the supply chain because the consumer cannot turn to other suppliers and because the consumer does not know the competitive price for the product and/or cannot get access to competitively priced products. Arbitrage presents the opportunity for suppliers and producers to exploit the consumer’s lack of product knowledge and earn higher profits.
Arbitrage is very important to commodity traders. Arbitrage enables the seller to buy a product, such as a commodity, in one market and sell the product in another market for a higher price. The arbitrageur makes money by taking advantage of the price disparity by selling in one market while simultaneously buying in the other. Excess profits are symptomatic of asymmetric information and inefficient markets. When someone knows more than someone else about a product, they will often use that information to achieve above-average profits or to secure resources at a steep discount. The benefactor of the windfall rarely views good deals as gluttonous. The number of suppliers and consumers for bongos in Helena Montana during the 1960s was very small, and there were very few opportunities to locate musical instrument catalogs that contained bongo drums. This is asymmetric information at work. A market is efficient when price discovery is easy and information is transparent and readily available to all market participants.
Arbitrage can also hurt the producer of a low-cost item. Someone could buy all of Joan’s low-cost jewelry boxes, repackage the jewelry box, add a little do-dad, and then sell them at a higher price in the same market. This could effectively reduce her high-end revenues. Continuous product differentiation along with marketing and searching for the most up-to-date information can reduce the impact of arbitrage. This can be summed up in the following relationship:
Information Asymmetries → Arbitrage → Bad Deals.
3.11: Conclusion
As we have seen in this chapter, product differentiation leads to additional revenues and is the basis for conducting experiments for determining what products and product versions to introduce in the future. We have also discussed how substitute and complementary products and services further drive innovation. Subsequent chapters will explore how product differentiation forms the basis for experimentation, innovation, and product development.
In this chapter, we have illustrated how price discrimination could be applied to Joan’s jewelry box case and optimum prices for product versioning could be derived. The key takeaways include the following:
• By adding additional versions, Joan has dramatically increased the present value of her business.
• Many large and small businesses, for reasons of simplicity, offer products using a one-price solution in order to have a simplified management agenda.
• By adopting a one-price solution, companies overlook the high-end consumers and the premium prices that they will pay for a product.
• A one-price solution also ignores the price-sensitive consumers who could be drawn into the market if an affordable option is made available.
• If a high-end product is not perceived as being adequately differentiated with higher-end features and additional functionality, the low-end product could cannibalize the demand for the higher-priced product.
• Two goods are independent if their consumption or use is not related. For example, cell phones and lawn mowers are independent goods.
• Complementary goods are typically used together like toothbrushes and toothpaste.
• Substitute goods have an equivalent function and one substitute good can be consumed or used in place of another. Examples are CD players and MP3 players and cable TV carriers versus satellite TV carriers.
• Companies have to be very cautious how they use price differentiation to personalize prices lest they incur the wrath of customers.
• Information asymmetry occurs when the seller has better information about the value of a product than the buyer and vice versa.
• Selling a product at a higher price in a market where consumers are not knowledgeable or privy to the true market price is called arbitrage. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/03%3A_Differentiation_in_Action/3.09%3A_Waves_of_Innovation_Fueled_by_Substitutes_and_Complements.txt |
Even though Joan is an economist, her knowledge of the market for jewelry boxes was based on experience and insight. She understands the market because she has bought and sold jewelry boxes and their raw materials and she has built them from scratch. Joan decided she should put some of her economics training to work and determine the ideal price and quantity to sell that would generate the most profit.
The typical demand curve has the price on the y-axis and the quantity demanded on the x-axis and is downward-sloping.See the following Web site for a good discussion of the Law of Demand: http://www.investopedia.com/terms/l/lawofdemand.asp A demand curve can be represented as a linear mathematical formula with quantity as the dependent variable (q = −5p + 400) or with price as the dependent variable (p = −5q + 80). A demand curve is a very useful diagram for describing the relationship between the price level and the quantity demanded at each price level. In general, as the price of a product increases, the demand for the good decreases. Similarly, as the price of a product decreases, the demand for the good increases. This section discusses how the demand curve can be used to identify the optimal price and quantity for selling just one version of a product.
Since Joan is a near-monopoly working in a market characterized by monopolistic competition, she can set her variable costs and fixed costs within certain limits related to the features she has established for her Jewelry boxes. Joan used algebra to come up with the optimal selling price for her standard jewelry box. This is the price that generates the greatest profit given the \$15 variable costs and the \$2,000 fixed costs.
Her first task was to develop a demand equation. The demand equation relates the quantity of the good demanded by consumers to the price of the good. Demand equations are in the form: Price = constant + slope*Quantity. This can be calculated by finding the slope of the curve using any two points (see Figure 3.9 "Two Points Are Used to Derive the Demand Curve"). We will use the points (q1, p1) or (100, \$60) and (q2, p2) or (200, \$40). The slope is the rise over the run or:
Slope = (60 − 40)/(100 − 200)
Slope = 20/−100
Slope = −0.2
The constant is calculated by determining where the demand line crosses the y-axis or, in this situation, the price or P-axis. This is accomplished by using the point slope form of the demand equation and any point such as (100, \$60). The resulting constant is 80.
pp1 = slope(qq1)
p − 60 = −0.2(q − 100)
p = 60 + 0.2q + 20
p = 80 − 0.2q
Figure 3.9 Two Points Are Used to Derive the Demand Curve
In many instances, the demand curve is expressed in terms of p because the price determines the amount demanded. You can just substitute a price into the following formula and find out how many units will be sold.
q = −5p + 400
So if Joan decides to price each box at \$50, then she will be able to sell 150 units.
Now that the demand equation has been found (p = −0.2q + 80 or q = −5p + 400), Joan’s next step was to determine the quantity where profits are maximized. This is accomplished by identifying where marginal revenue equals marginal cost. This is completed in two steps. The first step is to substitute the demand curve equation into the total revenue equation in order to get the total revenue calculation in terms of the quantity sold or q.
p = 80 − 0.2qTotal revenue = p × qTotal revenue = (80 − 0.2q) × qTotal revenue = 80q − 0.2q2
The above equation can be used to express the total revenue as a function of the quantity produced. We can check this answer by substituting 200 into the total revenue equation. For example, the total revenue when production is 200 units would be 80 × 200 − 0.2 × 2002 or \$8,000. This is the same value for total revenue using the p × q equation for total revenue (\$40 × 200 = \$8,000).
The second step is to find the quantity where marginal cost equals marginal revenue. This is accomplished by taking the first derivative of the total revenue equation with respect to q. This is then set to the marginal cost and then solved for q. The marginal cost is actually the variable cost in this example. The marginal cost to produce one additional jewelry box is \$15.
Total revenue = 80q − 0.2q2Marginal revenue = dtr/dq = 80 − 0.4qMarginal revenue = Marginal cost80 − 0.4q = 15−0.4q = −65q = 162.5
The 162.5 quantity is rounded up to 163 and then substituted into the p = 80 − 0.2q equation.
p = 80 − 0.2(163)p = 47.4
The 47.4 price was rounded down to \$47. This is the short-term optimal revenue solution.
Profit = \$47 × 163 − \$15 × 163 − \$2,000Profit = \$3,216
Joan decided after her analysis to produce fewer jewelry boxes since she could make more money selling fewer boxes at a higher price. She could have done a similar analysis using spreadsheet software and come up with a similar solution. She would, however, still need the original demand function along with an understanding of her variable and fixed costs to produce the jewelry boxes.
Optimal Solution for Three Versions of Jewelry Box
The demand dashboard can also be used to determine the optimum solution when there are three jewelry boxes. The optimum solution is calculated using a mathematical programming algorithm that is usually referred to as a solver add-on in spreadsheet programs (see Figure 3.10 "Optimal Profit with Three Versions of Jewelry Boxes"). The solver essentially identifies the price for the Athena, the Stryker, and the Natural that would maximize profit with all the other variables such as the variable costs remaining the same.
As you can see from Figure 3.10 "Optimal Profit with Three Versions of Jewelry Boxes", the optimal Athena price would be \$76.25 and about 19 units would be sold. The optimal price for the Stryker would be \$57.50 and about 94 units would be sold. The Natural would be priced at \$33.75 and would sell 119 units. The net profit for all three versions would be \$5,672. This is in contrast to the non-optimized solution of \$4,500. Joan just picked prices for each version using her intuition and insight into what consumers would be willing to pay.
Figure 3.10 Optimal Profit with Three Versions of Jewelry Boxes
You should note that the optimal solution for only having the Atlas product is \$3,281. This is little different than the \$3,216 solution obtained using the algebraic solution detailed in the last section because we rounded the price and quantity in the algebraic solution.
The optimal solution provides insight into the demand curve and the product mix, but it is not a magic potion for setting prices and developing versions. There are a number of factors that go into identifying the price and the characteristics for each version. There might be significant setup costs for constructing the Athena or, perhaps, it would be difficult to find artistically talented employees to work on the fake pearl inlays for just a couple of hours. Perhaps Joan does not want to focus on the Natural because she wants to eventually focus on upscale jewelry boxes and she is concerned that her product would not be considered a high-end offering because of the proliferation of inexpensive jewelry boxes. And, of course, it is very difficult to actually know if the demand curve is valid for all levels of prices.
Linear and Nonlinear Demand Curves
The demand curve for a good does not have to be linear or straight. As illustrated in Figure 3.11 "Nonlinear Demand Curve for Joan's Jewelry Boxes", the demand curve could be curvilinear. It appears that the price at which there is no demand is \$80 and that there is essentially unlimited demand for jewelry boxes that cost \$15. Let us examine how a different and, in particular, a nonlinear curve could influence the amount of revenues generated. Using Figure 3.11 "Nonlinear Demand Curve for Joan's Jewelry Boxes", if Joan charges \$60 for the Athena unit, she would sell 50 units. If she charged \$40 for the Stryker model, she would sell 50 units (100 − 50). If she charged \$20 for the Natural, she would sell 150 units (250 − 100). If Joan still had the same variable cost structure as before, she would generate the following revenues and profit:
Profit = (\$60 − \$30) × 50 + (\$40 − \$15) × 50 + (\$20 − \$10) × 150 − \$2,000 ← {fixed costs}Profit = \$1,500 + \$1,500 + \$1,500 − \$2,000Profit = \$4,500 − \$2,000Profit = \$2,500
Figure 3.11 Nonlinear Demand Curve for Joan's Jewelry Boxes
This amount is noticeably less than the \$3,216 algebraic solution (\$47 × 163 − \$15 × 163 − \$2,000) for the single version where it was assumed that demand was linear. This example illustrates that a slight miss in identifying the appropriate demand function can have a dramatic impact on profitability. Even though the demand and differentiation dashboards can only deal with linear relationships, we can estimate a linear function using only a portion of the demand curve. It appears that there is a linear relationship within the price range of \$20–\$80. The price where demand is zero (the Y intercept) and the slope of the demand curve were both estimated using the demand analysis dashboard as illustrated in Figure 3.12 "Demand Curve for Nonlinear Estimation". Figure 3.13 "Joan's Profit Using Estimates of Nonlinear Demand" shows the solution for the nonlinear demand curve using the differentiation dashboard. The key difference for this solution versus the solution that was presented earlier in the chapter is that the demand curve was estimated using points that were not linear with a linear regression algorithm. This leads to several interesting results.
Figure 3.12 Demand Curve for Nonlinear Estimation
Figure 3.13 Joan's Profit Using Estimates of Nonlinear Demand
The profit for one product using the optimal solution for the nonlinear curve is \$1,415.69. Using Figure 3.13 "Joan's Profit Using Estimates of Nonlinear Demand", again you can see that when the original variable and fixed costs are entered in the differentiation dashboard, three versions produce a net profit of \$2,458. This is in contrast to the \$4,500 profit for the three versions using the original linear demand curve.
When the demand is nonlinear, economists use “tricks” to transform a nonlinear demand data into a linear formula.Oz Shy (2008). For example, they take the natural log of the price and quantity data and then perform the regression analysis in order to develop an estimate of the function. The trick I used was to estimate the demand function by only using prices between \$20 and \$80.
If a new product is being introduced, then there may not be any data available for estimating a demand curve. Historical data are often scarce or nonexistent for new products and significantly revised versions of products. Sometimes, the entrepreneur has only two points for estimating demand. The first point is where the price crosses the Y-axis. This is essentially the maximum amount that most consumers would be willing-to-pay for a product. The second point is also a guestimate using a hypothetical question. What demand would result if we were to introduce a product at the prevailing market price using typical product features?
The key takeaway is that it is difficult to model consumer demand when products are new and untested, and even where there is a proliferation of historical data, it is still a difficult task. Another takeaway is that versioning will almost always generate more revenues and also greater profits in the long run. The crucial activity is to constantly experiment and continuously introduce product versions in order to understand the constantly changing nature of consumer behavior. Quantitative tools can provide insight, but they should be used to provide insight and not used as a sole solution for pricing and versioning products.
From an economist point of view, the primary goal of versioning is to capture consumer surplus. As one of my economist colleagues (Bill Hamlen) noted, it is very difficult to develop a reasonable mathematically grand optimal solution for capturing consumer surplus with even two versions. Economists have not attempted to tackle the problem of versioning because of the mathematical complexity. I have taken the liberty of using the same demand curve for all the versions. In reality, there is a separate demand curve for each version. Bill Hamlen suggested that since it is so difficult to find a grand optimal solution, that I should continue the approach used in the book because it still provides an insight into the important issue of capturing consumer surplus from a strategy perspective. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/03%3A_Differentiation_in_Action/3.12%3A_Appendix-_Determining_the_Optimal_Selling_Price_Using_Demand_Revenue_and_Cost_Equations.txt |
The demand for a product is influenced by a number of factors including product availability, the utility or usefulness of a product, consumer income levels, product features, marketing efforts, product awareness, the quality and performance of substitute products, fashion and the cost of complementary products. This chapter illustrates how product differentiation curves (PD curves) can be used to increase revenues and continually deliver updated products and services. We will sometimes refer to PD curves as versioning curves. The focus will not be on the math or even on the actual form of the demand curve. Our focus will be on using product differentiation or versioning curves as a conceptual tool for developing different product versions.
A PD curve is very useful in illustrating the relationship between price and the quantity demanded. But there is one major difference between the PD curve and the typical demand curve. The PD curve can include different versions of a product on the curve and also segments each product version according to willingness-to-pay characteristics of the buyer groups as illustrated in the case of Joan’s jewelry (see Figure 4.1 "Product Differentiation or Versions Curve for Joan's Jewelry"). These major groups are Midas, Atlas, and Hermes consumers. The primary purpose of the PD curve is to assist in identifying product versions and prices levels for discriminating each product version. The process for matching products to the willingness-to-pay segments is rooted in experimentation and the continuous introduction of new versions of products and services.
The PD curve is very useful for product positioning. Product positioning is the process where sellers and producers try to create an image, an identity, or an emotion toward a product or a service in the minds of consumers. This is the essence of the brand concept. A brand is simply something that lives in the head of consumers.Adamson (2006). The brand is a composite of the mental associations that are generated when you see or think about a certain product. Our focus will be on positioning products and services according to the different customer segments’ willingness-to-pay and price sensitivities. The PD curve can of course be used to illustrate how a single standardized product can be differentiated by geography, by market segment, and through branding efforts.
Figure 4.1 Product Differentiation or Versions Curve for Joan's Jewelry
One promising application of the PD curve is that it can be used to identify the so-called Blue Ocean markets. A Blue Ocean market is a market that does not exist. The goal is to create a new product that is radically differentiated from existing products that are being offered and to create the Blue Ocean market.Kim and Mauborgne (2005). A related concept in the marketing literature, called lateral marketing, was developed by Kotler and de Bes (2003).
4.02: Versioning and Goldilocks Pricing
The idea behind versioning is to engage in differential pricing by offering different types or editions of a product. Shapiro and Varian (1998). Ideally, the different versions should be perceived as having different levels of quality. The number of versions can also be related to the number of distinct market segments. In many instances, it is difficult to identify the optimum number of market segments, and it is also difficult to develop products for each market segment. Goldilocks pricing, and therefore versioning, is a rule of thumb that suggests that you should start out with three price levels. Shapiro and Varian (1998). The idea behind Goldilocks pricing is that offering 1 product is too few, 10 products is too many, and offering 3 differentiated products is just the right amount. A case was made in the chapter discussing Joan’s jewelry boxes for having more than one product because of the increased potential for generating revenue for Joan.
If a company does not introduce multiple versions of a product, they will be leaving money on the table. If a company does not have a high-end product for consumers who are affluent or price-insensitive, then they will not have extracted the consumer’s surplus from affluent customers or customers who simply do not care how much the product costs, they just want it. On the other hand, a business will also leave money on the table if they do not have a lower-end product for price-sensitive individuals because price-sensitive individuals will not purchase products that are above their willingness-to-pay. Price-sensitive customers, such as students, also present another opportunity; they can be the foundation for establishing a long-lasting relationship when they have more discretionary income.
There is one additional reason for offering more than one product to consumers. Introducing multiple versions of a product permits a company to experiment and observe consumer’s economic behavior in action. The company can monitor purchase behavior and determine which features and products consumers deem most desirable. Such experimentation is actually the most effective activity for conducting research and engaging in new product development. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/04%3A_Dynamic_Tension_in_Versioning_and_PD_Curves/4.01%3A_Product_Differentiation_Curves.txt |
In their book on developing creative approaches for solving problems, Barry Nalebuff and Ian Ayres describe the “What Would Croesus Do?” approach.Nalebuff and Ayres (2003), also see Why not? About the book. Also visit Wikipedia. The gist of the approach is to consider how a consumer would solve a problem when he or she has unlimited resources. Need tech support, have the tech sit outside your office, and enter when called. Bored, become a cosmonaut. This approach can help to identify high-end products and services for the consumer who is not price-sensitive and is interested in many different features (see Figure 4.2 "Dynamic Tension Between Midas and Hermes Leads to Atlas Products"). We have renamed Croesus to Midas products because it is easier to remember and because it imparts a very colorful and explicit image of high-end features. Midas products and services are designed for consumers who are not price-sensitive and demand high-end features. Products that are designed with high-end features for individuals who are affluent or individuals who are simply interested in high-end products are designed using extravagant engineering. Extravagant engineering is less concerned with costs and more concerned with using new technology and concepts to develop innovative and perhaps even radical products and services. In general, products and services that are extravagantly engineered contain advanced features and attributes.
Figure 4.2 Dynamic Tension Between Midas and Hermes Leads to Atlas Products
Pricing high-end Midas products and services is tricky and very important. The goal is not only to cover variable costs but also to make a profit. There is more at stake with Midas products. Another objective is to get consumers to focus on the attributes of a Midas product that distinguish it from other products. The point is to determine what product features customers value the most. This is accomplished partly by marketing research but also through economic experiments in the form of introducing products with different features and observing buying behavior. Bertini and Wathieu have identified several strategies that can stop consumers from fixating on price and focus on product features.Bertini and Wathieu (2010). One noteworthy approach is to willfully overprice the product in order to stimulate curiosity. It appears that some consumers are more inclined to analyze product features and even buy a product when there is a high price premium in the 30–80% range.
There is a part of the demand curve where the consumers are price-sensitive. This segment could include students, seniors, and, in general, individuals with low levels of discretionary income or individuals who are truly value-conscious. In designing products and services for this group, you can use the “What would Hermes Do?” approach. Hermes was the god of the traveler, the shepherd, the athlete, the merchants, the cunning, and was linked to invention and commerce. We are now designating Hermes as the patron for the part of the demand curve that does not have a patron.I realize that there are many patrons for this large segment of humanity. The goal is to have a question for the bottom of the pyramid. Please see Prahalad (2006) and many others who have been committed to this group. Hermes products and services are designed for consumers who are price-sensitive and demand features that are functional for the task at hand. Hermes products and services are still functional, but they have reduced and scaled-back features. There are a variety of very interesting products and services that have been developed for Hermes customers occupying the price-sensitive end of the demand curve. An important reason for offering Hermes products and services is to acquire customers who might eventually become Midas consumers. For example, students become less price-sensitive as they enter the work force and generate more discretionary income. Consumers’ tastes can also change as they become more familiar with a product line or because they get caught up in the hype around fashionable product. Designing Hermes products requires skills in frugal engineering.
Frugal engineering is the ability to design useful low-cost products and services for price-sensitive consumers.Athreye and Kapur (2009). Frugal engineering is the clean slate approach for engineering and designing products and services. The first step is to identify the fundamental or essential functions of a product or service. The next step is to concurrently design or redesign the existing product or service and the manufacturing process so that the process is very efficient and the components and materials used are inexpensive. The individuals using Hermes products can be price-sensitive because they are thrifty, but they can also be Hermes customers because they are part of the approximately 4 billion people in the world with a purchasing power of \$1,500 per year or consumers who are looking for a bargain.
Midas and Hermes products have an important role in developing new ideas for products and services for the middle of the demand curve. Midas gives product developers the license to create ideas that are unique and perhaps superfluous. Hermes products and services establish a minimal baseline for a product or service with the additional prompting of being inexpensive to produce. Hermes products should be less expensive to produce because they are meant to attract price-sensitive customers. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/04%3A_Dynamic_Tension_in_Versioning_and_PD_Curves/4.03%3A_Using_Dynamic_Tension_Differentiation_to_Develop_Products_and_Services_for_the_Entire_Demand_Curve.txt |
From the producer’s perspective, the idea is to get the creative juices flowing and use the top and bottom of the demand curve to generate new ideas for products and services by drawing on both extravagant and frugal engineering approaches to develop Atlas products. The mass-appeal or mainstream products in the middle are called Atlas products. Atlas was a Greek mythological figure that supported the weight of the heavens on his shoulders. Atlas products support the broad-based customer segment in the middle that requires products that have standard features and also have slightly differentiated features to meet the demand of monopolistic competition. The point is to create dynamic tension between the two ends of the demand curve, anchored by extravagantly engineered and designed Midas products and frugally engineered and designed Hermes products. The result of this dynamic tension is an Atlas product.Dynamic Tension was an exercise approach developed by Charles Atlas, but it also works here. This is a product with attractive features and with an attractive contribution margin. The result is also a robust process for continually inventing and reinventing the products and services to stave off the competition and establish a strong foundation for survival.
4.05: Midas Atlas and Hermes Versions
The three categories for product versioning and experimentation are the high-end or Midas product, the mass-appeal or Atlas product, and the low-end or Hermes product (see Figure 4.3 "Midas, Atlas, and Hermes Characteristics"). We will often use the terms version and product interchangeably; however, a version is usually related to a particular product. The Midas product is targeted toward the consumer who is not price-sensitive and is interested in many different features. Midas products might have an extended warranty or may be bundled with other products and services. Examples of Midas products include Cadillac, Acura, Lexus, TurboTax Premier, and specialized boutique stores. Sometimes, a Midas version is not even different than the Atlas version of a product or even the Hermes version of a product. Marketing efforts via branding may have infused the notion that the product is better than another product with the same features. This happens in the commodities markets, the car-rental business, and in electronics markets where standardized products such as CDs and DVDs are being sold.
Figure 4.3 Midas, Atlas, and Hermes Characteristics
Mass-appeal or Atlas products and services are developed to appeal to a large percentage of consumers. Mass-appeal products and services will contain elements of what is essentially a prototypical product. A prototypical product is the archetype product that other products are patterned after. In order for this product to appeal to the masses, it usually has a minimal set of standard features. In order to distinguish a prototypical product from the competition, there will also be a few features that are differentiators or there will be standard features that have been enhanced or amped up a bit to discern the product from other mass-appeal products. Examples of mass-appeal products include the Camry, the Accord, the Malibu, and TurboTax Deluxe. Examples of mass-appeal retail outlets include Sears, Safeway, and Amazon.
Low-end or Hermes products and services are designed for markets where the consumers are price-sensitive. These products have the essence of the prototypical product, but they are scaled back in order to meet the price sensitivities of this segment. These groups could include students, seniors, and, in general, individuals with low levels of discretionary income or even individuals who are value-conscious. Examples of products and services designed for the Hermes customers include TurboTax Free Edition, the Honda Fit and Tata Nano, and many of the large lot stores such as Sam’s Club, BJ’s, and Costco. Figure 4.4 "TurboTax Versioning" presents the all-to-familiar price and product versioning that is used by Intuit for TurboTax.
Figure 4.4 TurboTax Versioning | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/04%3A_Dynamic_Tension_in_Versioning_and_PD_Curves/4.04%3A_Dynamic_Tension_Between_Midas_and_Hermes_Spawns_Atlas.txt |
Low-end, low-cost products and services are of emerging importance because of the huge market at the so-called bottom of or base of the pyramid (BoP).Prahalad (2006). Price and product differentiation can benefit the 4 billion people who need pharmaceuticals, health care, personal grooming, and low-priced durable goods and electronics. In the past, many businesses have ignored this substantial collection of individuals. But there is money to be made at the BoP because there is demand for inexpensive products by these consumers. Price-sensitive consumers have many of the same wants and desires as the affluent consumers.See the discussion at the end of this chapter on Pareto Economics, Welfare, and Efficiency. They just have to spend more money on the basic necessities of life and have little discretionary income. Products can actually be designed at the high end and the mass appeal levels, and then scaled back so that they can be sold to individuals at the BoP. As noted above, price-sensitive customers can be the foundation for establishing a long-lasting monetary relationship when those customers attain more discretionary income. Here are a few additional examples of versioning approaches. The next chapter will provide many more examples of how versioning has been used by various businesses.
4.07: Versioning Restaurants Hotels and Motels
Competition in the restaurant, hotel, bars, and motel businesses is fiercely monopolistically competitive. Typically, these businesses compete on atmosphere, the level of service, and the uniqueness of their offerings. A Midas high-end hotel can have boutique rooms, spas and fitness rooms, and a vast array of food choices from room service to expensive high-end dining. In contrast, the Hermes hotel can be clean, Spartan, and in close proximity to fast food and casual dining outlets. The drama is in the details. Fresh flowers in the room, a free breakfast, and free cookies can attract customers. In most instances, the benefits of a given differentiation strategy are transitory, and new features have to be added or existing features need to be refreshed in order to compete effectively. Figure 4.5 "PD Curve for Restaurants" illustrates a PD curve for fast food, casual dining, and fine dining restaurants.
Figure 4.5 PD Curve for Restaurants
Figure 4.6 Differentiating a Standard or Similar Product
4.08: Versioning Commodity and Standardized Products
Standardized and commodity products can also be versioned. Sometimes, the high-end product is not even that different from the mass-appeal product or even the low-end product. Marketing efforts via branding may have instilled the notion that the product is better than another product with the same features. As illustrated in Figure 4.6 "Differentiating a Standard or Similar Product", the way to sell a standardized product to the high end is to have a distinct brand, offer extended warranties, deliver products and services faster, or all three. This happens in the auto business, commodities markets, and the entertainment industries. There are also ways to sell a standardized product to the low end without upsetting individuals who purchased a product at a higher price. This can be accomplished by offering customer rewards programs, having customers use coupons, and delaying the shipment of a product. If you buy months ahead from the airlines, you can sometimes get a better price than an individual who buys ticket days before departure. Rebates are also a way to sell at a lower price for standardized product. The product is not the same because of the hassle of filling out the documentation and the uncertainty that comes from not knowing whether the rebate or coupon will be honored. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/04%3A_Dynamic_Tension_in_Versioning_and_PD_Curves/4.06%3A_Bottom_of_the_Pyramid.txt |
There is no superset of features that can be used for product and service differentiation because demand is subject to the development of new technologies, changing wants, the social context, culture mores, and the fickleness of fashion. Here is a subset of the attributes of products and services that can be modified:
• Focus on the uniqueness of the product or service.
• Have a version that is simpler and easier to use than other products or services.
• Introduce a product or service that uses new emerging technology.
• Design a more attractive product and frequently refresh the product.
• Use creative and attractive packaging and labeling and continuously refresh the packing.
• Increase or decrease the size and weight of the product.
• Differentiate the product by performance, including speed and capacity.
• Offer different levels of convenience. Offer convenience that is not available in the marketplace.
• Product or service is available quickly and price-differentiated by availability.
• Use packaging and labeling that are unique and up-to-date.
• Offer products and services that are more reliable and durable than competitors.
• Have better customer support and warranties than the competition. Differentiate your products by the length of the warranty and the level of customer support.
• Increasing the cool factor, prestige, and elitism related to the product or service.
• Focus on how the product improves health and personal attractiveness.
• Focus on how the product or service improves some form of intelligence such as reasoning, verbal abilities, analytical skills, social adaptation, and emotional adaptation.
• Focus on how the product improves physical abilities and the ability to compete in sports.
• Illustrate how the product improves the children and family in some way so as to differentiate them from the masses.
• Focus on how the product or service facilitates connectivity and communication and social networking.
• Improve the brand through marketing and promotion efforts.
• Modify the price.
As you can see from the above list, and from the chapter, there are numerous strategies for versioning. Some of them require significant product and development and research and development (R&D), and others require modest investments and change in a product or service. Some of them require repositioning of the product through marketing and promotion efforts. The FAD (features, attributes, and design) template, which is introduced in Chapter 7 "Conceptualizing Products/Services Using FAD", is very useful for identifying features and attributes that can be used to version products and services for Midas, Atlas, and Hermes customers.
4.10: Version Rollout Strategies
Many companies start by introducing and designing the mass-appeal or Atlas product first. The objective is to get the product out the door and generate as much revenue as possible by setting the price and developing the features in such a way that profit and cash flows are near the optimum level. That was the strategy used by Joan’s jewelry. She then introduced a high-end Midas version to attract affluent consumers. This is sometimes followed by introducing a scaled-back Hermes version with easy-to-produce features after the production process has been fine-tuned. Some businesses introduce a low-end Hermes product at the same time that the Atlas and Midas versions are introduced. Their objective is to use the low-end version to attract buyers to the mass-appeal and high-end products. Sometimes, a version is given away or is offered on a try-and-buy basis. This is referred to as a freemium version.
The key consideration is to design products and services so that features can be easily added and subtracted and new versions can be quickly introduced. This of course implies that the producer will use modular design approaches and agile production processes in product development. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/04%3A_Dynamic_Tension_in_Versioning_and_PD_Curves/4.09%3A_Versioning_Strategies.txt |
A customer segment is a group of prospective consumers with similar products and services. Potential segments can be based on age, gender, income, family structure, affluence, city size, location within a country and around the world, interests, life style, behavior, psychological characteristics, culture, and product function. Segmentation is also found in business-to-business relationships. Businesses can be segmented by product and service needs, business function, and industry, location within a country and around the world, culture, and by the size of business.
The goal of segmentation is to target and sell to consumer groups that have similar characteristics and demand habits. Segmentation can be useful in describing the target market, but it should be used sparingly. Potential customers can be a member of many segments. There is a tendency toward oversegmentation. There are three key criteria available for developing and using a customer segment. The first question relates to whether the customer segment is easily identified and whether the customer segment make sense? The second question is related to the first and asks if the individuals in the customer segment are relatively homogeneous? The third question relates to being able to target and reach those customers in the segment. Can the organization effectively use advertising and promotion to target those customers in the customer segment?
Segmentation and grouping are typically based on age, gender, income, family structure, affluence, city size, interests, life style, behavior, psychological characteristics, culture, and product function. However, many businesses and marketers use more detailed and descriptive words to describe their customer segments. Here are a few of the many words that can be used to describe customers segments:
Traditionalists, Conventionalist, Survivalist, Easterners, Westerners, Northerners, Yankees, Southerners, Pioneers, Enthusiasts, Gamers, Minimalists, Organics, Granolas, Back-to-Naturists, Adventure Seekers, Risk takers, Romanticists, Aficionados, Connoisseurs, Fast trackers, Soccer Moms, Techies, Umbrella/Helicopter parents, Seniors, Oldsters, Middle Agers, Middle age crises and cruisers, Teens, Goths, Hip, Impulsive, Tweeners, Generation X, Millennials, Baby Boomers, Hippies, Yuppies …
It is interesting to note that many of the customer segments are related to the meaning that consumers attach to products and services. Additional discussion of the importance of the meaning underlying a product or service will be presented in Chapter 7 "Conceptualizing Products/Services Using FAD". The best use of segmentation is to provide additional insight and to describe in greater detail the consumers who will be buying the Midas, Atlas, and Hermes versions.
Usually, a product or service is targeted toward a particular customer segment. For example, suppose a company wanted to develop a global positioning system for Adventure Seekers and Risk Takers. After they identified the customer segment, they would then develop two or three versions (Midas, Atlas, or Hermes) of the product that were linked to price sensitivities. Here is another example. Suppose a company wanted to develop high-end head phones for listening to MP3 songs using a new speaker technology. They could target both the Tweeners and the Baby Boomers with different versions and marketing campaigns. They could also develop three versions (Midas, Atlas, or Hermes) of the product for Baby Boomers according to their price sensitivities as well as three versions of the product for Tweeners. Usually, but not always, businesses identify the customer segment or segments first. They then engage in versioning to obtain more revenues and to assist in identifying the product features that are attractive and in demand. The bottom line is that versioning complements and assists in the customer segmentation. Here is a summary of how customer segments fit into product development:
1. Conceptualize product or service
2. Identify appropriate customer segments for product or service
3. Design and develop two or three versions for each customer segment
4. Obtain feedback from potential customers, employees, vendors, and interested parties
5. Revisit step 1
This is of course not a linear process. For example, step 1 and step 2 often occur at the same time. It is similar to the creative problem-solving process discussed in Chapter 6 "Facilitating Creativity and Innovation". There are periods where product developers are engaged in leaning-about customers, emerging technologies, and other products offered in the marketplace. There are also periods of learning-by-doing, where prototypes are built and scrutinized, and where the feedback is obtained from relevant parties. It is, however, a never-ending process of refinement and experimentation. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/04%3A_Dynamic_Tension_in_Versioning_and_PD_Curves/4.11%3A_Customer_Segments_and_Midas_Atlas_and_Hermes_Versions.txt |
Pricing plays a key role in developing and formulating a market strategy. The use of PD curves in developing products and services incorporates several important pricing and product strategies.Jain (2000). Modern businesses often turn to product-line pricing strategy to offer a number of products with differences in quality, design, size, and style in order to maximize profits. The product portfolio can include products that are complementary and even products that compete with each other.
The use of PD curves is also in line with the two major pricing strategies for marketing new products: skimming pricing and penetration pricing. Skimming pricing is used to tap into the so-called “cream of the market.” It is an attempt to attract the high end of the demand curve where price elasticity is low. That is, the customers are not price-sensitive. The objective of using this strategy is to facilitate profitability with a slowly maturing innovative product, covering the high cost of R&D. In many instances, marketers introduce the high end first and then go for the mass market by lowering prices. Penetration pricing is a strategy of entering the market with a low initial price in order to capture a large share of the marketplace. One objective of this strategy is to tap into the demand curve where the price elasticity is high and customers are price-sensitive. It is used to lure customers, get at a large mass Atlas market, discourage competition, and build economies of scale.Shapiro and Varian (1998).
4.13: Dynamic Tension in Action at Singapore Airlines
Singapore Airlines (SIA) is a prime example of a business that uses dynamic tension to deliver high-end, innovative, differentiated services and still be efficient and cost-effective. SIA has garnered numerous awards for their world-class service in their coach, business, and first class offerings.Heracleous and Wirtz (2010). The rest of the story is that they have one of the lowest cost structures compared with any other airline at just under 5 cent per kilometer per seat. Here is an overview of how Heracleous and Wirtz describe SIA’s strategy for delivering world-class services and still being a cost leader.
They keep their fleet young and up-to-date. Their planes are much younger than most of the competition. This translates to fewer mechanical failures, more air time, lower fuel costs, reduced maintenance costs, and happy customers. Salaries are linked to SIA’s profitability. SIA provides twice as much training to their 14,500 employees than the industry average. They also recruit top-notch university graduates. SIA realizes that their employees are the critical touch point with their customers. SIA also realizes that their employees can be the first line of defense in cutting costs. SIA holds town hall meetings where senior executives stress the importance of reducing costs in order to remain competitive. SIA also staffs most of their flights with more cabin crew members than the industry standard. SIA encourages their employees to find ways to reduce costs. For example, cabin crew recommended carrying less food for late night flights and they stopped putting jam jars on every breakfast tray because some passengers did not use them. SIA’s back-office costs lag behind that of their competitors and its sales and administration costs are low and lean.
The secret sauce of SIA’s success includes harnessing the power of its employees, using technology effectively and appropriately, and pursuing the dual strategies of creative differentiation and reducing costs. SIA understands that long-term success is a function of balancing the dynamic tension between delivering high-end Midas services with the Hermes cost reductions. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/04%3A_Dynamic_Tension_in_Versioning_and_PD_Curves/4.12%3A_Pricing_and_Product_Differentiation_Strategies.txt |
In this chapter, we have illustrated a model for constructing PD curves that draws on the dynamic tension that exists between developing Midas and Hermes products. The key points are the following:
• PD curves are used to increase revenue and foster experimentation and R&D.
• A versioning curve is the same thing as a PD curve.
• Midas products and services are feature-rich versions of a product that are developed using extravagant engineering and design. Midas versions are high-end products for nonprice-sensitive consumers.
• Hermes versions of products and services are developed using frugal engineering and design. Hermes versions are for price-sensitive consumers.
• Atlas products and services are the result of the dynamic tension created between Midas versioning and Hermes versioning.
• Atlas products and services are designed for mainstream consumers. Atlas products and services incorporate the product design features that will attract the broadest customer base and will also be profitable.
• Even standardized products can be versioned.
• There are a variety of version strategies available and some of them require R&D and some of them can be developed through packaging and marketing.
• A customer segment is a group of prospective consumers with similar products and services. Versioning complements and amplifies customer segmentation.
• Versioning assists in developing and executing pricing strategies.
As noted earlier, we believe that using a combination of pricing and product-versioning strategies facilitates product experimentation and the ability to observe economic behavior in action and perform research and product development. It allows the company to monitor purchase behavior and determine which features and products consumers deem most desirable. The next chapter will introduce a variety of product differentiation versioning strategies that are being used by businesses to compete.
4.15: Addendum on Pareto Economics Welfare and Efficiency
Price discrimination and product differentiation leads to more efficient markets. Many contemporary discussions of economics begin by addressing the issue of the so-called Pareto efficiency or optimality. Vilfredo Federicao Damaso Pareto was an Italian intellectual during the later part of the 19th century and early part of the 20th century. A Pareto optimal distribution of a bundle of goods is one where all parties agree that the allocation cannot be improved upon without hurting at least one other party. It does not mean that everyone is happy with the distribution; it just means you cannot improve on the distribution without creating a disadvantage for one of the groups or parties. I like to use the word Pareto OK rather than Pareto optimal. A Pareto OK distribution of goods takes into account the idea the distribution of goods is equitable and the welfare of all is optimal given a distribution of incomes and consumer wants. A Pareto OK distribution is also more in tune with Pareto’s original conceptualization of optimality and welfare economics. The so-called Paretian welfare economics is built on three principles:Sugden (1984).
• Each individual is to be treated as the final judge of his or her welfare.
• The welfare of society depends on the welfare of the individuals who make up the society.
• If one person’s welfare increases, other things being equal, then societal welfare increases.
These three principles can be distilled into a single maxim: “as far as social choice is concerned, all that matters is the satisfaction of wants” (Robert Sugden, p. 507).
One goal of developing multiple products and using a product and price differentiation strategy is to deliver products that satisfy wants. Economists are always worried about economic efficiency and societal welfare. The natural questions related to price differentiation is whether this leads to efficient markets and whether society is better off. I propose the following definition of market efficiency:
A market tends to be efficient when the market participants have complete knowledge about the prices and features of products and services offered in the market.
This definition is somewhat different than the traditional definition because it incorporates the idea that market participants are knowledgeable about prices and that they are also knowledgeable about the features of a product. Efficient markets emerge when information is freely available. Dynamic and adaptive markets emerge when there are a variety of products and services available and market participants have the tools available to gather information on the products and services. Search engines and auctions are extremely effective tools for gathering information and developing knowledge about pricing and features and that is why the Internet has been such a powerful force for facilitating efficient markets. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/04%3A_Dynamic_Tension_in_Versioning_and_PD_Curves/4.14%3A_Conclusion.txt |
Introduction
In this chapter, more examples of product differentiation and versioning curves are presented. As noted earlier, the purpose of the product differentiation curves (PD curves) or versioning curves is primarily conceptual. However, the underlining rationale behind the curves is to generate more revenue and to provide a foundation for conducting economic experiments on what features attract consumers. In essence, introducing multiple versions of a product permits a company to experiment and observe economic behavior in action. The company can monitor purchase behavior and determine which features and products consumers deem most desirable. Such experimentation is actually the most effective activity for conducting research and engaging in new product development. This chapter presents several examples of how versioning is being used for a variety of products and services.
Figure 5.1 "PD Curves for Toyota Passenger Cars" illustrates a PD curve for Toyota cars that uses sales estimates from 1 month projected to a year. This PD curve also illustrates that demand curves are rarely linear and this is particularly true at the high end and low end of the demand curve for Midas and Hermes versions. It is difficult to obtain precise sales data and the graph should be used to understand how Toyota differentiates their cars and not to illustrate actual sales figures for the company. This is true in many of the graphs used in the book. There are other products in the company’s lineup, but these are their primary products for the Midas, Atlas, and Hermes customers. Within each line, there is also product differentiation. Figure 5.2 "PD Curve for Camry" illustrates the product price and product differentiation for the Camry line.
Toyota actually has another high-end product, the Lexus line. This line is actually more luxurious than the Toyota Avalon model and appeals to individuals at the highest income levels. The PD curve in Figure 5.3 "PD Curve for Lexus Sedan" illustrates that there is also Midas, Atlas, and Hermes versions for the Lexus sedans. The width of the Lexus ES quantity reflects the fact that the ES sedan dominates Lexus sedan sales. The top of the line for the Lexus sedans can be found in the hybrid cars. The Lexus hybrids start around \$45,000 and scale all the way up to around \$120,000 for a fully loaded LS hybrid.
Figure 5.1 PD Curves for Toyota Passenger Cars
Figure 5.2 PD Curve for Camry
Figure 5.3 PD Curve for Lexus Sedan
Figure 5.4 PD Curve for Engine Technologies
Motor technologies can also be placed on PD curves. Figure 5.4 "PD Curve for Engine Technologies" illustrates that combustion engines are at this time occupying the lower end of a PD curve. However, the hybrid cars that involve both internal combustion and electrical components are emerging as mass-appeal technologies. The hydrogen fuel cell autos and pure electric cars occupy the high end of the PD curve.
5.02: Versioning at Dell
Dynamic differentiation is the ability to sell personalized closely related, but not identical products to consumers. In a perfectly competitive market, there are a large number of knowledgeable sellers selling a standardized product to a large number of knowledgeable consumers. In such a market, product and price differentiation is difficult, if not impossible. In such a market, it is also impossible to extract any additional money from such consumers even if you can identify how much each consumer is willing-to-pay. That is why businesses turn toward product differentiation and the monopolistic competition model. As noted before, over 99% of the approximately 23+ million businesses are involved in monopolistic competition.Slavin (2008). The king of monopolistic competition is certainly L’Enfant terrible Michael Dell and his creation, Dell.com.
Michael Dell started out with three guiding principles:
1. Always listen to the customer.
2. Never sell indirectly.
3. Disdain inventory.
It appears that always listen to the customer is the driving force behind his model, but in reality, never selling indirectly is the engine behind the Dell model. Dell believes that the best way to listen to his customers is watch the customer select from a menu of system features and let the customer tell them what they value. This is the epitome of dynamic differentiation. By selling directly, Dell is very close to the customer and Dell can constantly adapt to subtle shifts and changes in customer preferences. Because they know what features are in greatest demand, they can move them to the high-end products. It is indeed manipulation, and a way to extract consumer surplus. And as an added benefit, Dell can carry very little inventory because they are listening to their customers and building the systems as the orders arrive.
Dell has of course adapted its model and has put more emphasis on listeneing to their customers. They are now selling products indirectly in the USA, in China, and all over the world. This is, in part, because PCs and laptops are becoming commodity products and less differentiable, but also because Dell has been listening to their current and potential customers. Some of them want the instant gratification of buying and taking it home today and some of them want to touch and feel before they buy.
Dell’s Migration and Evolution
At one time, Dell was more-or-less a pure pull company, just like Amazon.com. Much of their entire production system was driven by actual orders from customers. Part of their production process has also pushed products to consumers, but they are on balance a pull process company. They have been drawn toward the dark side and push production because of the demands of the marketplace. In a push production process, orders are forecasted and some products are scheduled for production based on forecasts and retailer demand rather than end-consumer. This change in attitude toward selling directly also coincides with Dell’s move to sell off their manufacturing units. They are attempting to alleviate the risk inherent in manufacturing products before customers order them. The risk is of course excess inventory and Dell disdains inventory. After Dell sells their manufacturing facilities, their systems suppliers will then absorb some of the risk of carrying excess and outdated inventory.
Figure 5.5 Differentiation at Dell
Dell, because of its direct selling and the ability to install numerous features, is a prime example of dynamic differentiation. They offer literally thousands of different product configurations or versions. As illustrated in Figure 5.5 "Differentiation at Dell", Dell has feature points over a broad range of prices (these statistics approximate Dell’s line in 2011). | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/05%3A_Examples_of_Product_Differentiation_and_Versioning_Curves/5.01%3A_Versioning_Automobiles.txt |
Microsoft over the past couple of years has jumped on the price discrimination bandwagon. It was difficult for them to engage in product and price differentiation because they were generating piles of cash as a monopoly. Microsoft is a monopolist in the operating systems arena and with their office suite of applications. The marginal cost to produce incremental levels of software and other information goods, such as DVDs and music, is essentially zero. But as usual, the fixed costs are substantial, and because Microsoft is a price setter, they chose to sell at a price that covers their fixed costs but still permits them to make a large profit without irritating too many consumers.This section has been adapted from a paper by Gopal and Sanders (2000).
For many years, Microsoft was not interested in price discrimination based on geography, market segment, or per capita GDP. But Microsoft had to move toward price discrimination because the willingness-to-pay for software was related to software piracy. Students and individuals with low incomes are price-sensitive and will simply turn to piracy when the price exceeds their willingness-to-pay. They also had to offer certain market segments lower prices because piracy was essentially rampant. Microsoft began to realize that they were leaving money on the table because they did not take dramatic steps to price discriminate through product differentiation. They have, in general, avoided unwanted attention by the FTC by attempting to follow the three guidelines outlined in Chapter 2 "Fundamentals of Product and Price Differentiation".
Sometimes product differentiation does not work.Ihnatko (2009). Microsoft tried to differentiate the Vista operating system (see the snap shot of Windows 7 and Vista Versioning in Figure 5.6 "Windows 7 and Vista Product Differentiation"). But Vista never gained legs for a variety of technical, customer support and marketing reasons. The product was not ready for prime time. They continued to product differentiate and price discriminate with the release of Windows 7. Home Premium was priced at \$199.99, Professional at \$299.99, and Ultimate at \$319.99. They definitely used the Goldilocks versioning. It appears that Windows 7 was a success because it was a stable, fast, and friendly operating system.
Of late, Microsoft has also had to contend with Google’s foray into the online office application suite called Google Docs and IBM’s offering of open-sourced Linux-based applications. The competition is heating up and the Microsoft monopoly is under attack on many fronts. Monopolies are often transitory as the competition looks for a crack in the armor and a chance to drink from the fountain of plenty. The growth of cloud computing (where data storage and CPU cycles move toward the utility model) and the availability of net-centric applications could continue to erode Microsoft’s market share. They have, however, started to address the attack by introducing a cloud-based Office 365 and the Azure development platform.
Figure 5.6 Windows 7 and Vista Product Differentiation
5.04: Versioning Wireless Communications
The most important activity in the history of humankind has been in the area of communications. As illustrated in Figure 5.7 "Communication Drives Innovation", the desire to communicate has been the driving force behind most of the advances in modern technology. The wireless phone is the current battle ground for the universal communication device that will be used for talking, texting and tagging friends and colleagues, scheduling, listening to music, reading eBooks, and in location assistance. Apple and Nokia’s strategies are distinctly different. Apple has gone after the cream and focused on the high end, competes primarily in the smartphone arena, and is also beginning to compete with the net-book laptops. Smartphones have applications such as scheduling, location assistance, email, and Internet access.
Nokia is not only interested in the high-end smartphone market, but they are also selling to the price-sensitive demographic and have an even bigger target in their sight. They want to become the biggest entertainment media network in the world.Borden (2009). They are trying to reach the entire market by using research and development (they have numerous research laboratories throughout the world) and by pursuing a comprehensive differentiation strategy. Nokia offers devices to satisfy every budget and they are trying to make their products and services indispensable. They have, however, been under an intense attack by Apple and Android-based phones. Android-based phones are very versatile and there are numerous models available at many price points.
Figure 5.7 Communication Drives Innovation
Figure 5.8 "Broad-based Versus High-End Differentiation Strategies for Cell Phone Devices" illustrates a PD curve for several cell phone devices. Apple and Android-based phones have been making steady gains in the smartphone business. Apple has been willing to offer a downscaled version of the iPod to the price-sensitive masses with the Nano and Shuffle. We suspect that iPhone technology will be adapted to the price-sensitive tail of the demand curve because of the competitive pressure of Android-based phones.
Figure 5.8 Broad-based Versus High-End Differentiation Strategies for Cell Phone Devices
How Wireless Companies Compete on Price: Hide the True Price
One way to compete on price is to make it difficult for the consumer to know the true price of the product. Companies sometimes use differentiation to hide the true cost of purchasing products and services. Many companies accomplish this task by offering very complex pricing and bundling plans (numerous versions). Wireless service and long-distance providers have become very good at this strategy. These providers rarely offer simple plans such as 5 cents per minute for a certain level of usage or 3 cents per minute for a certain level of usage. Instead, they offer customer’s very complex pricing schemes and service bundles that are difficult to disentangle. This helps these providers as well as providers of cable and Internet services to reduce the damage of price competition. Consumers have to engage in a large amount of price and feature comparisons in order to understand the features provided in the tableau of products and services. This is essentially a form of product differentiation but it is more precisely service differentiation. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/05%3A_Examples_of_Product_Differentiation_and_Versioning_Curves/5.03%3A_Versioning_at_Microsoft.txt |
Because Apple had such a strong brand and was very successful, they were able to secure part of the ongoing revenue stream that AT&T received as a wireless carrier. The success of the iPhone resulted in extreme demands on the AT&T network and this led to the introduction of a pay-for-level-of-use program in the middle of 2010 when the Apple iPhone 4 was introduced. One objective of the service differentiation plans was to reduce network traffic, but it also gave Apple and AT&T the ability to extract more revenue from their existing customer base and to attract new more price-sensitive customers. The original data plan was \$30 with no restrictions on the amount of data streamed. Under the new pricing structure, customers with deep pockets and less sensitive willingness-to-pay functions would readily pay \$25 for 2 gigabytes of streaming and \$10 for each additional gigabyte. Apple has recently introduced new iPhones at substantially reduced prices than their earlier launches. The iPhone models entered in at what we view as Atlas levels of \$199 and \$299. Apple also revamped their data plan to capture some Hermes-level customers by introducing a revamped data plan. The new low-end plan was \$15 and this included 200 megabytes of streamed data for more price-sensitive customers. These plans will of course evolve as Apple and AT&T conduct further competitive experiments on the right combination of phones and data plans. Figure 5.9 "iPhone 4 Data Stream Plans" illustrates the service differentiation curve for the data plans.
Figure 5.9 iPhone 4 Data Stream Plans
5.06: Versioning e-Books
One particularly interesting area of competition is in the e-book arena. The Amazon Kindle started out very strong and looked like a strong contender to capture the market for electronic books. Apple founder Steve Jobs was not impressed and stated, “It doesn’t matter how good or bad the product is, the fact is that people don’t read anymore.”Markoff (2008). Well he did release an e-book reader, the iPad, that also had additional functionality. Amazon responded by releasing three Kindle versions and by developing an iPad app for downloading and buying books from Amazon. Figure 5.10 "iPad Differentiation" and Figure 5.11 "Differentiating the Kindle" illustrate PD curves for the iPad and Kindle, respectively. It is apparent that the Apple has taken great pains to develop versions for a wide range of individuals with differing price sensitivities at the high end.
Figure 5.10 iPad Differentiation
Figure 5.11 Differentiating the Kindle
5.07: Versioning Digital Content
AOL Time Warner lost over \$98 billion in 2002. This happened after AOL had purchased Time Warner for \$106 billion in 2001.Lieberman (2003). The Time Warner content was supposed to propel AOL, the king of distribution, to the next level. Differentiating content and getting people to pay for the content is one of the most difficult problems facing many companies including newspaper and magazines publishers. As illustrated in Figure 5.12 "Digital Content Differentiation Strategies", it is possible to differentiate content, but it is still difficult to get the consumer to pay for digital content. Many consumers simply do not want to pay for the content because much of the content on the Web was free in the past and even when it was not free, it could be read indirectly by creative searching and by pirating.
Figure 5.12 Digital Content Differentiation Strategies
One way to make all contents desirable is to deliver the content faster and more conveniently than any other business. This can, in some instances, change the demand curve and increase the amount consumers are willing-to-pay for a content version. One way this is being tested is through the use of tablet computers such as the iPad or the Kindle. Delivering content faster and more conveniently than the competition amplifies the value of the content, even aggregated and repackaged content.
One of the challenges of providing content is to develop versions for mobile devices, for traditional Web browsing, and for print media. Content has to be written so that it can be used simultaneously for perusal on a mobile device, on the Web, and in traditional print media.A special note of thanks is extended to Emily Wester, consultant and owner of Magic City Media, for providing insight into the material used in this section. The key is to have different versions of content available that do not cannibalize each other. Headlines can effectively make-or-break a business model. For example, a headline received from a mobile phone should not only be interesting enough so that it is passed on to others, but also tweak the interest of the reader so that they will turn to more in-depth content on the Web or in print. If it provides too much information, then the reader will be satisfied and will not look toward other media outlets. Versioning via the type of media outlet is critical to the survival of content providers. Content needs to be carefully crafted in terms of its length and the information provided so that it conveys some information, but not too much; yet it has to be compelling so that it entices the consumer to delve into other outlets. This is the essence of the versioning process.
5.08: 5.8- Versioning Digital Entertainment
The primary characteristic of entertainment and media content is that the fixed costs for development are very high and the variable costs for reproducing digital movies, video game software, television programs, electronic books, and music are very low. The key is to find ways to sell at low price levels for those individuals who are price-sensitive and to capture some of the consumers’ surplus from customers who are price-insensitive. Movies are typically consumed only once and it is important to try to meet demand when there is a lot of hype around the release. In the case of movie releases, this is accomplished by charging more for movies attended in the first 3 or 4 weeks of introduction at theaters, charging less when they are released on pay-per-view, and even less when they are rented on DVD. Consumers who want the movie for a repeat view will pay a price that is usually above the price of attending the movie at a theater.
Video game publishers have found a unique way of differentiating their product on launch day by offering unique packaging and complementary items that are useful to game play and other items that are collectibles. These bundles amplify the consumer’s feelings of game uniqueness, but in reality the game is essentially the same. Microsoft used this strategy when they released Halo Reach. The standard game was sold for \$59.99 and essentially just came with a disc and brief manual. The limited edition cost consumers \$79.99 and the Legendary edition cost \$139.99. They were packaged differently and they also contained supplementary materials, such as journals, unique armor that could be downloaded and worn during battles, and statues of the virtual team members who support the game players during battles. The game was a resounding success, and sales on the first day were estimated to be in excess of \$200 million. Soon after the launch, the \$139.99 legendary version was discounted to \$99.99. This illustrates that even a successful product can be overversioned and overpriced. Consumer behavior on the upper (Midas area) and lower (Hermes area) parts of the demand curve is difficult to predict. There is a large measure of demand uncertainty at the extremes of the demand curve. Consumers expect prices to be in a certain range and when they are not, it is difficult to predict the demand. Figure 5.13 "Product Differentiation for the Halo Reach Game" presents a product differentiation graph for Halo Reach on launch day.
Figure 5.13 Product Differentiation for the Halo Reach Game | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/05%3A_Examples_of_Product_Differentiation_and_Versioning_Curves/5.05%3A_Versioning_at_Apple.txt |
According to the American Cancer Society, the estimated number of new cancer cases in 2010 was over 1.5 million.American Cancer Society (2010). One of my classes recently analyzed a case involving NovaCure, a company that developed a promising approach for treating cancer.Sahlman and Flaherty (2010). NovaCure developed a technique to disrupt cancer cell division using electromagnetic waves, called Tumor Treating Fields. Early clinical trials suggest that when the Tumor Treating Fields are used in conjunction with chemotherapy, the survival time of glioblastoma patients improves significantly. NovaCure estimates that the therapy might be suitable for treating 200,000 different types of cancers including brain tumors, head and neck tumors, presurgical breast treatment, nonsmall-lung cancer, and pancreatic cancer. Since the NovaCure approach is not a drug, but a medical device, the approval process is abbreviated, but it is still extensive and expensive. The question raised during the case analyses was whether versioning could be applied to treating diseases?The students analyzed the case by first using the FAD (features, attributes, and design) template and the Ten–Ten planning templates. In general, the case analyses were superlative and several creative solutions for versioning were identified. The total expenditures for life sciences’ R&D in the USA in 2010 were over \$59 billion and over \$133 billion globally.Grueber and Studt (2011). Life sciences include pharmaceuticals, medical devices and equipment, and biotechnology. The approval of pharmaceuticals and medical treatments and the accompanying R&D can exceed hundreds of millions of dollars. Versioning can even help solve the difficult problem of covering costs of developing expensive treatments for diseases and treating a substantial number of patients.
Figure 5.14 "Net Profits When Only One Version of the Treatment Is Offered" illustrates a hypothetical demand curve for a hypothetical treatment for a hypothetical cancer that affects 200,000 individuals a year. The made-up variable costs for treating the cancer were set at \$4,000. This is the base or minimum variable cost. As illustrated in Figure 5.14 "Net Profits When Only One Version of the Treatment Is Offered", if the company only sold one version at \$35,000 per month, they would net \$341 million per month. If they sell only the Atlas version at \$15,000 per month, they would net \$539 million per month. If they sell the Hermes version at \$2,000 per month, they would lose \$280 million per month.
Figure 5.14 Net Profits When Only One Version of the Treatment Is Offered
The first thing that has to be dealt with is that there are two conflicting goals. The drug and medical devices community want to cover the cost of development and eventually makes a profit. The goal of patients, doctors and some policy makers is to cure as many people as possible. This situation also illustrates that there is a difference in the willingness-to-pay and the ability-to-pay. In most situations, consumers are engaged in a never-ending calculus involving how much money they have to spend and how they want to allocate their money. These calculations are hidden, yet ongoing, and always involve trade-offs related to wants and desires and the consumers’ willingness-to-pay for a product or service. When there are decisions related to sustaining life, the life-sustaining trade-off dominates. There is a mismatch between the willingness-to-pay and the ability-to-pay. Versioning can help.
Figure 5.15 "Net Profit When Three Treatment Versions Are Offered" illustrates how a hypothetical drug or medical device company could make a nice profit by versioning the cancer treatment and also treat 70% of the patients having the disease. The company could just offer one version of the product and net \$539 million and treat 49,000 patients, or offer three versions and net \$239 million and treat 140,000 patients. This should cover the fixed costs of product development. The actual implementation of versioning would of course be subject to a variety of inputs and serious dialog involving the public, the drug and medical device companies, insurance companies, the health care community, economists, policy makers, and politicians. And of course arbitrage would have to be dealt with. Some sort of mechanism would have to be in place to prevent the purchase of a Hermes treatment and selling it in the Midas market. As we have demonstrated throughout this book, versioning is a keystone foundation of the current competitive marketplace. Versioning has the potential to bring beneficial medical products and services to a broader base of individuals suffering from serious diseases. It will just take a concerted effort on the part of the various constituencies to develop a versioning solution.
Figure 5.15 Net Profit When Three Treatment Versions Are Offered
5.10: Conclusion
In this chapter, we have illustrated a variety of product differentiation and versioning strategies that have been used by businesses. The key points are the following:
• Versioning concepts can be applied to products and services, including new product development, enhancements, digital content, and medical services and devices, and to emerging technologies.
• Some companies focus on versioning at the high end where consumers are less price-sensitive. Some businesses try to offer products across the entire demand curve from price-sensitive Hermes consumers through less price-sensitive Midas consumers.
• Versioning can be applied in a variety of ways including new product development, adding and subtracting features, offering complementary products, and packaging and marketing.
• Versioning also has the potential to be used in delivering medical treatments to a greater number of individuals suffering from serious diseases.
This chapter has illustrated the various ways firms have used to differentiate their products and services in order to compete effectively in contemporary markets. There are three general categories for differentiation. They are the high-end Midas products and services, the mass-appeal Atlas products and services, and the low-end Hermes products and services. There are identifiable revenue benefits for using a product differentiation strategy, but there are also R&D implications. As noted earlier, offering several products permits a company to conduct economic experiments that will help delineate trends in the marketplace and to actually create new markets. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/05%3A_Examples_of_Product_Differentiation_and_Versioning_Curves/5.09%3A_Versioning_Disease_Treatments.txt |
The Driving Force Behind Research and Development
The engines behind research and development are creativity and innovation. Creativity is typically defined as the ability to generate ideas. Creativity is actually a subset of innovation and refers primarily to the process of idea generation. Innovations are defined more narrowly as the ideas, the products, the services, and processes that (a) are perceived as being new and different and (b) have been designed, built, and commercialized. Innovation thus includes both creative idea generation and the actual implementation of the idea.Cf. Hülsheger, Anderson, and Salgado (2009). An invention is an innovation that is not ready for prime time. Inventions are ideas that have been built or conceptualized, but not widely used and available and usually not commercialized.
Creativity is the force behind innovation and invention. Creativity has been studied for many years and a variety of models and insights have been developed in order to understand and facilitate the creative process. Figure 6.1 "Creative Problem Solving and the Creative Star Model" illustrates an updated five-phase model of the creative process that incorporates problem solving, leaning-about, and the learning-by-doing concepts.The classic four-stage model of creativity was published by Wallas in 1926. The art of thought. New York: Harcourt Brace Jovanovich.. See Lubart (2001), for an overview of the various approaches for modeling creativity. The updated model used in this book has been adapted and extrapolated from the following papers: An, Hunt, and Sanders (1993); Cerveny, Garrity, & Sanders (1990). Here are the details of the model:
Trigger. This is the problem or opportunity that initiates the creative process. The trigger could occur at home, work, play, or while traveling.
Figure 6.1 Creative Problem Solving and the Creative Star Model
Learn-about activity. This involves searching for information and synthesizing that information. It also involves struggling to understand the information and the creation of new knowledge by analyzing the problem or opportunity. The learning-about activities include reading books and magazines; one-on-one dialog with colleagues and knowledgeable individuals; looking at competitor offerings; interaction with suppliers, customers, universities and research institutes; and attending courses, trade shows, symposia, and conferences.
Incubate. Incubation gives the mind time to work on the problem in the background. This not only involves contemplation, but also involves engaging in one-to-one dialog with family, friends, and colleagues on the problem or opportunity.
Learn-by-doing. This involves designing and constructing a solution to the problem or opportunity. It also involves designing and building a prototype, modeling with diagrams, drawing pictures, developing flowcharts, drawing digital or CAD diagrams in 2D or 3D CAD, conducting simulation, identifying system specifications, developing system mock-ups, developing business plans, and even the use of narratives. Designing and constructing might include very rough diagrams or developing mock-up pictures of the product or service by using sketching, drawing software, photo software, or presentation software. If the product is a software, then a mock-up screen can be designed by using a word processor, presentation software, or mock-up software. If the idea behind the product or service involves a complex process or business process, then flow diagrams can be constructed or a business process diagram can be developed with presentation software or specialized flowchart and business process diagramming software.
Development of know-how. This is the expertise, skill, and knowledge that can be used to produce a product or service.In large organizations, this information may be put into complex knowledge management repositories and is referred to as knowledge management. A significant amount of knowledge is actually maintained in the largest knowledge repository of all, the World Wide Web. It is the outcome of the creative process that can be used to provide insight and to build and construct products, services, and business processes. It is the applied and practical knowledge that can be used to make the product or service. In start-ups and small organizations, this knowledge is in the minds of the owner, management and staff, and developers. The knowledge may be codified in lists or in what we refer to as Knowledge Books. These Knowledge Books can be maintained on tablets and spiral notebooks and in computer files. They can contain the following information:
• Descriptions of procedures for providing services and products
• Descriptions of what the organization is good at and what it is not so good at
• Job descriptions and links to individuals with certain expertise
• Descriptions of how business processes and tasks are completed | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/06%3A_Facilitating_Creativity_and_Innovation/6.01%3A_Introduction.txt |
As illustrated in Figure 6.1 "Creative Problem Solving and the Creative Star Model", the process is iterative and not always linear. It is indeed a rare instance that creativity emerges through a simple linear process. For example, leaning-by-doing can spur additional learning-about activity and vice versa. This, in turn, can lead to a series of little ahas that eventually translates into the big aha. The big aha is sometimes referred to as illumination where a solution is found to the initial problem or opportunity identified in the beginning of the creative process. This is similar to what Peter Sims refers to as investing in little bets.Sims (2011). Investing in little bets leads to little ahas, which eventually lead to the big aha.
Search is very important as we have seen in an earlier chapter, but in the early stages of developing a solution for a problem or taking advantage of an opportunity, searching should be limited to a couple of sources. Hal Varian, chief economist at Google and one of the most insightful economists in this generation, details the following approach for generating economic models.Varian (1997), pp. 2–3.
I think that you should look for your ideas outside the academic journals … in newspapers, in magazines, in conversations, and in TV and radio programs. When you read the newspaper, look for the articles about economics … and then look at the ones that aren’t about economics, because a lot of the time they end up being about economics too. Magazines are usually better than newspapers because they go into issues in more depth.… Conversations, especially with people in business, are often very fruitful.… In many cases your ideas can come from your own life and experiences…. However, my advice is to wait a bit before you look at the literature. Eventually you should do a thorough literature review, of course, but I think that you will do much better if you work on your idea for a few weeks before doing a systematic literature search. There are several reasons for delay.
First, you need the practice of developing a model. Even if you end up reproducing exactly something that is in the literature already you will have learned a lot by doing it … and you can feel awfully good about yourself for developing a publishable idea! (Even if you didn’t get to publish it yourself …)
Second, you might come up with a different approach than is found in the literature. If you look at what someone else did your thoughts will be shaped too much by their views … you are much more likely to be original if you plunge right in and try to develop your own insights.
Third, your ideas need time to incubate, so you want to start modeling as early as possible. When you read what others have done their ideas can interact with yours and, hopefully, produce something new and interesting.Varian (1997).
The takeaway from this discussion is that the creative process is recursive and iterative. For example, you can spend a little time on learning-about by examining just a few magazines or talking to a few people and then go to learning-by-doing after you let the idea season in the incubation phase. Then, you might go back to the learn-about stage or even the trigger stage as you begin to converge on a solution to the problem. The initial search process should be limited to a few sources and then expanded in order to take advantage of ideas that might have been missed in the early stages of the creative process.
6.03: The Lonely Genius
A common theme that pervades the creativity literature is that creativity demands discourse, tension, dialog, and debate among the interested parties.Gardner (1994). Creativity endeavors are driven by interaction, search, and solitude. One of the most pervasive myths is the notion of the lone genius. The lone genius is the individual who toils away in the confined small room developing a grand theory and innovative ideas with little or no interaction. In reality, many inventions and innovative ideas are derived not in a vacuum of isolation, but rather in a sea of collaboration that is countered with periods of solitude and incubation. The prototypical lone genius is Albert Einstein. Einstein worked as a patent examiner during the time that he developed his ideas on relativity and theoretical physics. Einstein did not develop his ideas in solitude. His knowledge was based on intellectual foundations including his university studies, contemporary research papers of his time, and patent applications he viewed at the patent office. There is also evidence that he drew extensively on his academic contemporaries including Marcell Grossman (a classmate), Michele Besso (a friend at the patent office), and Mileva Einstein (his first wife) as sounding boards for his ideas.See, for example, Highfield and Carter (1993); Isaacson (2008); Ohanian (2008). The point is that anyone can become a wizard of ahas if they engage in serious learning-about and learning-by-doing with a pinch of collaboration and dialog. Curiosity and questioning are central to the success of creativity.For an overview of convergent and divergent thinking and questions related to these typologies and the psychological, sociological, and biological theories related to creativity, see Runco (2006). We are assuming that curiosity and questioning have not been completely driven out of the creative DNA that is hardwired in all humans.
6.04: The Habits of Successful Entrepreneurs
Creativity, as we have suggested earlier, can be learned. Dyer, Gregersen, and Christensen investigated the habits of 25 successful innovative entrepreneurs (e.g., Steve Jobs, Jeff Bezos, etc.) over the course of a 6-year study.Dyer, Gregersen, and Christensen (2009). Here is an overview of their findings related to entrepreneurs:
• They make unusual and unique associations and combinations of processes, products, and technologies.
• They are good at asking questions related to the why, why not, and what-ifs processes, products, and technologies.
• They like to observe and scrutinize processes, products, and technologies.
• They are experimenters with processes, products, and technologies.
• They are good at networking.
The authors of the study also note that these skills can be developed through practice and by creating an environment conducive to their development. The following section presents a series of steps that we have identified to create an environment that fosters creativity. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/06%3A_Facilitating_Creativity_and_Innovation/6.02%3A_The_Creative_Process_is_Inherently_Nonlinear.txt |
Creativity, invention, and innovation are driven by a series of little ahas.Sawyer (2006). When the little ahas are stitched together, they lead to innovative products, services, and business processes. Creative ideas are built on a tapestry of other ideas and the little ahas are the basis for both incremental and radical innovation.
Although innovation and creativity can emerge in a variety of settings and situations, some environments are more conducive to the creative process. In one large study, it was found that having a vision, being task-oriented, and engaging in external communication had a strong relationship to creativity and innovation.Cf. Hülsheger et al. (2009). The following section presents the environmental factors that encourage the creative process. They are drawn from a variety of sources including Sawyer,Sawyer (2006). Amabile, Hadley, and Kramer,Amabile, Hadley, and Kramer (2002). Goldenberg and Mazursky,Goldenberg and Mazursky (2002). and Nalebuff and Ayres,Nalebuff and Ayres (2003). and Michalko.Michalko (2006). The following environmental factors can facilitate the creativity and innovation in individuals, departments, and organizations:
Need a shared mission that is focused on a single goal. Creative and intellectual energy is not unlimited. If an individual or a group is working on too many projects, then it is difficult to focus on one particular problem. If the group has a shared mission, this will also lead to group cohesion and further contribution to solving a problem.
Create an atmosphere that facilitates one-on-one collaboration. Group meetings can sometimes provide focus and insight, and assist in bringing focus to the team. It, however, is the one-on-one collaboration that is most effective in fostering the little ahas and individual creativity. It is like reciprocal tutoring. Through discussion and dialog, both individuals, the tutor and student, are better able to understand and grasp their particular problem. This is true even when one individual has more knowledge than the other. The teacher often learns more than the student during discussions.
Promote risk-taking and permit failure. There are many paths in life that can lead one astray. Sometimes we can avoid them by gathering additional information, but many times we cannot know that a path is a dead end or is too roundabout until we travel the path. Risk-taking should be encouraged even when the risks are daunting. The road less traveled may be the right path. The idea of learning by making mistakes is the essential part of the learn-by-doing approach. Consider Steve Jobs. He is the prototypical example of failure leading to success. The path to success was fraught with disappointments including the Apple Lisa, the Power Mac G4 Cube, NeXT computers, and perhaps Apple TV. Counter these failures with the iPad one of the most successful technologies ever released.
Experimentation not only invariably involves some level of failure, but also leads to understanding and insight into what works. As illustrated in a later chapter, investing in a variety of projects diversifies risk and provides opportunities for the future. Making the right investment decision on the right projects and the right products is a combination of having the right information, intuition, and luck by learning-by-doing. Steve Jobs (Apple) and Jeff Bezos (Amazon) intuitively or explicitly invested in real options by exploring the applicability of emerging technologies to create unique products and services.
Allocate quiet time and solitude in order to help individuals think inside the box. There are some creative people who have a special place to go when they want to solve a problem. Quiet time and solitude are essential for the creative process and generating the little ahas. Quiet time can be in an office, in a special room, inside a refrigerator box, during an evening run, on the treadmill, in bed, or in the shower. Isolation and quiet time facilitate the creative process. The first thing solitude does is to help us focus on the problem. Even if you are not focused on the problem during quiet time, the mind works in the background reorganizing knowledge and ideas to help solve a problem. For many people, the best time for solitude and creative work is during the first 2 or 3 hours in the morning. I call these hours the Golden Hours. The mind has spent the previous 8 hours organizing knowledge and is primed for problem solving and insight. There is some evidence that artists have their Golden Hours after 10 pm.Wang and Chern (2008). These so-called Night Owl Learners seek the cover of night and solitude to produce their creative endeavors.
Make things by developing prototypes and experimenting. A prototype is a real, workable, and quasi-usable system built economically and quickly with the intention of being modified. As noted earlier, a key strategy for sparking creative activity is the learn-by-doing process. Learning by doing means that you make and build things, try experiments, and construct prototypes. Prototypes can be built for products and services, including software. A prototype is essential for learning about what you are trying to invent and also for illustrating proof of concept. The prototype is part of a continuous ongoing process of experimentation and review. If you need to write something or develop something that is artistically creative, then the same advice applies. The initial writing, photograph, painting, or sculpture is the prototype. The mantra of those involved in creative pursuits should be Prototype or Perish or Build or Bust.
Anyone can be creative. Half of the battle of being creative is convincing yourself and others that anyone can be creative. I sometimes hear friends and students say that they are not creative. Anyone can be creative; it just involves applying all of the following strategies:
• Have a mission and focusing on a single goal
• Need one-on-one collaboration
• Take risks and permit failure
• Need quiet time and solitude
• Need to prototype and experiment
• Work hard
In an ideal world, management would be responsible for creating an environment that is conducive to creativity. In reality, it is the individual’s responsibility to create such an environment by balancing time at work, at play, and at home that will match the desired level of creative activity. Everyone needs a bit of aha in his or her life.
6.06: How to Hinder Creativity
The first way to hinder creativity is to reduce thinking time and try to eliminate solitude. Management can accomplish this in six easy steps:
1. Schedule many meetings. In addition to weekly project meetings, schedule daily meetings to solve all kinds of problems and to show off what has been accomplished.
2. Have each team member account for all of his or her time in detail.
3. Tell people not to talk to each other about their tasks.
4. Interrupt individuals whenever possible. Give team members new tasks to accomplish. If problems arise on other projects, then send them over to help out.
5. Change the product specifications and put in new features at the last minute.
6. Have the team members stay at work 12 hours per day and have them work on weekends.
Lack of time and interruptions are enemies of the creative process. Creativity is diminished when individuals are under-the-gun and the workdays are fragmented with many meetings, with busy work and interruptions.Amabile et al. (2002). Creativity is not very efficient. It takes time to understand a problem and to develop ideas.
6.07: Embrace Some Adversity and Avoid Chronic Stress
There is some indirect evidence that some adversity can make you stronger. Researchers such as Mark Seery, Alison Holman, and Roxanne Cohan Silver found that a certain level of exposure to adverse life events resulted in better mental health and well-being outcomes.Donovan (2010). They found that a history of lifetime adversity, in contrast to low and high levels of adversity, was related to lower global distress, lower levels of functional impairment, less post-traumatic stress, and high levels of satisfaction. Yes, some levels of adversity can make us feel better.
Chronic stress, however, can have a negative influence on health, the immune system, cognitive performance, learning, memory, and brain development in general.Lupien, McEwen, Gunnar, and Heim (2009). When the brain detects some sort of threat, it releases hormones that are used to cope with the threat and the body goes into a fight-or-flight response. Extended or chronic exposure to these hormones and the fight-or-flight arousal state can significantly impair health and cognitive functions and, by extension, the creative process. The bottom line is that a little adversity might be ok; but if the adversity leads to chronic stress, then it will damage the individual. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/06%3A_Facilitating_Creativity_and_Innovation/6.05%3A_Environmental_Factors_Affecting_Creativity_and_Innovation.txt |
The effectiveness of creativity techniques is unclear. This section presents several techniques that have been used to foster the creative process. They are essentially problem-solving strategies for generating new ideas for product and services. This section is a compendium of ideas from a variety of places. You are encouraged to look at the various books that are available for additional insight into the approaches.c.f. Michalko (2006).
Challenge Assumptions by Recombining, Adding, Deleting, or Changing Product Features
Assumptions about how a product should look and perform create intellectual boundaries. As noted by Michalko,Michalko (2006). they become so ingrained that they are never challenged. FlippingNalebuff and Ayres (2003). and reversing are techniques for challenging the assumptions. For example, it is assumed that delivered pizzas should be cheap, hot, fast, and have standard toppings. How about cold, slow, and nonstandard toppings? Cold pizza is not a good idea, but perhaps expensive pizza, with slow delivery and gourmet ingredients, could be a winner. The first thing to do in this approach is to list all the features of a product, reverse the features, and then see what features make sense.
Other ideas where assumptions and product features have been challenged include the following:
• Taking your car to the glass shop to have the window repaired
• New assumption: The glass shop repairs the crack in the car window at your work.
• High-resolution expensive camcorder with many features
• New assumption: The popular Flip Mino was a low-resolution inexpensive camera with very few features. It was popular at one time because it could easily upload files to the Internet.
• Use global positioning system to get you to a location
• New assumption: Give other people your location and let them find you or come to you.
• Putting condiments in glass bottles
• New assumption: Flipping by putting condiments in plastic and turn them upside down (ketchup).
• Have spaghetti tonight, chili tomorrow, and macaroni and cheese the next day
• New assumption: Have Cincinnati Chili tonight. It includes spaghetti, chili, onions and lots of cheese.
Social networking Web sites have championed the idea of combing services in new ways (often referred to as mashups). For example, Facebook combines blogging, photo sharing, marketing, and instant messaging. Twitter has combined text messaging, mini-blogging, instant news, customer tracking, and paparazzi activities in one simple yet powerful system. All in one printers, multipurpose stadiums and Kansas City Chili are additional examples of how simple ideas can be combined into useful products.
Idea Arbitrage: Steal Ideas and Products From Someone Else
Taking ideas from others is idea arbitrage.Nalebuff and Ayres (2003). If the idea is not patented or copyrighted, it will be copied. And even if it is copyrighted or patented, it will probably still be copied.Choate (2005). Legal searching for ideas can come from a variety of sources including basic science journals, the popular press, conferences, and trade associations. As noted earlier, innovation benefits from search. And usually, the more sources you search, the better (this is probably true up to about 11 outside sources). The ideas can also come from other countries and cultures. There is a Web site in China called AliBaba.com where there are literally thousands of products that have never been seen in the West. With idea arbitrage, the goal should be to steal the gem and not the entire crown. Take the best ideas and combine them in order to differentiate your products from the competition.
One interesting application of the idea arbitrage is Etsy.com. Etsy is an online store that provides a market for crafts and handmade items. It has drawn on ideas from both Amazon and eBay and has recently begun to encroach on both eBay’s and Amazon’s market. It is a superb example of a monopolistic competition marketplace, where product differentiation rules the day.
Midas Approach: Product and Services Developed with Unlimited Resources
The idea behind this approach is that you can generate ideas for solving problems by throwing money at the problem.Nalebuff and Ayres (2003). The problems are the headaches. Even though contemporary life in the USA is pretty much headache free, by 18th-century standards, there are numerous instances where products and services are being developed to relieve irritations. For example, if you have a problem with technical support, then have a technical guru sit outside the door until you call for his or her expertise. Need help with school and homework? Hire a full-time assistant as a tutor. Having problems with snow on the driveway? Install a heated coil driveway. If you cannot guess when the mail arrives; install a sensor that transmits the status of the mailbox.
Barry Nalebuff and Ian Ayers describe the “What Would Croesus Do?” approach in their book entitled Why Not?Nalebuff and Ayres (2003). This is essentially a problem-solving approach where you have unlimited resources at your disposal. The goal is to identify products and services for the high end where the consumer is not price-sensitive and is interested in many different features. As noted earlier, we have renamed Croesus to Midas because it is easier to remember and because it imparts a very colorful and explicit image of high-end features. Midas products and services are designed for consumers who are not price-sensitive.
Hermes Approach: Products and Services Developed with Limited Resources
In an earlier chapter, we discussed the Hermes approach to problem solving and developing products and services to relieve headaches. The Hermes part of the demand curve is where the consumers are price-sensitive. This could include students, seniors, and, in general, individuals with low levels of discretionary income or individuals who are value-conscious. In designing products and services for this group you can use the “What would Hermes Do?” approach. Hermes was the god of the traveler, the shepherd, the athlete, the merchants, and the cunning, and was linked to invention and commerce. There are a variety of very interesting products and services that have been developed for the price-sensitive end of the demand curve. The idea is to use the top and bottom of the demand curve to generate new ideas for products and services. The point is creating dynamic tension between the two ends of the demand curve and eventually producing the best products for the price-sensitive (Hermes), the high end (Midas), and the middle of the demand curve (Atlas).
Nightmare Features: Think of Ways to Put Your Company Out of Business
An extension of the alleviate headaches approach is to think about ways to put your company out of business or for that matter any company out of business.This idea has been attributed to Alan Kay, one of the pioneers behind object-oriented programming and the graphical user interface, when he was a scientist at Xerox’s Palo Alto Research Corporation in the 1970s. When using this approach, the individual should marshal all the creativity approaches, including using unlimited resources to generate problem solutions, borrowing ideas using idea arbitrage, flipping ideas, and recombining products and services. Many of the ideas that have led to putting companies, industries, and even countries out of business were the result of disruptive technological innovation (e.g., the printing presses, armaments and tactical innovations, networking, computing, communications innovations, etc.). Disruptive technologies are product or process innovations that eventually eclipse or overturn the existing dominant technology. They are part of a product life cycle described by 19th-century economist Joseph Schumpeter that leads to Creative Destruction.Rose (2002). Schumpeter was a strong proponent of the entrepreneurial spirit. It was his position that products and services emerge, die, adapt, and re-combine in a never-ending cycle of birth, growth, and decline.
Fostering Creativity in Meetings and with Your Colleagues
The way we perceive the world is constrained by culture, social mores, institutions, education, and neurobiology. In some cultures and businesses, there is a distinct power distance that separates and modifies social interactions.Hofstede and Hofstede (2004). Power distance is the degree to which powerful individuals in a country, culture, occupation, or an institution accept and indeed demand subordination, obedience, and differential respect. Institutions with high levels of power distance are characterized by bosses pulling rank, requiring subordinates to clear everything with the boss, and having excessive rules for interaction and task completion. In general, when power distance is high between superiors and their subordinates, there is an aura of authoritarianism and class distinction. This is in contrast to work environments where the power distance between superiors and subordinates is low. In this situation, superiors treat individuals as somewhat equal, giving subordinates important tasks, permitting failure, and giving credit where the credit is due.
It should be noted that the appropriate degree of power distance is contextual. There are some jobs where high levels of power distance are needed (e.g., the military, some construction jobs, and police work) and others where low levels of power distance are desirable (e.g., research and development, piloting a plane, and creative endeavors). Malcolm Gladwell described a situation where high levels of power distance between flight crew members contributed to the plane crashes of a Korean Airlines in the late 1990s.Gladwell (2008). Planes produced by Airbus and Boeing are supposed to be flown by two pilots without a significant power distance between them, where one pilot corrects the other when necessary. As a result of the large power distance between the pilots of Korean Airlines, the co-pilot would not correct mistakes made by the other pilot, which in turn led to the fatal mistakes and crashes. There has even been speculation that the Madoff debacle was the result of too much power distance between the Securities and Exchange Commission and Bernard Madoff.Selling (2009).
It is important to reduce the power distance relationship within teams and at meetings when the objective is to encourage creativity and innovation. As noted earlier, having a mission, focusing on a single goal, encouraging one-on-one collaboration, encouraging risk taking, embracing failure, and having quiet time can all facilitate creativity. This can, of course, be very difficult to do because the power distance relationship is a somewhat durable, cultural, and institutional variable. Overcoming situations where the power distance relationship is high requires a dramatic approach, such as the Six Thinking Hats technique.
Six Hats Approach to Creativity
Edward de Bono has developed a technique for creativity that has been outlined in his book the Six Thinking Hats.de Bono (1999). The objective of his approach is to encourage problem solving and creativity by having team members wear different hats. This approach just might help to reduce relationships where the power distance is high. The following presents a brief overview of how the different hats influence team interactions and information gathering:
• White Hat Thinking: This involves gathering facts and figures related to the problem. It is also used to identify areas where more information is required.
• Red Hat Thinking: This involves emotional thinking. Gut feelings and passionate evangelism are permitted.
• Green Hat Thinking: This is where creativity is encouraged. Creative solutions are in order and you can draw it from the approaches discussed earlier (flipping, idea arbitrage, combining ideas, and unlimited resources).
• Black Hat Thinking: This involves the use of critique and judgment to assess the negative aspects of a solution. Key questions to be asked include whether the solution is viable and whether can it be executed.
• Yellow Hat Thinking: This involves the positive aspects of a solution. It is important to be optimistic about the solution when under the yellow hat.
• Blue Hat Thinking: This involves trying to get a strategic look at the problem. An attempt is made to get at the big picture in terms of where were we, where do we want to go, and how do we get there.
The six hats approach is a useful activity that may help to bring different perspectives into the creative process as well as reduce high levels of power distance. When implemented properly, it encourages participation and helps reduce dysfunctional power relationships among team members.
6.09: Conclusion
In this chapter, we have discussed the concept of creativity and innovation, and identified various approaches on how to foster them. There are several all-encompassing lessons that can be derived from the previous discussion:
• Innovation is the result of willful and serendipitous interconnections between the little ahas.
• Innovation usually involves intellectual and technological maturity levels so that learning-by-doing is possible.
• Innovation requires dialog, learning-about, encouragement, time, solitude, experimentation, construction, and some pressure, but not too much.
• Learning-about, learning-by-doing using prototyping, and hard work are the keys to creativity and successful innovation.
Innovation is an important driver leading to organizational financial performance.Han, Kim, and Srivastava (1998). It is after all the catalyst for developing differentiated products and services for competing in monopolistic competition markets. Research and development is driven by the diffusion of science and the translation of basic science into commercially viable products and services. R&D by entrepreneurs may not involve basic scientific research, but it does involve searching for ideas that will lead to differentiated and marketable products and services. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/06%3A_Facilitating_Creativity_and_Innovation/6.08%3A_Creativity_Techniques.txt |
Conceptualizing Products/Services Using FAD
The previous chapters have focused on learning the basic concepts related to product differentiation in the context of monopolistic competition. The focus of this chapter is learning-by-doing. We will use techniques to help transform a nagging idea about a new product to be more explicit and real. The tool for completing this task is called the FAD (features, attributes, and design) template. The FAD template is used to identify the features and attributes that can be used for product and service differentiation. The first part of the chapter will introduce the key concepts necessary to understand and motivate the use of the FAD template. The FAD template will then be introduced and used to demonstrate and structure the development of important attributes and features of a new product or service.
7.02: Features Attributes Form Design Function and Meaning are Interrelated Concepts
Here are some definitions and concepts that can be used to understand how products and services can be differentiated:
• An attribute is used to describe the characteristics or properties of something.
• A feature is often described as a prominent attribute.
• A function is what something does.
• Form is the external experience or shape.
• Design involves all the above.
• Meaning involves all the above plus the relationship of the product or service to emotional and psychosocial needs.
Figure 7.1 SuperDuper Smartphone
A very simple way to view all the above is that features, function, form, design, and meaning are all attributes, with different levels of information about a product. Consider the SuperDuper smartphone in Figure 7.1 "SuperDuper Smartphone". The SuperDuper phone has a keypad (attribute, feature, function, and form), with lighted square keys (attribute, feature, and form), and a high color indestructible screen (attribute, feature, and form) with a black onyx color and coarse texture (attributes, features, and form), which can be used for calling and texting (attributes, features and functions), listening to stereo music (attribute, feature, and function), and locating friends within 1 mile (attribute, feature and function). This smart and futuristic SuperDuper phone (attribute and overall design) creates feelings of connectedness, comfort, and security (attributes and meanings).
7.03: Meaning and Product Design
There are three fundamental approaches to design (Figure 7.2 "Fundamental Design Approaches"). The user-driven design (UDD) school is focused on researching consumer wants and needs. The technology-driven design (TDD) school is not a school per se, but rather an approach that is focused on applying new and emerging technologies to develop products and services. The meaning-driven design (MDD) school focuses on the emotional and psychological relationships that people have with things, objects, and products and attempts to design products that satisfy these meanings. Most products can be designed using all three approaches, for example, software, custom houses, furnishings, electronics, clothes, personal care, appliances, and transportation. Some products such as CPUs’ semiconductors and nanotechnology and health equipment are primarily technology driven.
Figure 7.2 Fundamental Design Approaches
MDD also involves UDD, but it is not the motivation behind the entire process. In MDD, the company executives and research and development (R&D) personnel design the next-generation product and then present it to consumers. They still obtain a reaction from potential consumers, but it is not the sole driving force behind the process. The MDD approach also incorporates technology-push innovation, where innovative emerging technologies are pushed to the market. In essence, MDD uses elements of both UDD and TDD to deliver innovative products. The unique part of MDD is the search for meaning. There is a search for meaning in the way that people relate to objects. This is often accomplished by collaborating with other organizations and with experts in the product domain on how the product should be designed. The design of the product is not solely derived from customer pull as is the case of UDD, but is also driven by the innovator and new and emerging technologies. In MDD, the innovator synthesizes information from a variety of sources and then uses this knowledge to design innovative products.Software developers often use a technique referred to as user-centered design or participative design that has elements of UDD and MDD. In user-centered design, there is an iterative process of building the application and having the user continuously validate software solution.
The idea behind the MDD School of innovation is to look for meaning in everyday products and to try to determine how they can be changed in a radical way to support the emotional and psychological needs of consumers. The MDD approach to developing a Blue Ocean market involves understanding how customers relate to products and then developing new products that get at the core of what meaning customers attach to products.As noted in an earlier chapter. A Blue Ocean market is a market that is not in existence. A Blue Ocean product is a new product that is radically differentiated from existing products that are being offered.
Many individuals in the MDD school believe that the user-centered design is a hindrance to developing radical innovations.Cf. Verganti (2009). The focus of the MDDapproach is to find the meaning in the way people relate to objects in their everyday life. The MDD school of innovation not only contemplates beauty and form, but also examines the emotional and psychological relationships that people have with things, objects, and products. Proponents of MDD believe that developing innovative ideas that transcend existing product concepts requires more than just attending to product differentiation. Since the MDD school of innovation uses a push strategy. Product ideas are conceived as a vision and offered to consumers as a proposal. As noted by Verganti: “These proposals are not dreams without a foundation. These proposals eventually emerge as the products users were actually looking for. They end-up being what people were waiting for—and thus are great marketing successes” (p. 116).
We alluded to the fundamental meaning of product in the earlier discussion of the basic functions of products. There are many different types of meanings that can be attached to products, some of them are tangible and some of them are complex and elusive. Key areas of meaning include the following: provide physical and emotional sustenance; facilitate control over the environment; provide entertainment; provide feelings of status, superiority, and elitism; provide a sense of stewardship; provide a sense of altruism; provide feelings of adventure; provide security and comfort; facilitate the completion of some work or home task; provide familial support; support learning and adaptation; help us to change location; provide opportunity for communication and networking; provide for respect and recognition; and, of course, be a source of satisfaction and happiness.
Traditional user-centered design approaches are not focused on understanding the meaning of the relationship that people have with objects. The Wii is not a game machine, it is the campfire surrounded by family and friends. Embedding diamonds in wireless phones contributes little to the calling function. But in some people’s minds, diamonds are a symbol of affluence and sophistication and are used to convey that image. The iPhone is not just a phone and the iTouch is not just an MP3 player, they are status symbols that also provide comfort and social networking. A Cirque du Soleil performance is not just a circus or just entertainment, it is a risky adventure in an ethereal world never seen before. The iPad is not a replacement for a netbook or a laptop, it is the adventurer’s guide to the galaxy of knowledge and entertainment. It is the present day Hitch Hikers Guide to the Galaxy.
Attaching meaning to objects is of course somewhat subjective and strongly influenced by the researcher’s background and by social mores. There are numerous types of meaning that can be examined and they are often interdependent.
Designing products that draw on meaning requires creativity and hard work. Creativity can be cultivated and is within the grasp of most people as discussed in Chapter 6 "Facilitating Creativity and Innovation". The hard work is the never-ending process of determining the proper ingredients that go into the secret sauce to keep people from becoming bored or even worse, ignoring your product.
A key part of the MDD process involves partnering with interpreters. This partnering involves both learning-about and learning-by-doing. The interpreters are the organizations and individuals who are working on products that are similar to the products that you are examining. They can be suppliers and component manufactures, consultants, consumers, competitors, universities, research firms and think tanks, trade association and publications, research conferences, and of course one of the most important interpreters, the search engine.
There are other approaches to design that focus on marketing, project management, product management, portfolio management, product engineering, creativity, and controlling the process. Later chapters will discuss the role of project management, new product development and portfolio management in providing structure to the innovation process.
Many companies use hybrid approaches that draw on UDD, TDD, and MDD. Our focus in this chapter is primarily on MDD. But we also rely on user-centered design for refining products and making them usable. Even Apple, who we believe is the wunderkind of MDD in the USA, listens to their customers. For example, they redesigned Apple TV to become an inexpensive video-streaming device and put buttons on the smallest shuffle because consumers did not like having all the music control buttons on the ear bud cord.Lyons (2010b, September 1). UDD is also very important for software development, whether it be in the context of game development, applications development, or social networking applications. A customer-centric agile development process is essential for delivering products that will be used. Ergonomics, ergonomics laboratories, and usability research are the foundation for delivering high-quality software products to the consumers.
There is one more design strategy that can be linked to many product failures. It is a purely functional design strategy that does not incorporate user needs or meaning at all. There is little if any UDD or MDD. This situation occurs where someone thinks that there is a need or demand for a product or service, but the end-users were not listened to or were ignored completely. This often occurs when there is no need or demand for a product or service, but someone thought that it would be a good idea to develop it anyway. I was involved with such a product when I worked as a programmer. Here is the story. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/07%3A_Conceptualizing_Products_and_Services_Using_FAD/7.01%3A_Introduction.txt |
Barlow was the head of our IT group and he was also the head scorekeeper for the plant’s golf league. Every Monday morning Barlow would take the golf scores from the past week of play and compute the league standings as well as calculate the handicaps. Barlow had been doing this for years. Someone in human resources thought that he was spending too much time on the league and they also thought it was a burden to Barlow. So HR commissioned a golf handicapping and league scoring system. A complete cost–benefit analysis was actually implemented and the payback was deemed acceptable, so the green light was given to the project. A team of analysts and programmers were assigned to gather requirements and implement the system. Tens of thousands of dollars were spent developing and programming the system. The system was used just a couple of times. It was a pain to use, the results were incorrect, and most importantly, Barlow could finish his calculations faster than it would take to key-in the data and generate the reports. Barlow actually liked his manual system and took pride in his ability to produce weekly updates in a few hours. He said as such, in quiet tones, but he was not listened to.
In the current market context, functionally designed products and services are sometimes at risk, unless the meaning of the design is to convey simplicity and functionality. There are numerous examples of successful products and services that simply do what they are supposed to do, because they are functional. Functionally designed products can be even more successful when they are accompanied by user-centered design and meaning-centered design.
7.05: Identifying Key Meanings Attributes and Features
One thing is for sure. There are literally thousands of attributes, features, designs, and meanings that can be used to define products and services. This section details the major attributes that should be considered during product and service development.
• Functions of the product or service and target customers. What does the product do? What important subfunctions does it perform? What type of customers or customer segment are you trying to attract?
• Quality. How well does the product or service conform to specifications? Does the product or service do what it says it is supposed to do in the user manual? Is it effective in performing its function?
• Reliability. Does the product or service perform as it is supposed to over the expected life of the product or service. Is it prone to failure? Is it easily maintained? Can parts be obtained at a reasonable cost and are they easy to change? Does the product perform satisfactorily in a variety of environmental conditions?
• Ease-of-use. Is the product or service easy to use and can consumers learn how to use it without much trouble? Is the product convenient to use? A convenient product or service is readily available, performs the task for which it was designed, and reduces the time it takes to complete a task.
• Performance. Is the product smaller than the competition? Is it more powerful? Does the product or service complete a task faster? Is the product adaptable to many situations?
• Design. Is the external form attractive? Is the product packaged properly? Does the product suggest a certain meaning? Do the materials used in developing a product also contribute to the overall look and feel? Thus, the meaning of a product is derived from the type and color of the material used to construct a product, the texture and feel of the product, the size, the product name, and from the overall form or style of the product or service.Verganti (2009). Examples of abstract design meanings might include: futuristic, scary, hallow, delicate, intellectual, feminine, masculine, macho, healthy, psychedelic, smart, fashionable, earthy, retro, metal, avant-garde, youthful, personal, worldly, mature, luxurious, elite, western, oriental, simple, sassy, cool, organic, green, and even abstract.
Design attractiveness and innovation also applies to services. Packaging for a service includes the overall look and feel of the service. It is the gestalt or form and configuration of the service as perceived by the consumer. The key success indicator for a service is the customer’s perception of the overall experience with the service process.Bitner, Ostrom, and Morgan (2008).
• Technology. Is there an emerging technology or a process that can improve the quality, reliability ease-of-use, performance, value, design, and meaning of the product?
• Value creation. Is there any intrinsic value in the product that significantly distinguishes it from other products or services offered by your company or the competition? Does the product or service solve a problem that consumers want to solve and will the solution attract them to the product or service?
• Meaning. The meaning of a product or service can be thought of as super-attribute or super-feature that nurtures the inner needs of the individual. Meaning can include the following: provides physical, health, religious, or emotional sustenance; provides feelings of being needed or being listened to; supports artistic and creative needs; facilitates control over the environment; supports feelings of closeness to the earth and being organic; provides entertainment; supports feelings of status, superiority, and elitism; provides a sense of stewardship or a sense of altruism; supports feelings of adventure; supports gender needs; supports feelings of security and comfort; facilitates and assists in the completion of some work or home task; provides feelings of familial support; helps an individual or a community to learn and adapt; helps us to change location; provides an opportunity for communication and networking; has above-average intrinsic value to some or many people; provide for respect and recognition; and finally, provides a source of satisfaction, happiness, or hope. The meaning of a product or service is very much tied-in to what the product does. For example, communicating is one of the most important and ongoing functions in our lives and we attach significant meaning to products and services that support communication.
Overlap in Meanings, Attributes, and Features
After reading through the list, you can probably notice that there is a significant amount of overlap among the different attribute categories. This is in part related to the imprecision of words in all languages and to the proliferation of synonyms. A Venn diagram illustrating the relationships among words and their meanings would visually depict significant degrees of overlap. This ties in very well with the concept of a brand and MDD. Recall that a brand is simply something that lives in the head of consumers.Adamson (2006). A brand is simply a composite of the mental associations that are generated when you see or think about a certain product. Another way to think about branding is as a gestalt view of the product. It is more than the sum of its parts (the attributes, features, functions, form, design, and meaning). It is the meaning we attach to the product and all the neural associations that are invoked when the product or service is recalled. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/07%3A_Conceptualizing_Products_and_Services_Using_FAD/7.04%3A__Functional_Design_and_User_Ignored.txt |
A fundamental force of adaptation in human beings is our attempt to control the environment.Cf. Jo, Moon, Garrity, and Sanders (2007). Infants try to get control of their environment by crying. Cuteness is a built-in genetic adaptation that augments crying and also facilitates environmental control. As we age, this strategy does not work very well and people control the environment by fitting-in, which is another type of control. Security, freedom, independence, and emancipation are the rewards of obtaining control. Getting wheels and driving, acquiring a secure and comfortable home, obtaining a job, and achieving financial security are milestones in achieving control. One person’s gain in control can sometimes lead to a loss of control by another. This is the collateral damage that can occur when someone gains too much control over others. For example, colleagues, family, and friends can facilitate (or hinder) the drive for environmental control. However, that same individual can in turn use the control to dominate those who helped him or her to achieve environmental control. Many individual and group conflicts can be traced to someone seeking excessive control or to someone else seeking emancipation from the excessive control.
The two fundamental strategies used to control the environment are primary control and secondary control. Primary control occurs when an individual tries to directly engage with and change the external environment to fit his or her needs and wishes.Heckhausen and Schulz (1995); Skinner (1996). Secondary control is a type of control that is directed at changing the self in order to cope with the environment. Secondary control is a goal-directed coping strategy for minimizing losses in primary control and also a mechanism for maintaining and increasing primary control. Individuals that do not engage in primary or secondary control have relinquished control and this is manifested by passivity and helplessness. Individuals engaging in primary control try to fix the environment, and those engaged in secondary control try to adapt to the environment. Both strategies assist in coping with the stress and complexity that are part of the everyday activities in the external environment.
We have found that primary and secondary controls also influence feelings of psychological ownership an individual has towards his or her avatar in an online game.Jo et al. (2011). Psychological ownership occurs when people have feelings of ownership towards material things or tangible objects and even immaterial or intangible objects.Pierce, Kostovab, and Dirks (2003). It occurs when an individual views the object as mine. We have found that the key to obtaining lock-in in online gaming environments is to get game players to embrace the system as though they own it. This ownership is the direct result of being able to exercise both primary and secondary controls over their online character by way of the user interface and by successfully interacting with members of the online guilds.
Facebook is a very interesting case of using systems to gain environmental control. It is very difficult for people to actually brag about their day-to-day accomplishments and activities in the real world or nononline world. It is much easier, and is indeed acceptable, in Facebook interactions to talk about oneself. There are several mechanisms built into Facebook that encourage bragging. For example, if a picture is added to the photo library or is used to display the image on the Facebook profile, then it is acceptable to brag or tout one’s stuff on the accomplishment or the activity. Facebook permits people to control what is known and what is not known about them. It also opens up new lines of communication and it can sometimes alleviate loneliness and even increase recognition and status. LinkedIn is the social networking tool of choice for bragging about professional accomplishments and looking for a job, while Twitter is the outlet of choice for serial braggers and businesses that want to obtain exposure.
The bottom line is that if people can control a product or service or if a product or service helps to actually control the world, people will feel that they own the artifact and thus become locked-in to using that product or service out of loyalty.
There are of course issues of having too much control and having too many options. There is some evidence that having too many choices leads to decision paralysis and some people believe that having too many choices contributes to depression.Schwartz (2003). Novice users of any product or service need directed guidance. A wireless phone or a DVR needs to be easy to use for the first-time user, but also readily customizable as experience grows and new features are sought. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/07%3A_Conceptualizing_Products_and_Services_Using_FAD/7.06%3A_Design_Products_and_Services_that_Facilitate_Control.txt |
Some attributes of products were important 5 years ago, but they are not today. Some product features were not even available last year, but they are mandatory today. Similarly, product designs and their accompanying meanings are constantly in flux. The importance of product attributes changes. The following classification scheme can be used to ascertain whether attributes and features are increasing or declining in importance. The classification scheme was derived from a variety of sources.Iyer and Muncy (2005); Keller, Sternthal, and Tybout (2002); Keller and Tybout (2002); Kim and Mauborgne (2005); McGrath and MacMillan (2000); Tybout and Sternthal (2005).
Points of Parity and Must-Haves (POPS)
These are attributes that most of the products in a category usually have. They are the basic features found in a product or service. They help to define the prototypical product. A product is something that is tangible and it does something and has a function.Adamson (2006). For example, it provides sustenance; it provides security and comfort; it helps us to complete some task; it helps us to learn and adapt; and it helps us to change location, communicate, and network. The product should do what it is meant to do, with certain features that are compelling and functional. These features with their accompanying functionality are “must-haves” for a product or service to be minimally acceptable, and preferably strongly desired. If a product does not possess these essential features and functionality, it might be eliminated from consideration. For example, an auto global positioning system (GPS) should have the ability to enter an address and display how long it will take to get to a location; a word processor should have spell-checking capabilities; and a movie theater should sell treats.
Points of Difference and Differentiators (PODs)
These are the attributes of a product or service that assist in distinguishing products from the competition and from similar models in a product line. Product and service features that are differentiators are usually derived from Midas products and are high-end products. They are for nonprice-sensitive consumers. You can think of the demand curve as a steep incline where product features roll down from Midas products to Atlas products. When costs are further driven down, the features become the standard of Hermes products. Hermes products are for price-sensitive consumers. Important differentiators for auto GPSs include Bluetooth capability, voice recognition, and topography maps. A movie theater could have very comfortable seats. A word processor could have voice control. As noted earlier, the features tend to roll down the demand curve and the differentiators become must-haves over time.
Blue Ocean Features and Exciters (BOFs)
These features are typically in the very early stages of R&D and part of a secret plan to develop a new market. BOFs have the potential to deliver a knockout punch by developing a Blue Ocean market, a brand new uncontested marketplace. In general, BOF features are in their infancy—beginning to unfold and emerge. Examples for auto GPS might include location of friends and family in close proximity.
Another way to identify exciters or BOFs is to think about ways you could go about putting your company out of business or for that matter any company out of business. These are nightmare features and technologies. Many of the ideas that have contributed to putting companies, industries, and even countries out of business were derived from radical technological innovation. Examples include the printing press; armaments and tactical innovations; and networking, computing, and communications innovations. These so-called disruptive technologies are product or process innovations that eventually eclipse or overturn the existing dominant technology. Disruptive technologies can lead to sunrise features and to sunrise products. Sunrise features and products are the dawn of new technological and conceptual capabilities.
Extinct and vestigial features (EXTs)
These are attributes that are no longer necessary or on the verge of becoming extinct. They are sunset features. They are features that are on the verge of becoming obsolete and fading into darkness and oblivion. Sometimes EXTs cannot be removed because there may be a small subset of people that demand the feature. In this case, a decision has to be made to abandon the features or keep the feature. Sometimes the decision to abandon is the best way to go because of cost issues and because the company is going down a new technology path. This was the case with recent versions of Microsoft’s operating systems that abandoned some of the legacy DOS code. Apple made a similar decision in regards to abandoning DVD drives in the MacBook Air product and the decision not to include a camera in the iTouch. All of Apple’s decisions are influenced by product positioning, product costs, and the emergence and decline of technologies.
The next category is actually a subcategory of extinct features. When products or services lead to actual dislike of a product or service, then they should be retired or at a minimum require major redesign.
Dissatifiers (DISs)
There are instances when products and features in existing products can discourage consumers from using your product or your competitor’s products. Sometimes features can actually cause consumers to actually avoid using a product. The feature may be a negative attribute of the product. This can occur because the product or service has not been designed correctly and is basically unusable. Numerous products and services have failed because consumers have been dissatified with the design. Consumers can also be dissatified with a product because the consumer does not want the feature in the product or service. DISs are often sunset features. For example, many people did not attend circuses because they were opposed to the use of wild animals in the shows or because they thought that the animals were not interesting. That is one of many reasons why Cirque du Soleil became popular with a larger adult market. Cirque du Soleil simply abandoned the use of animals in their programs. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/07%3A_Conceptualizing_Products_and_Services_Using_FAD/7.07%3A_Categorizing_the_Importance_of_Product_Attributes.txt |
The purpose of the FAD template is to try to facilitate and provide a degree of structure for conceptualizing new products and services (see Section 7.11 "Exhibit 1: FAD Template"). The first step in using the FAD template is to provide a description of the product or service that is being considered. The second step in using the FAD template involves describing the meaning of the product. Several product meanings have been listed to provide a starting point. The next step in using the FAD template involves identifying potential attributes. The attributes can be features, performance characteristics, form, design, and even additional meanings. We have included a few attributes that are often considered, but you are encouraged to seek the attributes that are important in the development of your product or service. One goal of using the FAD template is to facilitate product differentiation. Focusing on attributes that are exciters and Blue Ocean features will assist in the differentiation process. It is sometimes helpful to focus on features that are on the verge of extinction or features that consumers are not satisfied with or wish they were not there. Considering exciters and disastisfiers helps to expand the way designers view the meaning behind a product or service, and it allows the designer to gain deeper insight into how to improve the current performance of the product.
Prototyping and the FAD Template
The final stage of using the FAD template is to provide a way to visualize the product by: a drawing, a schematic of the product or service, or a physical model (see several examples in Section 7.13 "Appendix 1: Examples of Prototypes"). Learning-by-doing means that you make and build things. You try experiments and you construct prototypes. Prototypes need to be constructed for tangible products, for services, and also for systems applications. If the product is a tangible product, then a generic mock-up of the product needs to be constructed as early as possible. The idea is to develop a very rough prototype of the product or service. There are many different ways to do this. It could be a report developed in a word-processing program, an interface developed in a presentation program, a sketch using a vector or raster-based drawing program or even drawn using a pencil on the back of a napkin, a three-dimensional (3D) model developed in Google’s free SketchUp program, or a flow diagram illustrating a process. If the product is a computer application, then a prototype can be constructed using a rapid prototyping language or demonstrated via a presentation package such as PowerPoint. There are also many excellent applications available for tablet computers that are very effective for developing mock-ups of applications and for drawing or sketching preliminary product ideas.
Services should also be prototyped. A uniquely designed service can be used as a way to differentiate a firm from the competition. Service design should always focus on the customer and how the customer interacts with the business in receiving the service. These interactions between the customer and the business are referred to as the touch points or connections. There are many components that go into the design of a service. They include the people, the verbal and nonverbal interactions, the processes, the scripts, the tools, the materials, the infrastructure, and the technologies. Execution of the service is a function of how all the service components work together.
One popular tool for designing services is service blueprinting. It is a visual and descriptive tool for modeling visible customer interactions with employees and processes that also illustrates how the hidden processes support the customer interactions.Bitner et al. (2008). There are a number of tools that can be used to conceptualize, design, and test the design of the service including drawings, sketches, scenario analysis and task structuring, mock-ups, storyboarding, systems, Lego mock-ups, and many more (see http://www.servicedesigntools.org/repository). Because services often involve queues or lines, simulations can be used to understand how fast or how slow a service will be performed in a particular situation.
The goal of the first-cut prototype is to learn-by-doing, to get other people to understand what you are thinking about, and to help you understand what you are trying to do. Developing a prototype in some form or another is an important part of the learning-about and the learning-by-doing process that will facilitate creative insight.This notion is discussed in the chapter on innovation and is also the result of several research projects I have been involved with. See in particular Cerveny, Garrity, and Sanders (1986).
Many prototypes start out with paper and pencil and then become increasingly more sophisticated as they mature. The basic sequence of iterative design with stepwise refinement includes the following:
1. Initial Prototype: In the early stages, develop a pencil and paper picture of the product, the application, or the process. The key is to focus on the key or essential functions of the product or service.
2. Review: Let business stakeholders, family, friends, and eventually potential customers provide feedback on the product or service.
3. Revise and redesign prototype: Use the feedback to refine and improve the design of the product or service. Use more advanced tools as the prototype becomes more refined and detailed. This usually leads to the use of graphics, drawing, and mock-up software. Towards the later stages of development, the prototype might be a functioning product or service or an actual application with some level of functionality.
4. Go back to step 2 after revising and redesigning the prototype.
There are some very exciting prototyping tools for manufactured products. Although currently in their infancy, they have the potential to completely change the way that products are prototyped and eventually how everything will be manufactured.The Printed World (2011). These new tools are part of a new approach for manufacturing called additive manufacturing or desktop manufacturing. Rapid prototyping is becoming a reality because additive manufacturing assists in producing prototypes very quickly. One of the most promising technologies for implementing additive manufacturing is the 3D printer. Very detailed and complex plastic working models of products can be generated using 3D printers.In 2011, the 3D printers start at around \$10,000 (just search for “3D printers” to see what is currently available.). There are hobbyists versions of 3D printers in the \$1,000 range. The parts or products are made by using 3D digital descriptions to print successive thin layers of plastic on top of plastic until a 3D solid emerges. Some of these plastic products and parts can be used as final products and not just as prototypes. There are versions of the 3D printers that use titanium powder to construct very complex objects such as jewelry and avionics components. Several aviation companies are investigating the use of very large 3D printers to create entire aircraft wings.
Example of the FAD Template in Wine Aging Cooler
Aged wine has always been attractive to wine enthusiasts and wine connoisseurs, but aged wine is expensive because of the time involved. A merlot can take up to 15 years to age and Shiraz-based wines may require 20 years of aging. Several products have been introduced and patents have been secured and applied for that are purported to speed up the aging process.Search for “wine aging” at the U.S. patent office and with any search engine. Suppose an inventor found that it was possible to dramatically speed up the wine aging process by exposing a wine to an electromagnetic field with a very specific magnetic field strength. Suppose that the same inventor found that the taste of all wines could be improved using the special aging process. The net effect is that the technology could reduce the time to produce fine aged wine and also increase the quality of low-priced wines as well as increase the status of the owner of the wine aging product. Section 7.14 "Appendix 2: FAD Template for Wine Aging Product" illustrates how the FAD template could be used to conceptualize a new wine storage refrigerator that can be used to age wine. This example will be extended in Chapter 9 "The Ten–Ten Planning Process: Crafting a Business Story" using the Ten–Ten planning process.
Use the FAD Template to Develop the Blue Ocean Strategy Canvas
Chan Kim and Renée Mauborgne developed a technique they call the Strategy Canvas to assist in identifying a Blue Ocean market.Kim and Mauborgne (2005). A Blue Ocean market is essentially an uncontested new market with high profit and significant growth potential. They use the Strategy Canvas as a tool to assist in identifying Blue Ocean markets. One purpose of the Strategy Canvas is to understand where the competition is playing and investing their time and resources. Another purpose of the Strategy Canvas is to try to identify new customer segments in uncontested market spaces. The idea is simply to create new markets and attract customers.
One area where the Strategy Canvas is deficient is in the identification of attributes and features for competition and differentiation. The FAD template is ideally situated for assisting in that process. The FAD template can be used as an input device for constructing the Strategy Canvas by facilitating the identification of important attributes and features on which to compete.
The following approach can be used to develop a strategic canvas:
• Use the FAD template to identify the key competitive factors in terms of product and process features including price, meaning, technology, performance, design, availability, customer support, technology, size, weight, speed, ease of use, and other product features. These key competitive factors are then placed on the X-axis of the canvas (either at the top or the bottom).
• Then, each competitor and your company are plotted on the Y-axis. If a competitor has a high level of a particular factor, then it is plotted above the middle of the Y-axis. Similarly, competitors with low levels of a factor are plotted below the middle of the Y-axis.
A generic Strategy Canvas with the FAD categories is illustrated in Figure 7.3 "Preliminary Strategy Canvas with FAD Categories". It incorporates the essential concepts from the FAD template into the development of a Strategy Canvas. Figure 7.4 "Potential Strategy Canvas for Nintendo Wii" illustrates how the Strategy Canvas could be used to position the Nintendo Wii. We identified what we believed is the key meaning of the Wii along with several important attributes and key design issues for the Wii. The feature categories that apply to the attributes are highlighted in bold. For example, the Appeal to the entire Family attribute is considered a point of differentiation and a Blue Ocean Feature. The attributes and their values are, of course, contingent on who actually constructs the Strategy Canvas and they will change very quickly according to the whims of the market. Figure 7.5 "Nintendo Wii Strategy Canvas" illustrates a more attractive graphic that was created using the Strategy Canvas data.
Figure 7.3 Preliminary Strategy Canvas with FAD Categories
Figure 7.4 Potential Strategy Canvas for Nintendo Wii
Figure 7.5 Nintendo Wii Strategy Canvas
Benefits of the FAD Strategy Canvas
The FAD strategic canvas can be used to determine where a company wants to differentiate themselves from the competition. The objective is to determine where you would add, delete, or change the level of a factor in order to identify a Blue Ocean. It can also be used to identify attributes or factors that could be eliminated because the product features are considered low-value, extinct, or dissatisfiers. It could of course be used to assist in identifying unique features that could be added. You can also use the ideas discussed earlier such as combining products, borrowing ideas from other industries and products, and flipping ideas.
It should also be noted that the approach can be used in conjunction with a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis diagram to identify the major strengths and weaknesses in the design of existing and new products.
Lateral Marketing, FAD, and the Strategy Canvas
Lateral Marketing, a related concept found in the marketing literature, can also be used to assist in identifying Blue Ocean markets. The goal of lateral marketingKotler and de Bes (2003). is to help create new markets by:
• trying to reach a new set of customers by radically changing the product features either by adding or subtracting features;
• trying to identify substitute products or services that can compete with an existing product or service;
• trying to identify complementary products and services for existing lines;
• trying to reposition a product by having it satisfy different needs for different market segments.
The lateral marketing approach along with the other ideas presented in this chapter complements the Blue Ocean approach as a mechanism for identifying how product features can be added, subtracted, and adapted to create innovative products and services. Not all products and services introduced will be Blue Oceans; nevertheless, the approach using the FAD template and the Strategy Canvas will certainly provide a useful tool for understanding the positioning of your products and your competitors.
Marketing research is a complementary and systematic avenue for identifying key attributes and marketing opportunities for products and services. The literature describes a number of approaches for identifying what features are relevant to consumers:
• Brainstorm to identify a superset of existing and future product and service features
• Use auctions to identify what products and features are relevant to consumers
• Develop consumer surveys and sampling approaches
• Ask consumers what features they think are important
• Ask consumers to evaluate, compare, and rank the features they deem important in a product and service
• Use statistical analysis to disentangle and understand the relationships between customer wants and product features
• Look at consumer and editorial reviews and try to understand what features of a product or service appear to be attracting people.
For additional and more detailed insight into the concepts and approaches for conducting market research, you are encouraged to read Naresh K. Malhotra and David F. Birk’s very thorough book on the topicMalhotra and Birks (2009). and the Cavusgil, Knight, Riesenberger, and YaprakCavusgil, Knight, Riesenberger, and Yaprak (2009). book on conducting international marketing research. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/07%3A_Conceptualizing_Products_and_Services_Using_FAD/7.08%3A_The_FAD_Template.txt |
Many innovative products and services are actually complements of the original products. The innovation can be an add-on feature, an after-market service, or a different product or service. Transportation devices have spurred the development of substitute energy sources such as steam, electric, fuel cells, and solar energy. The automobile was the driving force behind the development of better roads, fueling stations, diners, and truck stops. The development of better sailing ships led to the need for complementary devices for navigation tools such as maps, star maps, compasses, sextants, and GPSs. The FAD template and the Strategy Canvas can also be used to identify competitive complementary products and services.
7.10: Avoid the Swiss Army Knife Approach to Product Differentiation
One model of the Wenger Swiss Army knife, called the Giant, has 87 tools, performs 141 functions, and costs \$1,400.http://www.wengerna.com/giant-knife-16999 If you were sent to a deserted island and were limited to what you could bring, that knife would certainly be on a short list of must-have items. The Giant was probably introduced because Wenger could introduce it and also because it creates a great image in the mind of consumers. Wenger has excellent engineering skills. In general, however, specialized tools perform better than the all-in-one tool. There is a trade-off between having everything in one place that is readily accessible and having superb capabilities and functionality. The cork-screw, the scissors, the magnifier, the golf club cleaner, and the wire cutter in a Swiss Army knife are OK, but they are not the best tools for doing the respective jobs.
Wireless phones have become the Swiss Army knife for communication, networking, and entertainment. Not all the implements (camera, music playing, video, net interface, retail showroom and purchasing, gaming, GPS, social networking, and communications) are stellar; they are, however, always available to the user. Apple has been very successful at integrating features on the iPhone, the iPad, and their other products that are attractive to their customers, but they are very cautious in adding features for feature sake.Manjoo (2010). Some of the hubris exhibited by Apple is attributable to the cache of the superb Apple brand. But there is a secret sauce for Apple’s success. There are strong design principles at work at Apple, involving minimalism, attention to quality, and focusing on the design of a high-quality user interface. Apple is also very big on attaching meaning to their entire product portfolio. Their commercials exude the development of meaning. The Flip Mino video camera was once very successful because it was simple and very easy to use. The very young and the old are always looking for easy-to-use products and services.
Feature creep occurs when a new feature is added and many of the old features are retained. Sometimes features are beneficial. Sometimes they become vestigial and forever encoded in the DNA of the product or service. They are like vestigial physical characteristics in human beings that are no longer needed. For example, humans have tailbones or coccyx, but they do not have tails. Once a feature is in place, it is difficult to remove it because some company will use the features to illustrate how they have more features than their competition. Automobile GPSs illustrate how feature creep occurs over time. Feature creep has been the boom and the boon of companies that produce automobile GPS applications. Figure 7.6 "Features Used to Differentiate GPS Offerings" illustrates the numerous product features that can be found in automobile GPS products. It is unlikely that many people are using the MP3 and photo players on their auto GPSs to play music or view photos, but these features have crept into many of the units sold by GPS manufacturers. The point is that there are instances where it might make sense to scale back on features because the features are either truly vestigial or overkill. This would also reduce the cognitive burden facing consumers because of the numerous choice points. Sometimes the vestigial features hinder design changes and can adversely affect the ability to add new features that are truly valuable to the consumer. One of the greatest impediments facing hardware and software developers in redesigning systems is in maintaining backward compatibility.
Figure 7.6 Features Used to Differentiate GPS Offerings
7.11: Conclusion
Successful product development should involve both UDD that is focused on consumer wants and needs and MDD that is predicated on understanding the emotional and psychological relationships that people have on products as well as incorporating the importance of new technological developments (TDD). We have also introduced the FAD template. The FAD template is based on the various design approaches and also draws on a classification scheme that can be used to ascertain whether attributes and features are increasing or declining in importance. The FAD template in conjunction with the Strategy Canvas can be used to assist in taking an abstract product concept and preparing a first-cut prototype of the product. The key points are the following:
• The focus of MDD allows the innovators to develop ideas that transcend existing product concepts, conceiving product ideas as a vision rather than only on product differentiation.
• Concentrating on function and ignoring user input is a recipe for failure.
• Identifying key meanings, attributes, and features is an essential step in MDD, including the customer relationship to the product, quality, reliability, ease-of-use, performance, design, technology, and most importantly, value creation and meaning.
• The meaning of a product or service is very much tied into what the product does.
• Attributes of a product to help users control either their internal or external environments have the power to make a significant impact.
• Psychological ownership of a product promotes user attachment and use, keeping users locked into the product out of loyalty.
• Attending to POPS as well as PODS is necessary to keep your product competitive. POPS ensure that your product meets the minimal essential features. PODS are necessary for distinguishing a product from the competition.
• Disruptive technologies and sunrise features are the dawn of new technological and conceptual capabilities.
• Use the FAD template to facilitate and provide structure when conceptualizing new products and services.
• Create a FAD Strategy Canvas to understand the attributes of your product in the context of your current and potential competitors.
• Seriously consider your feature list in terms of must-haves, points of differentiation, and vestigial features. Try to avoid feature creep, which involves adding features just for the sake of adding new features. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/07%3A_Conceptualizing_Products_and_Services_Using_FAD/7.09%3A_Developing_Blue_Ocean_Markets_from_Complementary_Products_and_Services.txt |
1. ___________________________________________________________
2. ___________________________________________________________
Potential meanings: The product or service provides physical, health, religious, and emotional sustenance; provides feelings of being needed or being listened to; supports artistic and creative needs; facilitates control over the environment; provides entertainment; supports feelings of status, superiority, and elitism; provides a sense of stewardship; supports feelings of closeness to the earth and being organic; provides a sense of altruism; supports feelings of adventure; supports gender needs; supports feelings of security and comfort; facilitates and assists in the completion of some work or home task; provides feelings of familial support; helps an individual or a community to learn and adapt; helps us to change location; provides an opportunity for communication and networking; has above-average intrinsic value to some or many people; provides for respect and recognition; and finally, the product or service is a source of satisfaction, happiness, and hope.
3. Price: How much does it cost?
___________________________________________________________
Quality: How well does the product or service conform to the product specifications? Does the product do what it says it is supposed to do in the user manual? Is it effective in performing its function?
___________________________________________________________
Reliability: Does the product or service perform as it is supposed to over its expected life? Is it prone to failure? Is it easily maintained?
___________________________________________________________
Ease-of-use: Is the product or service easy to use and can consumers learn to use it without much trouble?
___________________________________________________________
Performance: Is the product or service faster, smaller, more convenient, greater capacity, better resolution, compatible, and adaptable? Which features, functions, and processes are unique or distinguishing?
___________________________________________________________
Design: Is the external form attractive? Is it visually, tactically, audibly, and olfactorily attractive? Is the product packaged properly? Is the service experience attractive and positive from the consumer’s perspective? Does the product or service suggest a certain meaning?
___________________________________________________________
Technology: Is there an emerging technology or a process that can improve quality, reliability, ease-of-use, performance, value, design, and meaning?
___________________________________________________________
Value creation: Is there any intrinsic value in the product that distinguishes it from other products or services? Does it solve a problem that consumers want to solve and will attract them to the product or service?
___________________________________________________________
4. Points of parity and must-haves (POPS): List the attributes, features, and functions that most of the products or services in a category usually have.
• ___________________________________________________________
• ___________________________________________________________
• ___________________________________________________________
Points of difference and differentiators (PODs): List the attributes, features, and functions of a product that distinguish it from the competition. This typically refers to a product or service that you are developing.
• ___________________________________________________________
• ___________________________________________________________
• ___________________________________________________________
Blue Ocean features and exciters (BOFs): List the sunrise attributes, features, and functions that could be used to develop a new Blue Ocean market.
• ___________________________________________________________
• ___________________________________________________________
• ___________________________________________________________
Extinct and vestigial features (EXTs): List the sunset attributes, features, and functions that are no longer necessary or on the verge of becoming extinct for the product or service. This typically refers to products and services that are already being sold.
• ___________________________________________________________
• ___________________________________________________________
• ___________________________________________________________
Dissatisfiers (DISs): List the attributes, features, and functions that can cause some consumers to avoid using your product or your competitor’s product. This typically refers to products and services that are already being sold.
• ___________________________________________________________
• ___________________________________________________________
• ___________________________________________________________
7.13: Design and Prototype Product or Service
Put a mock-up picture of the product or service here (use sketching, drawing software, mock-up software, photo software, or presentation software). If the product is a software, put an example of a critical report or input screen here (use a word processor or presentation software). If the idea behind the product or service involves a complex process or business process, then draw a flow diagram or a business process diagram (use presentation software or specialized flowchart and business process diagramming software). | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/07%3A_Conceptualizing_Products_and_Services_Using_FAD/7.12%3A_Exhibit_1-_FAD_Template.txt |
1. Uses some type of technology to age inexpensive wines and make them more pleasant. Considering using an electromagnet with a specific magnetic field strength. The potential target customers are wine connoisseurs and individuals interested in fine wine.
2. Appeals to status.
Potential Meanings: The product or service provides physical, health, religious, and emotional sustenance; provides feelings of being needed or being listened to; supports artistic and creative needs; facilitates control over the environment; provides entertainment; supports feelings of status, superiority, and elitism; provides a sense of stewardship; supports feelings of closeness to the earth and being organic; provides a sense of altruism; supports feelings of adventure; supports gender needs; supports feelings of security and comfort; facilitates and assists in the completion of some work or home task; provides feelings of familial support; helps an individual or a community to learn and adapt; helps us to change location; provides an opportunity for communication and networking; has above-average intrinsic value to some or many people; provides for respect and recognition; and finally, the product or service is a source of satisfaction, happiness and hope.
3. Price: How much does it cost?
Unsure but will have two versions priced at \$300 and \$1,000 price level.
Quality: How well does the product or service conform to the product specifications? Does the product do what it says it is supposed to do in the user manual? Is it effective in performing its function?
Need to test the effectiveness of the technology in a research setting.
Reliability: Does the product or service perform as it is supposed to over its expected life? Is it prone to failure? Is it easily maintained?
Unsure. Plan on having a refrigerator function in the high-end version.
Ease-of-use: Is the product or service easy to use and can consumers learn to use it without much trouble?
Will have either knobs or a digital key pad to program the aging time.
Performance: Is the product or service faster, smaller, more convenient, greater capacity, better resolution, compatible, and adaptable? Which features, functions, and processes are unique or distinguishing?
We are optimistic that it will be faster than existing wine aging products. Will also have greater capacity than existing products.
Design: Is the external form attractive? Is it visually, tactically, audibly, and olfactorily attractive? Is the product packaged properly? Is the service experience attractive and positive from the consumer’s perspective? Does the product or service suggest a certain meaning?
The high-end model will look like a high-end, high-tech refrigerator.
Technology: Is there an emerging technology or a process that can improve quality, reliability, ease-of-use, performance, value, design, and meaning?
Unsure. However, our approach could be ineffective.
Value Creation: Is there some intrinsic value in the product that distinguishes it from other products or services? Does the product or service solve a problem that consumers want to solve and will the solution attract them to the product or service?
It may attract wine enthusiasts because it has the potential to improve the taste of all wines. We also think that it will also appeal to buyers of wine storage devices including refrigerators and coolers.
4. Points of parity and must-haves (POPS): List the attributes, features, and functions that most of the products or services in a category usually have.
• Capable of aging
Points of difference and differentiators (PODs): List the attributes, features, and functions of a product that distinguish it from the competition. This typically refers to a product or service that you are developing.
• Sophistication aging technology. Aging refrigerator available.
• High-tech design
Blue Ocean features and exciters (BOFs): List the sunrise attributes, features, and functions that could be used to develop a new Blue Ocean market.
• Sophistication aging technology
• High-tech design
Extinct and vestigial features (EXTs): List the sunset attributes, features, and functions that are no longer necessary or on the verge of becoming extinct for the product or service. This typically refers to products and services that are already being sold.
• Traditional wine aging process
Dissatisfiers (DISs): List the attributes, features, and functions that can cause some consumers to avoid using your product or your competitor’s product. This typically refers to products and services that are already being sold.
• Does not age wine
7.16: Design and Prototype Product or Service
Put a mock-up picture of the product or service here (use sketching, drawing software, mock-up software, photo software, or presentation software). If the product is a software, put an example of a critical report or input screen here (use a word processor or presentation software). If the idea behind the product or service involves a complex process or business process, then draw a flow diagram or a business process diagram (use presentation software or specialized flowchart and business process diagramming software). | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/07%3A_Conceptualizing_Products_and_Services_Using_FAD/7.15%3A_Appendix_2-_FAD_Template_for_Wine_Aging_Product.txt |
Strategic Planning and Ten–Ten Planning
To be strategic is to have plans of action that provide directions for operating in an uncertain world. In this section, our focus is on developing strategic plans to compete in a world characterized by monopolistic competition. Notice that the emphasis is on plans of action and not on a single plan. There is no single plan or single planning approach that can deal with the complexity of contemporary markets. What is needed is a continuous process for churning out new plans, for differentiated products and services, in order to compete in a dynamic environment. This chapter presents a brief overview of the various approaches to strategic planning and provides an overview of the planning literature. There is a lot of material to slog through, but each approach to planning has something to offer. This overview will set the stage for presenting the Ten–Ten planning process in the next chapter. The next chapter will integrate the various planning approaches and present a simplified, yet robust approach to planning called the Ten–Ten planning process. The key benefit of the Ten–Ten planning process is that it can be used for developing business plans in a very short time span.
There are two generic planning strategies that a business can pursue.Michael Porter originally identified three generic strategies. He noted that a business can also focus on a market that is not very competitive. Most people consider this to be a special case of the other two strategies. See Porter (1980). It can strive to be efficient, it can differentiate, or both. In other words, a firm can focus on delivering Midas versions of products, Hermes versions of products, or both. A firm that employs a strategy of efficiency strives to be the low-cost producer and compete on the basis of charging less than the other competitors. In contrast, a firm that is competing on the basis of product differentiation can charge premium prices. If charging premium prices yields larger-than-average profits, the market will, of course, attract attentions. Competitors will enter the market with a slightly different product, perhaps even a better product, at a lower price and ultimately drive down the premium prices. The firm will then have to embark on further cost-cutting initiatives, improve their product in order to hold on to market share and survive, or do both. The market is relentless and it demands a two-pronged approach of developing differentiated products and services and cutting costs.
The first mantra of the entrepreneur is “differentiate through innovation or perish” or in simpler terms “differentiate or die.” The second mantra of the entrepreneur is “strive to reduce costs.” The first mantra is accomplished by focusing on Midas versions of products using extravagant engineering and design. Differentiation is not only the engine driving business success under monopolistic competition, but it is also buttressed by attempting to improve costs and product design through frugal engineering. The second mantra is accomplished by focusing on Hermes versions of products using frugal engineering.
As noted earlier, over 99% of the approximately 23 million businesses compete in markets that are characterized by monopolistic competition. That is there are many buyers, many sellers, market entry and exit is easy, and the products are closely related but not identical. There are the two approaches for differentiating products. The first uses marketing and advertising to develop a brand. The second approach is to engage in product development through some sort of research and development (R&D) process and to develop goods and services with updated features. Both approaches are necessary parts of the differentiation process. Marketing and advertising can help illustrate the features and can sometimes delay encroachment by the competition. But in the long run (probably less than a year), successful differentiation depends on product development and R&D.
8.02: The Planning Process
Planning can be accomplished in a variety of ways. Figure 8.1 "The Planning Process (Adapted from May)" presents a typical model of the strategic planning process.Adapted from May (2010). The mantra is an often-repeated phrase that provides the basis for the existence of the company. It is a slogan, a watchword, a byword, or a motto that breathes life into the firm’s existence. The mantra is not a replacement for the mission statement. The mission statement is an overall view of the business at an abstract level. It describes what the company does and why it exists and how it satisfies customer needs. The mission statement can also include a statement reflecting whether the company will focus on product differentiation and niche markets, focus on being price-competitive, or focus on both. The mantra and the mission are rarely static but ever-changing and emerging throughout the life of the firm.
The essence of the planning process consists of looking-inside and looking-outside analysis. Analysis involves both introspection and extrospection. The internal and external organization environments are examined using a number of analytical approaches, several of which are included in Table 8.1 "Orientations of Strategic Planning Approaches". These techniques will be covered in the next section. There is a lot of confusion related to identifying goals and objectives. Many view the terms goals and objectives to be interchangeable. Goals are more abstract and broader than objectives. Objectives are generally more detailed. The important point that will be discussed in the next chapter is to identify the goals and objectives that will help support the mantra, the mission, and the value proposition over a certain time frame. The tactics are the activities the organization will use over the next 3 months to a year to reach their goals and objectives. The tactics can include timetables and schedules related to the goals and objectives. The key to the model in Figure 8.1 "The Planning Process (Adapted from May)" is that this is not a linear process. Sometimes a new mission emerges after analysis has been completed. Mission statements that change, reflect an organization that can adapt to dynamic environments.
Figure 8.1 The Planning Process (Adapted from May)
Table 8.1 Orientations of Strategic Planning Approaches
Inter organizational focus External competitive environments focus Time to execute
Value and supply chain analysis High Low Moderate
Porter’s five force model Low High Long
Resource-based framework High Moderate Long
Strategy maps High Moderate Long
Creating Blue Ocean markets using the strategy canvas Moderate to high Moderate to high Short
SWOT analysis Moderate to high Moderate to high Short
We will revisit the definitions in the next chapter and illustrate how the planning process can be streamlined and made more efficient and facilitate the development of business plans in a very short time span using the Ten–Ten planning process. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/08%3A_Strategic_Planning_and_TenTen_Planning/8.01%3A_Planning_Concepts.txt |
Analytical Approaches for Strategic Planning
There are a number of analytical approaches that can be used to develop a process for churning out new plans for differentiation. We will review several of the more popular strategic planning approaches because they all provide insights into the differentiation process. A discussion of planning concepts can be at times boring; however, such discussion is also crucial for developing good plans.
The approaches to be discussed include value chain and supply chain analysis, Porter’s five-force model, the resource-based framework, the use of Strategy Maps, creating Blue Ocean markets using the Strategy Canvas, and SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis. As illustrated in Table 8.1 "Orientations of Strategic Planning Approaches", each of the approaches can be classified as having an internal organizational focus (looking inside) or an external environmental focus (looking outside). Several of the strategic analysis approaches are better for understanding the organization and others are better suited for understanding the competitive environment. This table illustrates that there is no “best” approach for conducting strategic analysis and that a combination of approaches is necessary for completing an examination of the inner workings of an organization as well as the organizational context. Each of the strategic analysis tools will be covered in this chapter.
Value Chain and Supply Chain Analysis
Value chain analysis is a framework developed by Michael Porter that divides the company into primary and secondary activities related to delivering a product or service.Porter (1985). The primary activities include inbound logistics, operations, sales and marketing, and outbound logistics. The secondary activities are supporting activities and include the firm infrastructure, human resources, information technology, and procurement. Figure 8.2 "The Value Chain (Adapted from Porter)" illustrates the components of the value chain.
A closely related concept is the supply chain. A supply chain is defined as the connected activities related to the creation of a product or service up through the delivery of the product to the customer. It includes upstream suppliers as well as downstream activities such as wholesalers and distribution warehouses. Figure 8.3 "Supply Chain" illustrates the supply chain.
In general, the terms value chain and supply chain can be used interchangeably; although the value chain is rooted in the strategic planning literature, the supply chain is linked to the work in the operations management area. The key concept is that products and services have to be created and eventually delivered to consumers and the in-between activities can be referred to as the supply chain or the value chain.
Figure 8.2 The Value Chain (Adapted from Porter)
Figure 8.3 Supply Chain
The supply chain is an important visual tool because it can be used to understand where to look for processes that can be reengineered. That is, improvements can be made in connecting, coordinating, and controlling activities across linkages. It can also be used to determine what kind of information should be gathered to improve communications throughout the value chain and where value chain performance could be improved. For example, the firm can investigate where information technology can be marshaled to support the supply chain activity and where technology can be used to automate tasks. The goal, of course, is to reduce transaction costs up and down the supply chain.Coase (1937). Transaction costs refer to the effort that goes into choosing, organizing, negotiating, and entering into agreements for products and services.Williamson (1985). Transaction costs come in a variety of flavors and there is significant overlap among the various costs.
• Search costs: In general, these costs are related to gathering information on a product or service, including the costs associated with locating a product and offering a product for sale.
• Discovery costs: These costs are involved in locating an acceptable price for a product.
• Decision costs: These costs are associated with making a decision on what product to purchase. These include personal cognitive effort and organizational decision processes related to selecting a product or service.
• Negotiation costs: These costs are related to agreeing to the terms of a contract including the price, what will be delivered, how much, and when.
• Acquisition costs: These costs are involved in transporting, receiving, infrastructure development, and managing the product in inventory.
• Enforcement costs: These are the costs that the parties in the contract incur in order to enforce the terms of the contract.
• Settlement costs: These are the costs related to paying and getting paid for a product or service.
• Social costs: These include costs that are not necessarily picked up by the buyers and the sellers. Examples include pollution costs, health costs, privacy costs, and bankruptcy costs.
Porter’s Five-Force Model
Michael Porter has also developed a technique for assessing the desirability of competing in a particular industry and how a firm can compete in that industry.Porter (2008). Porter’s five-force framework considers the buyers, the sellers, the suppliers, the current competition, and the threat of competition from substitute products. The key idea is that a firm can be more profitable by understanding how the five forces influence the competitive environment, as will be explained next.
Threat of new entrants. This is the degree to which entry into an industry is easy to accomplish. If it is easy to enter an industry and start competing, then there is a threat of new entrants. If an industry has high fixed costs, such as in the case of semiconductor manufacturing, auto manufacturing, or operating systems construction, then there is a low threat of entry. This is in contrast to the situation where entry is easy and relatively inexpensive such as found in online retail stores, home maintenance businesses, and restaurants.
Entry into a market can of course be precluded because of the scarcity of expertise and resources. For example, in the late 1990s, there were very few individuals with expertise in Enterprise Resource Planning systems and in COBOL to handle the Y2K date problem. Numerous firms turned toward India and Singapore to find employees with skills in these areas.This is in part the reason that outsourcing and off-shoring started to increase so dramatically. Resource scarcity can also limit entry into a market. Examples of industries where resource scarcity is critical include diamond mining, where DeBeers owns a substantial amount of the diamond resources, and oil production where Exxon has access to oil production and installed refining capability.
Threat of substitute products. Substitute products are a constant threat in contemporary commerce. If another product can be substituted for a product in the industry under consideration, then there is a threat of substitute products. It is sometimes impossible to know where your competition will come from. For example, video and audio content can be delivered via satellite, wireless, coax cable, cat 5, and fiber optics. The content can in turn be delivered to a variety of devices including mobile phones, televisions, iPODs/MP3 players, game consoles, DVRs, and computers. A similar situation exists for transportation. You can travel via electric car, bus, and air or in the future, by way of a personal jet craft or some type of Segway device. Indeed content delivery can be a substitute for transportation. As video and audio becomes more robust and easy to use, it may be possible to be there without actually being there. Families will soon get together by linking-up and interacting with their plasma and LCD screens using a high bandwidth carrier to communicate video and audio feeds of a birthday party or anniversary. This has already occurred in businesses with the emergence of virtual meetings. This brings up another issue. People set aside a certain amount of dollars for entertainment. However, although technology is not a perfect substitute for entertainment outside of the home, it can be a substitute for spending on entertainment. Thus, a console or a game might threaten the launching of a new movie during the holidays or vice versa.
Bargaining power of buyers. If individuals, companies, or groups of companies can influence the price and the features required in a product or service, then the buyers have the bargaining power. This often occurs when there are few buyers or when the buyer is large. The auto companies have bargaining power over the component manufactures. The same goes for Dell’s component suppliers and Wal-Mart’s suppliers. When a buyer is large and switching costs are small, then the buyer has the bargaining power. Wal-Mart is in such a position with its suppliers. Dell, however, has less buyer power because it cannot simply switch the component suppliers because desktops systems are built around integrated components and the performance of the system can be adversely impacted when components are not integrated.
Bargaining power of suppliers. If a company supplying a product or service can dictate the terms of the transaction, then the supplier has the bargaining power. The bargaining power of suppliers can be derived from many factors including the scarcity of the resource or technology, the number of suppliers, the characteristics and features of the technology, whether the technology is proprietary, and even the brand image. Intel and Microsoft have some bargaining power over Dell, but the hard drive, dram, motherboard, and monitor manufacturers have less bargaining power. The power supply and case manufacturers have even less bargaining power with Dell. The game console and global positioning system (GPS) manufactures have some power over Wal-Mart when they introduce a new model, but a holiday candle manufacturer has much less power. In many ways, the bargaining power is related to the threat of new entrants and the threat of substitute products or services. The key issue surrounding the bargaining power of suppliers is the availability of other sources of the products and services. If alternative or second sourcing is available, then the bargaining power of the supplier is lessened.
Rivalry among existing competitors. This is the degree to which there is competition among the firms. When there are several competitors and the products they are selling are fairly standard or readily obtainable and the competitors cannot easily leave the industry, then the rivalry will be intense. Examples of intense rivalries include breakfast cereals, flash memory, dram and electronics industries, housing construction, online and offline retailing, and the airline industry. Intense rivalries among competitors are again driven by the threat of new entrants and the threat of substitute products and services. In this context, product differentiation is essential in order to reduce the ruinous effect of perfect competition. This is the reason that the producers of GPS systems are constantly refining and adding features to their product line. Airlines, breakfast cereal producers, and the housing industry are constantly looking for ways to differentiate their offerings and at the same time reduce costs.
The Five-Force Model in Practice
The five-force model can be used as the basis for conducting an industry analysis. The goal of an industry analysis is to understand the dynamics of competition and to ascertain how the five forces influence profitability. The following steps are used for conducting an industry analysis:
• Develop a brief description of the target industry
• Identify the competitors, buyers, suppliers, potential entrants, and potential substitutes
• Determine the strength and weaknesses of the forces
• Identify any recent changes in the dynamics of the forces
• Determine the potential for short- and long-term profitability
• Ascertain who in the industry is positioned to be profitable
• Determine where the organization should invest.
Porter’s five-force model provides an overarching view of the competitive environment and is extremely helpful for understanding the competitive environment. It does, however, have several deficiencies. First of all, it takes a long time to conduct a full-blown exposé of the five forces because many devotees to the approach tend to overanalyze the industry and the competition. This in turn leads to organizational fatigue. Overanalysis is related to the second deficiency. The ideas are very abstract and broad, and the technique requires consulting expertise in order to be applied effectively. Finally, it takes too long to implement for small organizations. For the entrepreneur working under extreme pressure, under the umbrella of monopolistic competition, there is very little time to attend to apply the approach effectively. Even though Porter’s ideas are very powerful, they do not resonate with the entrepreneur because they are abstract and difficult to apply.
Resource-based Framework
The resource-based view, also referred to as RBV, is very popular with academics. The intellectual foundations for the RBV approach are many, but the work by Prahalad and Hamel on core competenciesPrahalad and Hamel (1990). and the work by BarneyBarney (1991). on the link between resources and sustained competitive advantage established a strong foundation. The basic idea of RBV is that some organizations are more competitive because they have access to unique resources or special capabilities and competencies. Resources can be tangible or intangible and include raw materials, land, brand, knowledge and expertise of people, reputation with customers and suppliers, plants, equipments, patents, trademarks, copyrights, and funds. A capability or competence is the ability of a firm to turn its resources into customer value and profits. Capabilities or competencies can be manufacturing prowess, order fulfillment and delivery, customer service, marketing, finance and accounting, management expertise and leadership, and in essence any proficiency or prowess in the supply chain and value chain.
Porter’s five force model, and the accompanying industry analysis, tends to focus on locating a firm in an attractive industry and then taking steps to achieve competitive advantage over rival firms. In contrast, the RBV approach suggests focusing on competitive arenas where the firm has unique resources and competencies. For example, if you own property with rich productive topsoil, if your workers are diligent, and if your daughter is an excellent agronomist, you will probably be a successful farmer. The key to being successful in the context of RBV is that the resources and competencies are hard to imitate and help to establish a strong basis for competitive advantage. In essence, the status of the internal resources and competencies will assist in pursuing a particular strategic direction. Amazon has a core competency in selling online and it simply kept pursing that competency by selling construction tools, electronics, audio books, eBooks, and developing partnerships with brick and mortar vendors. Most of Google’s successful ventures are related to its core competency of search. Joan’s foray into the jewelry box business discussed earlier was linked to her excellent craftsman skills. Joan had a core competency in jewelry box design and fine woodworking.
Core competencies are the very critical skills that define an organization. For Google, it is their search capability, for Amazon it is their ability to sell online, and for Joan it is her prowess at jewelry box design and her knowledge of the marketplace. In the case of Joan, her knowledge and skills can probably be imitated and replicated in a shorter time frame than the competencies developed by Amazon and Google. But of course, Joan’s jewelry box business is more agile and can change direction much faster than Amazon and Google. Eventually, all capabilities and competencies (even Amazon and Google’s) can be imitated, replicated, and improved. Even scarce resources and monopolies can succumb to the onslaught of new technology, time, and market forces. There are substitutes for oil, diamonds, and operating systems.
The RBV is a powerful idea for understanding strategic direction, but it has several deficiencies. First of all, it is very broad in scope and hard to implement as part of a concrete business plan. Delineating the unique capabilities, competencies, and resources and then using this information in strategic planning are time-consuming. In addition, there is little guidance on how to build competencies. Indeed, some theorists believe that core competencies cannot be built but simply emerge. For additional discussion on RBV, see HenryHenry (2007). and Grant.Grant (2007). Later on, we will discuss how this approach can be effectively integrated with SWOT analysis and, in the next chapter, we will discuss how this approach can be integrated with the Ten–Ten planning process.
Strategy Maps
A strategy map is a visual diagram that represents a causal structure of an organizational strategy. The strategy map is an outgrowth of the balanced scorecard approach developed by Robert Kaplan and David Norton.Cf. Kaplan and Norton (1996, January–February, 2003b) and visit www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx The purpose of the balanced scorecard is to develop a series of measurable performance indicators that are linked and aligned with organizational missions and objectives. Measurement at the operational and tactical levels is a key part of the balanced scorecard approach and essential for developing and benchmarking best practices. Measurement can be used to identify where management should redirect its attention and also to identify whether best practices are already in place.
There are four primary areas where performance indicators can be used. They are the financial performance indicators, customer performance indicators, performance indicators related to internal organizational processes, and performance indicators related to the ability of the organization and employees to innovate and learn. The strategy map is an overview of the causal relationships related to the four perspectives. Figure 8.4 "Example of a Strategy Map for a Railroad" is an example of a strategy map for a railroad. You are encouraged to use Google’s image search using the keyword strategy map for additional examples.
In general, the balanced scorecard/strategy maps approach is more suitable for older larger organizations with a lot of time for developing and executing a strategic plan. Kaplan and Norton point out that a strategy map presents an integrated overview of the outcome measures and the performance drivers of outcomes using cause-and-effect relationships. The strategy map can serve as a strategic measurement system and strategic control system that align departmental and personal goals with overall strategy.Nørreklit (2000). There are, however, problems in assumptions and the time it takes to implement the approach.Nørreklit (2000). The first problem is that the approach is too hierarchical and not particularly suitable for dynamic and complex environments. Some researchers also question the causal relationships among the variables. For example, are there causal links related to enhancing cost control leading to increases in the rate of competitiveness, which in turn are leading to improvements in customer satisfaction?Nørreklit (2000). In essence, does cost control always lead to customer satisfaction through competitiveness? One hopes that this is the case, but it is not easy to verify from both research and practice perspectives.
Figure 8.4 Example of a Strategy Map for a Railroad
From the public sector, permission of Wikimedia Commons License Agreement, commons.wikimedia.org/wiki/File:StrategyMap.jpg.
The major problem from an entrepreneurial perspective is that the balanced scorecard approach using strategy maps approach is very complex and difficult to implement. In general, strategy maps and the balanced scorecard approach are more applicable to relatively mature companies and are not conducive to new venture development. New ventures, whether they are intrapreneurial or entrepreneurial, need a more adaptive and agile approach. A customer orientation, with an attention to securing and reducing the cash burn rate, a focus on executing the plan by attending to developing internal processes, and focusing on R&D and learning are the most important takeaways from the balanced scorecard/strategy maps approach.
Creating Blue Ocean Markets Using the Strategy Canvas
As noted throughout the earlier chapters we believe that the Blue Ocean concept is an important contribution to the strategic planning literature.Kim and Mauborgne (2005). The idea is very similar to the so-called killer-app concept and lateral marketing approach. The goal of the Blue Ocean approach is to identify uncontested market spaces for profit and growth rather than compete in traditional Red Ocean market spaces where there is a tendency to focus on either cost-cutting or differentiation. Table 8.2 "Red Versus Blue Ocean Strategy" illustrates how the concepts developed in the book with Midas, Atlas, and Hermes products relate to the Blue Ocean concepts. This process of developing a Blue Ocean market is facilitated by developing the Strategy Canvas and by using the FAD template as an input into the Strategy Canvas.
This is in contrast to the competitive strategy approach where a large and growing already-served market is identified and the entering firm tries to find a way to compete. Several research projects have been conducted on the efficacy of the Blue Ocean approach, and the results suggest that organizations pursuing Blue Ocean markets can in some instances be successful. A Blue Ocean strategy that is focused on intense innovation and on product differentiation and brand creation has been found to be profitable.Burke, Stel, and Thurik (2009). The Blue Ocean approach apparently helps to insulate a firm from intense competition. In many instances, Blue Oceans are not completely blue, but rather have patches of red. The net effect is that it is sometimes necessary to find a niche in a large market and then use Porter’s five-forces model to assess the desirability of competing in a particular industry and how a firm can compete in that industry. The key idea is that a firm can be more profitable by understanding how the five forces influence the competitive environment. The most important part of the Blue Ocean approach is to assist in identifying strategic opportunities for product differentiation using the Strategy Canvas. This was discussed in an earlier chapter where we used the FAD template to develop a Strategic Canvas for the Nintendo Wii.
Table 8.2 Red Versus Blue Ocean Strategy
Red Ocean Blue Ocean
The major goal is to beat the competition in an already established market space. The major goal is to make the competition irrelevant and superfluous by developing a new product or service in a new market space.
Compete on the existing demand curve in the existing market space. Growth is slow. Compete and capture a new uncontested demand curve in a new market space. Growth is above average.
Develop either Midas, Atlas or Hermes products and services. Develop and introduce Midas, Altas and Hermes products and services.
Focused on product differentiation or being a low cost producer. Focused on product differentiation and also being a low cost producer.
Focused on cost cutting, outsourcing, brand management and advertising. Focused on research, product design and learning.
SWOT Analysis
The genesis of the SWOT approach to strategic planning is usually attributed to Albert S. Humphrey during his tenure with the Stanford Research Institute.Before he died in 2005, Humphrey wrote a brief history of SWOT development. He indicated that it was initiated in 1960 because long-range planning approaches were not working properly. The research team interviewed 1,100 organizations and had 5,000 executives complete a 250-item questionnaire. The approach was originally called SOFT (Satisfactory, Opportunity, Fault, and Threat) but after subsequent adaptations by a number of consultants and academics, it evolved into SWOT. There are devotees of SWOT that believe it originated at Harvard Business School under the guise of Albert Smith, Roland Christensen, and Kenneth Andrew. See Humphrey (2005); Panagiotou (2003). Even though the SWOT technique can trace its roots to the 1960s, it is still an important and useful tool that is constantly evolving and improving to deal with the ever-increasing complexity of contemporary markets.
The objective of a SWOT analysis is to facilitate the development of a strategy in starting a new venture or large-scale project, completing a large-scale project and diagnosing deficiencies in an existing organization by taking its temperature in a particular environmental context. A SWOT diagram consists of four quadrants (see Figure 8.5 "SWOT Diagram"). The upper two quadrants relate the internal strengths and weaknesses of the organization. The bottom two quadrants relate to the external organizational environment in terms of the opportunities and threats faced by the organization in the marketplace.
Figure 8.5 SWOT Diagram
One of the benefits of SWOT is that it can be used to analyze the organization as well as the organizational environment in order to identify areas of competitiveness and areas that need attention. It is a very useful tool for looking inside and looking outside to identify the state of the organization and the competitive environment. In an ideal situation, it draws on organizational constituencies and scans the external environment for opportunities and threats. Several examples of how SWOT can be used to analyze the strategic context are presented below.
Example 1: iPhone 4
Figure 8.6 "iPhone 4 SWOT Analysis" illustrates a SWOT analysis for Apple’s iPhone 4. Substitute products are the greatest threat; however, Apple has been able to counterbalance such encroachment by paying attention to product differentiation through research and product development and, of course, the coolness index.
Figure 8.6 iPhone 4 SWOT Analysis
Example 2: Dell’s Entrance Into the Chinese Computer Market
Dell decided to enter the Chinese PC market in the 1990s. They faced many impediments to entering such a complex environment. Figure 8.7 "SWOT Analysis for Dell Entering China" illustrates a hypothetical SWOT analysis for Dell as they embark into the Chinese PC market. The Dell supply chain is top-notch as well as their strong commitment to R&D. They have numerous business process patents as well as product patents. One of the earlier knocks on Dell was that the Chinese culture was not conducive to Dell’s golden rules of disdaining inventory, always selling directly, and always listening to the customer. They have subsequently begun to listen to the customer and have started to sell through retail outlets.
Figure 8.7 SWOT Analysis for Dell Entering China
Integrated SWOT Analysis
Even though a SWOT analysis is fairly easy to understand and apply, it is not necessarily easy to develop a good one. One of the primary criticisms of SWOT is that it leads to a large laundry list of strengths, weaknesses, opportunities, and threat factors. It is also criticized because it lacks direction and focus. The net effect is that strategic planners are not sure what variables are important or where to start in the process. This is particularly relevant in a world characterized by strong domestic and global competition where risk and uncertainty are driven by the winds of technological change, political turmoil, and governmental actions.Panagiotou (2003).
The quick SWOT approach alleviates the deficiencies of traditional SWOT analysis by drawing on the other analytical approaches looking at strategy presented earlier. It takes the key variables in value and supply chain analysis, the five-force model, the resource-based framework, and the technology-based strategy approach and uses them to drive the SWOT process. The critical variables or drivers that influence the SWOT are listed below:
• Internal Organizational Drivers
• Supply and value chain performance
• Core competencies and organizational resources
• Emerging technology
• External Organizational Drivers
• Threat of substitute products
• Threat of new entrants
• Bargaining power of buyers
• Bargaining power of suppliers
• Local and world economy, culture, and government influence
Some of the variables influence both the internal and external organizational environment. For example, the supply chain boundary affects the internal environment, but it is also part of the external environment and involves logistics and financial institutions. Similarly, the onslaught of new technologies also influences the internal as well as the external environment. Figure 8.8 "Key Drivers for Quick SWOT Analysis" illustrates the SWOT template along with the key variables that should drive the SWOT analysis.
Figure 8.8 Key Drivers for Quick SWOT Analysis
The Quick SWOT Supported With Strategy Canvas
A SWOT analysis should be conducted very quickly as illustrated below:
1. Conduct a brief external industry analysis.
• Identify the competitors, buyers, suppliers, potential entrants, and potential substitutes.
• Understand the industry supply chain and how it works.
2. Conduct a brief internal organizational analysis.
• Identify organizational capabilities/competencies related to manufacturing prowess, order fulfillment and delivery, customer service, marketing, finance, accounting, R&D, employees, and management. This is essentially the internal supply and value chains.
3. Use a strategy canvas to identify how you can add or subtract features for product differentiation. The idea is to identify new opportunities and perhaps Blue Ocean markets.
4. Develop a 4 × 4 SWOT diagram using the template. Try to limit the number of factors in each quadrant to four factors.
5. Start the process over after 4 months.
The next chapter will provide a simple template as part of the Ten–Ten planning process for conducting an organizational and industry analysis that incorporates the quick SWOT approach.
Monopolistic Competition and SWOT
Monopolistic competition involves many buyers and many sellers offering slightly different competitive products. Producers are always searching for markets with potential. In such an environment, there are several strengths that are critical for survival. Figure 8.9 "Competing Under Monopolistic Competition Requires Strength in At Least Two Areas" illustrates the idea that if there are substitute products or emerging technology threats, then you need to have 2 out of 3 critical strengths. The critical strengths are research and product development, a high performance supply chain, and a strong brand. The optimum situation is to be strong in all three areas, but this is not very common. If any of these three are placed in the critical weakness category, the organization is definitely at risk. It should also be noted that an organization could be strong in all three critical strengths and still fail. Survival is still linked to long-term profitability. Many of the very successful companies are 3 for 3 and have above-average performance in R&D and a strong brand and excellent supply chain.
Figure 8.9 Competing Under Monopolistic Competition Requires Strength in At Least Two Areas
8.04: Conclusion
In this chapter, we have reviewed many popular approaches for strategic planning. The key points are the following:
• The two basic strategies for business planning include product differentiation and striving to be the low-cost producer.
• Product differentiation can be accomplished by focusing on Midas versions of products using extravagant engineering and design. Being the low-cost producer can be accomplished by focusing on Hermes versions of products using frugal engineering and design.
• Planning approaches can be classified as having an internal organizational focus (looking inside) or an external or environmental focus (looking outside).
• The development of an abbreviated SWOT analysis that is supported with a strategy analysis can be used to integrate the key attributes of the various strategic planning approaches.
• The planning process never ends. With continuous pressure from market and competition, firms are suggested to develop new strategy and planning from time to time.
This chapter reviewed the various analytic approaches for strategic planning. There is no single business plan that can be used to deal with the complexity of monopolistic competition nor is there a single planning approach that will take the organization down the right path. A revised analysis tool, called quick SWOT analysis, was introduced that combines the various strategic planning approaches.
This chapter also sets the stage for the Ten–Ten planning process, a simplified yet robust approach to planning. The next chapter will present two templates for developing a business plan. The first template is the Organizational and Industry Analysis template and it incorporates the quick SWOT approach along with concepts from value chain analysis, the resource-based approach, Blue Ocean market analysis, and the other strategic analysis approaches discussed in this chapter. This information is then used to fill in the Business Plan Overview template. The use of the two templates is part of the Ten–Ten planning process. The approach can be used to produce one plan and also to churn out new plans in order to compete in dynamic environments characterized by monopolistic competition. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/08%3A_Strategic_Planning_and_TenTen_Planning/8.03%3A_Analytical_Approaches_for_Strategic_Planning.txt |
Ten–Ten Planning Process
As noted in the last chapter, the planning process is never-ending because of the ongoing pressure in the marketplace. There is no single plan that can deal with the complexity of monopolistic competition. The first mantra of the entrepreneur is: differentiate through innovation or perish, and this is accomplished by focusing on Midas versions of products using extravagant engineering. The second mantra of the entrepreneur is: strive to reduce costs, and this is accomplished by focusing on Hermes versions of products using frugal engineering and design. The dynamic tension between delivering Midas and Hermes versions will also lead to mainstream Atlas products. A continuous process for developing business plans is necessary for competing and surviving under monopolistic competition. As discussed in the last chapter, the strategic planning process can be modeled using the diagram in Figure 9.1 "Strategic Planning Process". The mantra and mission are constantly evaluated and revisited throughout the life of the firm.
Figure 9.1 Strategic Planning Process
The Ten–Ten planning process contains two templates: an Organizational and Industry Analysis template and the Business Plan Overview template that identifies the mantra, mission, money, goals, objectives, and tactics in a very brief format. (These templates can be downloaded from http://glsanders.wordpress.com/) The idea behind the Ten–Ten approach is that once you have gathered some background data related to the industry and the organization, you should be able to complete the two templates in about 20 minutes.See Horan (2007). This is an alternative approach to Horan’s approach developing a brief plan. One deficiency of the Horan approach is that it does not integrate the key ideas found in the major planning approaches. The deficiency in all of the other planning approaches discussed in Chapter 8 "Strategic Planning and Ten–Ten Planning" is they take too much time and, yet, they are not comprehensive enough because they do not include and build on other approaches. The Ten–Ten approach attempts to reconcile speed with comprehensiveness. This will of course be a very rough first-cut, but it will be the foundation for developing more refined plans. The Ten–Ten process is meant to be quick and to the point, but it can be expanded to 10 hours, 10 days, or in some instances 10 weeks, but rarely more than that. These templates along with the FAD (features, attributes, and design) template can be used to develop the executive summary. This in turn can be used to develop a full-blown business plan, which is the foundation for building the business. Figure 9.2 "The Business Development Process" illustrates the entire Ten–Ten process from conceptualizing the business idea through building the business.
Figure 9.2 The Business Development Process
The first template is the Organizational and Industry Analysis template and it incorporates the quick SWOT analysis using concepts from supply chain analysis, Porter’s value chain analysis and five-force model,Porter (1998). the resource-based approach,Barney (1991). core competencies analysis,Prahalad and Hamel (1990). and the Blue Ocean Strategy Canvas.Kim and Mauborgne (2005). The idea is to conduct a brief industry analysis without getting bogged down in the details. This template is contained in Note 9.3 "Organizational and Industry Analysis Template (do this first)". The FAD template is a good source of information related to what products or services are going to be produced and sold. The point of the first planning template is to help you understand the current or proposed organization and the target industry. Questions 1 through 5 assist in detailing the basic question related to what business you are in and what the industry looks like. Question 6 is a simplified SWOT diagram. It is intentionally small so that that it is difficult to enter too many items. Long laundry lists are a recurring critique of SWOT analysis. One area where the simplified SWOT analysis differs from the traditional SWOT approach is that the focus is not on just internal issues, but on any areas where an organization has strengths and weaknesses. For example, the research and development (R&D) and product development areas are typically considered internal functions, but the supply and value chains along with the brand image are interconnected functions that span the internal and external organizational environment.
Organizational and Industry Analysis Template (do this first)
1. Give a brief description of your business model including what products or service you are producing or will produce.
___________________________________________________________
2. Describe your target customers and the size of the market.
___________________________________________________________
3. List and describe your current competitors.
___________________________________________________________
4. List and describe your potential competitors.
___________________________________________________________
5. Who will you purchase or acquire materials, components, resources, or other inputs from?
___________________________________________________________
6. SWOT (consider human resources, R&D, marketing, procurement, manufacturing, distribution, engineering, IT, finance, accounting, and legal)
• What are your strengths (products, R&D, supply chain, brand, pricing, core competencies, resources, infrastructure, scalability, and interfaces)?
• What are your weaknesses (products, R&D, supply chain, brand, pricing, core competencies, resources, infrastructure, scalability, and interfaces)?
• What are the opportunities (growth, market share, product lines, Blue Ocean, complementary products, lock-in, brand, and first-mover advantage)?
• What are the threats (substitutes, emerging technologies, new entrants, economic climate, government regulations, and social/culture issues)?
7. Strategy Canvas for new product compared with competitor or industry (price and quality are example attributes)
Use the FAD template to add key attributes to the Strategy Canvas (you can continue the table if you need more attributes)
Meaning of product or service BOF POD POP EXT DIS BOF POD POP EXT DIS BOF POD POP EXT DIS BOF POD POP EXT DIS BOF POD POP EXT DIS BOF POD POP EXT DIS
Attribute name Price Quality
Very high
High
Average
Low
Very low
Not applicable
BOF, Blue Ocean features and exciters; POD, points of difference and differentiators; POP, points of parity and must-haves; EXT, extinct and vestigial features; DIS, dissatisfiers
Another important feature of the Organizational and Industry Analysis template is the presence of question 7 and the development of a strategy canvas, the Blue Ocean strategy, for identifying the current product features and how they compare with one or more competitors or with a typical product or service found in the industry marketplace. The goal is to assist in illustrating what product features are being used to differentiate the competitors and to identify other areas where you might want to reduce or add features or even increase or decrease performance. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/09%3A_The_TenTen_Planning_Process_-_Crafting_a_Business_Story/9.01%3A_Organizational_and_Industry_Analysis_Template.txt |
The second template is the Business Plan Overview template (see Note 9.5 "Business Plan Overview Template (do this second)"). This template uses the Organizational and Industry Analysis information and FAD template to identify the organizational mantra, the mission, the money or value proposition, goals and objectives, and tactics. It is essentially a scaled-down business plan that can be used to develop the full-blown business plan that will be discussed in a later chapter.
1. The mantra: Guy Kawasaki prefers using a mantra in lieu of a mission statement.Kawasaki (2008). He is very critical of mission statements that are crafted by a large committee of 60 at an offsite retreat. We do not see the mantra as a replacement for the mission statement. We see the mantra as an often-repeated phrase that provides the basis for the existence of the company. It is a slogan, a watchword, a byword, and a motto that breathes life into the firm’s existence. The meaning of a product as identified in the FAD template is a good place to look for the foundations of a mantra. Examples include the following:
• Hospital: Service, respect, and excellence in healthcare
• Software Developer: Quality software through hard work and creativity
• Manufacturing: Quality is our endgame
• Telecommunications: We hear our customers.
2. The mission statement: The mission statement presents a brief overall view of the business. It describes what the company does and why it exists. It should focus on meeting customer needs. It should address at an abstract level what products or services are produced. It can also include a statement reflecting whether the company will focus on product differentiation and niche markets, focus on being price-competitive, or focus on both. The FAD template is also a good source of information for the mission statement. Examples of a mission statement include the following:
• We use high-quality materials and craftsmanship to develop superior jewelry boxes for the discriminating buyer.
• We develop general purpose and customized charity event planning software for nonprofit organizations.
• We manufacture high-quality measurement instruments for companies involved in oil exploration.
• Our school prepares students to work in highly productive software environments.
3. The money: The purpose of this section is to provide an overview for the value proposition. That is how your organization will make money using the two generic business model strategies. The organization can differentiate, be the low-cost producer, or both. As noted earlier, most organizations attempt to differentiate and be the low-cost producer at the same time. Because they are often conflicting strategies, many organizations are slightly better at one or the other. The best performers balance both strategies. One important consideration is the generation of additional sales by offering complementary products and services. For example, a printer company can sell toner, warranties, and maintenance contracts. A phone manufacturer might become a mobile application developer and also sell accessories for the phone. Firms should also discuss the potential size of the market when it is relevant and whether there is potential for a Blue Ocean market. Examples of money statements include the following:
• We will generate profits by constantly introducing jewelry boxes with new features and cutting costs by using building technology to lower costs.
• We generate most of our revenues by developing high-end customizable charity planning software. We will keep development costs down by developing software modules that are conducive to adding and subtracting features. We will generate additional recurring revenues by offering upgrades and providing customized systems development for nonstandard applications. It is a largely untapped market with excellent revenue potential.
• We will sell a high-end social-networking project management tool for large companies. The companies we will sell our product to are not price-sensitive and we will be able to charge a premium price to cover our high fixed costs. We will generate additional recurring revenues by offering upgrades and providing customized systems development for nonstandard applications.
• We will build an inexpensive house using modular and inexpensive building materials. We will be the low-cost supplier. We will generate additional recurring revenues by offering house maintenance services to our customers.
4. The goals and objectives: There is a lot of confusion related to goals and objectives. Goals are thought of as being more abstract and broader than objectives. This is a rather overstated and specious claim that creates more harm than good. This section of the business plan template encourages you to list both goals and objectives. The important point is to identify the goals and objectives that will help support the mantra, the mission, and the value proposition over the next 3 months to a year. Examples include the following:
• Launch new product line in July
• Increase sales by 5% over the next year
• Service 10% more customers than last year
• Reduce waste by 5%.
5. The tactics: The tactics are the activities the organization will use over the next 3 months to a year to reach a company’s goals and objectives. In the context of the military, the tactics are the techniques used to deploy troops, hardware, aircraft, and ships for combat. In business, this includes the activities related to marshaling human resources, manufacturing resources, acquiring equipment, and related supply chain activities to attain the goals and objectives. The tactics can include timetables and schedules related to the goals and objectives. Examples of tactics include the following:
• Purchase a high-performance band saw in February
• Hire employees in April to develop new customer interface software
• Develop a radio-marketing plan for introducing new product in November
• Have the sales force contact every customer who has not purchased a product in the last 2 years.
Business Plan Overview Template (do this second)
1. What is your mantra considering differentiation through innovation or perish or cost reduction (3–10 words on why your company should exist)?
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2. What is the overall mission of the business (1–3 sentences on what your company does or will do and your target customers)?
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3. How will you make money in terms of product differentiation, being the low-cost producer, and what complementary products and services will be offered in order to generate recurring revenues?
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4. What are your goals and objectives over the next 3 months to year (2–6 phrases on precise performance intentions)?
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5. What tactics will you use over the next 3 months to a year to reach your objectives and mission (2–8 phrases)?
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___________________________________________________________ | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/09%3A_The_TenTen_Planning_Process_-_Crafting_a_Business_Story/9.02%3A_Business_Plan_Overview_Template_%28Mantra_Mission_Money_Goals_Objectives_and_Tactics%29.txt |
One of the most common reframes we hear from entrepreneurs is that:
They just don’t understand our business model.
They just don’t understand what we are doing.
Who are they? They can be friends, family, investors, and even the business founders. In reality, they sometimes do not understand because the business concept is faulty, but sometimes they do not understand because you have not communicated the essence of the vision to the relevant parties. The Ten–Ten planning templates can alleviate some of the confusion; furthermore, at some point, the Ten–Ten templates will have to be converted into a well-crafted executive summary that tells an interesting story. This will help further refine the business model, and it will also serve as a platform for communicating with the many theys that are encountered.
The executive summary should tell a story in one or two pages or perhaps even three pages. The best way to prepare the business plan is to use Business Plan Overview template information as a starting point and use the Industry and Organizational and the FAD templates for additional input into the development of the executive summary. Here is a general format for the executive summary:
• Paragraph 1: Introduce the idea (four to six sentences).
• The first line of the executive summary should be a catchy sentence that captures the essence of the mantra.
• The remaining sentences of the paragraph should discuss the mission of the company.
• Paragraph 2: Describe your business model and what products or services will be produced (four to eight sentences).
• Describe your target customers.
• Describe your product or service and tell what it does.
• Describe how it will benefit consumers or other businesses.
• Discuss why your business model will work in terms of product differentiation, being the low-cost producer, or both.
• If appropriate, describe how your approach and your products are superior to the competition.
• If appropriate, describe the size of the market and if it is a Blue Ocean opportunity.
• You can add additional paragraphs if you think that more detail is needed to describe your product or service. Sometimes a technology or a concept is very unique and it needs additional discussion.
• Paragraph 3: Discuss your strengths (three to six sentences).
• Use the SWOT analysis to discuss the strengths, core competencies, and resources that are keys to the company’s success.
• Paragraph 4: Discuss the opportunities and how the goals and objectives relate to achieving the opportunities.
• Use the opportunities in the SWOT analysis to identify the business opportunities.
• Discuss how you will make money and generate revenues.
• Use the goals and objectives in the Business Plan Overview to indicate how the firm will take advantage of the opportunities.
The executive summary can be up to three pages and have additional paragraphs, but you should still aim for brevity, crispness, and clarity. Remember, the goal of the executive summary is to communicate your business model to the readers by telling a story. One of the best ways to communicate ideas is to keep the readers interested and avoid long meandering discussions. Here are a few ways for increasing attention and interest.
The first thing is to avoid using bullet points in your executive summary. Bullet points create the impression that you have just cut and pasted the presentation into the executive summary. In addition, readers tend to skim bullet points and sometimes even ignore them. You should also vary the length of your sentences. For example, have two short sentences, one long sentence, and one short sentence followed by a long sentence and then a short sentence. The idea is to mix up the sentence structure and create interest. Always try to begin and start your executive summary with a catchy phrase related to the mantra. Finally, editing is important, and having someone else edit your plan is essential. Even if you do not use the edited version, you will obtain insight into where the executive plan is unclear and needs work.See Section 9.5 "Conclusion" for an example of an actual business where the templates have been filled in. One example of an executive summary is exhibited in the Appendix at the end of this chapter. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/09%3A_The_TenTen_Planning_Process_-_Crafting_a_Business_Story/9.03%3A_Developing_an_Executive_Summary-_Crafting_a_Business_Story.txt |
Chapter 7 "Conceptualizing Products/Services Using FAD" introduced the concept of a device that could be used to reduce the time that it takes to age wine. The FAD template was presented in Chapter 7 "Conceptualizing Products/Services Using FAD" for a storage and refrigerator device that could be used to age wine. This example is extended in the Appendix of this chapter. The Appendix contains a completed template for the Organizational and Industry Analysis and a completed template for the business plan overview. The Appendix also contains an executive summary for the wine aging cooler and the picture of the proposed product. The product was subsequently named the AddVintner Star.
9.05: Conclusion
In this chapter, we have illustrated a model for quickly crafting a business plan. The key points are the following:
• The Ten–Ten planning process is very brief yet dynamic and adaptable to a variety of situations.
• It draws on the major strategic planning approaches as well as the FAD template discussed in Chapter 7 "Conceptualizing Products/Services Using FAD".
• It consists of completing two templates and developing an executive summary.
• The first task consists of collecting internal and external information completing the Organizational and Industry Analysis template. This template also uses information from the FAD template.
• The second task uses the Organizational and Industry Analysis template along with the FAD template to complete a Business Plan Overview template.
• The information gathered using the FAD template, the Organizational and Industry Analysis template, and the Business Plan Overview template are then used to write an executive summary.
• The goal is to communicate with partners, confidants, and funding sources.
Strategic planning is often criticized as taking too long, being too complex, and even being counterproductive. The Ten–Ten approach alleviates many of these criticisms by its conciseness and the way it focuses on learning-by-doing. It is still hard work. However, the author has actually had groups of people complete a Ten–Ten plan in one night. This includes conceptualizing a new business model up through the completion of the business templates. The feedback was generally positive from the experience, although the participants were exhausted.
The business plan serves many purposes. But the primary goal is to foster communication with the business founders, partners, confidants, and funding sources. The Ten–Ten business plan presents a succinct overview of the what, how, when, and why of the business. It provides a concise overview of what the business is about and how money can be made. In many ways, the Ten–Ten documents are a prototype of the business model. This is in essence a scaled-down business model that describes how the business will function and serve as a platform for the business founders to communicate with each other and identify strengths and weaknesses of the emerging firm. In Chapter 12 "Developing a Business Plan", we will present the infrastructure for a full-blown business plan that can be used as a blueprint for operating the business the first year.
9.06: Appendix- Illustrations of Completed TenTen Templates and an Executive Summary for the Add
1. We will develop high-tech devices that will significantly reduce the wine aging process. Most wines can benefit from aging. The typical Merlot needs 15 years to age and Pinot Noirs and Burgundies sometimes need 5 years to age. Shiraz-based wines sometimes require more than 20 years.
2. We will target wine connoisseurs, the wine aficionado, upscale restaurants and clubs, wine enthusiasts, and dabblers in sophistication. The wine connoisseur is one who understands the details, technique, and principles of wine as an art and is competent to act as a critical judge. The aficionado includes individuals who like, know about, appreciate and fervently pursue fine wines. The enthusiast and dabblers includes individuals who are interested in wine and enhancing prestige at a reduced price.
3. List and describe your current competitors.
• Existing wine production companies and distributors
• Wine aging tester at www.vinummaster.com/Eng/InfosClefEn.htm
• Wine aging accelerator www.amazon.com/Vintage-Express-Accelerator-Bourbon-BEVERAGES/dp/B001I2S308
• Any individual or company applying for a wine aging patent
4. Any business interested in wine aging technology. Companies currently producing wine refrigerators are also a threat.
5. We will secure local manufacturers to develop the device and will hire local people to assemble the device.
6. SWOT (consider human resources, R&D, marketing, procurement, manufacturing, distribution, engineering, IT, finance, accounting, and legal)
• What are your strengths (products, R&D, supply chain, brand, pricing, core competencies, resources, infrastructure, scalability, and interfaces)?
• The idea
• Creative team of researchers and entrepreneurs
• What are your weaknesses (products, R&D, supply chain, brand, pricing, core competencies, resources, infrastructure, scalability, and interfaces)?
• R&D
• Supply chain
• Brand
• Infrastructure
• What are the opportunities (growth, market share, product lines, Blue Ocean, complementary products, lock-in, brand, and first-mover advantage)?
• Per capita wine consumption in the USA has been hypothesized to exceed 9 liters.
• Gen X and millennial wine drinking is expected to be high.
• Will try to secure wine connoisseurs, aficionados, clubs, enthusiasts, and dabblers.
• What are the threats (substitutes, emerging technologies, new entrants, economic climate, government regulations, and social/culture issues)?
• Market can be easily entered.
• Our research or our competitors may show that it does not work.
• Wine companies may go after our product. For example, expensive wine vintners may take out advertisements to attack our product.
• Wine refrigerator companies.
We also plan on developing a series of complementary products and services. For example, we could engage in wine consulting to producers. We could also introduce a line of wine accessories for consumers.
7. Strategy Canvas for existing product compared with competitor or industry
Meaning BOF POD POP EXT DIS BOF POD POP EXT DIS
Attribute name Price Sophistication Wine aging and refrigeration Design
Very high Us Us Us
High Us Us
Average Us
Low Competition
Very low Competition Competition Competition | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/09%3A_The_TenTen_Planning_Process_-_Crafting_a_Business_Story/9.04%3A_Extending_the_Wine_Aging_Cooler_Example_Using_the_TenTen_Templates.txt |
Business Plan Overview Template for AddVintner (confidential draft)
1. AddVintner: Creating fine wine before its time.
2. We will develop high-tech refrigeration devices that will significantly reduce the time to age wines for a broad range of customers.
3. We plan on offering at least two products. One is targeted at the wine connoisseurs, aficionado, and expensive restaurants/clubs. The other product will be targeted toward wine enthusiasts and dabblers. The high-end products will be priced in the \$1,500–\$2,500 range. The low-end product will start at \$400.
4. What are your goals and objectives over the next 3 months to year (2–6 phrases on precise performance intentions)?
• Sell 5,000 units of \$2,000 unit by December.
• Sell 10,000 units of \$400 unit by December.
• Conduct research on the effectiveness of the wine aging process.
5. What tactics will you use over the next 3 months to a year to reach your objectives and mission (2–8 phrases)?
• Purchase warehouse for manufacturing by March.
• Conduct additional research on the viability of the aging process.
• Hire additional designers to develop product portfolio.
• Develop marketing strategy by March.
• Develop production process by May.
• Hire 10 employees by June.
• Start advertising by July.
• Start production by August.
9.08: Executive Summary (first draft not for distribution)
It is said that music is the wine of silence. Aged wine is for those seeking silence and comfort in the chaos of everyday life. It is our mission to bring aged wine to the discriminating concern and to give everyone the opportunity to drink aged wine at a reasonable price. A good Merlot can take up to 15 years to age, a Pinot Noir or a Burgundy can take up to 5 years to age, and Shiraz-based wines may require 20 years. We sell the most advanced solutions for improving the aged quality of most wines without having to pay high prices or wait many years for the wine to be ready for the palate.
Our product (see prototype below of the AddVintner Star) can attract variety wine drinkers including wine connoisseurs, the wine aficionado, and expensive restaurants/clubs and wine enthusiasts and dabblers. Our product will help to reduce the time that a consumer has to wait for fine wine, it will also increase the quality of low-priced wines and it will increase the status of the owner of the product. We are strong believers in design-driven innovation and will spend several months experimenting with new ideas and concepts for creating new customer meanings for wine aging. R&D will be the key driver for developing products that are unique, contemporary, and relevant to the wine community. The competition will simply not be able to keep pace with our research-based design-driven products.
We are an idea-driven company and have assimilated a creative team of researchers and entrepreneurs to deliver products to compliment and reflect contemporary tastes. Our marketing and production plans are in place and we have a strong grasp of the critical elements in the supply chain. We are developing an organization that will not just listen to consumers but will also be proactive in developing products that will anticipate and drive demand.
Per capita wine consumption in the USA exceeds 9 liters per year.www.wineinstitute.org/files/PerCapitaWineConsumptionCountries.pdf Wine drinking by the Gen Xers and the Millennial’s exceeds the consumption of beer and spirits.www.winemarketcouncil.com/research_slideview.asp?position=9 We have an opportunity to tap into that huge market and develop products that are relevant to the life style of Gen Xers and the Millennial’s. We believe that we can generate nearly \$7 million in revenue the first year. It is our goal to enter the market by January with two new products for producing fine wine before its time.
Figure 9.3 The AddVintner Star | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/09%3A_The_TenTen_Planning_Process_-_Crafting_a_Business_Story/9.07%3A_Sample_Business_Plan.txt |
Introduction
Lock-in occurs when there are costs involved in switching from one product or service to another product or service. For example, consider how cable television broadband providers and wireless phone providers have penalties for the customers who terminate a contract within the term of specific agreement periods. Switching costs can also involve time and psychological effort. When you switch cable providers, there is a definite learning curve related to using the new station guide and digital video-recording device. Cable providers try to increase monetary and psychological switching costs so that consumers are locked-in to their service. The nature of psychological switching costs can be traced to past use of a product and to the learning effects as consumers become attached to the product and become familiar with the interface and how to control the interface. Economists have identified a related concept that they refer to as the increasing-returns-to-adoption phenomena where the use of a technology leads to greater use and this in turn leads to technological improvements.Arthur (1989). This “learning by use” approach, which we have also described in an earlier chapter as the learning-by-doing phenomena, creates a situation where locking-in customers essentially locks-out the competition.
Lock-in also increases the so-called network effect phenomenon. A network effect occurs when the value of a good is dependent on the number of customers already owning that good. Metcalfe’s law states that the value or utility of a network is proportional to the number of users of the network.Shapiro and Varian (1998). In the economics literature, a network effect typically refers to a change in the positive benefit that a consumer receives from a product when the number of consumers of the good increases.Liebowitz and Margolis (1994). Lock-in is also related to Moore’s law, whereby the performance of products always increases over time and the cost of the product stays the same or decreases. This increase in performance is a function of technological developments and learning curve effects. When network effects are combined with increased product performance, product diffusion can increase dramatically and result in exponential market growth and sales (see Figure 10.1 "Growth and Lock-In").
Figure 10.1 Growth and Lock-In
10.02: Switching Costs are Everywhere
Switching costs are the costs that result from switching to a new product or a new service. They are often viewed in terms of dollars but they can also be conceptualized in terms of time and psychological effort. Switching costs can include early termination costs, the amount of time and effort to switch, all learning costs required to understand the new product or service, cash outlays for switching, and even the emotional discomfort caused by switching.Burnham, Frels, and Mahajan (2003). The goal of buyers is to try and avoid switching costs and not be locked-in to a particular product, service, or technology. Buyers want flexibility and they try to avoid lock-in.
The goal of producers is to essentially lock-in their customers and lock-out the competition. This is accomplished by creating a value proposition for their customers and make it difficult for them to leave the fold because of the high switching costs. Here is a list of situations that result in product and service lock-in:This section is based on Kaplan and Norton (2003a, September 15); Shapiro and Varian (1998).
• High-quality product and service that are in demand. Examples include high-end cars and newly introduced game consoles.
• Products that are sold at a relatively low price while its development costs are recouped through replacement parts, consumables, and maintenance. Examples include printers, razors, and autos.
• Recently purchased products that are relatively expensive will probably be too new to abandon. Examples include new cars, freezers, most durable goods, and houses.
• Products or services that cause customers to continue using the product because it forces them down a particular path. The path can be related to technology and is often proprietary. Examples include operating systems, game consoles, computers, tax software, banking, colleges, social networks, Internet service providers, word-processing, and various other applications software.
• Products, services, and vendors that are usually the lowest cost. Examples include Kohl’s, Wal-Mart, Target, Newegg, inexpensive cars, off-brand inks, alternative materials (plastic for metal), discount airlines, and most of the Hermes products and services.
• Brands that customers will turn to because they engender trust, confidence, and quality. Examples include IBM, Audi, Clark’s shoes, Expedia, Amazon, Tide, and many of the companies selling Midas products and services.
• Legal contracts for providing products and service. Examples include wireless phone, broadband, cable, and outsourcing agreements between businesses.
• Loyalty programs and frequent use programs. Examples include airlines, retail stores and discounts for repeat purchases.
• Product and services that complement the main product or service. Examples include software applications for operating systems, mobile phone applications, social networking applications, and maintenance and repairs departments connected with the dealer.
• Customers who are socially and emotionally involved with the product and services. Examples include online and offline social networks, online role-playing games, colleges, and church groups.
• Products that facilitate control of one’s environment. If a consumer can control a product or service, then they feel that they own it and thus become locked-in to using that product or service out of loyalty.
Figure 10.2 "Levels of Lock-In for Several Businesses" illustrates the author’s view of the degree of lock-in for several business activities. One particular interesting example of lock-in is related to social networking sites such as Facebook, MySpace, and LinkedIn. Social networking sites have an abundance of features that facilitate lock-in. First, they encourage the development of very strong emotional ties among the participants. Secondly, some of them attempt to thwart searching by search engines. And finally, they encourage the customization and control of the home screen. Our research has found that if you can give users the ability to control and customize their environment, then they will begin to exhibit feelings of ownership toward a virtual place.Jo, Moon, Garrity, and Sanders (2007). It appears that in some people, the emotional ties are stronger than the ties exhibited by some individuals toward a house or a car. In addition, there is a positional effect. This can reduce the influence and reduce the network effects:
Figure 10.2 Levels of Lock-In for Several Businesses
Positional goods purchases, consequently, are interdependent: what we buy is partially a function of what others buy. Put another way, the value of a positional good arises in part from social context. The positionality of a particular good is often two-sided: its desirability may rise as some possess it, but then subsequently fall as more possess it.… A particular fast car is most desirable when enough people possess it to signal that it is a desired object, but the value diminishes once every person in the neighborhood possesses one. Nothing about the car itself has changed, except for its ability to place its owner among the elite and to separate her from the crowd. Similarly, part of the appeal of a “fashionable” resort is that only a few people know about it, or are able to afford it. For these goods, the value of relative exclusivity may be a large part of the goods’ total appeal.”Raustiala and Sprigman (2006), p. 1719. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/10%3A_Lock-In_and_Revenue_Growth/10.01%3A_Lock-In_Leads_to_Network_Effects_and_Increased_Product_Performance.txt |
We have developed a set of questions that can be used to measure lock-in. It can be viewed as a lock-in index. Try to think of a product or service and then answer the following questions:
• The people who use this product are very cool. Add 1 point.
• This product has a strong brand. Add 2 points.
• The product or service is relatively expensive and was recently purchased. Add 1 plus 1 point for each time you use the word very.
• The replacement parts for the product are relatively expensive. Add 2 points.
• There is a service contract. Add 1 point for each year.
• There is a significant learning curve for using the product effectively. Add 1 plus 1 point for each time you use the word very.
• This product is a social networking application or has social networking features. Add 3 points.
If the score for the product or service is above 9, then this is a product or service with significant switching costs and lock-in. If the score is between 6 and 9, then the lock-in is moderately strong. If the score is between 3 and 6, then the lock-in is average. And if the score is 3, then the lock-in is minimal. If the score is zero, then you are probably buying an off-brand candy bar.
There are some products where the lock-in is transitory. Consider the fashion and clothing industry where the lead designers develop an anchor for next year’s fashion.Raustiala and Sprigman (2006). The premier lines typically develop seasonal themes for the fashion community. Everyone copies the anchored themes including the fashion leaders with their slightly scaled-back bridge lines (e.g., Gap Inc. represented by Banana Republic, the Gap and Old Navy and the Armani Group represented by Giorgio Armani, Armani Collezioni, and Emporio Armani). Copying is actually beneficial to the fashion industry. Copying an emerging fashion concept helps to standardize the design for a year or two until the design becomes obsolete. Some level of standardization is essential or chaos would ensue and costs would skyrocket because the supply chain would never stabilize. Nevertheless, the fashion themes are extremely transitory because, in a very short time, a new theme emerges and the old theme is out-of style.
10.04: The Downside of Lock-in
A consistent theme of this book is that companies must pursue innovation and differentiation constantly. Locking in your customers does not mean you can abandon innovation and let your products and service languish in mediocrity. Because consumers will eventually abandon your products and services and you will eventually fade from the marketplace. As we have said in an earlier chapter, people want to control their environment and they do not want to be controlled. Google has been very proactive on this front because they realize that lock-in is very transitory and they have attempted to engender trust through innovation.Fitzpatrick and Lueck (2010). Cable companies were able to lock-in their customers because there was very little competition. The landline cable companies avoided innovation and they treated their customers poorly. It is only recently that they have been able to shirk their earlier image and begin to engender trust and acceptance in the marketplace. All businesses must change, even if it is only in the minds of consumers, or they will eventually be abandoned.
10.06: Customer Acquisition Customer Retention and Lock-in
Customer acquisition and customer retention through lock-in are the two primary components of market share. Once customers have been acquired, the next step is to retain them. There has been an ongoing debate on whether to focus on acquisition or retention marketing.Lenskold (2003). Both are important. But there has been significant interest in retention because of the research findings on customer retention. For example, increasing customer retention by just 5% can increase profits by 25–95%.Reichheld and Schefter (2000).
The point is that customer retention should be a critical goal for all organizations. This is particularly true in the current business climate where substitute products and competition from unforeseen sources are the norm. Customer acquisition and customer retention are related to the development of a viable business model and having good products, good people, a good brand, successful marketing, a capable R&D process, and an efficient supply chain.
10.07: Conclusion
In this chapter, we have discussed the concept of lock-in and identified various issues on the lock-in such as how companies can achieve it, the downside of it, and the lock-in index for practical use. We also have addressed the relationship between the lock-in and companies’ absorptive capacity within the framework of outsourcing. The key points are the following:
• Lock-in is pervasive. It is part of the normal day-to-day transactions in business.
• If you are a producer, then you need to take steps to acquire customers so that you can lock them in (see Figure 10.3 "Lock-In Issues"). This may include giving potential customers money, providing additional complimentary services, and developing attractive incentives for participation.
• Producers will always try to lock-in consumers. It is important that consumers try to get producers to offer incentives in order to offset present and future switching costs.
• The initial stage of bargaining is important because once the consumer has committed to a seller, then the lock-in has been cast. If you are a business and are considering outsourcing, then you will be locked-in as soon as you sign on the dotted line. In that case, you should look for second sources.
• When a company or an individual outsources, they are essentially merging with another entity that has a competitive advantage in a particular area. Identifying the processes where having a core competency is critical for the firm to survive and to engage in learn-by-doing activity in that area.
Figure 10.3 Lock-In Issues | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/10%3A_Lock-In_and_Revenue_Growth/10.03%3A_A_Lock-In_Index.txt |
Valuing the Business
Everyone is interested in how much a business is worth. The entrepreneur and the entrepreneur’s family are interested because they hope to use some of the income from the business to live on or because they are interested in how much they might sell the business for someday. Then, there is a simple curiosity factor: “I wonder what I could get for this?” If the entrepreneur seeks outside funding from friends, banks, angels, and venture capitalists (VCs), they will be very interested in the potential value of the firm. When a public company is being sold, its current trading price establishes a starting point—usually a minimum transaction price—but the acquiring company must still decide on the maximum bid consistent with a profitable acquisition. But when selling a nonpublic company, even that starting point does not exist. The field of business valuation has developed techniques designed to estimate the value of a business.This chapter is adapted from material originally appearing in Huefner, Largay, and Hamlen (2005 and 2007, Thomson Custom Publishing; used by permission of the copyright holders).
One author gives this thorough definition of business valuation:
A business valuation determines the estimated market value of a business entity. A thorough, robust valuation consists of an in-depth analysis by a qualified independent professional who combines (a) proven techniques; (b) analysis and understanding of a specific company and its associated industry; (c) research and analysis of industry, association, and other publications; academic studies; the national and local economy; and online databases with (d) judgment honed by education, training, and experience; and (e) intuition. A valuation estimates the complex economic benefits that arise from combining a group of physical assets with the intangible assets of the business enterprise as a going concern. The resulting valuation, part science and part art, is a well-founded estimate that represents the price that hypothetical informed buyers and sellers would negotiate at arms length for an entire business or for a partial equity interest.Jones and Van Dyke (1998).
A major reason why businesses are bought is that parties interested in beginning or expanding business activity often prefer acquiring an existing business rather than starting a new one. Existing businesses are “up and running,” and have in place a product or service line, a work force, customers, suppliers, the necessary physical resources, and various intangibles—technology and “know-how,” systems and procedures, location, reputation, and the like.
From a seller’s perspective, business owners need to have an exit strategy, a means of extracting value from their investments of time and resources in the business. A sale may be occasioned by the death or intended retirement of the owner, or by a desire to “cash out” the investment at a time when its value is perceived to be high. Or, an owner may wish to expand the business by taking on new partners, selling a portion of ownership to new parties. Sometimes this is done to reward and retain key personnel by offering them an ownership interest in the business.
Even when no transfer of ownership is involved, a business valuation may be done when seeking major new financing. A valuation provides the prospective lender with an indication of the safety of a loan secured by the business. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/11%3A_Valuing_the_Business/11.01%3A_Why_are_Businesses_Bought_and_Sold.txt |
The foundations of business valuation techniques and practice lie in the tax law, as it has long been necessary to value businesses for estate and gift taxation. Though over 50 years old,The first two digits in a Revenue Ruling number signify the year of issue. Thus, Revenue Ruling 59–60 was issued in 1959. Revenue Ruling 59–60 is still recognized by professionals and by the courts as an important source of standards for valuation. Section 1 of the Ruling states its purpose:
The purpose of this Revenue Ruling is to outline and review in general the approach, methods, and factors to be considered in valuing shares of the capital stock of closely held corporations for estate tax and gift tax purposes. The methods discussed herein will apply likewise to the valuation of corporate stocks on which market quotations are either unavailable or are of such scarcity that they do not reflect the fair market value.
Subsequent rulings enhance and expand these basic standards:
• Revenue Ruling 65-193 clarifies that the procedures outlined in RevRul 59-60 apply to intangible as well as tangible assets.
• Revenue Ruling 68-609 extends the provisions of RevRul 59-60 beyond estate and gift taxation to any type of business interests and any tax purpose, and provides a “formula approach.”
The basis for business valuation is the familiar concept of fair market value, which is defined in Section 2.02 of RevRul 59-60 as follows:
Fair market value [is] the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.
This definition remains the common definition of fair market value: the price negotiated by well-informed, willing, and able buyers and sellers who are not compelled to act.
11.03: Controlling and Noncontrolling Interests
One consideration in determining the value of a business ownership interest is the extent to which that interest can exercise control over business activity. Control refers to the power to direct the policies and management of the business. Control is most commonly measured by voting power—holding more than 50% of the voting equity of the company. In some cases, when there is no majority stockholder, other circumstances can lead to one owner having effective control.
When there is a controlling interest, other ownership interests are said to be minority or noncontrolling interests. Such interests represent 50% of the voting power in the company. A voting interest of exactly 50% is neither a controlling nor a minority interest. While a 50% interest cannot cause things to happen, it can prevent things from happening. Having two 50% owners is often considered an inefficient business structure, as a stalemate occurs if the two owners do not agree. However, that structure—shared control—appears in many joint ventures.
A controlling interest is generally considered to be worth more, on a per-share basis, than a noncontrolling interest. Among the powers of a controlling interest are the abilities to:Pratt (2001).
• establish the nature and policies of the business;
• select officers, employees, and directors, and set their compensation and benefits;
• enter into contracts with suppliers, customers, and others;
• determine the existence and amount of dividends;
• decide on acquisition and disposition of assets;
• determine the financing and capital structure of the company.
A controlling owner has different options for disposing of the investment (exit) or converting it to cash (liquidity) than does a noncontrolling owner. The controlling owner’s exit or liquidity options include selling the controlling interest, taking the company public, or deciding to liquidate the business. The noncontrolling owner’s exit or liquidity options include selling to the controlling owner or selling to another noncontrolling owner. When a buyer does not exist, the noncontrolling owner effectively has no exit option. Continuing to hold the investment is a liquidity option to the extent that the business pays dividends. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/11%3A_Valuing_the_Business/11.02%3A_Overview_of_Business_Valuation_Techniques.txt |
A variety of techniques are available for conducting a business valuation. Part of the skill and expertise of a valuation analyst is the ability to select the appropriate technique for the situation at hand. Even when one technique is chosen, valuation under other techniques is often determined for comparative and confirmative purposes. Some analysts present a weighted average of the outcome of several techniques as their final conclusion, while others select a final value from the range of outcomes without resorting to formal weighting.
Factors to be Considered in a Business Valuation
Whatever the technique, the analyst should consider a variety of factors about the business and its industry. Among the factors to be considered are the following:This listing is drawn from American Institute of Certified Public Accountants (2003).
• What is the stage of the company’s development? Is it new, established and growing, mature, or declining?
• What is the current and prospective state of the industry in which the company operates, and of the economy in which it competes? How attractive is the industry to capital suppliers?
• What is the experience and competence of the members of top management and the company’s Board of Directors?
• What is the company’s position in the marketplace—for example, its market share—and what major competitors does it have?
• Are there barriers to entry in the company’s marketplace?
• What are the competitive forces in the company’s industry (recall Porter’s five competitive forces, discussed in an earlier chapter)?
• Does the company have proprietary technology, products, or services, and what is the nature of the protection, such as patent rights or exclusive licensing?
• What is the nature and quality of the company’s work force, including employer–employee relations, pay and benefits, labor supply, and the like?
• What is the nature and quality of the company’s suppliers and of the company’s customers? Is the company dependent on a small number of customers or vendors, or does it have a broad base? Are the customers and suppliers financially solid?
• Are there strategic relationships with suppliers, customers, and sources of financing? The existence of such relationships may be a positive or a negative factor when valuing the company.
• What is the company’s cost structure (operating leverage, fixed-variable mix) and its financial strength indicated by debt capacity, free cash flow, and the like?
• What risk factors does the company face?
The consideration of risk factors is an especially important part of business valuation. Uncertainties or concerns in any of the above areas may signify risks to be considered.
Two simple approaches to business valuation are (a) determining the value of the company’s net assets (assets minus liabilities) and (b) identifying the fair market value of a similar business. We discuss them briefly in the following sections, although they often prove unsatisfactory.
Asset-Based Methods
One approach to business valuation involves direct estimation of the value of the net assets to be acquired (=assets to be acquired by the buyer minus any liabilities to be assumed by the buyer). An asset-based approach typically begins by examining the firm’s balance sheet. However, there are several reasons why book (recorded) values are typically unsatisfactory indicators of business value:
• Book values reflect the accumulated effects of applying Generally Accepted Accounting Principles to the past transactions of the firm and have no necessary connection to current economic value.
• Book values may not reflect the impact of changing prices (inflation) or technological change.
• Balance sheets may not include all the relevant assets of the business, especially unrecorded intangible assets.
Given these deficiencies, the analyst attempts to adjust book values to arrive at an overall business valuation. The analyst examines and values each asset and liability to estimate its fair market value, using techniques such as the determination of market values for comparable assets, expert appraisals, and price index-based inflation adjustments. It is important to identify and value unrecorded intangible assets, including goodwill, and unrecorded liabilities, such as environmental liabilities, operating leases, and other off-balance-sheet and contingent obligations.
Direct Comparison Approach
The logic of a direct comparison approach lies in the idea that similar assets should sell for similar prices, a principle well established in other markets.See Cornell (1993). In real estate, for example, the market value of a house could be estimated by finding recent selling prices for substantially similar houses in comparable neighborhoods. Finding sales of comparable businesses, however, is difficult. Transactions are few, and comprehensive data sources do not exist. Thus, a true direct comparison approach cannot generally be used in business valuation.
However, a form of direct comparison exists when some measure or ratio serves as the link between the business valuation in question and other businesses. For example, professional practices like Certified Public Accountant (CPA) firms often sell for a multiple of billings, perhaps two to three times annual billings. For example, the average price–earnings (P/E) ratio of similar public firms in the industry might be used. If such firms sell for 12 times earnings, we can apply that same measure to a business being valued. The capitalized earnings approach discussed later is a version of this technique. As with the discounted future returns approach discussed later, one needs to select a particular cash flow or income measure, such as gross revenues. One also needs to select the “other variable”—number of years’ billings, P/E ratio, and the like—that will link the business being valued to other businesses.
Direct comparison techniques serve as a quick way of estimating business value, with little need for extensive estimation. However, because the comparison typically reflects an average of other businesses, this technique does not do a good job of incorporating distinctive features of the business being valued.
Payback Method
The payback for an investment is the number of periods management must wait before the accumulated positive cash flows from the investment exceed the initial cost of the investment project plus any negative operating cash flows. Investments are considered acceptable when the payback period is less than some predetermined time period, for example 3 years. Here is the computation:
Beginning investment: \$100,000
Cash flow year 1: −\$15,000 (with the beginning investment, \$115,000 still left to recover)
Cash flow year 2: \$50,000 (\$65,000 still left to recover)
Cash flow year 3: \$60,000 (\$5,000 only left to recover)
Cash flow year 4: \$60,000
Cash flow year 5: \$60,000
In this example, the payback occurs at about 3 years and 1 month. Many people do not consider payback to be a discounted cash flow technique because it does not take into account the time value of money. This is not entirely true. A short payback period, say, for example, 2 years, reflects the importance of dollars received in the short term and thus the time value of money.The payback approach is related to the hyperbolic discounting phenomena. There appears to be psychological as well as economic reasons behind the fact that people prefers a reward today rather than wait for a substantial reward. Studies have found that people sometimes use average annual discount rates of over 300% over the course of 1 month and over 100% over a 1-year horizon. They ask people whether they prefer \$100 today rather than \$200 next month. See Noor (2009). The payback approach does not take into account cash flows that are outside of the payback threshold and they do not take into account the magnitude of the cash flows. Amazon is now a viable business but early investors did not consider the payback to be an important tool for deciding whether to invest in Amazon. This is a normal situation for many start-ups where positive cash flows do not occur until many years in the future. Discounted cash flow approaches incorporate the importance of distant cash flows and the magnitude of the cash flows.
Discounted Future Returns
Perhaps the most common, and conceptually best, technique for business valuation is calculation of the present value of expected future returns from the business. Although present-value computations are easy, determining the relevant inputs is not. Choices need to be made for:
• the type of future return to be measured (income or cash flow);
• estimates of the future amounts;
• an appropriate discount rate;
• the time period for the analysis; and
• the estimation of a terminal value.
We consider each of these areas.
Definition of Future Return
Numerous measures of future return are available to the business valuation analyst. Although cash flow measures are the most common, the analyst must still decide on a particular cash flow measure to use. One possibility is cash flow from operations, which reflects the cash impact of all operating activities during a time period. Others use free cash flow, a term for which different definitions exist.
The most common definition of free cash flow is cash flow from operations minus cash investments in new assets needed to maintain operations. A less common definition is cash from operations minus cash investments in new assets needed to maintain operations minus debt repayments (this measure is designed to approximate cash available to the new owners).
Other analysts use income rather than cash flow measures. There are many variations here as well: net income as conventionally measured by accounting; earnings before taxes (EBT); earnings before interest and taxes (EBIT); earnings before interest, taxes, depreciation, and amortization (EBITDA); and the like. In some cases, especially if a minority investment is being evaluated, expected dividends is the relevant measure of future return.
Estimating Future Returns
Estimating future returns is a difficult task. Often the starting point is past returns, perhaps adjusted for unusual and nonrecurring items that have occurred. Knowledge of the business, industry, economic conditions, and other factors must be brought to bear.
One important task is to separate the expected future returns from the business in its present form from the expected future returns under the guidance of the new owner. Often, the efforts of the new owner will be more influential in determining future success than continuing the same uses of assets already in place. Because the business valuation is usually being conducted to establish a selling price, the buyer should not pay the seller for the buyer’s anticipated improvements in the business.
Another consideration is whether to conduct the analysis on a constant dollar basis or to estimate revenue and cost increases resulting from inflation. Whichever is chosen, the discount rate should be selected in a consistent manner, as discussed in the next section.
Although discounting expected future returns is a conceptually sound approach to business valuation, it is often not used due to the practical difficulties of implementing it. We need projected returns for several years into the future, and such estimates can be highly speculative.
Choice of Discount Rate
Many considerations enter into the selection of a discount rate. First let us consider the focus of the analysis. If the analyst employs return to all invested capital, then a discount rate appropriate to the entire capital structure should be chosen. This rate is usually called a weighted average cost of capital, because it includes costs for both debt and equity capital. In contrast, a return to equity capital focus calls for an equity-based discount rate. Following the well-known capital asset pricing model of finance, this rate includes at least two components: a risk-free rate and a risk premium, reflecting both the risks of general economic conditions and the risks of the specific business and industry. The beta β coefficient is the typical measure of risk premium used.
Next we consider adjusting for growth or inflation. When the estimates of future returns reflect inflation, then a discount rate that includes an inflation component applies. If future returns are estimated on a current (constant) dollar basis, then the inflation component should be subtracted from the discount rate. For example, suppose that an appropriate discount rate, including inflation, is determined to be 25%. The analyst uses this rate to discount estimated future returns that include inflation-based growth in revenues and costs (nominal dollars). On the other hand, if estimated future returns are based on current (constant) dollars, and the inflation assumption is 4% annually, then a discount rate of 21% (=25% minus 4% inflation adjustment) should be used to discount the current-dollar future returns. To express this another way, if the future dollar amounts in the valuation analysis reflect future prices and costs, the discount rate should include the inflation component. If the future dollar amounts are based on current prices and costs, reflecting no growth or inflation, the discount rate should exclude the inflation component.
These two discounting approaches do not provide exactly the same answer, but they are close enough. Given the many assumptions that go into a valuation calculation, the slight difference is usually deemed acceptable. For example, assume that the annual cash flow is currently \$300,000. An 8-year time horizon is used for the analysis. It is estimated that cash flows will grow by 5% annually. A discount rate of 15%, including growth, is deemed appropriate. The present value of \$300,000 annually discounted at 10% (15% minus the 5% growth assumption) and the present value of the growth-adjusted cash flows discounted at 15% are shown in Table 11.1 "Comparison of Present Values With and Without Growth".
Table 11.1 Comparison of Present Values With and Without Growth
Year Projected annual cash flow without growth (\$) Present value of cash flow without growth at 10% discount rate (\$) Projected annual cash flow with 5% growth (\$) Present value of cash flow with 5% growth at 15% discount rate (\$)
1 300,000 272,727 315,000 273,913
2 300,000 247,934 330,750 250,095
3 300,000 225,394 347,288 228,347
4 300,000 204,904 364,652 208,491
5 300,000 186,276 382,884 190,361
6 300,000 169,342 402,029 173,808
7 300,000 153,947 422,130 158,694
8 300,000 139,952 443,237 144,895
Total \$1,600,476 \$1,628,604
When multiyear analysis is used, a growth or inflation factor should be considered in some way. If growth is completely ignored in the above example, the present value of a \$300,000 annual cash flow discounted at 15% would be approximately \$1,350,000. If growth is expected, ignoring it clearly understates the value of the business. Of course, if future declines in cash flows are expected, indicating a business with initial appeal but little staying power, ignoring the expected negative growth would overstate the business value.
As seen in the above example, a positive growth assumption can either be built into the cash flow estimates, or incorporated by a reduction of the discount rate. Either approach will increase the business value relative to making no adjustment for growth.
The two present values in Table 11.1 "Comparison of Present Values With and Without Growth" are approximately the same, differing by 2%, which may be more precise than the cash flow estimates themselves or the discount rate selection. Nonetheless, one could easily find the precise discount rate and use that. If one accepts 10% as the correct rate without growth, then the correct rate with 5% growth that would discount the cash flows with growth (fourth column above) to the \$1,600,476 present value turns out to be 15.50%. Similarly, if one accepts 15% as the correct rate with growth, then the correct rate without growth that would discount the constant cash flows (second column above) to the \$1,628,604 present value turns out to be 9.52%. But for most purposes, the process illustrated above is sufficient.
Most of the literature on the weighted average cost of capital is based on information from public capital markets. Recently, work has been done to try to establish a private cost of capital approach.See Slee and Paglia (2010). They identify five different capital markets for private firms: bank lending, asset-based lending, mezzanine financing, private equity, and venture capital. Median rates of returns for these markets (first quarter 2010) were found to range from 6.8% for bank lending to 38.2% for venture capital financing.
Selection of Time Period for Discounting
The analyst who uses a discounted future returns approach must determine how far into the future to project. The general answer is as far as possible, keeping in mind that the uncertainty of the estimates increases as they get further away. Because a business is usually assumed to be a going concern, returns are presumed to continue indefinitely. Thus one could assume that returns continue forever. Alternatively, the analyst could limit the analysis to a fixed time period, say 10 years. In this case, one makes specific annual projections for 10 years and estimates a terminal value of the business at the end of that period.
Although estimates of future returns, or of terminal value, become more speculative the further in the future they are, the effect of discounting mitigates the increased uncertainty. For example, at a discount rate of 20%, \$1,000 in year 10 contributes only \$161 to the present value, and \$1,000 in year 20 contributes only \$26 to the present value.
When we assume that future returns will continue forever in equal amounts, we have a perpetuity. The present value is given by:
Present value of ordinary perpetuity = Constant annual return/Discount rate
For a discount rate of 20%, the present value is five times the annual return (\$5 = \$1/0.2). As shown in Table 11.2 "Impact of Time on Present Value ", about 60% of the present value occurs in the first 5 years, and about 84% in the first 10 years. Returns in later years have relatively little impact on the present value.
Capitalized Earnings
Despite the conceptual soundness of the discounted future returns method, the subjectivity of future return estimates is a major deterrent to its use. Parties to the negotiations will likely disagree over the assumptions employed in arriving at the estimates. As a result, business valuation often employs a conceptually similar approach that appears to avoid future estimation. This approach is known as capitalized earnings.
We saw that the discounted future returns method computes a present value based on applying a discount rate to the estimated returns of a number of future time periods. The capitalized earnings approach, on the other hand, computes a present value based on applying a capitalization rate to a single amount of present or past returns, as follows:
Table 11.2 Impact of Time on Present Value
Period Present Value of \$1 at 20% Cumulative Present Value Percent of perpetuity value
1 0.833 0.8333 0.1667
2 0.6944 1.5278 0.3056
3 0.5787 2.1065 0.4213
4 0.4823 2.5887 0.5177
5 0.4019 2.9906 0.5981
6 0.3349 3.3255 0.6651
7 0.2791 3.6046 0.7209
8 0.2326 3.8372 0.7674
9 0.1938 4.0310 0.8062
10 0.1615 4.1925 0.8385
11 0.1346 4.3271 0.8654
12 0.1122 4.4392 0.8878
13 0.0935 4.5327 0.9065
14 0.0779 4.6106 0.9221
15 0.0649 4.6755 0.9351
16 0.0541 4.7296 0.9459
17 0.0451 4.7746 0.9549
18 0.0376 4.8122 0.9624
19 0.0313 4.8435 0.9687
20 0.0261 4.8696 0.9739
Note: Annual payments assumed to occur at the end of year.
This formula is equivalent to the present value of a perpetuity discussed above.
What amount of return should be capitalized? First, as discussed previously, any measure of return can be used—a cash flow measure, an income measure, or even revenues or dividends. Second, the return measure may be based on past, present, or even future data. Examples include the following:
• Return for the past 12 months or most recent fiscal year
• An average return, either simple or weighted, for some number of past years
• A normalized current or average return, excluding unusual or nonrecurring items
• A forecast for the current period or a future period.
Most commonly, the use of present returns, or an average of past returns, appears to avoid the estimation problem. But one cannot really avoid estimation. To base a present value on current or past returns implicitly assumes the continuation of such returns in the future.
The capitalization rate is the relevant discount rate, discussed above, minus the assumed rate of growth (or decline) in future returns. As an example, suppose last year’s net income of \$200,000 is the amount to be capitalized, that we decide on a relevant discount rate of 20%, and that we expect 3% earnings growth. The capitalized value of the company is:
Present value = Amount of return to be capitalized/capitalization rate
= \$200,000/(0.20 − 0.03)
= \$200,000/0.17
= \$1,176,471
On the other hand, if we anticipate a 3% earnings decline, the capitalized value is:
Present value = Amount of return to be capitalized/capitalization rate
= \$200,000/(0.20 + 0.03)
= \$200,000/0.23
= \$869,565
A capitalization rate for equity returns is the inverse of the familiar P/E ratio commonly cited for publicly traded companies, and thus is sometimes called an earnings–price (E/P) ratio. For example, a company selling at 17 times earnings has an effective capitalization rate of 5.88% (0.0588 = 1/17). In selecting a capitalization rate for a specific business, one could use E/P ratios of reasonably similar public companies as guides. However, when valuing small nonpublic companies, lower P/E ratios (higher E/P ratios and capitalization rates) are typically appropriate, to allow for increased risk. It is not uncommon for small nonpublic companies to sell for 3–10 times earnings.
Capitalizing Excess Earnings
A widely used variation of the capitalized earnings method is called the capitalization of excess earnings. This hybrid method reflects the concept that earnings are derived from both the tangible assets and intangible assets of the business. Earnings from tangible assets are assumed to be relatively constant from one firm in an industry to another, whereas earnings from intangible assets may vary widely. The method proceeds as follows:
• Estimate the value of net tangible assets
• Estimate the earnings attributable to the tangible assets, perhaps by multiplying the value of the tangible assets by the average industry return
• Subtract this amount from total reported earnings; the difference is excess earnings, the amount above what is explained by the company’s tangible assets
• Capitalize the excess earnings.
The value placed on the business has two components:
Business value = Net tangible assets + Capitalized value of excess earnings
Because we tend to consider earnings attributable to intangibles to be more risky than earnings attributable to tangible assets, we tend to use high capitalization rates (low multiples).
Table 11.3 Capitalization of Excess Earnings (\$)
Value of net tangible assets 350,000
Reported earnings of the company 50,000
Earnings attributed to tangible assets = \$350,000 × 0.10 35,000
Excess earnings 15,000
Capitalized value of excess earnings = \$15,000/0.25 60,000
Estimated value of company 410,000
When we calculate negative excess earnings, the business is still presumed to be worth the value of its net tangible assets and we make no reduction for apparent negative intangibles.
For example, suppose a company reports earnings of \$50,000 and net tangible assets of \$350,000. Average industry earnings are 10% of net tangible assets, and we decide to capitalize excess earnings at 25%. The value estimate for the business is \$410,000, as shown in Table 11.3 "Capitalization of Excess Earnings (\$)".
The excess earnings method, like much of business valuation, has its foundation in materials promulgated by the Internal Revenue Service. Revenue Ruling 68–609 sets forth a so-called formula method, as follows:
The question presented is whether the “formula” approach, the capitalization of earnings in excess of a fair rate of return on net tangible assets, may be used to determine the fair market value of the intangible assets of a business. The “formula” approach may be stated as follows:
A percentage return on the average annual value of the tangible assets used in a business is determined, using a period of years (preferably not less than five) immediately prior to the valuation date. The amount of the percentage return on tangible assets, thus determined, is deducted from the average earnings of the business for such period and the remainder, if any, is considered to be the amount of the average annual earnings from the intangible assets of the business for the period. This amount (considered as the average annual earnings from intangibles), capitalized at a percentage of, say 15 to 20 percent, is the value of the intangible assets determined under the “formula” approach.
The percentage of return on the average annual value of the tangible assets used should be the percentage prevailing in the industry involved at the date of valuation, or (when the industry percentage is not available) a percentage of 8 to 10 percent may be used.
The 8 percent rate of return and the 15 percent rate of capitalization are applied to tangibles and intangibles, respectively, of businesses with a small risk factor and stable and regular earnings; the 10 percent rate of return and 20 percent rate of capitalization are applied to businesses in which the hazards of business are relatively high.
The above rates are used as examples and are not appropriate in all cases.…
The past earnings to which the formula is applied should fairly reflect the probable future earnings. Ordinarily, the period should not be less than five years, and abnormal years, whether above or below the average, should be eliminated. If the business is a sole proprietorship or partnership, there should be deducted from the earnings of the business a reasonable amount for services performed by the owner or partners engaged in the business.…
The “formula” approach should not be used if there is better evidence available from which the value of intangibles can be determined.…
Because of the extensive guidance given in Revenue Ruling 68–609, many business valuation analysts follow it closely, even though it contains many cautions and qualifications, especially in performing valuations for tax purposes. This approach has come to be known as the Treasury Method.See Pratt et al. (1993) for an expanded discussion of the excess earnings method.
Valuation Premiums and Discounts
After initially estimating the value of a business, that estimate may be adjusted upward (premium) or downward (discount) to reflect other factors related to the ownership interest in question. For example, a controlling interest in a business is worth more on a per-share basis than a minority interest, as the holder of a controlling interest has authority over business decisions, whereas the minority interest holder does not. This section briefly examines some common premiums and discounts.For an extended discussion of premiums and discounts, see Pratt (2001).
Business valuations typically begin with a base value, using techniques applicable to a broad range of businesses. A premium or discount is an upward or downward adjustment to this base value, to reflect some different characteristics of the particular business being considered. These characteristics are reflected in various ways. If one uses a discounted cash flow approach to valuation, a higher or lower discount rate could reflect the special characteristics. Alternatively, the analyst could adjust the initial valuation estimate upward or downward for specific features of the business. Knowing how to identify and quantify premiums and discounts is one of the specific skills of a business valuation expert. The following situations can increase or decrease the discount premium:
• Control premium: The buyer acquires a controlling interest—usually defined as more than 50% of the voting power—in the acquired company. Because of all the powers a controlling owner has, a controlling ownership interest is clearly worth more than a noncontrolling interest. These premiums can be in the 30–50% range.
• Minority interest discount: A minority interest discount, also known as a discount for lack of control, is the logical opposite of a control premium. If the ability to exercise control commands a premium, the lack of that ability is worth less.
• Strategic acquisition premium: Sometimes the acquisition of a business may be important from a strategic perspective. For example, an acquisition may complement the existing product line, broadening the geographic market, ensure a source of supply, or eliminate a key competitor, for a specific buyer.
• Lack-of-marketability discount: Publicly traded equity shares have a high degree of liquidity—they can be readily converted into cash at close to prevailing prices. Because investors value liquidity, a negative factor exists when the investor lacks the ability to sell on short notice at a market price. Studies report that thinly traded stocks realized a 30–50% price decline when the brokerage firm that was their sole market-maker went out of business.Pratt (2001), p. 79. Studies of restricted stock of public companies that itself cannot be publicly traded find discounts for the lack of marketability ranging from about 20% to 70%.Pratt (2001), chapters 5–9. Ownership interests in nonpublic companies almost always are discounted for the lack of marketability.
• Key person discount: Some acquisitions include an arrangement for the key person(s) to join the new company for a period of time. In other cases, the key persons do not accompany the acquisition, perhaps due to death or retirement. When the key person does not continue with the business, attributes such as the loyalty of customers, suppliers, or employees may be lost, as well as the key person’s particular business skills. Research studies and court cases find the key person discount to typically be in the range of 5–10% in public companies, and 10–25% in private companies.Pratt (2001), Chapter 12 "Developing a Business Plan".
Discounts may be applied to base business valuations for factors other than those described earlier. One possibility is a discount for contingent liabilities, reflecting potential future claims resulting from past business activities that will become the responsibility of a buyer. Such contingent liabilities involve potential litigation such as product liability, potential environmental claims, or potential tax adjustments for prior years. Because these liabilities are situation-specific, the valuation analyst must look sharply for them!
The above discussion indicates that discounts are more frequent than premiums. After achieving a base valuation, the analyst considers adjustments for the various factors discussed above. Note that the impact of these factors can be incorporated into the base analysis—for example, by adjusting the estimates of future income or cash flows—or can be reflected as an adjustment to the base value calculation. However incorporated into the business valuation analysis, discounts can have a large effect on the ultimate value. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/11%3A_Valuing_the_Business/11.04%3A_Specific_Valuation_Techniques.txt |
Businesses that are yet to be undertaken, or are in the early stages of their development, are especially hard to value. Suppose an entrepreneur with a concept for a new business needs capital to launch the business. Because of the high risk of new businesses, traditional capital sources—banks and other institutional lenders, and the public equity markets—are usually not available. Most new businesses begin with capital raised from the founder’s own resources, and perhaps from friends and family. Sometimes, an unrelated investor who believes in the concept, referred to as an “angel,” also provides some seed capital. Angels are especially common in artistic ventures, such as movies or stage shows. As the business begins to develop, VCs often provide the next influx of capital. These investors take short-term ownership stakes in promising new businesses. Business valuations have a role to play in these situations as well as in the financing or purchase of established businesses.For an expanded discussion of valuation of startup companies, see Abrams (2001), especially Chapter 12 "Developing a Business Plan", and Evans and Bishop (2001), especially Chapter 15 "Wrap-Up".
Approaches to Valuing a Start-Up
Because a new business has little to no history, and because it may be pursuing innovative products, services, or other business features, uncertainty about its future prospects is especially high. A capitalized earnings approach cannot be used, as new companies frequently report losses in the early years, and their present earnings (losses) may not be indicative of expected earnings. A discounted earnings or discounted cash flow approach is typically most appropriate. Many analysts favor using cash flows rather than earnings, because of the importance of cash management in start-up firms. Many start-ups fail because they quickly run out of cash. During the “dot.com” era, analysts often focused on the rate at which a start-up consumed cash, a phenomenon colorfully known as its burn rate.
When performing a discounted cash flow approach to valuing a new business, the analyst must decide on the estimate of cash flows to use. The entrepreneur’s forecasts are likely to be highly optimistic, reflecting his or her vision of a successful future. When using an entrepreneur’s forecasts, the analyst typically tries to neutralize the entrepreneur’s optimism with a high discount rate. A high rate reflects both the degree of risk involved and the expectations of capital providers for high returns to compensate for the risk. VCs might seek rates of return of 50% or more during the seed capital stage and 30–50% at later stages.
VCs are not long-term investors. They seek to cash out after 3–5 years. Their investments often take the form of specialized equity, such as a preferred stock issue with a high dividend rate and mandatory redemption at a specified future time, either at a high cash price or at a generous conversion into common shares. The latter option is appealing when the VCs anticipate an initial public offering of the start-up’s shares.
Venture capital investing is high risk. First-time start-ups have a 21% chance of succeeding. Even previously successful venture-capital-backed enterprises still only have a 30% chance of succeeding in the next venture.Gompers, Kovner, Lerner, and Scharfstein (2010).
Multiscenario Approaches
In addition to using high discount rates for start-up companies, valuation analysts may use a multiscenario approach. One multiscenario approach begins by constructing alternative outcomes under different degrees of optimism about the future of the company. The approach next estimates a discounted cash flow value for each outcome, called a conditional value, and then weights each outcome according to a probability estimate of its likelihood of occurring. Often referred to as the First Chicago Approach,Abrams (2001), pp. 410–413. this methodology frequently creates a table such as the one shown below, using the success percentages cited above:
Scenario Conditional value (\$) Probability Weighted value (\$)
Very optimistic 150,000,000 0.02 3,000,000
Optimistic 80,000,000 0.08 6,400,000
Conservative 20,000,000 0.20 4,000,000
Break even 0 0.30 0
Pessimistic (25,000,000) 0.40 (10,000,000)
Weighted Average \$3,400,000 | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/11%3A_Valuing_the_Business/11.05%3A_Valuing_Start-Up_Businesses.txt |
Many considerations and estimates enter into a business valuation. It is more art than science, with the skill and insight of the valuation expert playing an important role.
To illustrate some of the effects of the estimates and assumptions involved, consider a new business venture, Ron’s Business Valuation Services, with the first-year cash flow estimates as shown in Table 11.4 "First-year Projected Cash Flow".
The first question is the expected growth of the business. Consider first an assumption of 6% annual growth. We assume that collections and all expenses will grow at that rate, though other assumptions could be made. A 5-year cash flow projection for Ron’s Business Valuation Services, with 6% growth, would be as shown in Table 11.5 "Five-year Cash Flow Projection, 6% Growth Rate".
A discount rate needs to be chosen. Since growth is already built into the cash flow assumptions, the discount rate reflects only the riskiness of this business. If we believed that the business had relatively little risk, we might choose a discount rate of 10%. This would give a present value for the 5 years of cash flow of \$76,080. If we believed the risk was high, we might choose a discount rate of 30%, which would give a present value of \$47,968. Clearly, the choice of discount rate has a major influence on the calculated present value.
Instead of estimating the cash flow of each of the first 5 years, suppose we simply estimated that the average annual cash flow over 5 years would be \$20,293. This would not make a big difference in the present-value calculations, giving \$76,926 at a 10% discount rate and \$49,425 at a 30% discount rate. These amounts are somewhat higher than shown earlier, because using an average in this case attributes somewhat higher cash flows to earlier years and somewhat lower cash flows to later years, thus increasing the present value.
Table 11.4 First-year Projected Cash Flow
Cash receipts (\$)
Cash collections from clients 200,000
Cash payments (\$)
Payroll 80,000
Marketing and customer service 16,000
Rent 30,000
Office supplies and equipment 20,000
Taxes and licenses 36,000
Total cash payments (\$) 182,000
Net cash flow (\$) 18,000
Table 11.5 Five-year Cash Flow Projection, 6% Growth Rate
Year 1 Year 2 Year 3 Year 4 Year 5
Cash collections (\$) 200,000 212,000 224,720 238,203 252,495
Cash payments (\$)
Payroll 80,000 84,800 89,888 95,281 100,998
Marketing and customer service 16,000 16,960 17,978 19,056 20,200
Rent 30,000 31,800 33,708 35,730 37,874
Office supplies and equipment 20,000 21,200 22,472 23,820 25,250
Taxes and licenses 36,000 38,160 40,450 42,877 45,449
Total cash payments (\$) 182,000 192,920 204,496 216,764 229,771
Net cash flow (\$) 18,000 19,080 20,224 21,439 22,724
This example considered only 5 years; what about subsequent years? One approach would be to continue the growth projections for more years, although the confidence in our estimates decreases as we go further out in time. At the other extreme, we could assign zero value beyond 5 years, on the basis that the survival of the business beyond that time is too uncertain. A third possibility is to assume that the average cash flows calculated above would continue indefinitely; the present value of that perpetuity would be \$202,930 (=\$20,293/0.10) at a 10% discount rate or \$67,643 (=\$20,293/0.30) at a 30% discount rate. As can be seen, the value of this business depends heavily upon the assumptions used in our calculations.
Consider next an assumption of 16% annual growth. Again, we assume that collections and all expenses will grow at that rate, though other assumptions could be made. A 5-year cash flow projection for Ron’s Business Valuation Services, with 16% growth, would be as shown in Table 11.6 "Five-year Cash Flow Projection, 16% Growth Rate".
Here the present value of the 5 years of projected cash flows is \$91,244 at a 10% discount rate and \$55,836 at a 30% discount rate. These present values are 20% and 16% higher, respectively, than those calculated under the 6% growth assumption. Average 5-year cash flow for this scenario is \$24,758; the present value based on the 5-year average is \$93,842 at 10%, and \$60,300 at 30%, both 22% higher than the corresponding figures for the 6% growth scenario. Perpetuity values are \$247,580 (=\$24,578/0.10) at 10% and \$81,927 (=\$24,578/0.30) at 30%.
Table 11.6 Five-year Cash Flow Projection, 16% Growth Rate
Year 1 Year 2 Year 3 Year 4 Year 5
Cash collections (\$) 200,000 232,000 269,120 312,179 362,128
Cash payments (\$)
Payroll 80,000 92,800 107,648 124,872 144,851
Marketing and customer service 16,000 18,560 21,530 24,974 28,970
Rent 30,000 34,800 40,368 46,827 54,319
Office supplies and equipment 20,000 23,200 26,912 31,218 36,213
Taxes and licenses 36,000 41,760 48,442 56,192 65,183
Total cash payments (\$) 182,000 211,120 244,899 284,083 329,536
Net cash flow (\$) 18,000 20,880 24,211 28,096 32,592
These comparisons represent the importance of sensitivity analysis in performing business valuation calculations. Sensitivity analysis addresses the question of how much difference in the outcome results from different assumptions. The more sensitive the outcome, the less confidence we should place in the result. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/11%3A_Valuing_the_Business/11.06%3A_Examples_of_Valuation.txt |
The growth rate of revenues can have a dramatic impact on the value of the business. As noted earlier, one way to determine the value of a business is to use the formula for the present value of perpetual annuity. The following formula was used.
Present Value of Ordinary Perpetuity = Constant annual return/Discount rate
This formula can be slightly modified to include a growth in annual returns.
Figure 11.1 The Influence of Growth Rate on Firm Value
Firm Value = Initial Annual Return/(Discount Rate − Growth Rate of Initial Return)
If the initial annual return is \$50,000 and the cost of capital is 8% and revenues are not expected to grow then the value of the firm would be \$625,000. If the initial annual return is expected to grow at 2%, then the value of the firm would increase to \$833,333.
Figure 11.1 "The Influence of Growth Rate on Firm Value" presents a graph where the growth rate ranges from 0–10% with a discount rate of 12% and an initial annual return of \$50,000. The present value of a firm with 0% growth rate is approximately \$417,000. The present value of the firm with a 10% growth rate is \$2,500,000. As the growth rate approaches the discount rate the present value of the firm increases exponentially. This in part illustrates why companies with very modest returns are sometimes valued very highly by potential investors. A firm with strong growth potential, even with small initial returns, is an attractive target for investors.
11.08: Conclusion
In this chapter, we have presented an overview of business valuation. The key points are the following:
• Business valuation is a complex and challenging field that offers several methods to choose from, and requires that many decisions be made when applying any method.
• These choices and decisions are typically guided by the purpose of the valuation, the nature of the business being valued, the availability of data, and the skill and expertise of the valuation professional.
• Multiple valuations based on different methods are likely to yield different results. Some analysts choose to average the values to arrive at a composite estimate. Others frame the valuation as a range of values defined by those outcomes that are reasonably consistent with one another, ignoring any outliers. There is considerably more art than science involved in this field.
• Once an initial valuation is completed, consideration should be given to any factors that may lead to an increase (premiums) or decrease (discounts) in the value of the business.
• Start-up or early-stage businesses are especially hard to value, due to the lack of a track record. Expected rates of return on investment are high at this stage, to compensate for the much higher risk that the endeavor will not be successful.
Business valuation for a start-up is often ignored because it is complex and because there is no historical financial patterns to turn to. It is, however, important because of the numerous stakeholders who are interested in the value of the business. It is also significant because it provides key insight into the overall financial structure and the firm’s value proposition. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/11%3A_Valuing_the_Business/11.07%3A_The_Importance_of_Growth_Rate_on_Firm_Value.txt |
The terms strategic planning and business plan are often used interchangeably, even though they are different. The strategic planning process is essentially the upfront activity related to generating a business model. It involves using the analytical strategic planning approaches discussed in Chapter 8 "Strategic Planning and Ten–Ten Planning", such as value chain analysis, Porter’s five-force model, the resource-based view of strategy, the technology life cycle, and SWOT analysis among othersThe SWOT analysis is rarely part of the business plan and is usually not part of the business presentation. The purpose of a SWOT analysis is to assist the founders in understating what the business is all about and where it is heading. The strengths and opportunities will of course be woven into the business plan and the business plan presentation. But there is little to be gained from focusing on the threats and the weaknesses. Indeed, a significant part of the business plan and presentation involves developing strategies for dealing with weaknesses and threats.. In Chapter 9 "The Ten–Ten Planning Process: Crafting a Business Story", we introduced an abbreviated approach to planning, called the Ten–Ten planning process that can be quickly implemented and assist in bringing focus and clarity to the entrepreneur’s vision. You are encouraged to complete the FAD template, Organizational and Industry Analysis template, Business Plan Overview template and to develop an executive summary using the material in earlier chapters before you develop a full-scale business plan. There are two reasons for this. The first reason is that the material developed during the Ten–Ten planning will be very useful in developing a focused, more complete, and better plan. The other reason for using the Ten–Ten process is that business models evolve very rapidly; sometimes it is better to let the idea incubate and to present the plan to a variety of audiences before committing and finalizing the full-blown plan.
In this section, we will present a more detailed approach for constructing a full-blown business plan. The expanded business plan provides additional focus by adding details on the what, why, how, when, and for whom a product or service will be produced. The business plan is an abbreviated description of the business model (see Note 12.1 "The Business Model: Important Business Model Decisions"). The business plan is presented to the outside world through a business presentation and is accompanied by a business plan document.
The Business Model: Important Business Model Decisions
• What will the product features and product mix look like?
• How will the firm acquire market share, define market segments, and market the product mix?
• What type of pricing strategy will be used (menus, auctions, and bartering)?
• Where will the organization build core competencies and capabilities?
• With whom, when, and why will partnerships and alliances be formed?
• How and why are funding and resource decisions made?
• How will the supply chain work? This involves the when, who, and how tasks are performed.
• Should supply chain tasks be outsourced, off-shored, or in-tasked?
• How will employees be acquired and retained?
• What will the information technology look like in terms of hardware, software, and networking?
• How will product, process, and content innovation be carried out in terms of R&D?
Adapted from Afuah and Tucci (2001).
12: Developing a Business Plan
The business plan serves many purposes. The business plan presents a succinct overview of the what, how, when, and why of the business. First, it is used to communicate with investors. It provides investors with a concise overview of what the business is about and how investors can make money. In many ways, the business plan is a prototype of the business model. It is a scaled-down version that describes how the business will function. The business plan also serves as a platform for the business founders to communicate and it can be used as a blueprint for operating the business the first year.Sahlman (1997, July-August). It also helps mentors and consultants to identify weaknesses, missed opportunities, strange assumptions, and overly optimistic projections. Finally, the business plan also serves as a tool for educating new employees on how the business works and how they will fit into the business activities. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/12%3A_Developing_a_Business_Plan/12.01%3A_Purpose_of_Business_Plan.txt |
There are several approaches for developing a business plan. The first approach is to thoroughly develop the business plan and then make a presentation to investors, other entrepreneurs, interested parties, and family members. The feedback from the presentation is then used to rewrite and modify the business plan. The updated business plan is then presented to the relevant parties. The major criticism of this approach is that too much time is spent developing the business plan and not enough time on refining and streamlining the business model.
The second approach consists of writing an executive summary, or a business concept paper, and then to prepare a presentation and deliver it to the relevant parties without any modification from presentation feedback. We have used this approach for over 10 years. Guy Kawasaki uses a similar technique called the pitch and plan approach.Kawasaki (2008).
Kawasaki believes that one purpose of the plan is to attract investors, but that the most important reason for developing a plan is to solidify the management team’s objectives. He believes that the executive summary plays a critical role in attracting investors and creating focus for the management team. He recommends pitching the idea first and then developing a full-blown plan.
As noted above, we completely agree with that assertion and have used a similar approach for years. The FAD template, the Business Plan Overview template, the executive summary, the business presentation, and the full-blown business plan are in reality prototypes of the business. They are all abbreviated business models. They give the management team, the founders, and the investors an opportunity to focus on something that represents the actual business. How many times have you heard the following refrains?
They just don’t understand our business model!
They just don’t understand what we’re doing!
One of the most important duties of the entrepreneur is to educate and facilitate the learning process of the management team, the founders, and investors. The objective should not be too obscure the way the business works, but rather to help interested parties understand why the business will work. The Ten–Ten planning approach coupled with the executive summary, the presentation, and the full-blown business plan should facilitate the learning process and lead to better communication. Better communication will in turn lead to an improved business model.
12.03: Prototyping the Product or Service
As noted throughout the book, a key activity for innovative activity is to engage in learning by doing. Learning by doing means that you make and build things, try experiments, and construct prototypes. Prototypes need to be constructed for tangible products and also for systems applications. If the product is a tangible product, then a generic mock-up of the product needs to be constructed as early as possible. If that is not possible, because of limited resources or an overly complex product, a handmade drawing with a graphics program or with CAD/CAM software or Google’s free SketchUp application can be used to develop a prototype. If the product is a computer application, then a prototype can be constructed using a rapid prototyping language or with a presentation package such as PowerPoint. There are also many excellent applications available for the iPad to develop mock-ups of applications and drawings for product ideas.
One interesting way of presenting the idea behind the business is to tell a story about how the product or service solved a problem. Presenting a problem and solution scenario is a very effective way for communicating a business plan concept. One business plan presentation used a clipart in the form of a scenario comic book to communicate the business concept. It involved a consumer coming home to find the inside of the house flooded. The story then went on to describe how the consumer would use a new emergency repair network to find a reputable contractor via a competitive bidding process. It was a very convincing story and quite effective in illustrating how the service was much different than the competition’s service. The goal of using a scenario is to get the readers to understand the details of what the business has to offer. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/12%3A_Developing_a_Business_Plan/12.02%3A_Approaches_for_Developing_Business_Plans.txt |
The business presentation is the dog and pony show. One of my students asked me whether the business presentation should be informational or a pitch. It should be both, and that is the ongoing dilemma for the presenters. Including the proper mix of information and creating excitement about the business is a difficult task. The presentation should have conveyed approximately the same content as the business plan, but in an abbreviated format (see Note 12.4 "Business Plan Presentation"). The goal is to maintain interest and communicate your ideas. The ideal number of slides for the presentation should be approximately one slide for each section. However, this can be increased if the slides are not too dense. This means that you will have to talk around the key concepts of each section. You do not want to read your slides. Just have the key concepts on the slide and talk around them. The most important thing you can do is practice your presentation and, if possible, memorize your notes. There are always limits on the length of the presentation and it is important to hit that mark within 30 seconds. Practice helps to convey the impression that you know what you are talking about and that you have the best product since sliced white bread. Guy Kawasaki suggests a 10/20/30 rule. That is 10 slides, for 20 minutes using a 30-point font. This is good advice, but it is sometimes necessary to extend the number of slides depending on the particular business context and the amount of content in each slide.
Business Plan Presentation
General guidelines for business plan presentations
1. Introduction of team (30 seconds)
2. Company overview (4 minutes)
1. Description of products and services to be offered.
2. Presentation of your product, service, or system prototype. Could be a prototype, a scenario, a picture, a diagram, or a mock-up of your product, or service. Briefly discuss the prototype.
3. How does the product or service solve an important problem or present an opportunity to fill an important market niche?
4. Discuss how the product is competitive.
5. How do you intend to differentiate yourself (price, quality, or service)?
6. Present a Strategy Canvas illustrating how your product/service compares to the competition.
7. What is the size of the market you intend to enter?
8. What is the growth potential of your market?
3. Industry analysis (1 minute)
1. Description of current and potential competitors (substitute products).
2. How will competition react to market entry?
3. What are the barriers to entry?
4. Are there critical governmental or economic issues?
4. Marketing strategy (2 minutes)
1. How will you price your product?
2. What customer segments are you trying to reach? How will versions be matched to customer segments?
3. How will you promote your product?
4. What techniques will you use to acquire customers?
5. How will you retain and lock-in customers?
6. How will you distribute your product?
5. Operations strategy (2 minutes)
1. Where will the product be made?
2. How will it be made?
3. Who will build the product or service?
4. What are the detailed variables and fixed costs for producing the product or service?
5. Are there important issues related to the supply of components/materials?
6. Are there important issues related to the fulfillment of orders?
6. Forecasts and financials (2 minutes)
1. What do your projections show for sales, profit, expense, growth, and investment?
2. Capital requirements over the next 3 years.
1. Development costs
2. Advertising costs
3. Human resources
4. Sources of capital
7. Stage of development and the implementation plan (1–2 minutes)
1. What resources have already been committed?
2. What stage of development are you in?
3. What needs to be done before launch?
4. When and how will the system be implemented (show timeline here)?
8. How much venture capital funding do you need? (1 minute)
1. What are you offering in return for funds?
2. When can they obtain return?
3. Return on investment expected?
9. Summary (30 seconds)
These are the restrictions I use: Questions (4 minutes): Total allowable time for presentation and questions is 19 minutes. Be sure to conduct a trial run of your presentation so that you will not go over the 15-minute presentation limit.
Be sure to illustrate a prototype or at least show an illustration of your product or service. The prototype could be an illustration, a picture, a diagram, an example report, a scenario, or a mock-up of your product or service. If you are developing a complex process that is hard to understand, then you should still try to convey the idea using some sort of flow diagram or business process diagram. The goal here is to try to get your audience to understand just what you are trying to sell and try to get them to buy your product or service. The goal is not to be vague or obscure. As noted earlier, the scenario is a very effective tool for communicating the business concept. An actual or even a fictional scenario can be a powerful tool for explaining how the product or service works. Scenario presentations can include live acting, movie clips, storyboards using clipart and drawings, simulations and even the use of stick figure animation.
The business should be pitched and presented several times before the final plan is developed. The business plan presentation along with the executive summary will help to structure the business and make it more focused, clear, and understandable. It is all part of the learning process consisting of learning-about and learning-by-doing. It is important to have someone document all the questions that arise during the presentation and then to try to understand what the questions mean. It could be simply that the business model was not communicated effectively during the presentation, or a critical issue was not considered and that it needs to be addressed. Businesses are emergent; they take time to design, build, and to be successful; and the pitch and presentation is a critical part of the growth process. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/12%3A_Developing_a_Business_Plan/12.04%3A_Business_Presentation.txt |
Content is of course the king in all writing activities and this is also true for the business plan. However, the appearance and the look and feel of a document can often overcome minor deficiencies and sometimes hide major flaws. The most important element of the business plan is the “look.” It must look clean. In general, the business plan should be between 10 and 20 pages.An interesting book on the details of writing a business plan was published by Chambers (2007). Here are a few recommendations for preparing a business plan or an executive summary that will improve the way they look and read.
The first step in helping the reader to read is accomplished by having a document with the following features:
• Use good-quality paper.
• Use at least 1-inch document margins.
• Always double-space between lines. Never single space in the body of the business plan. You can single space tables, quotes, and the appendices.
• Use descriptive headings and subheadings to set off sections and to assist in transitions between content.
• Use a simple typeface, such as Arial, Calibri, Times-Roman, or Cambria or a related typeface that is easy to read. Use color to improve the appearance, but do not overuse.
• Include some figures and tables and refer to them in your discussion. Each figure and table should have a number and a caption. Make sure the figures, tables, and financial spreadsheets look attractive and are understandable. Use color to improve the appearance.
• Never present your business plan as a series of bullet points. The plan should have paragraphs and tell a story. It should not look like a presentation.
Simple fonts facilitate reading, understanding, and even the accomplishment of tasks. Psychologists at the University of Michigan conducted an experiment where they were trying to get 20-year-old college students to exercise.Herbert (2009). They divided the students into two groups. One of the groups received instructions for a regular exercise routine in an Arial typeface and the other received the same instructions in a Brush typeface. The subjects who had read the exercise instructions in Arial indicated that they were more willing to exercise and they believed that the routine would be easier and take less time than those subjects reading the instructions in a decorative typeface. They conducted another test in which two groups of students read instructions in preparing sushi rolls in a simple typeface and a decorative typeface. The results were similar. The students using the simple typeface instructions were more willing to attempt making sushi rolls than those reading from instructions in a decorative typeface.
Reader fatigue is an important issue. Another way to reduce fatigue is by changing the lengths of your sentences. For example, have two short sentences and one long sentence and one short sentence followed by one long sentence and then one short sentence. The idea is to mix up the sentence structure and create interest. The second method that fatigues readers is of course having too much to read.Guy Kawasaki posits that for every 10 pages over 20 you reduce reading and funding probability by 25%. This is particularly true when the business plan involves difficult and unfamiliar material. Succinct and clear writing coupled with informative figures and tables will alleviate reader fatigue. This is the essence of pithy writing. The length of the business plan narrative should usually be between 10 and 20 pages and rarely if ever exceed 20 pages. You can also add between 4 and 6 pages of figure, tables, and appendices. Graphics and tables are also important elements for assisting in chronicling and presenting the business plan. Tables and figures should always have numbers and captions, and they should always be referred to by their figure number or table number in the text.
The last point is extremely important. “Never present your business plan as a series of bullet points.” Remember, the goal of the business plan is to tell an interesting story. Bullet points need background and discussion. The business plan should never look like it was simply lifted from a presentation. This is a serious rookie mistake. Use bullet points sparingly and when you do use them, you need to discuss them, just as you would discuss a point during a presentation.
Finally, how can you cram all of this information into one business plan and not bore your readers. It requires hard work and constant refinement so that the core aspects of the business are communicated in less than 20 pages. Several trade-offs have to be made; some areas will expand and others will be reduced. Very few business plans look the same. They are highly differentiated. It is the role of the entrepreneur and the entrepreneurial team to educate and facilitate the learning process of the reader. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/12%3A_Developing_a_Business_Plan/12.05%3A_Writing_Organization_and_Formatting-_Helping_the_Reader_to_Read.txt |
Note 12.3 "Business Plan Template Part 1" presents an overview of a business plan. It should not be viewed as a checklist, to be filled in extensively with bullet points and narratives. It should be viewed as a set of guidelines for constructing and developing a business model. Some of the subheadings for the sections may not even be addressed in the business plan and others may be addressed in great depth. It depends on the business context.
Business Plan Template Part 1
1. Business plan title
1. It should include the name of the business and the name of the founders.
2. Acknowledgements page
3. Table of contents
4. Executive summary (1–2 pages)
5. Business overview (2–3 pages)
1. Description of products and services to be offered. If it is a complex product, provide a detailed description of the functions.
2. Provide a prototype, a scenario, a picture, a diagram, or a mock-up of your product or service. Briefly discuss the prototype. It is often a good idea to illustrate your concept early if the product or service is complex or very unique.
3. Describe how the product or service solves an important problem or presents an opportunity to fill an important market niche. Be sure to explain why the product or service is not just a good idea, but a sustainable source of revenue that can eventually generate a profit.
4. Discuss how product is competitive compared with existing product or service offerings.
5. Will you differentiate your product on price, quality, service, or all the three?
6. Present a Strategy Canvas illustrating how your product or service compares to the competition.
7. What is the size of the market you expect to enter?
8. What is the growth potential of the market?
6. Industry, economic, and regulatory analysis (2–3 pages)
1. Describe the current and potential competitors (substitute products). Be sure to discuss potential products and technologies that could make your offering irrelevant.
2. How will the competition react to market entry?
3. What are the barriers to entry in the marketplace?
4. Are there any governmental or regulatory issues that should be considered?
5. Economic issues?
7. Marketing strategy (1–3 pages)
1. Exactly how will you price your product?
2. What customer segments are you trying to reach?
3. How will versions be matched to customer segments?
4. How will you go about promoting your product?
5. What techniques will be used to acquire customers?
6. How will you answer inquiries about the product specifications, features, and functions?
7. How will you retain and lock-in customers?
8. How will you interact and distribute your product to your customers?
8. Operations strategy (1–3 pages)
1. Who will design the product or service and where will product or service design take place?
2. Where will the product be made, who will make it and how will it be made?
3. What are the detailed variables and fixed costs for producing the product or service?
4. Are their important issues related to the supply of components and materials?
5. How will order fulfillment take place? Are there important issues related to the fulfillment of orders?
6. How will you provide customer service and support including tech support?
9. Human resource strategy (1–3 pages)
1. What kind of employees do we need to run the business?
2. Where will we recruit them from?
3. What kind of compensation incentives will be offered in terms of salary, stock options, and benefits?
4. How will employees be trained and developed?
5. How will employees be evaluated?
10. Financials and forecasts (1–3 pages)
1. Present a simple pro forma sources (cash inflows) and uses of funds (cash outflows) for 3 years after launching.
1. The sources of funds include starting cash, incoming cash from sales, investor funds, loans, and personal funds.
2. The uses of funds include payroll or salaries, rent, materials, supplies, land, office space, equipment, warehouse costs, transportation costs, maintenance, marketing, and other overhead.
3. Include ending cash balance for each year. Can also include net present value and internal rate of return calculations.
2. Present a simple pro forma income statement for 3 years after launching. Be sure to discuss assumptions for sales, expenses, and growth.
1. Income should include total sales, less production costs or cost of goods sold, and net or gross margin.
2. Include operating expenses that have been somewhat aggregated and total expenses.
3. Bottom line should list net profit or loss.
3. Start-up and development costs needed before launch (see above). How will they be funded?
4. What are the capital or funds requirements over the next 3 years?
5. What type of accounting system will be utilized? Will it be ready by launch date?
6. Risk assessment: How will you handle extraordinary events (such as changes in demand, turnover, economic conditions, disasters, and employee loss)? How will the risk factors affect the bottom line.
11. Stage of development and the implementation plan (1–2 pages)
1. What resources have already been committed?
2. What stage of development are you in?
3. What needs to be done before launch?
4. When and how will the system be implemented (show timeline here)?
12. Angel and venture capital funding (1–2 pages)
1. How much funding is needed?
2. What are you offering in return for funds?
3. When can your investors expect a return on their investment?
4. What are your projections for the investors’ return on investment?
13. Business plan summary (1 page)
14. Appendices (1–5 pages)
1. Short bios or resumes for principals.
2. Critical financial, operational, marketing, or financial details. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/12%3A_Developing_a_Business_Plan/12.06%3A_Business_Plan_Template.txt |
Investors invest in people and then they investigate the idea.Sahlman (1997, July-August). This is true even when your investors are your family and friends and when economic times are challenging. Superstars in music, cinema, and in baseball garner the accolades and ultimately the money because of their above-average expertise. Music and movie publishers and baseball general managers go to the superstars because they are a known commodity and have a track record for delivering hits. This is also true for start-ups. The investors look at the management team, the CIO, the VP’s of marketing, operations, and finance, and the lawyers in terms of their reputation, education, job history, and previous experiences with start-ups.
Many start-ups have difficulty in getting funds.See the following Web sites for an overview of funding issues and general entrepreneurial concepts: http://www.sba.gov/, http://www.entrepreneur.com/, http://www.nvca.org/ There are a variety of avenues for generating additional funds that do not involve the professional investors. The first search for funds usually includes savings, credit cards, home equity loans, bank loans, and selling equity to family, friends, and selling personal assets. Bootstrapping is the process of starting a business from scratch with little or no outside capital. The goal of bootstrapping is to minimize expenditures and to reinvest the cash flow generated by the start-up back into the business.
Figure 12.1 "Typical Amount of Funds Generated During Business Development" illustrates the typical level of funds that can be generated as the business grows.Applegate, Simpson, White, and McDonald (2010). Figure 12.2 "Funds Generation as Firm Grows" presents additional detail on where funds are generated as the business grows.Applegate et al. (2010).
Figure 12.1 Typical Amount of Funds Generated During Business Development
Figure 12.2 Funds Generation as Firm Grows
Here is a list of additional sources of funding to keep the business going as it grows and that the entrepreneur can turn to in lieu of professionally managed funds.
• Trade credit: Where a business sets up an account with another business and does not have to pay for the goods and services until a certain time period has elapsed (e.g., 30–90 days. Lumber and hardware companies often set up such accounts for contractors.
• Asset-based loan: A business will use its equipment, inventory, or facilities as collateral for a loan.
• Factoring of accounts receivables: A business sells its accounts receivables to the lender or factor. The lender usually handles most of the transactions that occur after the sale, such as sending out invoices and collecting the funds that are owed.
• Loan: Loan is given after the financial statements have been analyzed, a small business credit score is obtained, or both. Could be a bank or some other financial institution or individual. Sometimes involves collateral or assets such as inventory, facilities, equipment or personal assets of the borrower.
• Leasing: The lender purchases the asset and then charges a monthly or some periodic fee for the lessor to use it (purchase of fixed assets by lessor).
• Relationship lending: This is the good buddy loan. The lender has dealt with the borrower in the past and grants a loan because of past success. There is often an ongoing advisory and guidance relationship between the lender and borrower. Could be a bank or some other financial institution or individual.
Sources of funds and their timing depend on the economic context, the type of business, and the capabilities and attitudes of the founders, and these figures reflect averages and processes that are forever changing.
12.08: Angel Investors
Angel investors are very early participants in funding start-ups. When the amount of financing required is <\$1 million, then the start-up should probably approach angel investors. The angel investors are usually not involved in managing the start-up. Angel investments range from \$100K to \$500K. Angel investors usually look for a 20–40% return on their investment after 3 years or somewhere between two and three times their original investment. For example, a \$500K investment would return about \$1M–\$1.5M in three to 4 years with a 25% return. Not all of the investments by angel investors are successful (about 50%). A small percentage of the investments carry the load and subsidize the marginal and failed businesses.Applegate et al. (2010). | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/12%3A_Developing_a_Business_Plan/12.07%3A_Identifying_Potential_Investors.txt |
Venture capital funds are professionally managed funds that provide high-potential start-ups with funds in exchange for management fees and equity or shares of stock in the start-up. Venture capitalists (VCs) invest between \$1 and \$20 million in a start-up, but it can vary. The venture capital funds are themselves funded by wealthy investors. The venture capital funds sometimes charge about 2–4% per year as a management fee. In addition, they charge 20–25% return (sometimes more) on their investment over the course of 5 years. So if a start-up borrows \$5 million from the venture fund, then they may have to pay \$100,000 in management fees per year (at 2%) and then pay out approximately \$13.3 million in 5 years (at 20%) for the return on the VCs investment. The management fee is a kind of coaching or consulting fee. A typical fund can have 15–20 ventures with about half-generating returns. Only a few of the businesses are hits and the hits subsidize the failures and the marginally successful ventures.
Potential Problems with Venture Capital
There has been much criticism in the engineering community in reference to venture capital funds stifling innovation.Stuck and Weingarten (2005). Some of it is related to investing in start-ups with superstar management and some of this is related to the tendency of VCs to pursue incremental innovations where there are lower levels of risk. VCs are not interested in technology; they are interested in adding a business to their portfolio that has a good chance of generating above-average returns. They know that some start-ups will fail, and they rely on their knowledge and expertise and portfolio diversification to deliver a few successful start-ups. The point is that it is hard for the new entrepreneur to make a splash because there are no previous splash patterns. Start-ups with little experience usually rely on the founder’s money, family and friends, and a variety of other approaches to run the company (see brainz.org/startup-funding/ for an excellent overview of nonventure-capital fund sources). There are many opportunities to raise funds outside of professionally managed money and indeed that give the company’s founder a degree of control and flexibility that may exceed the benefits of securing funds that reduce flexibility and control and are accompanied by very high interest rates.
Importance of Market Potential to VCs
VCs are interested in firms that have the potential to acquire substantial market share in large markets.Sahlman (1997). They want to know whether the market is large, whether it is growing rapidly, and whether the start-up can capture some of that growth. They also want to know whether the business is scalable. A scalable business model means that the business can shrink or grow very quickly with minor changes in the cost structure. In the best situation, growth should not increase variable costs and fixed costs (perhaps even decrease variable costs). Ideally, growth should not incur large fluctuations in business processes as new customers are added. Remember, however, that scalable growth is usually scalable within a relatively narrow range.
The potential investors will also want to know whether the start-up can acquire customers and keep them. They will also be interested in the market forecast. Savvy investors will question market forecasts that indicate that the firm will garner either 1% or 10% of the market. The 10% share of the market usually means that the market is relatively small and the start-up needs 10% to break even. The 1% usually means that the market is huge and the start-up will be lucky to acquire even 1%. Market forecasts need to be based on realistic assumptions, rather than based on what makes for easy spreadsheet construction. There should be a strong rationale why the start-up will acquire 10% of the market the first year and increase that share by 20% in subsequent years.
Guy Kawasaki has several good ideas for developing market forecasts. His first idea is to develop a forecast from the bottom-up. In this approach, the start-up would try and identify the number of sales outlets and then estimate how many items might be sold at each outlet. Another example would consist of looking at the number of sales contacts each week for each salesperson and then estimate the percentage that will be successful. This approach, admittedly, also relies on percentages and, in some ways, is also seat-of-the-pants as is the 10% solution. The important point in developing forecasts is to examine and test assumptions and to constantly refine the forecasts. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/12%3A_Developing_a_Business_Plan/12.09%3A_Venture_Capital_Funds_and_Venture_Capitalists.txt |
Suppose you are developing a green or environmentally friendly product line that is particularly attractive because of a government tax credit. What if the government rolls back the tax credit? Or what would happen if a key member of the management team leaves the company? What if interest rates sky rocket? What if a key employee deletes the design specifications of a new product? What if a disgruntled employee destroys the social networking application and backup files? It is impossible to have a fall-back plan for every situation. But if there are key people and key assumptions that will determine business success, then a contingency plan is essential.
Risk is the probability that some adverse event will happen that will have a negative impact on the start-up’s ability to survive. Risk management is an attempt to identify the adverse events within a company and in the external organizational environment, and in turn develop strategies to deal with the consequences. Many of the internal risks to the start-up are related to the critical assumptions involving the tenure of the management team, the ability to attract key personnel, the ability to set up key organizational systems such as operations and marketing, the ability to manage cash flows, and the ability to adapt untested technologies. There are also external industry-related risks related to the ability to forecast market growth, and the risks related to unforeseen competitors and unforeseen emerging technologies that might affect profitability. There are also external risks related to economic downturns, interest rates, government intervention, political movements, and even changes related to social norms. Risk assessment also has to be made in terms of the impact of adverse weather conditions, earthquakes, and other natural disasters.
As noted earlier, there is some danger in pointing out weaknesses and threats, but they need to be addressed in a surreptitious manner. This can be accomplished by presenting alternative scenarios and focusing on the probability of their occurrence. Contingency planning and risk assessment should be addressed in the business plan or at least informally documented and communicated among the founders of the business and key management employees.
12.11: Due Diligence
Professional investors such as angels and VCs, potential employees, and family members use a variety of criteria for evaluating a business plan. The process of evaluating the plan is referred to as due diligence. The Merriam Webster dictionary defines due diligence as:
1. The care that a reasonable person exercises under the circumstances to avoid harm to other persons or their property;
2. Research and analysis of a company or organization done in preparation for a business transaction (as a corporate merger or purchase of securities).
Due diligence can be evaluated in terms of how careful investors are in evaluating a business plan and how diligent the founders are in preparing the business plan. There is evidence that when the investor is duly diligent, the business will have a greater chance of succeeding.Applegate et al. (2010). We also believe that due diligence becomes very important as the business emerges from the conceptualization stage and is being built. Due diligence becomes important when the shoe meets the pavement or rather when the entrepreneur starts interacting with the investor. Here are the modified definitions of due diligence:
1. How wise and careful did the entrepreneur put together the business plan?
2. How wise and careful did the investor examine the business plan?
We usually read about 20–40 business plans per year. We evaluate the plans in terms of organization and format of the plan, writing, and content. All three areas are interrelated, and it is our experience that hard work usually leads to a great format, good writing, and strong content. Table 12.1 "Due Diligence Checklist Questions Asked by Investors, Founders, and Employees" presents an overview of the major due diligence questions asked by investors, founders, and potential employees. It is one checklist that needs to be checked off. Some of the questions are more important to one group than to another. Just go through them before submitting the final plan. One thing is clear, if the writing style is poor and the plan is poorly organized, then it will be very difficult to sell your ideas. At least 2 or 3 people outside of the founding group should be sought to provide editorial support for the plan format and the content to insure that the plan makes sense.
Table 12.1 Due Diligence Checklist Questions Asked by Investors, Founders, and Employees
Yes No Maybe NA Needs Work
Could such a business make money?
Solves a problem or presents unique opportunity?
Is the business concept scalable?
Is the market large and expanding?
Has the target market been adequately identified?
Is the product or service differentiable?
Can customers be acquired at a reasonable cost?
Can customers be locked-in?
Is pricing addressed adequately?
Are current and potential competitors identified?
Addresses competition’s reaction to market entry?
Is the marketing plan adequate and executable?
Is the operation’s plan adequate and executable?
Is the implementation plan adequate/executable?
Are the projected financial statements reasonable?
Can the key management personnel get the job done?
Can the business be built and fulfill promises?
Any hidden traps, oversights, oversimplifications?
Is there contingency planning and risk assessments? | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/12%3A_Developing_a_Business_Plan/12.10%3A_Contingency_Planning_and_Risk.txt |
Since we are on the topic of due diligence, this is a nice segue into the importance of attorneys in developing a business. Guy Kawasaki has identified a number of difficulties that arise when dealing with lawyers.blog.guykawasaki.com/2007/09/the-top-ten-six.html#axzz18O5LrqfG But Kawasaki also believes that lawyers are critical for the success of business start-ups.blog.guykawasaki.com/2007/10/ten-questions-1.html#axzz18OGNAE1M and blog.guykawasaki.com/2007/06/482413_for_lega.html#axzz18OGadUe2 Lawyers and entrepreneurs often have trouble interacting because lawyers focus on what can go wrong and the entrepreneur is the eternal optimist and focuses on getting things done. Entrepreneurs tend to embrace risk and focus on the prize, whereas lawyers tend to be risk averse and focus on what can go wrong. Entrepreneurial enthusiasm tempered with a bit of lawyerly caution can alleviate many hazards on the road to building the business. Lawyers can assist with the following activities:
• They can help in selecting the appropriate form of business incorporation such as a sole proprietorship, a corporation, or a limited liability corporation.
• They can provide guidance on whether you can leave a company and start a business in the same industry.
• They can provide insight and counsel on protecting intellectual property in using copyright, patents, and trademarks.
• They can assist with real estate and rental transactions.
• They can check employee benefits and employment contracts.
• They can provide legal expertise on venture and angel investment funds.
• They can assist in selling the business and going public with the issuance of stock.
A good starting place for information on the selection of legal counsel, working with accountants, and incorporating companies can be found at http://www.entrepreneur.com and http://www.sba.gov/. You probably do not have to include the lawyering and legal issues in the business plan, but you need to be aware that there are numerous legal issues and accounting issues that are looming. Professional expertise is expensive, but in some instances their advice is critical for successfully navigating through the legal and financial systems.
12.13: Conclusion
In this chapter, we have illustrated the process and the elements that are used to develop a full-blown business plan. The key points are the following:
• The FAD template, the Organizational and Industry Analysis template, the Business Plan Overview template and executive summary are used as the basis for developing the full-blown business plan.
• The business plan serves many purposes including serving as a communication tool for investors; it is a scaled-down version of how the business will function and it is used as a platform for communications among the founders, employees, consultants, and mentors; and finally, it can be used as a blueprint for operating the business the first year.
• A business plan template is presented that illustrates the typical sections that are contained in the business plan.
• The writing style, the organization and the formatting are just as important as the content for communicating the essence of the business model.
• It is important to pitch and present the business plan before finalizing the full-blown plan. This will help to bring focus and clarity on the emergent business.
• In many instances, investors invest in the management as much as in the idea.
• Many investors are interested in market potential in terms of the growth of the market and the total size of the market.
• Contingency planning and risk assessment should be addressed in the business plan or at least informally among the founders of the business and key management employees.
• Time, hard work, and attention to details will lead to better business plans.
• Legal counsel and accounting expertise are essential for incorporating the business and providing guidance through the legal and financial systems.
The business plan is presented to the outside world through a business presentation and the presentation leads to the development of a short business plan document. An important part of developing the business plan is the learning-by-doing process. It is important that the emerging company make and build things, try experiments, and construct prototypes. Prototypes need to be constructed as early as possible for tangible products and also for systems applications. As illustrated in Figure 12.3 "Planning Process Is Ongoing an Iterative", the process is iterative and ends only after the business is not in existence.
Figure 12.3 Planning Process Is Ongoing an Iterative
The most important element of the business plan and the business presentation is the “look and feel.” The plan and the presentation should look clean and streamlined. The development of a business model and plan begins with the moment that the entrepreneur has the original aha experience; this is followed with a very brief strategic planning process (we recommend the Ten–Ten approach coupled with a FAD analysis) and this is in turn followed by the development of the executive summary. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/12%3A_Developing_a_Business_Plan/12.12%3A_Legal_Issues.txt |
Project Management for New Products and Services
As discussed throughout the book, there is an overarching business life cycle involving several key development points. These points are primarily under the control of the entrepreneur, the founders, or executive management. They are the initial conceptualization of the business through some form of business plan, the development of the initial business processes using some form of project management, the business launch, the addition of additional controls and structure as the business grows, and finally the re-conceptualization of the business as it begins to decline (Figure 13.1 "Key Management Activities During the Business Life Cycle").
Building-the-Business Phase
Once the business model has been created and the business plan has been developed, the hard work begins. In most situations, everything is new and needs to be built up from scratch. The entire supply chain has to be built and tested to insure that orders for products and services can be accepted, filled, and supported. This is the Building-the-Business phase and it is vital to a successful business launch. As illustrated in Note 13.1 "Key Business Questions Before Launch", several key business questions must be answered before launching the business.
The hard part is to install initial processes or systems to make the business work, and that is where project management is essential. We use the term project management system loosely, since in many instances the system can be self-contained and organized in the mind of the entrepreneur. Nevertheless, the hard part involves building the business to produce the product and deliver the service. This requires project management. Even if you have plans for manufacturing, marketing, and distributing the product, you still need to have a process to accomplish or execute the plan.
Figure 13.1 Key Management Activities During the Business Life Cycle
Key Business Questions Before Launch
1. Where will the product or service be made?
2. Who will make the product?
3. How will it be made?
4. How will orders be tracked?
5. With whom, when, and why will partnerships and alliances be formed?
6. What will the supply chain look like and how will dependencies work?
7. Should supply chain tasks be outsourced, off-shored, or in-tasked?
8. What will the information technology look like in terms of hardware, software, and networking?
9. Are there important issues related to the supply of components/materials?
10. How will order fulfillment work?
11. Are there important issues related to the fulfillment of orders?
12. Where will the organization build core competencies and capabilities?
13. How will employees be acquired and retained?
14. How will business and accounting transactions be handled?
In many instances, entrepreneurs turn to turnkey systems for accounting and inventory management. Turnkey systems are ready-to-go-software, ready-to-go-processes, or both for running a business. Time and effort is still needed to identify the turnkey solution and then more time and effort is required to actually implement it. Some sort of mechanism is necessary for determining what solution fits the business, how the system will be implemented, who will operate the system, and how it fits in with the other business activities. Even if the so-called turnkey solutions have been identified for accounting and inventory management, additional planning is needed for implementing and creating business processes for installing and running the system.
Project management is the tool for executing the plan and installing the business processes. It helps to detail what tasks will be accomplished, who will be involved in completing the tasks, and when tasks should start and finish. The minimal tasks that need to be accomplished for a business to start or launch include marketing and sales, production and operations, staffing, and accounting. In addition, some sort of research and development (R&D) process needs to be initiated soon after launch in order to re-prime the pump. These are the first steps in designing organizations for the long term.
Organizational design involves the simultaneous integration of the tasks that need to be completed by overlaying some type of organizational structure that uses a blend of technology and people to fulfill the organizational mission.Adapted from Leavitt (1965). Here are the Building-the-Business functions and critical questions that need to be in place before or soon after launch:
• Need a marketing function or system:
• How will you promote your product or service?
• What techniques will you use to acquire customers?
• How will you retain and lock-in customers?
• How will you distribute and sell your product?
• How will you support your customers and maintain an ongoing relationship?
• How will you track customer satisfaction?
• Need an operations or production function or system:
• Who will design the product/service and where will product/service design take place?
• Where will the product be made and who will make it?
• How will it be made?
• Who will supply the components and materials?
• How will the company keep track of finished goods inventory, components, and raw materials and track the production process?
• How will order fulfillment take place?
• Need a human resource function or system:
• What kind of and how many employees are needed to run the business?
• Where will we recruit employees?
• What criteria will be used to select employees?
• How will performance be evaluated and rewarded?
• What kind of compensation incentives will be offered (salary, stock options, and benefits)?
• How will employees be trained and developed?
• Need an accounting function or system:
• How will you keep track of business transactions?
• How will you track business performance?
• How will the company handle accounts payable, accounts receivables, general ledger, purchase orders, and payroll?
• Need an R&D function or system (immediately after launch):
• What organizational functions will be involved in product development and deployment?
• Who, where, and how will R&D (learning-about and learning-by-doing) be conducted?
• How will product and service development and deployment be evaluated?
• How will scientific, product, and organizational knowledge be retained and utilized (knowledge management)?
• Need legal counsel and assistance:
• Assist in selecting appropriate form of business.
• Assist with real estate and rental transactions.
• Assist in developing contracts for employee benefits and employment contracts.
• Provide legal expertise on venture and angel investment funds and with initial public offerings of stock and related financial funding issues.
• Assist in protecting intellectual property in the form of copyrights, patents, and trademarks.
Even the simplest start-up company has to accomplish the functions described above in some capacity. These systems may be in the mind of the entrepreneur and also executed by the entrepreneur, but they are still necessary for survival. There are other system processes that need to be in place as illustrated in Figure 13.2 "Systems Emerging Over Time". These systems or functions typically emerge and evolve as the business grows and prospers. A good way to consider the complexity of a large business is to think about the components of the supply chain. This is again illustrated in Figure 13.3 "Large Organizations Need Many Systems and Structures" where a number of critical processes need to be in place for a large and growing supply chain. In larger organizations, these activities are part of a more formal approach. The formal approach is project management. If a business only has one employee, the entrepreneur, then all the systems will be conceptualized and executed by the entrepreneur. However, even in a small, one-person operation, understanding and implementing some type of project management is necessary in order to deal with the complexity of the start-up process. Just having a checklist of things to do and things that have been accomplished will help in dealing with the overwhelming complexity of launching a start-up.
Figure 13.2 Systems Emerging Over Time
Figure 13.3 Large Organizations Need Many Systems and Structures | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/13%3A_Project_Management_for_New_Products_and_Services/13.01%3A_Building-the-Business_Phase.txt |
Project management involves time and effort, but it can also be a friend of the start-up. There are two reasons that project management is important. First, project management assists in dealing with complexity and time pressure. Many organizational tasks are difficult, and from the perspective of the entrepreneur, they are close to rocket science because the number of hands for completing tasks are so few. Project management is structured problem solving and it assists with problem decomposition and with managing the risk inherent in product and service development. Even though the focus of this book has been on product differentiation, many products and services also suffer from too much differentiation and feature creep.
Features are critical for maintaining an edge over the competition in the context of monopolistic competition, but there is some point where products need to be delivered and specifications stabilized. Project management is there to assist in converging on a satisfactory solution to problems related to delivering products and services by freezing the specifications. The specs are not frozen for long; perhaps a couple of weeks, a month, or even two, until it is time to renew the innovation process and develop an upgraded product.
Another important feature of project management is that it is very useful in developing and maintaining localized managerial and scientific knowledge related to core competencies and know-how. Project management assists in formalizing the learn-by-doing and learning-about processes into the genetic foundations of the emerging organization.
13.03: What is a Project
The Project Management Institute, an organization that sets industry standards in project and portfolio management, conducts research and provides education, certification, and professional exchange opportunities for project managers, defines a project as: “a temporary endeavor taken to create a unique product, service, or result.”Project Management Institute (2004). Temporary means the project has a definite beginning and end. This applies to the project, and not necessarily to the product, service, or result. All the systems that need to be built by the entrepreneur and his or her partners are basically projects.
Typically, projects progress in steps or incremental stages. The goal of a project is to reach a stated objective, and then terminate, passing results to ongoing operations. Initiation of projects is usually due to a market, customer, or organization demand, a technological advance, or a legal requirement. Figure 13.4 "Project Management" presents an overview of the project management process.IPS Associates (1997). It is sometimes referred to as a waterfall process because the process is typically sequential or linear.
Figure 13.4 Project Management
In many instances, project management can be carried out in a linear fashion. Linear projects follow the waterfall approach to project management. That is, the activities for completing the project are sequential and each separate activity follows in a more-or-less precise order. In general, the linear approach is amenable to very straightforward projects. Many of the activities related to setting up accounting systems, human resource systems, and many inventory management systems could be handled using the linear approach to project management.
There are instances where the project to be accomplished cannot be solved using a linear project management approach. Some projects are very complicated, with very loose specifications, and the final outcome in terms of success and features of the product are unpredictable. For example, new product development in the nanotechnology area where there are few products with similar features and the territory is largely uncharted needs a different approach to project management. Many of the emerging software applications involving social networking and game development also need a different approach. Agile project management is suitable in situations where learning-by-doing plays a more dominate role in product development. Discovery is the key as new territory is charted and the solution to the problem unfolds. Scrum development is one example of an iterative and agile approach to project management.Cf. Takeuchi and Nonaka (1986). The key difference from the traditional, waterfall process is that the agile process will be iterative and occur many times.
Regardless of the process, there are several tools that may be used to help manage a project and to communicate to the project team. There are of course sophisticated approaches and tools to managing the process as well as software tools for tracking projects. The simplest of tools includes a diary that can be used to track the amount of time that is spent on project activities. Section 13.8 "Exhibit 1: Project Management Individual Diary" is a sample Project Management Individual Diary for the initiation of a new business, as outlined earlier in the chapter. This diary outlines the tasks or activities needed to complete the project or subproject. Section 13.9 "Exhibit 2: Project Management Summary Diary" presents the Project Management Summary Diary, an aggregation of the individual project tasks used to manage projects.
Another useful tool is the work breakdown structure (WBS). The WBS is always based on the project deliverables, rather than the tasks needed to create those deliverables, and is built from the top-down. It is constructed through decomposition. Deliverables are broken down into progressively smaller pieces. The result is a graphical, hierarchical chart, logically organized from top to bottom. Figure 13.5 "Work Breakdown Structure" represents a portion of a simple WBS.
A Gantt chart is another very useful tool for understanding where a project has been, where it is going, what tasks need to be completed, and the tasks that have already been completed. Bar charts, or Gantt charts, show activities represented as horizontal bars and have a calendar along the horizontal axis. The length of the bar corresponds to the length of time the activity should require. A bar chart can be easily modified to show percentage complete (usually by shading all or part of the horizontal bar). It is considered to be a good tool to use to communicate with management because it is easy to understand at a glance. A typical Gantt chart for a project is illustrated in Figure 13.6 "Gantt Chart".
Figure 13.5 Work Breakdown Structure
Figure 13.6 Gantt Chart | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/13%3A_Project_Management_for_New_Products_and_Services/13.02%3A_Why_Project_Management_is_Beneficial.txt |
There is extensive literature by academics and practitioners on why businesses and projects fail. There is some agreement that management commitment and participation, along with involvement of employees, are the key success and failure factors, but after that the literature is somewhat confusing and inconclusive.We have been involved in several research papers on the subject including Garrity, Glassberg, Kim, Sanders, and Shin (2005) and Garrity and Sanders (1998). Note 13.7 "Watch Outs During Project Management" presents a few of the areas that can cause problems and perhaps even cause the project to fail. These issues should be treated as watch outs.
Risk is inherent in all businesses and projects. It is virtually impossible to make everything perfect and deliver a perfect product or service. Guy Kawasaki in Reality Check is very aggressive in his view of launching a new product or service.Kawasaki (2008). He states “Don’t worry, be crappy” and thinks that it is acceptable to ship a version of a product with elements of crappiness. He believes that the crappiness can be subsequently fixed in version 2.1 of the product. Kawasaki has a number of very insightful views on the innovation process as illustrated in Note 13.8 "Kawasaki Insights".
Watch Outs During Project Management
• Management did not spend enough time and resources on the project and/or business.
• The employees that were to use a system were not sufficiently involved in the development.
• Insufficient resources were allocated to the project. This includes money, technology, time, and staff and others.
• The function or process was not developed to match the tasks that were to be accomplished.
• The system interfaces were poorly designed.
• Not enough time to complete the project and too many competing commitments.
• Too many changes were made to the original specifications of the project.
• An emerging and immature technology was not ready for prime time.
• There was no demand for the business or the project.
• There was little if any project management.
Kawasaki Insights
“Innovation had better create wealth because it is so damn hard to do.”
• Build something that you want to use. Don’t look towards the “visionary entrepreneurs” (that is a “crock of bull shitake”). People start companies because they want to use the products or services they create.
• Make meaning. Great innovations enable people to do something better or permit people to do things they never wanted to do. For example, the iPad, iPod, iPhone, the Frisbee, and auto global positioning system.
• Jump to the next curve. Most companies spend all of their time duking it out on the same demand curve. True innovation occurs when companies jump to the next demand curve. We do not need icehouses and landline phones anymore.
• Don’t worry be crappy. It is ok to ship an innovation with elements of crappiness. First versions are seldom perfect and you will never ship if you wait till it is perfect.
• Churn, baby churn. It is all right to ship with elements of crappiness, but you should not stay crappy. You need versions 1.5, 1.9, 2.0, and so forth. Employees do not want to hear about product complaints during launch. They just want to ship. “Innovation is not an event it is a process.”
• Don’t be afraid to polarize people. Deliver great products and do not worry if your product does not appeal to every demographic, socioeconomic, and geographic location. You want to incite passion in the marketplace.
• Break down barriers. It takes a long time to gain acceptance in the marketplace. Do not become flustered when acceptance is slow. You need to keep on chugging and get people to test drive your innovation.
• Let a hundred flowers blossom. Be flexible in how people use your products. People used Apple for desktop publishing rather than use it for the spreadsheet, word-processing, and so forth. Recall that Avon Skin-So-Soft was also used as a bug repellent.
• Think digital act analog. Use all of the technology to deliver innovation, but remember it is the happy people and not the coolness of the technology that is important.
• Never ask people to do what you wouldn’t want to do. If the product solves a great problem and it is hard to use, then it will not stick.
• Don’t let the bozos grind you down. Do not let influential people outside of the company influence you. Stick to your knitting. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/13%3A_Project_Management_for_New_Products_and_Services/13.04%3A_Launching_the_Business_or_Project.txt |
There comes a time when a decision has to be made when to launch the business or project. Problems inevitably arise as the launch date approaches and the question whether to continue with the launch date or delay it looms its ugly head. Delaying a launch after the date has been announced can adversely impact the employees of a start-up and create a negative view of the business by consumers and the media. We have developed a very simple set of questions that can be used to ascertain if the launch should go as scheduled.Varianini and Vaturi (2000). The questions are outlined in Figure 13.7 "To Launch or Not to Launch: These Are the Questions".
Figure 13.7 To Launch or Not to Launch: These Are the Questions
There is no simple answer regarding the decision to launch, even in the face of numerous deficiencies and potential problems. Sometimes it only takes a negative answer to only one question and the launch should be delayed. If a new online banking service is being launched, then any hint of problems should preclude launching. In some instances, there can be numerous problems with a product and downloading software patches can alleviate them. Online gaming developers are notorious for launching software with numerous bugs. It is a very contextual decision and dependent on the product features and what the product will be used for.
13.06: Growing Up and Professional Management
Growing pains are an inevitable part of life for the start-up and they begin to emerge soon after launch (see Figure 13.1 "Key Management Activities During the Business Life Cycle"). They are impossible to avoid because the world is not stagnant. The entrepreneur may not be looking for stability and consistency in the face of market dynamics and change, but the organization and the employees are looking for stability and consistency. Organizations and organizational members seek control in the form of standardized, coordinated business processes and systems; they want well-defined, enriched, and specialized jobs; and they also want salaries and benefits with the potential to grow. Small companies with astute founders can manage and perhaps even perform these tasks admirably. As the business grows, there may be a need to hire professional managers with the knowledge and skills to implement better practices.
Growing up does not mean that the founder should be ostracized or relegated to honorary duties. This may in fact put the organization at risk. The founder may have a certain entrepreneurial mojo that cannot be replaced. Steve Jobs had an almost magical power to guide Apple in the right direction. The company certainly performed better under his leadership than when he was away. Identifying professional managers is itself a project, requiring project management. Deciding on how to manage and guide the growth of the business is a key decision for survival.
Growing up also means that there are more groups that are trying to protect their own turf with somewhat unique objectives. This includes operations, managerial accounting, marketing, human resources, and product design groups. The six hats approach discussed in a previous chapter can help to reconcile conflicts during meetings, but a new organizational process for product development may be necessary in order to reconcile the inevitable differences that will occur when the functional silos begin to emerge. Concurrent engineering may be a solution for organizations as they become larger and more complex.
Concurrent engineering is the simultaneous design and development of a product and the manufacturing process for building a product.Anderson (2010). An important part of concurrent engineering is the use of multifunctional teams. Concurrent engineering design teams are typically very comprehensive. They could include customers, suppliers, workers, dealers, regulators, design and manufacturing engineers, purchasing, materials managers, marketing managers, customer support, and financial and accounting representatives, among others. The objective of assembling such teams is to instill the diversity of opinion into the design and manufacturing process. Using such teams also forges trust among the parties and can also help to develop organizational knowledge that can be used to reduce development times for new products. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/13%3A_Project_Management_for_New_Products_and_Services/13.05%3A_Launch_Date.txt |
In this chapter, we have illustrated that the business cycle for a new venture involves several development points, mostly under control of the entrepreneur. The key takeaways include the following:
• Project management is the primary tool for executing the business plan, installing the businesses processes, and achieving the strategic ambitions of the entrepreneur.
• Project management helps to detail what tasks will be accomplished, who will be involved in completing the tasks, and when tasks should start and finish.
• Typically, projects progress in steps or incremental stages; however, other approaches for rapid, interactive project management are also widely used.
• Several tools can be used to manage the project and communicate timing and status, including task diaries, WBSs, and Gantt charts.
• Projects fail for many reasons. It is management’s responsibility to determine whether the inherent risks in the project can be accepted and the project can be launched, or whether the project be delayed.
Project management is not a panacea, but rather a critical tool in the never-ending process of growth and renewal of the business. It allows the entrepreneur to minimize and mitigate inherent risks and increase the potential for success of the launch and the ongoing operations.
13.08: Exhibit 1- Project Management Individual Diary
(This is used by an individual to track how much time is spent on project activities.)
Group Number and Group Name Project Description Individual(s) Preparing Review Date
Legal Team Project Firestorm Norma Gleeson 4/1/11
Task or subtask Date Hours worked What’s going well? What’s not going well? Additional resources (people, technology) required? Are users and management participating?
Needs assessment conducted 2/12/11 8 Cross-functional team, including management. Requirements have been documented and agreed upon.
Name search conducted, name approved 2/14/11 4 No issues.
Real estate search conducted 2/19/11 40 Various properties researched and visited.
Rental contract signed 2/21/11 4 Ahead of plan.
Incorporation paperwork completed and filed 2/21/11 40 No issues.
Incorporation status completed. 3/3/11 16 On target with plan.
Investors contacted for funding opportunities 3/31/11 36 In process.
13.09: Exhibit 2- Project Management Summary Diary
(This diary is an aggregation of the individual project diaries.)
Group Number and Group Name Project Description Individual(s) Preparing Preparation Date Review Date
PMO Project Firestorm James Xu 2/11/11 4/1/11
Task or subtask Assigned to Date Hours scheduled Hours accumulated Precent completed What’s going well? What’s not going well? Additional resources (people, technology) required? Are users and management participating?
Requirements gathered James Xu 2/16/11 40 32 100
Team development and project planning James Xu 2/16/11 8 8 100
Legal plans Norma Gleeson 3/3/11 240 240 100
R&D plans Garry Hall 3/10/11 480 540 100 Over budget due to expanded scope.
Accounting plans Michel Bulan 3/24/11 240 240 100 On budget and on plan.
HR plans Davis Wilson 3/31/11 440 420 100 Completed under budget and ahead of plan.
Funding and investments Norma Gleeson 5/5/11 480 240 50
Employee recruitment Davis Wilson 6/23/11 480 0 0
Employee contracts Davis Wilson 7/7/11 80 0 0
Development Garry Hall 11/10/11 960 0 0
IP (patents) Norma Gleeson 11/10/11 730 0 0 | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/13%3A_Project_Management_for_New_Products_and_Services/13.07%3A_Conclusion.txt |
Re-priming the Business Using Real Options Concepts
It does not matter how innovative or how much money the current business is making. There is a life cycle for products and technologies, and eventually, the business will decline unless it can find new opportunities. The business needs to be constantly re-primed with new products and services or it will fade and dissolve (see Figure 14.1 "Critical Organizational Activities During Business Life Cycle"). Critical to re-priming a business is scalability of the business. Scalability means that the business can shrink or grow very quickly with minor changes in the cost structure. Ideally, the ability to grow will not require a large change in variable costs, perhaps even decreasing variable costs and little increase in fixed costs. In addition, a scalable business should be able to handle a large influx of new customers and still be able to handle them without having to drastically change business processes. However, scalability cannot be achieved without investing money and time in stepping stones for future business that provide the business with options. For this reason, real options concepts can be used as the catalyst for differentiation and to re-prime the business pump. This chapter will focus on how real options concepts can be used as the foundation for continually reinventing the business.
Investment Decisions
Making the right investment decision on the right projects and the right products at the right time is a combination of having the right information, intuition, and luck. As Figure 14.1 "Critical Organizational Activities During Business Life Cycle" illustrates if there is a process in place for differentiation and new product development, then the decline of the business may be alleviated. There are choices and decisions to be made related to populating the product and project portfolio. These are the critical investment decisions that the entrepreneur has to make. Figure 14.2 "Risk Is Inherent as You Get Closer to the Top" illustrates that the potential profitability is greater as you climb up the inverted pyramid, but there are also greater levels of risk and uncertainty toward the top. All businesses face the following investment decisions while climbing the reward pyramid:
Figure 14.1 Critical Organizational Activities During Business Life Cycle
Figure 14.2 Risk Is Inherent as You Get Closer to the Top
• Maintenance decision: They can maintain their current investment in products, projects, machines, and technologies. This also takes into account investment to deal with depreciation. This is the maintain option. The goal of the maintain strategy is to keep current customers with existing products and services. Learning-about and learn-by-doing are maintained at current levels.
• Growth decision: They have the option to invest a little or a lot in new products, projects, machines, and technologies. There is a step-up in learning-about and learning-by-doing. This is the growth option and it includes a number of approaches:
• Differentiate by scaling-up existing product line. Scaling up your investment and investing even more. For example, adding features for Midas customers and acquiring new Hermes customers on the existing demand curve.
• Differentiate by scoping-up and developing complementary products for existing product line.
• Differentiate by scoping-up and developing new products that are not part of the existing demand curve.
• Differentiate by switching-up the growth path. A switching-up decision incorporates both growth and abandonment options. When a company makes a switch-up decision, it may discard previous investments and take a different path for growth based on the capabilities accumulated from the previous investments. It typically concerns a switch of input, output, or location. For example, instead of using technology A, a firm may use technology B to produce the same thing. Instead of using the current machine to produce product X, a firm may produce product Y (cf. flexible manufacturing system). A company can switch among locations for research and development, manufacturing, distribution, and so forth.
• Develop new Blue Ocean market. This involves scaling-up, scoping-up, and switching-up. This can be a substitute product that competes with an existing line.
• Abandon decision: They have the option to abandon investing in new or existing products, projects, machines, and technologies. The abandon strategy relates to the inadequacy of the current business model and the need to bail.
• Postpone decision: They can defer investing in a product or a technology until a later date. Some investment might occur in the form of monitoring and very early exploratory work. The major investment includes learning-about in the form of search and synthesis.
There are three primary approaches for evaluating investment decisions. They are payback, discounted cash flow analysis, and real options analysis. We discussed the discounted cash flow techniques in the last chapter. The focus of this chapter is on real options analysis.
14.02: Real Options
Amazon was incorporated in July of 1994.phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-faq Amazon reported its first-ever profits of \$5 million (a penny a share at a \$12.60 closing price) in the fourth quarter 2001 over 7 years after selling its first book.http://news.cnet.com/2100-1017-819688.html I doubt that most investors using net present value (NPV) and internal rate of return (IRR) analysis would have been willing to wait so long to receive such a modest return. Profits in the fourth quarter of 2009 were \$384 million (85 cents a share).http://online.wsj.com/article/SB10001424052748704878904575031504159206726.html As Jeff Bezos noted in his articulation of Amazon’s strategy:
We start with the customer and we work backward. We learn whatever skills we need to service the customer. We build whatever technology we need to service the customer. The second thing is, we are inventors, so you won’t see us focusing on “me too” areas. We like to go down unexplored alleys and see what’s at the end. Sometimes they’re dead ends. Sometimes they open up into broad avenues and we find something really exciting. And then the third thing is, we’re willing to be long-term-oriented, which I think is one of the rarest characteristics.Lyons (2010a, January 4).
NPV, IRR, and payback approaches may not be suitable for pursuing projects that will provide a competitive edge. The benefits of new technologies sometimes result in very strange NPV calculations that are either very high or very low. They are difficult to apply in situations involving emerging technologies where some level of investment is required in order to examine their long-run potential. There are inherent difficulties in data collection, decision analysis, and risk assessment when new and emerging technologies are involved. To put it bluntly, it is very difficult to apply discounted cash flow techniques for analyzing Blue Ocean markets. Real options can play an important role in developing a diversified product and technology portfolio for competing in dynamic environments. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/14%3A_Re-priming_the_Business_Using_Real_Options_Concepts/14.01%3A_Investment_Decisions.txt |
A real option is a decision or choice to invest a little or a lot in a product, a technology, or a project. They are called real options because they are investments in tangible assets, products, processes, and services rather than financial instruments such as stocks. For financial investments, option-pricing techniques are heavily used to take into account the flexibility issue. The most popular is the Black–Scholes option-pricing model where the option value is determined by five input values of the exercise price of an option, the time to exercise date, the current price of the asset, the variance per period of rate of return on asset, and the risk-free rate of interest. If you plug all these values into the Black–Scholes option-pricing model, you would get a positive value (do not forget all options have a positive value). This is the option value. This value would be added to the NPV analysis. So, what is initially a negative NPV would become a positive NPV once the project’s option value is incorporated. This calculation looks very simple. However, investments in technology differ from those in financial assets in terms of priceability and tradability of the underlying asset. Contrary to financial investments, in technology investment situations, the price of an underlying asset is hard to know, and the underlying asset cannot be traded easily.
The purpose of a real option is to explore the potential of a product or new technology. Car manufacturers are constantly making small investments (from their perspective) in emerging technologies. They purchase real options in fuel technologies, engine technologies, drive-by-wire technologies, steering and braking technologies, advanced construction materials, and design. Sometimes they invest a little money and just search for information and try to understand whether a technology is applicable and cost-effective. Sometimes they invest a lot of money and develop full-blown prototypes using a variety of technologies and showcase the technologies in the so-called concept cars. Sometimes they decide to go whole-hog and develop a fresh line with modern features and technologies. Sometimes they just abandon a product or a technology completely.
Amazon did not just settle into the production of the Kindle e-book. They explored various technologies such as the screen technologies, the book delivery mechanism, and the file format for storing the books as well as if consumers would be interested in reading e-books.
The following example illustrates how a real options analysis can be conducted.
Jin Beans Tonic Elixirs
Jin Beans Tonic Elixirs produces exotic health drinks containing a combination of vitamins, herbs, fruit extracts, and supplements.The company used in the example is fictitious. Jin Bean is a compendium of numerous examples of actual companies that have decided to go ahead with an investment in the face of negative values for NPV. See Mauboussin (1999); Mun (2005); Trigeorgis (1996), for additional examples that also include financial calculations. The competition is fearless and they compete with a number of highly competitive vitamin water, energy drink, and sports drink and boutique drinks in the water industry. They are known for delivering healthy drinks in unique high-quality safe plastic biodegradable containers. The super high quality of their ingredients, the design of their bottles, as well as the design of their labels set them apart from the competition.
Most of their bottles are being produced overseas and because they change the design of the bottles every 2 months, the cost of design, development, and delivery is very high. They are exploring the idea of manufacturing the bottles at each of their five bottling centers in the USA. This will require the purchasing of injection blow molding equipment (see Figure 14.3 "Blow Injection Molding Diagram", for an overview of the blow molding process).
Jin Beans Real Option Decision
The president of Jin Bean’s assembled a group of financial analysts; the marketing department and the operations department conducted a study to ascertain the cost of switching bottle production in-house. They determined that it would cost the company an additional \$1 million per year to purchase the machines, hire staff, and maintain the machines over what they are currently paying to import their bottles. Each machine costs \$250,000 and will involve personnel costs and maintenance costs exceeding \$100,000. No matter how they put the numbers together, they could not generate a positive NPV. Even though the figures did not look good, the presidents of Jin Bean decided to go ahead and purchase one machine and install it in Florida. The decision of Jin Bean’s president was based on her knowledge of real options analysis. By purchasing and using one machine, they were able to learn and conduct an economic experiment. The company could obtain insight and also acquire the flexibility to expand in the future as the effect of the investment on the bottom-line gets clearer and knowledge about the use of the machine is accumulated.“Permission is granted to copy, distribute and/or modify this document under the terms of the GNU Free Documentation License, Version 1.2 or any later version published by the Free Software Foundation; with no Invariant Sections, no Front-Cover Texts, and no Back-Cover Texts. A copy of the license is included in the section entitled GNU Free Documentation License.” http://commons.wikimedia.org/wiki/File:Blow_molding.png
14.04: The Influence of Interaction Effects on Investment Decisions
New investments can interact positively or negatively with existing assets of the firm. For example, when Amazon started offering electronic books (Kindle) and electronic audio (Audible), there was an obvious and natural synergy with existing content and their core competencies. These investments improved Amazon’s strong performance because they complemented existing company assets. When Amazon began adding tools and a variety of other home improvement products and then started selling groceries in certain markets and branched out into cloud computing, there were concerns related to synergy. Part of the answer relates to Amazon’s core competencies. Amazon is good at online retailing and it is very good at maintaining a very scalable and robust server and processing infrastructure. They had core competencies that were transferable to those businesses.
There are numerous examples where an investment lacked synergy with existing assets. Many believed that eBay’s acquisition of Skype was ill conceived because there did not appear to be any positive synergies between the businesses.http://dealbook.blogs.nytimes.com/2010/03/15/skype-poised-for-a-big-initial-stock-offering/ The businesses did not appear to mesh and the executives at both eBay and Skype were constantly fighting. eBay eventually sold Skype at what was considered a very modest amount. In some ways, eBay’s competitive advantage was undermined because of the relationship. The interaction effects between eBay’s assets and Skype’s assets were negative. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/14%3A_Re-priming_the_Business_Using_Real_Options_Concepts/14.03%3A_The_Role_of_Real_Options_in_Investment_Decisions.txt |
A new investment may force competitors to think about their existing investments and engage in counterinvestments to compete with a new investment. These competitor reactions or counterinvestments made by competitors can affect the revenue base and cost structure of a firm in the long term. This is part of the reason that first-mover advantages are transient. If a move appears to be threatening, then competitors may invest substantially more in the technology or product in order to catch up and perhaps even surpass the first mover’s investment. The net effect is that the new entrant can dilute earnings and performance. An investment that is projected to produce profits can prompt the competition to overreact and invest at higher levels than expected. These types of responses are common in the consumer electronics marketplace and, in general, are found in many types of markets.
When Amazon entered the cloud-computing market in 2006 with the introduction of Amazon Web Services, there was a definite reaction by many companies, some of them were competitors and others were just interested. Data storage vendors, CPU and hardware manufacturers, infrastructure companies, operating systems companies, service providers, consulting companies, ERP vendors and application software developers took note. Many of these companies responded by investing more and more money in cloud computing. Amazon’s continued pursuit of the growth option in cloud computing was in turn answered with many other companies pursuing a growth option in cloud computing. Dell, for example, invested more than a billion dollars in cloud computing.
14.06: The Strategic Actions Model- Combining Interaction Effects and Competitor Response
Figure 14.5 "Strategic Action Framework (Modified from Kim and Sanders)" illustrates how these two dimensions can be combined to provide guidance into the investment decision process. The implication is that when there are positive interactions with existing capabilities, then growth options should be pursued. If competitor reactions are low, then an aggressive growth option should be pursued. When competitor reactions are high, then a switching-up option should be pursued. The point is if there are strong competitor reactions, a company may want to change its future investment for growth, even if the interaction effects are high.
Risk enters into the framework when the synergies between existing competencies are low and competitors are not responding. The implication is that the technology may not be important and there is little reason to pursue it if the market is not responding accordingly. The other tricky quadrant occurs in the instance where there is a competency and interaction effects and competitors are not signaling that it is important. In that instance, the product or technology may need to be monitored closely.
Figure 14.5 Strategic Action Framework (Modified from Kim and Sanders)
14.07: The Project Selection Model- Considering Risk and Reward
After a company decides on a strategic action to pursue based on the strategic action model, it needs to decide how it will proceed with the action, that is, what kind of project it will launch to implement the action, how much risk it can bare and how much of a reward it wants to gain. Most companies want to minimize risk and maximize reward in launching a project. O’Sullivan and DooleyO’Sullivan and Dooley (2008). have categorized projects in terms of their risk and reward as being pearls, oysters, bread and butter projects, and white elephants (see Figure 14.6 "Project Categorization (Modified from O'Sullivan and Dooley)"). It would be nice if all investments translated into pearls and a few ended up being successful oysters, but that is not possible. Therefore, when selecting a project, companies take into account the strategic action they will pursue. For example, if the strategic action chosen is aggressive growth, it may want to develop a project falling into the category of pearls. If the strategic action chosen is switching-up growth, it may want to develop a project falling into the category of oysters. On the other hand, if the strategic action selected is postponement, it may want to play with a bread and butter project, a small, simple, low-risk project, and wait for additional information.
Figure 14.6 Project Categorization (Modified from O'Sullivan and Dooley)
14.08: Conclusion
In this chapter, we have discussed real option concepts and strategic action framework. The key points are the following:
• It is often difficult, if not impossible, to use the financial techniques including discounted cash flow, NPV, and economic value added to justify an investment in certain projects, “exploratory” or “experimenting” or learning projects in particular. The “Jin Beans Tonic Elixirs” case nicely illustrates this very point.
• Firms should keep options open under the conditions of uncertainty and irreversibility and develop a portfolio of investment opportunities. Firms can defer “commitment” under uncertainty and irreversibility. This way of thinking can make a big difference for firms’ strategy, including portfolio decisions, mergers and acquisition decisions, governance choice, technology adoption decisions, and so forth.
• To develop a portfolio of investment opportunities, firms need to keep monitoring risk, assessing market trends, and trying new things on a small basis of experimentation.
Investment decisions are never easy. Cash flows, whether they are positive or negative, are fraught with uncertainty. Selecting the appropriate discount rate is never easy, but it has a dramatic influence on the go/no-go decision. Technical analysis using discounted cash flow techniques does not alleviate the uncertainty and does not permit hunches and intuition. One student noted that his presentation in another class was marked down because he had a hunch that a company should invest in a project, even though the NPV analysis was unfavorable. After discussing the issue for a short time, I let him in on the great secret that was revealed to me by one of my mentors after I had spent days trying to justify a modest expenditure using return on investment calculations. He told me to tinker with the numbers until they fit the desired outcome. Investment in emerging technologies and a new product line rarely result in positive NPVs unless the data have been cooked. Real options when combined with the development of a product and project portfolio can bring truth, beauty, and enlightenment into the investment process.
Real options concepts can be applied in a variety of ways. Smaller organizations can focus on learning-about by investing in education, reading high-tech magazines and trade publications, attending trade shows, and attending research conferences. Larger organizations can use real options as the basis for learning-about as well as investing in basic research and using learning-by-doing strategies to develop prototypes. The important point is to keep ones options open and to develop a portfolio of investment opportunities. Important activities included in the development of the portfolio include monitoring risk and frequent monitoring and assessment of the product and project portfolio by a cross-functional team of key personnel who understand and are aligned with the business mission. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/14%3A_Re-priming_the_Business_Using_Real_Options_Concepts/14.05%3A_The_Influence_of_Competitors_Response_on_Investment_Decisions.txt |
Carol RothRoth (2011). is convinced that most people are not right for entrepreneurship. Some people try to become entrepreneurs because they want to be the boss; but they end up working for more people. They end up working for investors, lenders, landlords, customers, suppliers, and even their employees. Some people think that if they start a business involving their favorite hobby, they will have more time to spend working on the hobby that they love. The reality is that they end up spending less time on the hobby and more time running the business. Baking cakes is different than running a bakery.
The business of the entrepreneur is primarily about designing and maintaining business systems.Gerby (1995). As illustrated in the project management chapter, there are at least 30 main activities and systems that have to be attended before launch date and very few involve cake baking and decorating. After one of my students filled out the Ten–Ten business template, she told me that her life-long desire to own a florist shop was gone. The two templates can be filled out very quickly, but they also highlight the numerous details that eventually need to be dealt with before launching the business. Filling out the simple templates and preparing an executive summary is a good check on reality.
Roth’s other contention is that most of the great ideas for businesses are already taken. And she argues that the value of a business is not in the idea, but in the execution. We agree, in part. The best execution of an outdated idea can surely lead to failure. Where are the old icons of the music industry, how about telegraphy, where are desktop PCs headed, and what about those old persimmon woods? The key for survival is product differentiation coupled with improving execution and driving down costs. The key is the dynamic tension created from developing Midas and Hermes versions of products and services.
Ideas for products do not seem to be diminishing, but rather increasing. Compared with the approximately 49,000 patents granted in 1963, there were over 244,000 patents granted in 2010.Visit the U.S. Patent Office at http://www.uspto.gov/web/offices/ac/ido/oeip/taf/us_stat.htm Knowledge development and the ensuing products and services are the result of the cumulative progression of ideas over years, decades, and even centuries.Cf. Garud and Nayyar (1994). The foundational knowledge for a simple digital voice recorder are the results of discovering the properties of metals, research in physics on ferromagnetic theory, and the development of electronics components such as vacuum tubes in the late 18th century and earlier. The world of today is truly built on the shoulders of ancient ideas.
I am constantly amazed at the diversity of products and services students develop for term projects in my class. They include a robotic surgical simulator, a 100-amp cable dispenser, an online animated user manual development system, an organic chemistry tutorial system, a penny auctioning site where anyone could offer a penny auction, various smartphone apps, numerous shopping assistance applications, a franchise system for asphalt sealing, generic mentoring software, home, pet and child monitoring systems, home improvement and emergency repair services, a variety of health monitoring and health-related products, adult pajamas with footies, an atomic scale measuring device, different types of cloud-computing systems, and many others. Because of my ongoing interest in global positioning system technology, there have been several products related to bus scheduling, tracking assets, and social networking. I am still amused by the Smell-Me-Up-Clock that produces smells, such as coffee brewing, to wake a person up. I am also bemused by the Rent-a-Friend. It was funny and provided a poignant commentary on contemporary society.
Several projects have been or are in the process of being patented, including a technology that isolates atoms and molecules and then measures the effect of electrical and mechanical stimulus on atoms and molecules. Then there was the hockey puck that had radio-frequency identification (RFID) chips embedded in the puck that could be used to determine when a gala was scored. The prototype for the puck was developed using 3D printing technology. Another interesting product was the improved lightning arrestor device used by utility companies that would last longer and perform better.
The point is that there are many new opportunities for new businesses, but there are also many good ideas for improving existing companies. Many of the projects developed in the class are related to improving existing businesses and improving existing versions of products and services. Monopolistic competition is relentless. If a business does not make little and sometimes big tweaks to products and services, it will become a business footnote. The ideas and concepts presented in this book will not guarantee success, but they can be used to confront and sometimes even ignore the competition. Ignoring the competition is achieved by focusing on the development of new opportunities rather than meeting the checklists of product features touted by the competition. A definition of entrepreneurship was presented in the beginning of the book:
Entrepreneurship is a risky endeavor involving the continuous creation and re-creation of a new enterprise, a new product, or a new idea.
The traditional concept of the entrepreneur is that the entrepreneur starting the business absorbs most of the risk. In today’s climate, however, businesses need to be entrepreneurial. Businesses must absorb and deal with the risk of product development and enhancement. In today’s climate, the individual has to be entrepreneurial in terms of their career path. Knowledge and skills have transitory value that can be in demand today and out next year. Differentiation of the individual can only be achieved by continuous leaning-about and learning-by-doing.
As noted in the beginning of the book, entrepreneurship is currently being viewed as a set of skills that are part of a rational and logical process for identifying and creating opportunities. The skills have been likened to learning how to read, write, calculate, and conduct scientific reasoning. Entrepreneurship requires insight and knowledge of problem solving, strategic planning, new product development, project management, and portfolio management among others. Participation in entrepreneurial activity leads to the creation of opportunities for individuals, businesses, and countries.
Entrepreneurs are made through life experiences and a willingness to work hard and become totally immersed in a goal. Being an entrepreneur is the goal of the entrepreneur. The research on the personal and demographic factors contributing to the entrepreneurial activity supports the idea that the entrepreneur cannot be identified by any single demographic characteristic. There are demographic tendencies, but in reality entrepreneurs can be young or old, male or female, and from wealthy or disadvantaged backgrounds. The key is participation and self-motivation and, most importantly, continuous learning and adaptation. It is hoped that this book will put you on the right path to becoming an entrepreneur on your own or as an intrapreneur in an existing organization. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/15%3A_Wrap-Up/15.01%3A_Wrap_up.txt |
Phil Libin, cofounder and former CEO of Evernote, once said there are “lots of bad reasons to start a company. But there’s only one good, legitimate reason . . . it’s to change the world.”1 Evernote is an example of an entrepreneurial startup. Its goal is to make our lives more organized and increase our personal memory abilities by storing necessary and desired information on the Evernote app. Evernote is designed to capture information through note taking (including pictures, web pages, drawings, and even audio), track and organize this material, and then save and archive the information. Evernote Corporation describes itself as “not only an organization, rather it is a family of professionals who are creative, innovative and experienced in their respective fields.”2
Around the globe, individuals, communities, and organizations advocate for and support the entrepreneurship movement. Many colleges and universities offer courses, degrees, and competitions for entrepreneurship teams. Communities provide support through services such as incubators that foster planning and startup activities. Organizations like UNESCO’s Global Action Programme on Education for Sustainable Development holds a Youth Entrepreneurship Competition annually.3 That is where student Chloe Huang, in 2017, submitted her idea for an algae energy pavilion to the Education for Sustainable Development competition. Huang recognized the problem of lakes suffering from oversaturation of algae and saw a solution in converting the algae into a biofuel, creating green energy while alleviating an environmental problem.4
In the examples of both Libin and Huang, the entrepreneurial products focus on the use of technology and improving life, but they also represent two vastly different approaches to entrepreneurship. Libin’s focus was on improving quality of life by allowing users to track and organize information in their business and personal lives, whereas Huang focused on a global environmental issue to sustainably improve water quality. Each idea solves a problem that many people might not even have noticed. Becoming aware of problems that need to be solved, then solving the problem to make our lives easier or better, is part of the entrepreneurial perspective.
1.01: Entrepreneurship Today
By the end of this section, you will be able to:
• Define entrepreneur and entrepreneurship
• Describe types of entrepreneurial careers and lifestyles
• Understand entrepreneurs as problem solvers
• Explain current factors driving the growth of entrepreneurship
• Compare differences in entrepreneurial opportunities around the globe
As we delve into the study of entrepreneurship, let’s define what we mean by the word entrepreneur. An entrepreneur is someone who identifies and acts on an idea or problem that no one else has identified or acted on. This combination of recognizing an opportunity to bring something new to the world and acting on that opportunity is what distinguishes an entrepreneur from a small business owner. A small business owner is someone who owns or starts a business that already has an existing model, such as a restaurant, whereas an entrepreneur is someone who creates something new. This new creation can be a new process or product, a business that identifies a new or unique target market, or a combination of ideas that creates a new approach or method, for example.
In a broader sense, what people consider an entrepreneur can vary. Some scholars strictly differentiate between entrepreneurs and small business owners.5 Others acknowledge that a small business owner may also be an entrepreneur—they are not mutually exclusive. Someone may start a venture that is not a completely new idea, but that introduces a product or service to a new region or market. Where does a franchise fall in this discussion? Again, there is not complete agreement, with some claiming that a franchisee and entrepreneur cannot be the same, and others arguing that a franchise is, indeed, an entrepreneurial venture. According to an article in Forbes, “In the for-profit world, an entrepreneur is someone who creates and runs a new business where one did not exist before. And, no, the McDonald’s franchisee didn’t create McDonald’s. But he certainly created a McDonald’s where there never was one before. Franchisees are entrepreneurs.”6 The point is that small business owners and franchisees can be considered entrepreneurs. For the purposes of this course, you will learn the key principles of entrepreneurship alongside the concepts, strategies, and tools needed to succeed as a small business owner or franchisee.
Entrepreneurs have many different talents and focus on a variety of different areas, taking advantage of many opportunities for entrepreneurial ventures. An entrepreneurial venture is the creation of any business, organization, project, or operation of interest that includes a level of risk in acting on an opportunity that has not previously been established. For some entrepreneurs, this could be a for-profit venture; for other entrepreneurs, this could be a venture focused on social needs and take the form of a nonprofit endeavor. Entrepreneurs might take a variety of approaches to their entrepreneurial venture, such as those shown in Table \(1\).
Table \(1\): Types of Entrepreneurs
Type of Entrepreneur Approach to Venture
Innovators Find new approaches, methods, or products that add value through solving a problem in a unique manner
Creators Make something new or see a problem that other people have not noticed
Market makers Innovate or reinvent their market from a future perspective by asking what the market could evolve into
Expanders and scalers Seek out opportunities to expand upon previously created methods, processes, or products
In this course, you will explore these myriad avenues toward entrepreneurship.
How Do You Define Success?
• What is your personal definition of success? How would you define success for your venture idea? Take time to consider these questions carefully.
• Write your answers to both questions as formal descriptions of your definition of success.
• After completing your definitions, meet with your family members or your personal support group (the important people whose support you need to achieve the defined success statement) to discuss your personal definition of success.
• After hearing their input, you might want to revise your personal success statements.
• Follow through with this activity by talking to your startup team or other supporting people about your venture’s success definition. This activity may help guide you in decision-making throughout your life journey and the journey of starting your venture. It will also be helpful when you and your startup team create a vision statement for your venture.
The Entrepreneurial Lifestyle and Career
People often have thought of entrepreneurs as corporate rebels, nonconformists, or activists. Being an entrepreneur has become synonymous with being an innovator, a change agent, or a risk taker. Regardless of job titles or descriptive characteristics, entrepreneurship has a universal appeal for how people think and engage with the world.
Choosing the path of entrepreneurship requires a willingness to take on calculated risks. The difference between risk and calculated risk is due diligence, or conducting the necessary research and investigation to make informed decisions that minimize risk. Not everyone is comfortable letting go of a steady paycheck, especially when we know that there is no long-term guarantee that the paycheck will continue into the future. In one approach to minimizing personal financial risk, some startup entrepreneurs continue with their current employment while working on the side to develop their idea into a venture that eventually will generate an income. Until the venture requires near full-time work and generates income, maintaining an outside income works well for many entrepreneurial teams.
Consider the eyeglass startup Warby Parker (Figure 1.2). Dave Gilboa and Neil Blumenthal, lead entrepreneurs for Warby Parker, were still working their normal jobs when they approached an angel investor with their idea. The angel investor asked a few questions and wasn’t impressed. This investor believed that Gilboa and Blumenthal should demonstrate their solid commitment to the venture by quitting their day jobs to dedicate more time and energy to Warby Parker. Instead of following that advice, Gilboa and Blumenthal kept their day jobs while they continued to work toward building their venture, and Warby Parker eventually became highly successful. There are many paths to becoming an entrepreneur, and many paths to creating a successful venture (see Entrepreneurial Journey and Pathways). It is important to identify the path that works best in your life—and for the venture—and that supports your goals and your unique situation and visions.
Figure \(1\) Within the entrepreneurial world, the idea of a lifestyle venture has evolved to mean a business in which the founders’ primary focus is the lifestyle they will attain through becoming entrepreneurs, rather than a primary interest in financial rewards through the selling of the business. Within the entrepreneurial world, harvesting is the typical exit strategy. The harvest is the point at which the investors and entrepreneurial team receive their return on creating and building the venture.
For a lifestyle venture, the entrepreneur is more likely to be a solo entrepreneur, someone who moves forward in starting a new venture without the support of a team or group of likeminded individuals who recognize the value or potential of an entrepreneurial idea that could potentially result in significant returns. A lifestyle venture is also more likely to be funded through family and friends, and more traditional methods such as a bank loan or a small business loan. This lifestyle includes greater freedom to decide areas of responsibilities, hours of contribution to the venture, and other decisions that support the desired lifestyle. An example of a startup lifestyle venture is The Wander Girls, a company that identified the unique concerns of women traveling alone.7 The Wander Girls organizes trips and events for groups of women traveling in India. A team member organizes the trip, travels with the female tourists, and handles daily interactions and transactions.
Another example of a lifestyle venture is based on how an entrepreneur aligns values, interests, and passions to create a balance between enjoying life and earning enough money to support those passions. Roxanne Quimby had a passion for living off the grid, creating her own life in the woods of Maine, and not being restricted by the rules and regulations required when working as an employee. After becoming a parent, Quimby faced the challenges presented by her lifestyle choices and started making candles to earn enough money to support her family. Eventually, Quimby’s lifestyle candle-making business expanded into the highly successful Burt’s Bees Corporation, moving her lifestyle business into a career as the CEO of Burt’s Bees (Figure 1.3). After selling Burt’s Bees to Clorox Co., Quimby continued her passion for the north woods of Maine by donating land and money to create a wildlife sanctuary and preserve that land from development.
Quimby’s latest endeavors include creating a pasta company, My Pasta Art, focused on increasing employment opportunities for people in northern Maine,8 and building the tourist industry to encourage people to enjoy the region’s beautiful habitat and scenery. Although she is highly successful from a financial perspective, money was never the motivation for her ventures. As you can see, there are many paths to finding your career in entrepreneurship, and multiple trigger points at which you might make the decision to become an entrepreneur.
How Can You Put Your Strengths to Work?
Create a list of ten strengths that you currently possess. If you need help creating your list, ask your friends or family what they believe you are good at doing. Think about what achievements you have accomplished, what compliments you have received, and what people say about you. The answers to these questions will help you identify your strengths.
• Create a list of ideas that build off your strengths or are related to your strengths.
• Then analyze this list to create another list of possible businesses that you could start that relate to your strengths.
The Entrepreneur as a Problem Solver
What are some challenges you face in your life? Have you ever actively thought about how you could solve those problems? Or have you actively identified exactly what the problem is from an analytical perspective? We often have a tendency to jump quickly from noticing a problem to selecting a solution, with little understanding of whether we have even correctly identified the problem. Identifying the problem—and testing the potential, novelty, and feasibility of your solution—is an important part of resolving the problem. Often, when we start to explore the problem, we find that it has multiple causes. Among them are:
• The need for something to be better, faster, or easier
• The effects of changes in world on your industry, product, or service
• Market trends based on geography, demographics, or the psychology of the customers
You will learn more about identifying opportunities in Identifying Entrepreneurial Opportunity and Problem Solving and Need Recognition Techniques.
One characteristic of a savvy entrepreneur is recognizing the ability to identify a problem from an opportunity-identification perspective. We might identify feeling hungry as a problem, but an entrepreneur would identify the problem using an opportunity-identifying perspective by determining how the problem could be translated into an opportunity to create a new venture—perhaps combining the problem of feeling hungry between meals into a street kiosk or a vending machine with food choices or creating a new snack that is nutritious, satisfying, and portable. People need to eat, and they get hungry, but during a busy day with no open time or convenient food, people end up hungry. Rephrasing the problem, or need, from an opportunity viewpoint opens the search for a sustainable solution beyond the simple awareness of feeling hungry. We might solve this problem by opening a snack bar with offerings that contain essential vitamins and proteins, and is easy to transport with a long shelf life. Understanding the problem from the perspective of how to solve it for one person into how to solve it for multiple people rephrases the problem into an opportunity-identification perspective.
You might also have an interest in solving food-related problems on a larger scale. People trapped in a war-torn region may not be able to leave the safety of their shelters to find food, grow food, or barter for food, or they may not have the money to buy food. How could you reach your target market within a war-torn area? Red Cross emergency response vehicles traveled 2.5 million miles to deliver food, relief supplies, and support to communities affected by disasters during 2017.9 That’s the equivalent of driving around the globe 103 times. Could your idea of creating a snack bar fit into a partnership with the Red Cross?
Although this might seem like a simple problem with a simple solution, persevering from the recognition of a problem to finding a realistic solution, then moving that solution forward into a successful venture, requires an entrepreneurial mindset. Every day, people become entrepreneurs as they identify and solve problems, or face new challenges or frustrations, and resolve them in creating products or services to address these issues.
Recognizing Problems
In your daily life, what problems do you encounter? What would make your life easier? How would you finish this sentence: “If only ________ existed, my life would be better or easier”? To spur your creativity, you might research global problems to find an area that interests you, that sparks your passion for living a fulfilling life. When identifying a problem, consider process-related problems as well as service-related problems.
For more ideas like Chloe Huang’s, visit the UNESCO Global Action Program on Education for Sustainable Development (https://en.unesco.org/gap) and review other submissions that may activate your own creativity in thinking about how you want to contribute your skills and knowledge to improve our world.
• What problem have you identified?
• What can you do to resolve that problem?
Factors Driving the Growth of Entrepreneurship
Do you know anyone who has lost their job? Or who has been rejected or mistreated at work? Or had their income reduced, or benefits removed? Research shows that 47 percent of all US employment is at risk through artificial intelligence and other technologies, although there will also be new opportunities for jobs that currently don’t exist.10 These types of experiences and outlooks have provided the impetus for many people to start their own businesses. When we work for someone else, we are at the mercy of their decisions and actions, but we get paid and don’t carry the full risk of their decisions. When we work for ourselves, we get to make the decisions (not that making decisions is easy). But when we have our own business, we have greater control—in exchange, we also carry the risk for all decisions we make. This control over decision-making is one reason that some people find the world of entrepreneurship attractive.
Another contributing factor to the desire to become an entrepreneur is the excitement and fun of creating something new. Many entrepreneurs are excited at the idea of moving the concept through to the materialization of the idea.
A third factor that supports the growth in entrepreneurship is the combination of retirement and longer life expectancies. Many people enjoy working. For them, retirement consists of too much open time and not enough activities or the type of engagement with the outside world that fulfilled their needs during their working lives. Retirement also presents unique financial considerations, depending on an individual’s lifetime savings and planning. The combination of having available time and a desire for continued earnings encourages some older adults to explore their own entrepreneurial opportunities.
A fourth factor driving the growth of entrepreneurship is the expanding awareness and support of entrepreneurship as a viable career choice. In much of the twentieth century, families encouraged their children to find a stable career with a large corporation. During this era, there was a certain expectation of reciprocal loyalty between the employer and the employee based on some traditional employee-employer roles in that century. The general, informal agreement was that if employees came to work every day and fulfilled their responsibilities, they would have long-term employment with that corporation. But as competition increased and new business practices evolved, this unspoken guarantee no longer held true. The model of certainty of employment gradually disappeared. As people acquired a new perspective on their careers and income, they increasingly realized that we are all responsible for our own paths. Most studies suggest that people change their careers between three and seven times.11 Note that this is not how often people change jobs, but how often they change their careers, moving from one industry to another, or moving from one type of work to a different type of work. The older model of stability through working hard for someone else has vanished. This awareness and acceptance have encouraged recent generations to consider creating their own futures through entrepreneurial ventures.
Just as individuals have become aware of the benefits of entrepreneurship, communities and organizations have also become aware of how entrepreneurial ventures add economic development and enhancements worth supporting, bolstering opportunities for those who decide on this path.
Entrepreneurship around the Globe
In the United States, entrepreneurial opportunities abound, relatively speaking. Between 1990 and 2014, the number of campus-based entrepreneurship education programs increased from 180 to over 2,000.12 Comparing globally, the United States has the greatest number of entrepreneurial ventures, with Switzerland, Canada, Sweden, Denmark, and Australia following in order, according to Global Entrepreneurship Index, a global consulting firm Figure \(4\).
Why is the United States leading with the greatest number of entrepreneurial ventures? What does it take to become an entrepreneur? In addition to having an entrepreneurial mindset (see The Entrepreneurial Mindset), entrepreneurs also need education and funding to support their new ventures.
You will learn more about funding in Entrepreneurial Finance and Accounting, but as an introduction, you should know there are three primary sources of outside funding: family and friends, angel investors, and venture capitalists. Some family members and friends are willing and able to invest money in helping the entrepreneurial team. An angel investor is someone who has available funds and an interest in supporting a new venture. They are often entrepreneurs who have successfully launched and harvested their own ventures, and who have an interest in helping other entrepreneurs in their startups, staying active in the entrepreneurial world, and a desire to receive a return on their investment in the venture. Angel investors often provide funding early in the life of a venture. As the venture grows, it typically requires more funding, at which time venture capitalists may invest in the venture. A venture capitalist (VC) is a group of people (or organizations) who pool resources to invest in entrepreneurial ventures, contributing larger sums of funds than are available through angel investors. In each funding round, investors receive an equity stake in the venture with expectations that at some point in the future, the venture will be sold, or harvested, at which time the investors will receive a return on their investment. Because they tend to be in larger groups, VCs typically have access to larger amounts of money and resources than individual angel investors. (You will also learn about other types of financing, such as bank loans and bootstrapping, in Entrepreneurial Finance and Accounting.)
In the United States, VCs contributed \$72.3 billion in 2015 for 3,916 deals, or funding rounds. In China that same year, \$49.2 billion were invested in 1,611 ventures.13 European VC investment totaled \$14.4 billion and 1,598 deals. Tracking these numbers over time shows steady increases in VC funding as entrepreneurial ventures have become more common Figure \(5\).
Other factors that can affect entrepreneurial opportunity include employment rates, government policies, and trade issues. For example, in the Middle Eastern kingdom of Saudi Arabia, a newer driver of entrepreneurship includes a high unemployment rate with a large percentage of the population in its prime earning years. In the past, employment was less of a concern because of dependency on state support from oil revenue. The population received monthly allotments to cover expenses from state-owned oil production. More recently, the population has become restless, with a desire to become productive and have greater control over their own resources. And the rulers recognize that oil production income is volatile and unsustainable. Today, with more future-oriented leaders, countries in the Middle East desire to encourage their citizens to consider starting their own businesses.14 The example of entrepreneurship in the United States has spread around the globe, with other countries taking an interest in developing support systems to encourage their populations to become entrepreneurs.
As noted, the United States is a world leader in entrepreneurial innovation. Perhaps because the United States is, in large part, a nation of immigrants, with people arriving from all over the world, Americans have few prescribed traditions that encourage conformity. America’s longstanding traditions and reputation for individualism, ingenuity, and self-reliance have reinforced this mindset. However, the governments of other nations have discouraged their citizens from independent or innovative thinking. Some cultures emphasize political, cultural, and economic unity, and place a strong value on not being noticed, blending in, and following prescribed habits and traditions. Countries like Japan, France, Russia, China, and others continue to reflect these norms. Other countries have complex bureaucracies that prevent quick responses and place barriers to entrepreneurial activities. Parts of worldwide economic structures (banking, investments, and technology) are not accessible or even explicitly exclude some nations and the poor. Systems like this discourage people from coming forward with entrepreneurial ideas because the culture and bureaucracy prevent people from finding access to information necessary for the successful advancement of an idea. In contrast, other countries are noticing the benefits of encouraging their populations to become more open-minded and creative through new ventures.
LINK TO LEARN
Transparency International is an organization that tracks corruption, which can be an inhibitor to entrepreneurship. The Transparency International website provides information to rank 180 countries in identifying the abuse of entrusted power for private gain.1
Key characteristics that encourage entrepreneurship include support for freedom to create and innovate. What conditions encourage creativity and innovation? Acceptance of failure is a key characteristic for success as an entrepreneur. Many of the great inventions in the United States resulted after dozens of failures, as when Thomas Edison eventually developed a working light bulb. Edison identified a problem: Once the sun set, working hours were restricted, as were daily activities such as reading a book or washing dishes. Edison, along with many other inventors, recognized the need for an artificial light source. Consider how complex this idea was and how many failures must have occurred before creating a product that emitted light.
Another condition that encourages entrepreneurial behavior is the ability and opportunity to connect with other people to discuss ideas, problems, challenges, and solutions. This connection with other people, in an open environment that supports the exchange of ideas, is essential for encouraging creativity and innovation.
With the advent of the Internet, people around the planet are becoming increasingly aware of geopolitical and environmental situations across the globe. As more people observe these changes and situations, more people exchange ideas. These discussions can generate new opportunities for people to discover methods for solving problems. Any one of us could be living in one country but identifying a problem in another country. Given our interests and backgrounds, we could actively choose to develop a solution for that problem. What we need, as a general approach, is an efficient and transparent way to form companies and enable constructive competition, along with continued free and fair trade.
These are just some of the areas that many nations and organizations consider as they seek to encourage a transition away from group-prescribed thinking toward uniquely individual entrepreneurial ideas. Each of us encounters life from a different perspective. Although we all might recognize the restrictions presented by the sun setting every night, only a few people might question why we couldn’t change that situation by creating our own light. Similarly, someone in another country may observe our country (or vice versa) and ask why that country has a particular problem. Meanwhile, people living with that problem may have become so accustomed to it that they might not recognize the opportunity to seek solutions.
Increasing opportunities in entrepreneurial education are also driving growth. More colleges and universities are teaching entrepreneurial studies and opening entrepreneurial centers that encourage students from every discipline to become entrepreneurs.16,17 As the employment and entrepreneurial landscape continue to evolve, some institutions have started offering courses to prepare students for work in the gig economy.18 In fact, some of the best new entrepreneurial ideas come from groups of students in different majors who collaborate to create new, innovative business ideas that meet specific needs and challenges in today’s world. In some cases, students from different universities around the globe are connecting to come up with business ideas to solve global problems, such as the lack of clean drinking water and the need for medical vaccination programs. Technology and global travel have made such partnerships more common and very productive.
The world of entrepreneurship opens doors for each of us to look beyond our own self-created barriers and explore opportunities around the world. Consider the creation of Starbucks, borne from the realization of how pleasant it can be to sit at a European café and drink excellent coffee. Awareness of an idea that is commonplace in one country, but new to a different country, presents the possibility of introducing that idea to another nation. In the Starbucks example, was there a problem that needed to be solved? Not necessarily, but the founder, Howard Schultz, had a desire to bring a specific quality-of-life element from one country to another, a business idea with an entrepreneurial aspect. One of the entrepreneurial aspects of creating Starbucks was the idea of mass expansion of coffee shops. Prior to Starbucks, the idea of creating a high-quality coffee drink hadn’t been developed. Even more significant was the idea of expanding the business across the United States and then around the world.
Given the growth of coffee shops throughout the United States, we might not think that this idea is innovative, but before Starbucks, coffee typically was served at a diner, and it was served out of habit, rather than as the main attraction. With Starbucks, people changed their ideas about coffee and their coffee-drinking habits. Although businesses like Dunkin’ Donuts served coffee, their focus was on selling donuts, not coffee. As Starbucks grew through repositioning coffee as their main product, other companies like Dunkin’ Donuts and McDonalds realized the missed opportunity in not reinventing the coffee market with multiple choices of high-quality coffee. In fact, Dunkin’ Donuts has changed its name to just “Dunkin,” removing the emphasis on doughnuts.19
Social and Environmental Issues and Opportunities
A social entrepreneur has an interest in solving a social, environmental, or economic problem. A social entrepreneur identifies a problem with a social or community focus, a concern for quality of life, or concern for our entire planet’s health (you will learn more about social entrepreneurship in The Ethical and Social Responsibilities of Entrepreneurs). One such person is Angad Daryani, a young serial inventor. Daryani left school in the ninth grade to join the Media Lab at the Massachusetts Institute of Technology (MIT), where he worked on an industrial-scale air filter to clean pollutants and carcinogens out of our planet’s air. Daryani’s home country of India is the world’s third largest emitter of carbon dioxide, according to Global Carbon Atlas, behind China and the United States (Figure 1.6).20
Social Entrepreneurship
Consider a social issue that you might feel compelled to take on as a passion project. Some social issues include childhood hunger, access to clean water, access to education, or opioid abuse. Watch Johann Hari’s Ted Talk on addiction to learn more.
• Do you have any ideas for creating an entrepreneurial venture around the idea of building quality relationships and communities?
• How would you balance a passion project with an entrepreneurial purpose?
Not only is Daryani interested in solutions for air pollution, but his product will also provide financial gains and add to his personal credibility as a serial entrepreneur, or someone who starts and harvests multiple entrepreneurial ventures. Darvani describes himself as an inventor and social entrepreneur, combining his interest in improving lives through a variety of entrepreneurial ventures including products like Sharkits (a do-it-yourself-kit company that teaches children how to build technology), the SharkBot 3D Printer (an attractive, low-cost, and reliable 3D printer), and several other projects that combine technology and human needs. As each of these products advances to commercialization, the products and technology are becoming more applicable for other uses as well. For more examples of projects that Darvani is working on, take a look at his website (http://www.angadmakes.com), which includes videos and articles, and highlights the international recognition he has received for his innovative work.
Angad Daryani
Research Angad Daryani and his technology to remove air pollution (https://www.cnn.com/2018/03/28/healt...ero/index.html).
• What other products could this technology or methodology be used for, besides the originally intended application of improving air quality?
• What critical decisions would you anticipate that Angad will face in creating and commercializing his product?
• How would you define success for Angad or this air-cleaning company? | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/01%3A_The__Entrepreneurial_Perspective/1.00%3A_Prelude_to_the_Entrepreneurial_Perspective.txt |
By the end of this section, you will be able to:
• Define an entrepreneurial vision
• Develop a vision statement
When you think of yourself as a successful entrepreneur, what types of images or feelings do you experience? Do you find yourself daydreaming about creating the next great solution to society’s problems, or do you see yourself providing a solution for the next health or environmental crisis? Maybe you can imagine yourself creating something that equally balances art, function, and ingenuity.
This section is designed to help you develop your entrepreneurial vision. Vision is an important part of everyone’s future, and this is especially true for entrepreneurs. Establishing your vision is the first of several steps toward making your venture a reality.
Many would-be entrepreneurs aspire to launch the next great business or organization that will change the world. Some know exactly what they want to create, whereas others figure it out as they go along. Although there is no secret to success, you do need to have some idea about what you envision for your entrepreneurial future. What do you see in your future? How do you want to contribute to the world?
Entrepreneurial Vision
Every successful entrepreneur that you encounter or read about likely started with an image or idea related to something he or she felt passionate about creating. This occurs even when the person has no idea how (or if) what they desire to accomplish or create will become a reality. An entrepreneur’s vision is the start of a roadmap that will determine where he or she wants to go with their entrepreneurial efforts. Vision speaks to what the entrepreneur wants the business to look like in the future—perhaps five or ten years out. Unfortunately, many potential entrepreneurs have dreams and ideas but never develop a concrete vision. A vision statement is the picture you have for what the venture will become in the future: what it will grow into. Be aware, though, that oftentimes, the identified vision at the start of the venture changes into something different. In later chapters, we discuss how this change requires open-mindedness and a willingness to adapt. The mission statement is a formal declaration about what the venture will do, what value it will provide to the end customer, and how it will accomplish this action. In describing your mission, carefully think about the value proposition that you provide. The value proposition is a summary statement that conveys the benefits your product, service, or unique business process/model provides to customers. This relates back to the perspective of problem solving. Not only do you need to solve the problem, but you also must provide value. We might solve a problem, but if the value proposition isn’t relevant or seen as “real” by the customer, the venture will probably not be successful. Both concepts of a future vision and the mission of the venture should be formalized into statements.
In spite of your best efforts, you may have trouble putting your entrepreneurial vision on paper. This is normal, especially in the early stages of the process. You may want to start with an outline and fill in the details later. Or set aside a short time each day that you can spend on this task so you train your mind to think about the vision you are setting for yourself. If you experience a mental block, try changing your environment—go outside, try a different time of day, or go to a setting that has similarities to the business you are interested in creating. You might also consider talking with someone who has experience in the industry to give you suggestions. Or better yet, find a mentor in your chosen area of interest and keep this person apprised of your progress. Having someone to bounce ideas off is a great asset to have when imagining the possibilities of the future.
Finding a Mentor
Mentorships can provide you with numerous benefits Figure \(1\).
Read the article at https://www.forbes.com/sites/goncalo.../#2bec86b1d469 on the benefits of having a mentor, and click on the resources the author provides in the article.
Then read the article at https://www.inc.com/young-entreprene...ould-have.html, which discusses types of mentors. Notice that in this second article, the author focuses on sales, operations, business development, and entrepreneurial experience as the most significant areas that need expertise for startups.
Next, describe the areas that you would want help from a mentor for learning and developing your business idea. Then, list a few possible avenues where you could find a mentor who fits your needs. Considering the information in these articles, how would this information help you develop your statements and describe your value proposition?
An entrepreneurial vision considers what you want your venture to become, what this venture will look like, what the driving forces are, and what values and culture should surround it. Each individual entrepreneur has a unique picture of what the venture will become. For example, Kevin F. Adler wanted to help homeless people. He created Miracle Messages, a volunteer-based nonprofit organization with a goal of helping homeless people reconnect with loved ones. The vision for this organization includes building a vast network of volunteers and partnerships to stop homelessness and bring people together. This vision is about creating community, helping each other, and strengthening communities. The business model encourages homeless people to create short Miracle Messages through video, audio, or text, with messages then uploaded to social media and other methods to find that person’s loved one.
Globalizing Miracle Messages
Go to the website www.miraclemessages.org to learn about the vision and mission of Miracle Messages. Their slogan, “Everyone is someone’s somebody,” conveys their culture of care and concern for all human life. As you read about this organization, consider what this organization could become in the future, with an extensive network that supports connecting volunteers to homeless people, then to loved ones, and to other organizations that support the physical relocations and resources to address the original reasons why the person became homeless. How can this organization become a global business? Consider families dislocated through wars, famine, and other disasters who want to find their loved ones. The infrastructure developed with Miracle Messages could be replicated for other populations besides homeless people in the United States. Depending on the founder’s vision, Miracle Messages could continue to focus on homelessness in the United States, or the vision could expand into other geographic areas and needs.
In an entrepreneurial venture, when the vision has a shorter timeline, such as five years, it could focus on a local problem or situation, and over time evolve into a vision that is broader and includes more diverse markets or populations. Your vision should inspire the people involved in your startup to support your venture. Use your imagination to create this picture of your venture with a focus on the future of the venture. Even though entrepreneurs use their imaginations and creativity in developing this picture, they also need to understand the venture’s industry, the competition, and trends that are evolving or might evolve in the future. This information helps guide the vision for the venture and define how it is uniquely different from any other business. Ideally, the vision should be insightful, bold, inspirational, and believable, and it should be developed into a formal vision statement.
The vision statement should also be clearly stated and discussed with the startup team. Although you might not have a startup team, a mentor, or a support group developed yet, to create an entrepreneurial venture, you will need support. Your support network understands that working without pay is often the normal situation at the beginning, with the potential for financial rewards coming when the venture is harvested or sold. For some entrepreneurs, knowing the vision includes the sale of the venture to another group or corporation is difficult to accept. However, that is the point at which the venture can grow to become ever more viable. Alternatively, if your vision is to be a small business owner, such as owning a franchise, then you are buying into a business plan package that has already fine-tuned the processes and decisions to support your success as the owner/manager of that business. A small business owner starts or buys into a business idea that already exists, whereas an entrepreneur is someone who seeks to create something new through either new products, services, methodologies, or combinations of ideas that create a new venture or organization.
The lead entrepreneur should share the vision statement with employees and investors, as these groups are formalized, communicating what this vision means personally and to the success of the venture. You might also need to revisit this vision as your venture grows, making changes based on your decisions and knowledge about your industry, products, and customers’ needs. Even if your vision statement changes based on new information and decisions, creating an initial vision statement is a valuable step and will help guide your decisions.
A Personal Vision Statement
What do you want your life to look like ten to twenty years from now? Consider these questions:
• Where are you living?
• What are you doing for a living?
• What does your home look like?
• Who lives in your home?
• What are you doing with your life?
You could describe a typical workday and weekend day in your life as part of answering these questions. Create a vision statement that describes the answers to these questions.
Creative Approaches to Developing Your Vision
There are many definitions of and ways to express creativity (you will learn more about creativity in Creativity, Innovation, and Invention). Artists typically show their creative side in their art, musicians show their creativity through music, and writers express their creativity in writing. Others express technical creativity through cell phone innovations or new car technology. It is up to you to determine how you will express your creativity in your venture and in your professional life. In most cases, when people follow their passions, their creativity flows from that passion.
One approach to discovering your vision for your future is to begin with the end in mind. What picture of your desired future do you have in mind? How could this vision fit with the ideas you have of creating a successful venture? Notice that these questions are about both your personal future and the vision for your venture’s future. These two pictures should coexist. The vision for your personal future should allow for the necessary resources to support the venture’s future, just as the venture’s future will provide for your personal future. We will discuss work-life balance later in the chapter to help you identify what creates success as you describe your vision.
Another approach to developing your vision is to use a creative thinking process. This type of thinking allows people to come up with ideas that they might not have had without adopting a creative mindset. The creative thinking process (covered in more depth in Creativity, Innovation, and Invention) has four steps: preparation, incubation, illumination, and verification (Figure 1.8).
In the preparation stage, gather information and collect ideas. As part of the process of tapping into creative ideas, you can apply divergent thinking by generating as many ideas as possible, even when those ideas do not seem logical. Create a list of conflicting ideas, or ideas that are diverse and disparate. Preparation is the first step of the creative thinking process. The next action is to walk away from thinking about the activity: incubation. We are programming our minds to realize that the work done in preparation is an important topic for consideration. When we walk away from consciously thinking about the activity or problem, we allow our unconscious minds to continue to think about the activity, even though our conscious minds are busy doing other things. This incubation period is essential for advancing creativity. In the incubation stage, you might go for a walk, take a nap, or just continue with your daily activities. At some point, you may have a sudden inspiration or illumination—an aha! moment—that clearly addresses the activity or problem you want to solve. In this step, the answer often pops into our conscious minds, and we recognize how to proceed. The last step is verification, crafting our vision statement or message, or responding to the exercise in creative thinking. You can apply this creative thinking process to many different business situations. Once we further develop and crystallize our ideas (the Business Model Canvas discussed in Launch for Growth to Success is a good tool for this activity), we provide an opening for a creative and viable solution as we continue to think about the issue.
Design thinking, brainstorming, and mind mapping are tools that you will learn about later in the course. Although these tools may be familiar, there are specific methodologies that can optimize their success in entrepreneurial situations. Brainstorming requires that participants generate ideas around the desired topic without judgment. You can do this alone or with others, but including other people provides a greater variety of ideas, as one person’s ideas might trigger another idea from someone else. Be sure to write down your thoughts so that you can return to them later. Brainstorming is different from divergent thinking, which does not require ideas to be associated with the identified topic. For example, in brainstorming on the topic of helping the homeless population, we might come up with ideas such as finding community food and housing, or providing free medical care. Using divergent thinking, we would arrive at more diverse ideas, such as filming homeless people then uploading the videos to a social media website to connect family members with the homeless person. These tools could incorporate divergent thinking in the idea-generation step, but typically, unless people are taught how to use divergent thinking, the ideas generated are more structured and constrained, and more logical. As much as we want to encourage divergent ideas, we also want to discourage any judgment around our ideas. Once we start judging our ideas, we restrict our creativity and end up with less than ideal solutions. Approach this process with some playfulness and relaxation.
Mind mapping is another popular technique for creative thinking. Here, you create an illustration on paper or a chalk board. Write down the words that come to mind then link those words together with lines in a diagram that shows how each word relates to the others. The idea is that one word can lead to another. You can discover associations that might not have been evident before you created the mind map.
You can conduct research on entrepreneurial ideas by creating surveys and asking people questions about their experiences related to your idea. For example, let’s say you are considering creating a new non-messy health food that can be eaten while commuting to work. You could ask people about their experiences eating while commuting to work or ask questions about nutritional concerns or diets. Or you could find secondary data on when people eat, eating while commuting, popular diets, or other related topics. Or you could find case studies that focus on a few in-depth similar areas of interest or perform your own case studies by selecting a few peers to track their eating habits. Or you could create a prototype of your product and ask people to tell you about their experience using your product. You will learn more about research strategies in Identifying Entrepreneurial Opportunity, Problem Solving and Need Recognition Techniques, and Entrepreneurial Marketing and Sales.
Creativity through a Change in Routine
Practice your creativity skills by changing your routine. Because our brains block out many routine activities, such as our commute to work, or other repetitious habits, we often fail to notice our surroundings. Pick one day this week to experience the world through a new perspective. Change your routine in as many ways as possible. As you change your routine, pay attention to how you are experiencing the day.
• What was the experience like?
• Did you notice being more alert to your surroundings?
Consider how you can use this experience to learn how to identify new opportunities and to interact with people, situations, and objects to identify problems in a way that could be translated into an entrepreneurial venture.
Achieving Balance
Entrepreneurship comes with many challenges because the entrepreneur must wear many hats. This is especially true if the entrepreneur is the only employee in the business. But regardless of the business model, all entrepreneurs must be able to achieve balance in their lives between their dedication to growing their entrepreneurial venture and their personal life. Developing a vision that includes different areas of your professional and personal life can help make this type of balance achievable.
How do you define balance in your life? What areas do you consider when you think about a balanced life? Having enough money to support your lifestyle might be one goal. Other areas might include physical activities or hobbies, social interactions and entertainment, satisfaction with how you earn money, your family and personal relationships, and other interests and values. Some entrepreneurs start lifestyle ventures to achieve this balance. But how do we achieve balance when our goal is to be a career entrepreneur?
A career entrepreneur is someone who takes on the daily management as the owner of the venture, accepting, and perhaps enjoying, the daily risks and rewards of managing and building the venture such as Roxanne Quimby. For Roxanne Quimby, growing Burt’s Bees involved making difficult decisions, such as relocating from Maine to California to meet the growth needs of the company. Even though Roxanne wanted to provide employment opportunities to people in northern Maine, she knew that her business needed the right infrastructure for success, and that infrastructure wasn’t available in Maine. If you choose to become a career entrepreneur, your focus may be primarily on advancing your entrepreneurial idea into a successful venture, like Roxanne did with Burt’s Bees; this can come at the expense of personal life goals.
Many career entrepreneurs need support from family and friends who accept that the lead entrepreneur’s attention and energy are required for the success of the venture, and many lifestyle entrepreneurs will find challenges in meeting the needs of the venture while maintaining work-life balance. Discussions with family, close connections, and the entrepreneurial team should occur in the early idea-formulation stage to gauge the support of the people whose interests might be compromised by the entrepreneur’s dedication to advancing the venture.
Clearly defining your idea of success for your life, and for your venture, is an important step in achieving balance. What are your priorities? What can you do to balance the success of your new venture, the success of your own life, and the success of your family? Considering that balancing all the roles that we have in life is a frustration point for many people, can you find an opportunity to create an entrepreneurial venture?
Exploring What Success Means to You
What is your own definition of success? It’s helpful for your entrepreneurial ventures for you to explore and define what success means for you personally and professionally.
After reviewing these resources, think about how you would define success, and how you can use that knowledge to plan for a satisfying work-life balance.
As you explore what success means for your venture and how your definition aligns with balance between your personal life and dedication to your venture, you should consider some of the unique challenges entrepreneurs can face. For example, there might be a learning curve in unfamiliar areas of business, such as accounting or finance. Or you might face a dilemma about whether to expand a product line, or whether or where to open a new location. Entrepreneurs often mention the physical requirements of starting up a business. Physical demands can include the sheer stamina needed to clean a new space, move in, and set up shop. Depending on your business, you also might need to adjust to being on call twenty-four/seven. Here again, developing a vision of where you want to be in the future can help you plan for the challenges you will face in the early stages of your business.
Entrepreneurship can be especially draining if you are not prepared for the tasks at hand—as can be the case with any professional or personal role. Therefore, self-care and emotional awareness can play a key role in maintaining your emotional health as an entrepreneur. Taking time for yourself is very important. This could involve creating a time management calendar. Tracking how you spend your time can keep you on schedule with tasks and prevent you from expending too much on any one area of the business or your personal life in detriment to the other. Taking time away from the business is emotionally healthy and can provide important perspective that can help you make better decisions. “Leaving work at the office” is a successful strategy that many business people use to separate their personal and professional lives. If this is not possible—for example, if you work from home—setting aside family or personal time can allow for work-life balance.
Having trusted advisors and mentors for your business and personal life can also promote emotional health. When you face a decision or challenge that you have difficulty with, it is important to have someone to talk to who knows you and knows your situation. Some entrepreneurs may find themselves in their first experience of leading others, with total responsibility for the outcomes as owner of the business. Every business person should have a personal leadership improvement plan. This plan can take the form of academic classes or professional coaching, but sometimes, it will be a personal commitment to improvement. You should identify your preferred leadership styles, as well as leadership strengths and weaknesses. It might be useful to look back on your own work experiences to identify which leadership traits you admired and which ones you didn’t. As with any other business skill set, you can learn and improve these strengths in yourself. You also can hire people with complementary skills to handle the areas that you feel unsure about.
Being aware of your own strengths and weaknesses, as well as of your preferences and dislikes, will help you achieve and maintain balance in your life. Having counselors, mentors, advisors, checklists, and timelines can keep you on track and prevent any one area of your business or personal life from taking over or being neglected.
The Importance of Goals
Entrepreneurial vision imagines a future, whereas goals focus on a desired outcome. Although vision is key to creating the future that you want for yourself and your business, goals are important to help you realize the steps needed to make that vision a reality.
Read through your definitions of success and your vision statement. Now create a list of possible actions that will help you achieve success and accomplish your vision. Review your list and categorize the words and actions in terms of relevance and time frames.
SMART goals are well-structured and defined goals that are specific, measurable, achievable, realistic, and timely (Figure 1.9).
• Specific: Your goals should be precise rather than overly broad.
• Measurable: You should be able to test in some quantifiable manner whether a goal has been met, meaning that there needs to be some method to determine if the goal has been met or not.
• Achievable: The goal must be attainable; it cannot be so lofty that it cannot be accomplished. On the other hand, the goal should not be so easy that it can be accomplished quickly or with little effort.
• Relevant: The goal should be well suited for what you want to accomplish; this means that the goal should be relevant to the outcome needed.
• Timely: Each goal needs to have a defined deadline, the time when the goal must be accomplished. What time frame do you have for completing your goals? How does this timeline fit into your overall plan?
For example, if your personal definition of success and your vision for your future include financial independence—with, say, a vacation home in the mountains—what goals can you define today that will lead to this outcome? You would include financial goals tracked either monthly or yearly to save a set amount of money based on your projection of how much money it will take to own these two vacation homes. You would also set goals about finding the right locations. This process is also necessary to support the success of your business venture. Setting goals is a powerful approach that leads us to the future we want for our lives.
Roomify’s Goals
Research Roomify at https://www.inc.com/profile/roomify and www.roomify.com. If you were one of the cofounders of this company, what goals would you create for this business? Should you harvest the company? Expand into other related products? Repackaging products for ease of purchasing is an excellent idea that can be translated into other areas. Can you think of a new idea based on repackaging products that is focused on the benefits of saving people time and the hassle of decision-making? Create a list of at least ten ideas based on the idea of saving people time and adding convenience to their lives. Which ideas most appeal to you?
Here is a fictional example of an entrepreneur’s goals, which we can test against the SMART criteria to see if they are feasible. Soraya runs a small tutoring business in Dallas, Texas. Her target market is high school students. Soraya is currently the only employee in her sole proprietorship, but she hopes to hire more employees soon. She is excited about her business, and so far, she has done well in the four years that she has been operating it. On the advice of a friend in business school, Soraya has defined three business goals for the next year. They are:
1. Increase sales by 50 percent.
2. Open a new location.
3. Hire two employees.
In reviewing these goals using the SMART criteria, it is evident that goals one and three are specific because they are quantitative, but goal two is not. All three goals can be measured. With Soraya as the only employee, it is unlikely that she can achieve goals one and two, but goal three is achievable. And hiring more staff would increase the likelihood of achieving additional goals. All three goals are relevant to growing the business. And each goal could use more detail in terms of being timely. That is, in order to increase sales by 50 percent in the upcoming year, Soraya should have additional monthly or quarterly sales goals to meet her annual goal. Likewise, the opening of a new location requires more time-bound details, such as leasing or purchasing the location, and determining the business model for this location. Finally, hiring additional employees should have a time component as well, such as a timeline for recruiting, interviewing, selection, hiring, and training. Therefore, Soraya’s goals are appropriate for her small tutoring business, but they need refining so that they meet the SMART criteria. Soraya is more likely to achieve SMART goals, and they are more likely to lead to desired business outcomes. | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/01%3A_The__Entrepreneurial_Perspective/1.02%3A_Entrepreneurial_Vision_and_Goals.txt |
Learning Objectives
By the end of this section, you will be able to:
• Explain what it means to have an entrepreneurial mindset
• Describe what is meant by entrepreneurial spirit or passion
Entrepreneurship takes many forms (see Table 1.1), but entrepreneurs share a major trait in common: An entrepreneur is someone who identifies an opportunity and chooses to act on that opportunity. Most business ventures are innovative variations of an existing idea that has spread across communities, regions, and countries, such as starting a restaurant or opening a retail store. These business ventures are, in some ways, a lower-risk approach but nonetheless are entrepreneurial in some way. For example, Warby Parker, a profitable startup founded by four graduate students at Wharton, disrupted a major incumbent (Luxottica) by providing a more convenient (online initially), affordable, and stylish product line for a large segment of consumers. In this sense, their innovation is about creating something new, unique, or different from the mainstream. Yet they attracted an existing, and in some ways mature, sector of an established industry. In a different way, McDonalds, which is 90 percent owned by franchisees, introduced an “all day breakfast” menu in 2017 that was hugely successful; it also targeted a larger segment (in part younger consumers) and brought back consumers who had chosen other options. In summary, many entrepreneurs start a new venture by solving a problem that is significant, offering some value that other people would appreciate if the product or service were available to them. Other entrepreneurs, in contrast, start a venture by offering a “better mousetrap” in terms of a product, service, or both. In any case, it is vital that the entrepreneur understand the market and target segment well, articulate a key unmet need (“pain point”), and develop and deliver a solution that is both viable and feasible. In that aspect, many entrepreneurs mitigate risks before they launch the venture.
Being aware of your surroundings and the encounters in your life can reveal multiple opportunities for entrepreneurship. In our daily lives, we constantly find areas where improvements could be made. For example, you might ask, “What if we didn’t have to commute to work?” “What if we didn’t have to own a vehicle but still had access to one?” “What if we could relax while driving to work instead of being stressed out by traffic?” These types of questions inspired entrepreneurial ventures such as ride-sharing services like Uber, the self-driving vehicle industry,21 and short-term bicycle access in the free bike-sharing program in Pella, Iowa (Figure 1.10).22
These ideas resulted from having an entrepreneurial mindset, an awareness and focus on identifying an opportunity through solving a problem, and a willingness to move forward to advance that idea. The entrepreneurial mindset is the lens through which the entrepreneur views the world, where everything is considered in light of the entrepreneurial business. The business is always a consideration when the entrepreneur makes a decision. In most cases, the action that the entrepreneur takes is for the benefit of the business, but sometimes, it helps the entrepreneur get ready to adopt the appropriate mindset. The mindset becomes a way of life for the entrepreneur. Entrepreneurs often are predisposed to action to achieve their goals and objectives. They are forward thinking, always planning ahead, and they are engaged in “what if” analyses. They frequently ask themselves, “What if we did this?” “What if a competitor did that?”—and consider what the business implications would be.
Most people follow habits and traditions without being aware of their surroundings or noticing the opportunities to become entrepreneurs. Because anyone can change their perspective from following established patterns to noticing the opportunities around them, anyone can become an entrepreneur. There is no restriction on age, gender, race, country of origin, or personal income. To become an entrepreneur, you need to recognize that an opportunity exists and be willing to act on it. Note, however, that the execution of the entrepreneurial mindset varies in different parts of the world. For example, in many Asian cultures, group decision-making is more common and valued as a character trait. In these regions, an entrepreneur would likely ask the advice of family members or other business associates before taking action. In contrast, individualism is highly valued in the United States and so many US entrepreneurs will decide to implement a plan for the business without consulting others.
Entrepreneurial Spirit and Passion
An entrepreneurial spirit allows entrepreneurs to carry a manner of thinking with them each day that allows them to overcome obstacles and to meet challenges with a can-do attitude. What does it mean to have an entrepreneurial spirit? For the purposes of this discussion, it could mean being passionate, purposeful, positive, bold, curious, or persistent.
The founders of Airbnb have a passion for supporting individual rights to rent out unused space. Why should the established model of hotels prevail? Why shouldn’t an individual homeowner have the freedom to rent out unused space and leverage that space into an income? Airbnb has succeeded in creating more flexible and affordable options in the space of the rapidly growing "sharing" economy. At the same time, some states and municipalities have raised issues about the regulations monitoring ventures like this. While entrepreneurial spirit is partly about fighting for individual rights and freedoms, there should be a balance between economic freedom and consumer protection. The entrepreneurial spirit involves a passion for presenting an idea that is worthwhile and valuable, and a willingness to think beyond established patterns and processes, while still keeping in mind local laws and regulations, in the quest to change those established patterns, or at least to offer alternatives to those established patterns.
Passion is a critical component of the entrepreneurial process. Without it, an entrepreneur can lose the drive to run the business. Passion can keep an entrepreneur going when the outside world sends negative messages or less-than-positive feedback. For example, if you are truly passionate about starting an animal shelter because of your love of animals, you will find a way to make it happen. Your internal drive to help animals in need will spur you on to do whatever it takes to make the shelter become a reality. The same is true of other types of startups and owners with similar passions. However, passion needs to be informed by the entrepreneur’s vision and mission—passion of the sake of passion is not enough. A clear mission statement—which details why the business exists and the entrepreneur’s objectives for achieving that mission—will guide an entrepreneur’s passion and keep the business on track. Passion, vision, and mission can reinforce each other and keep the entrepreneur on the right track with next steps for the business.
Some ideas might seem small or insignificant, but in the field of entrepreneurship, it’s important to recognize that for every new startup, someone else may recognize a spin-off idea that expands upon the original idea. The opportunities for identifying new possibilities are endless. Review your work in creating spinoff ideas for Angad Darvani’s projects, or Kevin F. Adler’s Miracle Messages venture. Or consider possible spin-off ideas around the technology used in agriculture. Creating spin-off ideas fits well with our discussion of divergent thinking and brainstorming. Through these processes, we can discover new uses for existing technology, just as Ring did by using video technology to add security by allowing customers to see who is at the door without opening it.
An Entrepreneurial Mindset in Your Discipline or Field
Within your industry of interest or area of study, what are the challenges that create frustration? How can these be turned into opportunities? Earlier in this chapter, we discussed Evernote, a company that focuses on expanding our memories by storing and organizing information. Let’s look at some other examples of entrepreneurial endeavors in specific industries to help you plan your own venture in your own industry.
In the agriculture industry, insects, weeds, weather conditions, and the challenges of harvesting crops are all ripe for entrepreneurial activities. The move toward organic produce has also affected this industry. From an entrepreneurial perspective, what products could you invent to support both organic farming and the problems of insects that damage or destroy crops? The old method was to use chemical sprays to kill the insects, but today, the growing demand for organic foods and increased awareness of the impact of chemical sprays on our environment are changing this scenario. One new idea to solve this problem combines a vacuum cleaner with an agriculture product.
LINK TO LEARNING
Watch this video on the creation of a crop vacuum that sucks up insects and bugs to learn more.
A bug vacuum is an example of how using divergent thinking contributed to the solution of removing bugs from crops without using chemicals. In the group activity of creating divergent ideas, this idea may not have been received well. However, in the incubation stage, the idea must have come forward as a viable solution. Entrepreneurs frequently face the challenge of pressure to conform to established habits and patterns within industries.
Often, the entrepreneurial mindset includes futuristic ideas that shake up the normal, conventional processes that are grounded in experience over time. Tried-and-tested processes and products that have a proven history of success can be a formidable obstacle to new ideas. A new idea may even appear as impossible or outlandish, perhaps even an embarrassment to the steady and predictable practices established within an industry. This can create a dilemma: Do we try something new and unproven that lacks documented research? Sometimes, we must disregard our past successes and research to be open to new possibilities for success and failure. An entrepreneurial mindset includes creativity, problem-solving skills, and a propensity to innovation.23 Open-mindedness is one characteristic that supports creativity, problem solving, and innovation. Taking the time to explore new ideas, dream, reflect, and view situations from a new perspective contribute to the entrepreneurial mindset. Some innovations can lead to disruptions within the industry, or even create a new industry.
The innovator’s dilemma was presented by Clayton Christensen to explain disruptive technology, which are technologies that, once introduced, displace established patterns, processes, and systems previously accepted as normal or accepted. One example of a disruptive technology is Airbnb, a company that threatens the established hotel industry by connecting personal resources to people who desire those resources. If you have a spare bedroom that you aren’t using, why not sell that space to someone who wants and needs the space?
Airbnb has become a significant threat to the established hotel industry’s business model of building large hotels and renting rooms within those hotels to their customers. Airbnb has reconfigured that model, and since its 2008 launch, 150 million travelers have taken advantage of 3 million Airbnb listings in more than 191 countries. Airbnb has raised more than \$3 billion (plus a \$1 billion credit line) and is considering selling stocks to support significant expansion. The value of Airbnb is approximately \$30 billion. Compare this market value to Hilton’s market capitalization of \$19 billion and Marriott’s of \$35 billion. If you were the CEO of Hilton or Marriott, would you be worried? The hotel industry recognized Airbnb as a threat, and in 2016, began a campaign to create legislation to rein in Airbnb’s growth and popularity. From the hotel industry’s perspective, Airbnb is not playing by the same rules. This is the definition of disruptive technology, the focus on creating a new idea or process that negates or challenges established process or products.24
Sometimes disruptive technologies result from not listening to customers. Customers don’t always know what they want. Customer groups might need to be redefined by the entrepreneurial team on the basis of better models, knowing when to invest in developing lower-performance products that promise lower margins while still satisfying the need, and knowing when to pursue small markets at the expense of larger or established markets. Basically, disruptive technologies occur through identifying new and valuable processes and products.
The founders of Airbnb recognized that some people have unused resources, bedrooms, that other people need. We can apply this idea to other unused resources such as vehicles and motor homes. We see this model reproduced in short-term car rental and bike-sharing programs. | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/01%3A_The__Entrepreneurial_Perspective/1.03%3A_The_Entrepreneurial_Mindset.txt |
career entrepreneur
someone who takes on the daily management as the owner of the venture, accepting, and perhaps enjoying, the daily risks and rewards of managing and building the venture
disruptive technology
technology that once introduced, displaces established patterns, processes, and systems previously accepted as normal or accepted methods
divergent thinking
process of generating as many ideas as possible, even when those ideas do not seem logical; the list of ideas can be conflicting, diverse, and disparate
due diligence
conducting the necessary research and investigation to make informed decisions that minimize risk
entrepreneur
someone who identifies an idea that no one else has acted on or identified; small business ownership and franchising are also entrepreneurial options
entrepreneurial mindset
awareness and focus on identifying an opportunity through solving a problem, and a willingness to move forward to advance that idea
entrepreneurial venture
any business, organization, project, or operation of interest that includes a level of risk in acting on an opportunity that has not previously been established
entrepreneurial vision
idea of what an entrepreneur wants a venture to become, what it will look like, what the driving forces are, and what values and culture should surround it
harvest
point at which the venture is sold, at which time the investors receive a return on their investment
lifestyle venture
business whose founders’ primary focus is the lifestyle they will attain through becoming entrepreneurs, rather than a primary interest in financial rewards
mission statement
statement of an organization’s reason for being that defines its primary long-term goal, explains what the venture will do, what value it will provide to the end customer, and how it will accomplish that action
opportunity-identifying perspective
method for identifying a problem and determining how it could be translated into an opportunity to create a new venture
quantifiable manner
method to determine if a goal has been met or not
serial entrepreneur
entrepreneur who becomes involved in starting multiple entrepreneurial ventures
SMART goals
well-structured and defined goals that are specific, measurable, achievable, realistic and timely
social entrepreneur
entrepreneur who has an interest in solving a social, environmental, or economic problem
value proposition
summary describing the benefits (value) customers can expect from a particular product or service
vision statement
picture of what the venture will become in the future or what the venture will grow into
1.05: Summary
1.1 Entrepreneurship Today
An entrepreneur is someone who takes on an entrepreneurial venture to create something new that solves a problem; small business ownership and franchising are also entrepreneurial options. The venture could be for profit or not for profit, depending on the problem it intends to solve. Entrepreneurs can remain in a full-time job while pursuing their ideas on the side, in order to mitigate risk. On the opposite end of the spectrum, entrepreneurs can take on lifestyle ventures and become serial entrepreneurs. There are many factors driving the growth of entrepreneurship, including employment instability, motivation to create something new, financial factors and free time associated with retirement, and the greater acceptance of entrepreneurship as a career choice. The cultures of nations around the world affect the ability for entrepreneurs to start a venture, making the United States a leader in entrepreneurial innovation. Entrepreneurs often find inspiration in social, environmental, and economic issues.
1.2 Entrepreneurial Vision and Goals
Establishing an entrepreneurial vision helps you describe what you want your venture to become in the future. For most entrepreneurial ventures, the vision also includes the harvesting or selling of the venture. There are creative ways, such as brainstorming and divergent thinking, as well as investigative ways to define an entrepreneurial vision. Once you have established your vision, it is important to write goals to help you realize the steps toward making your vision a reality.
1.3 The Entrepreneurial Mindset
Identifying new possibilities, solving problems, and improving the quality of life on our planet are all important aspects of entrepreneurship. The entrepreneurial mindset allows an entrepreneur to view the world as full of possibilities. Entrepreneurial passion and spirit help entrepreneurs overcome obstacles to achieve their goals. Disruptive technologies involve using existing technology in new ways and can provide new opportunities as well as new challenges. Entrepreneurship is transforming some industries and potentially creating others, though many entrepreneurs create value by starting small businesses, buying franchises, or introducing new services in mature industries. The key thing to remember is that anyone can be an entrepreneur and that new technologies are making the cost of starting a new business less costly, but still risky at some level.
1.06: Review Questions
1.
What factors contribute to a growing interest in entrepreneurship?
1. unemployment levels
2. low job turnover rates
3. increasing levels of creativity
4. decreasing rates of discrimination
2.
Angel investors contribute to the entrepreneurial world by ________.
1. outpacing venture capitalists in access to startup funds
2. directly investing in entrepreneurial startups
3. holding seminars to teach people how to become an entrepreneur
4. forming groups of other investors to supply greater quantities of investment funds to entrepreneurs.
3.
An entrepreneur is someone who ________.
1. creates a small business based on other existing businesses
2. creates a home-based business that sells products available through other retailers
3. creates a business around the idea of solving a problem
4. is highly creative
4.
Roxanne Quimby of Burt’s Bees is an example of an entrepreneur primarily for which of the following reasons?
1. She saw available resources and recognized the resources could be used to create a business.
2. She acted on her passions.
3. She solved a significant societal problem.
4. She had the time and energy to dedicate to starting business.
5.
In the early stages of developing an entrepreneurial venture, the entrepreneur might seek funding from which group?
1. venture capitalists
2. the local bank
3. friends and family
4. shark tank
6.
The acronym SMART for goal setting stands for ________.
1. short-term, measurable, accurate, relevant, and timely
2. specific, measurable, accurate, relevant, and timely
3. specific, measurable, achievable, realistic, and time oriented
4. specific, measurable, achievable, results, and time oriented
7.
A vision statement does not include ________.
1. a picture of the future described in words
2. concepts and ideas that inspire and focus people’s actions toward a united outcome
3. both creative and exploratory process in creating the vision
4. the scope of the venture
8.
Which one of the following is not a quantifiable result?
1. 5 percent annual growth in sales
2. increase market share by 2 percent
3. decrease collection of accounts receivable by \$5,000.00
4. increase creativity throughout the venture
9.
Which of the following is not a creativity building technique or tool?
1. conducting a case study
2. brainstorming activities
3. mind map creation
4. brain writing
10.
Disruptive technologies include all but which of the following?
1. new methods or approaches that make established methods obsolete
2. self-booking of air travel
3. restaurant food delivery services
4. a change from ownership of resources to the ability to have access to resources
11.
The entrepreneurial mindset includes ________.
1. a willingness to develop ideas that are not always initially popular
2. a willingness to wait for an idea to become popular before moving forward with that idea
3. an ability to focus on past successes
4. a belief in following tradition and established patterns | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/01%3A_The__Entrepreneurial_Perspective/1.04%3A_Key_Terms.txt |
1.
Why is the United States a leader in entrepreneurship?
2.
What commonalities do the top five countries have that put them in the lead for entrepreneurial ventures?
3.
One of Roxanne Quimby’s motivations in starting businesses included helping employ people in her community. How does or doesn’t this motivation fit in the definition of an entrepreneur as someone who identifies a problem and solves that problem?
4.
What are the similarities and differences between the business ventures of Wander Girls and Roxanne Quimby?
5.
Why is knowing your vision for the future important?
6.
Why should we create goals using the SMART method?
7.
What is the value in using divergent thinking when trying to solve a problem?
8.
How would you explain the concept of an entrepreneurial vision to your college roommate who is a history major?
9.
What is the primary difference between divergent thinking and brainstorming?
10.
Identify five disruptive technologies and the industries that these technologies impact.
11.
In thinking about the future, and your own experiences, what opportunities are there for disruptive technologies in one or two familiar industries?
12.
What is the difference between an entrepreneurial mindset and entrepreneurial spirit?
13.
Describe your own level of entrepreneurial spirit.
1.08: Case Questions
1.
What suggestions could you make to Angad Daryani on other products that would fit his focus on improving the lives of people?
2.
On Angad Daryani’s website, he says he believes “that the path humanity follows, need to be pivoted for the better.” What other needs or problems do humans have? Create a list of twenty needs that would fit Angad Daryani’s belief statement.
3.
Research Miracle Messages. Identify Miracle Messages vision statement, mission statement, and value statements. Do not copy their statements, but rather create your own statements based on what you would create if you were the lead entrepreneur for this organization.
4.
Identify five other organizations that have services or products that you would want to partner with if you were the lead entrepreneur of Miracle Messages. What value does each of these five organizations provide to Miracle Messages’ vision, mission, and value? What services or products are not supported either through Miracle Messages or the five organizations you addressed? What new for-profit or nonprofit could be created as a spinoff idea from your research on Miracle Messages?
5.
Review the website http://www.coastaltractor.com/ to learn more of about Coastal Tractor. What spinoff ideas could you identify using this same technology or concept as the bug vacuum?
6.
In reviewing Coastal Tractor’s website, what evidence of an entrepreneurial mindset is present within this company’s website?
7.
Do you think Coastal Tractor is using a disruptive technology? Why or why not?
1.09: Suggested Resources
1.1 Entrepreneurship Today
https://www.entrepreneurship-campus.org
youtu.be/zV2vi8FilLM
1.2 Entrepreneurial Vision and Goals
The following links might provide you with more ideas about creating a vision statement.
https://website-designs.com/business...entrepreneurs/
https://www.businessnewsdaily.com/38...statement.html
Check out this website’s ideas for developing your vision: https://www.executestrategy.net/blog...sion-statement
Eleven Free Goal Setting Software & Tools You Can Use: http://www.goal-setting-college.com/...-use-for-free/
YouTube: Achieve More by Setting Smart Goals: www.youtube.com/watch?v=yA53yhiOe04
Twenty-four Essential Mind Mapping and Brainstorming Tools: http://mashable.com/2013/09/25/mind-.../#jP47h7Q818qM
Read more about the challenges of work-life balance and what brings satisfaction to entrepreneurs in this article: https://www.wsj.com/articles/why-som...ont-1432610236
Learn about applying a SWOT analysis (strengths, weaknesses, obstacles, threats) to your personal life: https://www.forbes.com/sites/lisaqua...-o-t-analysis/
1.3 The Entrepreneurial Mindset
M. M. Baluku, J. F. Kikooma, and K. Otto, “Positive mindset and entrepreneurial outcomes: The magical contributions of psychological resources and autonomy.” Journal of Small Business & Entrepreneurship 30, no. 6 (2018): 473–498.
E. Fleck, “Needed: Entrepreneurial mindset.” Central Penn Business Journal 34, no. 12 (2018): 10.
M. Israr and M. Saleem, “Entrepreneurial intentions among university students in Italy.” Journal of Global Entrepreneurship Research 8, no. 1 (2018): 1.
https://www.christenseninstitute.org...ive-innovation | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/01%3A_The__Entrepreneurial_Perspective/1.07%3A_Discussion_Questions.txt |
What do you plan to do with your life after graduating from school? This is one of the most common—and admittedly most terrifying—questions that students are asked on a regular basis. There are literally thousands of career choices and just as many pathways or options to reach them. How do you decide which career pathway is best for you? You might select a new career based on your major, a favorite high school subject, the advice of a family member or friend, or an inspirational summer or internship experience.
What if none of those options reflect the future that you see for yourself? It may mean that you are destined to create your own career path by becoming an entrepreneur. Regardless of the career pathway that you follow, your entrepreneurial journey begins with a single step.
2.01: Overview of the Enterpreneurial Journey
Learning Objectives
By the end of this section, you will be able to:
• Explain the entrepreneurial journey to explore and discover entrepreneurship as a career choice
• Identify the steps, decisions, and actions involved in the entrepreneurial journey
• Recognize the rewards and risks of the steps in the entrepreneurial journey
Self-Employment as an Entrepreneurial Journey
When the economy and the job market are strong, the entrepreneur has a safety net that decreases the risks in creating a new venture, a startup company or organization that conducts business or is created to satisfy a need, and allows for a quick recovery if the venture is not successful. There are more new startups when there are high levels of confidence in both the venture’s success and the entrepreneur’s confidence in finding employment if the venture fails. People over 40 years of age account for most new startup activity, in part because of the continuing trend in which a business may choose not to hire an employee but instead hire an independent contractor, a person who provides work similar to an employee without being part of the payroll for the contracting business, and who is responsible for paying their own taxes and providing their own benefits. With previous knowledge and expertise, this group of entrepreneurs recognizes opportunities created by this move away from hiring full-time employees to more outsourcing to independent contractors. One contributor is the gig economy, which involves using temporary and often transitional positions hired on a case-by-case basis, rather than keeping a full staff of hired employees. Advantages for the employer include a decrease in cost of benefits and loyalties to specific employees. Advantages for the hired worker or independent contractor (sometimes called a freelancer) include no long-term commitment and flexibility in accepting contracts. From an entrepreneurial perspective, the creation of websites that support the gig economy offers opportunities for independent ventures. Many people today are becoming small entrepreneurs. This process goes by a variety of names, such as the sharing economy, the gig economy, the peer economy, or the collaborative economy. Maybe it means driving for a company such as Lyft, Uber, or GrubHub, or perhaps offering services through TaskRabbit, UpWork, or LivePerson. The projected numbers of independent contractors and on-demand workers are stated as 42 percent for small businesses by the year 2020, a growth of 8 percent from current figures.1 And a projection of greater than 50 percent of the workforce will be independent contractors by 2027 if this trend continues at the current pace.2 In the “Freelancing in America: 2019” report, the sixth annual study by UpWork and Freelancers Union, 57 million United States citizens are estimated to freelance, with income approaching 5 percent of US gross domestic product (GDP) at nearly \$1 trillion and earning a median rate of \$28.00 an hour, representing a hourly income greater than 70 percent of workers in the overall US economy.3 One report found that 94 percent of net job growth from 2005 to 2015 was in alternative work categories, with 60 percent due to independent contractors and contract company workers.4
According to the US Bureau of Labor Statistics, the number of self-employed Americans is growing, with 9.6 million self-employed people at the end of 2016. That number is expected to grow to 10.3 million by 2026.5 A more recent study by FreshBooks’ second annual “Self-Employment” report predicts that 27 million US employees will leave traditional work in favor of self-employment by 2020, tripling the current population of full-time self-employed professionals to 42 million. The main driver for this change in the workforce is a greater desire for control over one’s career with the ability to have greater control over working hours and acceptance of work.6,7 Of course, self-employment is a broad category that includes small-business owners as well as entrepreneurial startups and freelance gig employees. Since 2016, there has been a downward slide in the number of employees working for self-employed businesses, which results from a variety of factors, including difficulties in finding qualified employees, qualified employees having more employment options, such as employment through the gig economy, outsourcing activities, and technology actions that decrease the need for employees, with entrepreneurial activity remaining steady.8
Entrepreneurship around the World
In a 2017 Business Insider article, “America Needs Immigrant Entrepreneurs,” David Jolley writes that immigrants constitute 15 percent of the US workforce and 25 percent of the country’s workforce of entrepreneurs.9 Forty percent of startups include at least one immigrant. Jolley’s article cites a study that identified immigrants as twice as likely to start a business as native-born Americans. In 2016, 40.2 percent of Fortune 500 companies were founded by at least one immigrant or a child of immigrant parents. Dinah Brin, writing for Forbes, stated in a 2018 article that immigrants form 25 percent of new US businesses and that new immigrant-owned firms generated 4 to 5 million jobs.10
These statistics and other findings have prompted countries such as Canada to revise their immigration policies to attract more entrepreneurial-minded immigrants. A World Bank report from May 2018 ranked the United States 53rd out of 190 countries for ease in starting a business, with higher scores representing greater ease.11 The same report ranks the United States eighth for ease of doing business. The difference in these rankings indicates that once a business is established, factors such as regulations, permits, access to credit, and infrastructure support the business owner’s ability to continue the business, but actually starting the business is more challenging. For any given country, ease in starting a business and the country’s interest in supporting entrepreneurial activity are crucial in both attracting entrepreneurial people and supporting their ability to open a business. Imposing restrictive regulations and processes on new ventures significantly decreases the number of new ventures.
According to a 2018/2019 report, the highest rate of entrepreneurial activity worldwide in 2018 was in Angola at 41 percent.12 Angola’s low-income economy meant fewer employment opportunities, creating pressures to find other ways to earn an income. Guatemala and Chile reported 28 percent and 25 percent of entrepreneurial activity, respectively, with medium- and high-income economies. These percentages are quite high, considering that these economies offer employment opportunities in existing companies. In terms of innovation, India at 47 percent, and Luxembourg and Chile at 48 percent each, take the lead in offering new products and services not previously available. This entrepreneurial activity reflects the ease of starting a business. The Netherlands, Poland, and Sweden were reported as the easiest countries in which to start a new business, in part because many people in those countries view entrepreneurship as an attractive lifestyle. As you can see, both economic opportunities and a country’s specific support for entrepreneurial behavior contribute to the number of people who enter entrepreneurial activities.
From a gender perspective, there are currently over 11 million woman-owned businesses in the United States. This number includes both small business owners and entrepreneurs. Thirty years ago, there were only 4 million woman-owned businesses.13 The number of woman-owned businesses has increased 45 percent between 2007 and 2016, five times faster than the national average, with 78 percent of new women-owned businesses started by women of color.
Starting Your Entrepreneurial Journey
How do you fit into this entrepreneurial journey? This chapter will help you to explore and discover your potential for entrepreneurship as a career choice. Think of this exploration and discovery experience as a way to map out a strategy to reach your goals or dreams. Let’s imagine that your dream vacation is a hiking trip to Glacier National Park in the US state of Montana. Just as hikers have different levels of experience, so do entrepreneurs. Just as your plan for a wilderness hike would involve many stages, your entrepreneurial journey involves multiple levels of self-discovery, exploration, experiences, and accomplishments on your way to success. For our purposes, the term entrepreneurial venture means any type of new business, organization, project, or operation of interest that includes a level of risk in acting on an opportunity that has not previously been established. For each story of entrepreneurial success that is shared—such as that of Facebook or Airbnb—there are even more lesser-known entrepreneurial success stories such as Zipline, a company that delivers medical supplies in Rwanda and Ghana by drone. These entrepreneurs faced the same dilemmas in pursuing their passion, or opportunities, which led them to their entrepreneurial destiny. They courageously stepped out of their comfort zones to explore the possibilities that lie ahead. What is the difference between entrepreneurs and you? The main difference is taking that first step. Many people have ideas that fit into the definition of an entrepreneurial idea but never take that first step. Just as the Chinese philosopher Lao Tzu suggests, every journey begins with a single step.
Taking the First Step
Go to Fire Nation’s website on taking the first step to learn more. Changing your mindset (your perception of yourself and your life situation) and encountering trigger events (significant external situations) can nudge you into taking the first step toward being an entrepreneur.
• Is there a venture you’ve always thought you should start but never did?
• Think about what factors are stopping you. Consider your mindset and how you might change your mindset so that your venture could become a reality.
• What are some possible trigger events that could make the difference between starting your venture and waiting to start your venture?
Opening your future to the possibility of starting your own venture brings new and exciting experiences (Figure 2.2). Every entrepreneur moves through several steps in considering the entrepreneurial journey. Once you understand this journey, the steps will help you define your path toward creating and starting your new venture. Each step of this process offers another level of understanding that prepares you for long-term success. How will you achieve this success? By taking one step at a time, exploring and learning, considering new ideas and expectations, and applying these experiences to achieve your personal outcome. Think of the entrepreneurial journey as a guide to knowing what is in store for you as you start your new venture.
One benefit of outlining a step-by-step process is the opportunity to explore different paths or behaviors that may lead to an entrepreneurial venture. Think again of your dream visit to Glacier National Park. How would you get there? What equipment would you need? What kinds of experiences would you expect to have? Think of the Glacier National Park journey as your entrepreneurial journey, a metaphor intended to help you as you create your career as an entrepreneur.
What makes someone ready or willing to choose entrepreneurship over becoming an employee of an established business or a small business owner? It takes confidence, courage, determination, resilience, and some know-how to select entrepreneurship as a career as well as the recognition of the opportunity. An entrepreneur is defined as someone who not only recognizes an opportunity but who also is willing to act on that opportunity. Both actions are required. We might identify an opportunity, but many people do not act on the idea. Confidence, courage, and willingness are necessary to take that first step, as well as remembering the following:
• You are unique. Even if two similar people attempted to launch identical ventures, the results would likely not be the same. This is because each one of us has different ideas, approaches, available resources, and comfort levels, all of which influence the venture’s development and eventual success.
• Although there are no hard and fast rules or theories of the best way to launch into entrepreneurship, we can gain wisdom from the lessons learned by experienced entrepreneurs.
• Selecting an entrepreneurial career requires honesty, reflection, and a tendency to be action oriented. You will need to recognize your own strengths, limitations, and commitment as part of that honesty. Reflection is required for self-growth—seeking improvements in your own skills, interactions, and decision making—and commitment is required to maintain consistency in your willingness to make the new venture a top priority in your life. You will also need to understand that you cannot accomplish everything by yourself, and you may need to ask for help. It helps to be curious, open, and able to take calculated risks and to be resourceful and resilient when faced with challenges or obstacles.
Entrepreneurial Potential Self-Assessment
Take this quick Entrepreneurial Potential Self-Assessment to assess your potential to become an entrepreneur. After completing this self-assessment, what new information did you learn about yourself? Do you think your answers will change as you acquire more life experiences and education? Why or why not?
Optimizing Interest Areas
What are three areas that interest you? These could be hobbies, work activities, or entertainment activities. How would someone else describe your skills and interests, or what you are known for? Answering these questions provides insights into your strengths and interests. Next, what is one area that you are passionate about? What strengths could you bring to this passion to build your own business?
Keep an open mind in looking for an opportunity that fits your strengths and interests. If you decide to explore entrepreneurship, what would be your first step? What are your initial thoughts about being an entrepreneur? What would you review or search to find more information on your idea or area of interest? With whom would you first question or discuss this idea? Why?
The Entrepreneurial Journey as a Trip
The entrepreneurial journey is your exploration to discover if entrepreneurship is right for you. Every entrepreneurial journey is unique; no two individuals will experience it in the same way. Along the way, you will find opportunities and risks coupled with challenges and rewards. It’s useful to think about the entrepreneurial journey as an exciting trip or other adventure. Most of the preparations and steps involved with planning a trip are like those for starting a venture. Just as you would plan and prepare for a trip—starting with inspiration and leading up to finally traveling on the trip—you might follow similar steps to launch a venture. And just as you would prepare for any challenges that you might encounter on a trip—bad weather, lost luggage, or detours—so you should consider potential obstacles or barriers along your entrepreneurial journey (Figure 2.3). Think of these difficulties as opportunities to learn more about the entrepreneurial process—and about yourself and how you manage challenges.
Developing a venture can be an exciting and active experience. It is also a lot of hard work, which can be equally rewarding and enjoyable. Here we present the entrepreneurial journey as seven specific steps, or experiences, which you will encounter along the road to becoming an entrepreneur. You’ll find more information about the entrepreneurial journey in other chapters in this book.
• Step 1: Inspiration – What is your motivation for becoming an entrepreneur?
• Step 2: Preparation – Do you have what it takes to be an entrepreneur?
• Step 3: Assessment – What is the idea you plan to offer through your venture?
• Step 4: Exploring Resources – What resources and characteristics do you need to make this venture work?
• Step 5: Business Plan – What type of business structure and business model will your venture have?
• Step 6: Navigation – In what direction will you take your venture? Where will you go for guidance?
• Step 7: Launch – When and how will you launch your venture?
As you work through each step of the entrepreneurial journey you should prepare for significant aspects of this experience. You will meet with rewards and challenges, the consequences that result from the decisions made at various points along your journey. To visualize the steps of the entrepreneurial journey, imagine your possible hiking trip to Glacier National Park (Table 2.1). Just as hikers have different levels of experience, so do entrepreneurs. Compare the following aspects of preparing for a hike with aspects of your entrepreneurial journey.
Table 2.1.1: Hiking and Entrepreneurial Journey Metaphor
Type of Hiker Mountain Hiking Skill Level Entrepreneurial Journey Equivalent
Walker
• Basic or limited hiking experience
• New or limited entrepreneurial exposure
• Never started a venture
Climber
• Moderate hiking experience
• Special skills for adventure, difficult terrain
• Some entrepreneurial knowledge or experience
• Exposure to entrepreneurship (family or friend in business)
Mountaineer
• Experienced hiker with technical skills for climbing hills and mountains
• Experienced entrepreneur
• Attempted or launched a venture (solo or with partner)
Step 1: Inspiration
When you think of being an entrepreneur, what is the inspiration for your venture? Just as you might have an inspiration for a hiking trip to Glacier National Park, you will have an inspiration behind the decision to become an entrepreneur. When you’re planning a trip to a new and exciting place, one thing you might do is to imagine what you will experience along the journey and on arriving at your destination (Figure 2.4). This portion of the entrepreneurial journey includes imagining yourself as an entrepreneur or as part of an entrepreneurial team. For this stage, you need a creative, open, and innovative state of mind, also known as an entrepreneurial mindset, which is discussed in more detail in The Entrepreneurial Mindset and Creativity, Innovation, and Invention. Dream big about your potential future and opportunities (Figure 2.5).
Step 2: Preparation
Just as when you are preparing for a trip, you need a plan (Figure 2.6) to move forward on your entrepreneurial journey. Before your dream hiking trip, you might gather information about Glacier National Park from a trusted source, such as a good friend with travel experience, or you might conduct online research. Your friend’s feedback could be just the motivation you need to try this experience yourself. Or you might use your research to determine if the trip is possible. You will need to look at maps, either online or on paper. Either way, you might also consider travel and accommodation options, such as booking a flight and finding a place to stay. You might want to create benchmarks to align your journey with your available resources, such as the amount of time and the amount of money you have to spend on the trip. Benchmarking is a method of tracking target expectations with actionable results by comparing one’s own company’s performance with an industry average, a leader within the industry, or a market segment. Benchmarking can help design the trip to meet incremental goals and timelines. From both a travel plan and an entrepreneurial perspective, although benchmarking is used as a control mechanism, we know that situations can arise that require an alteration in the plan, causing the benchmarked items to also need adjustments.
LINK TO LEARNING
Which type of benchmarking will help you the most in beginning your entrepreneurial journey? Visit the American Society for Quality’s resource page on benchmarking for help.
To plan for an entrepreneurial journey, you should first conduct some preliminary research regarding your venture idea. Your research must be honest and objective if it is to give you a clear picture of the venture. Next, you might organize and prioritize your research and thoughts. For instance, you might see an idea like yours online or on television, and feel disappointed that someone stole your great idea or beat you to the punch. This is a common occurrence in entrepreneurship, but it should not discourage you. Instead, use that knowledge and energy to find an overlooked or different aspect of your original idea. The difference might even be the focus on a different target market, a specific group of consumers for whom you envision developing a product or service. Further, it is critical to maintain a fluid focus upon expanding the scope of a product or service to uniquely differentiate provisions of benefits apart from existing benefits or those offered by competitors. A focus on a different target market is exactly how the Jitterbug smartphone was created, because it targeted senior citizens. The Jitterbug smartphone offers a larger screen, larger buttons, and simpler features that make it easier for older people to make quick calls or send texts.
Preparation also includes opening space in your life to the time and energy commitment needed to support your new venture. Are the important people in your life willing to support the interest and passion you will need to dedicate the time, energy, and other resources to this new venture? Review the questions shown in (Figure 2.7) to consider your answers to these questions. Preparation through research and other activities is discussed in more detail in Identifying Entrepreneurial Opportunity.
Step 3: Assessment
Now that you have decided where to go for your trip and have gathered information to prepare for it, the next action is to create and set your schedule. This action is simple but critical, because it involves connecting and coordinating information and resources that fit your lifestyle and needs. For example, you might schedule an early-morning Uber or Lyft to the airport and electronic delivery of your plane tickets to your smartphone. For the entrepreneurial journey, this phase might also include recognizing appropriate relationships and gathering needed resources. For many entrepreneurs, the opportunity to receive guidance from trusted advisors or mentors may provide valuable insights on how to manage the process. This step allows for reflection on your idea and intentions. After you’ve done your researching and gathering knowledge about your idea through the preparation step, is the idea still viable? Is the idea still interesting to you? With a better understanding of the industry, your idea, and your own interests that you gained in Step 2, is this idea something that you still want to explore? This step is discussed more fully in Problem Solving and Need Recognition Techniques with deeper coverage on the topic of opportunity recognition (Figure 2.8).
Step 4: Exploring Resources
Regardless of where you might travel, you could not complete your trip without adequate resources such as available financing. There are many ways you might fund a hiking trip: savings, loan, pay-as-you-go, sponsorship (family or friends), or any combination of these options, to name a few. No matter how you finance your trip, it might help to have a balance of available credit and cash on hand to support your day-to-day expenses and any extracurricular activities or even unforeseen emergencies. As discussed in Entrepreneurial Finance and Accounting, the US Small Business Administration (SBA) provides funding opportunities.
This scenario is mirrored in the entrepreneurial journey. Just as you wouldn’t begin a trip without adequate resources, including access to cash, you wouldn’t begin your entrepreneurial journey without the necessary resources, including cash. The options between funding a trip and funding a new venture are similar, but they have different names. For example, on a trip, you might use the cash you have on hand, from savings or a personal loan. For an entrepreneurial journey, you might address cash management—management of cash inflows and outflows to support cash needs of the venture—to include bootstrapping, a funding strategy that seeks to optimize use of personal funds and other creative strategies (such as bartering) to minimize cash outflows. (See Entrepreneurial Finance and Accounting for more information on bootstrapping.) Bootstrapping includes ideas like leasing instead of purchasing, borrowing resources, or trading unneeded resources for needed ones. Another example of cash management includes a business model that offers subscriptions rather than a payment received for an item purchased. Subscriptions provide the entrepreneur with cash up front, with the buyer receiving benefits throughout the year. Consider the example of Amazon. Amazon offers Prime with a yearly subscription service, as well as Subscribe & Save, Amazon Instant Video, Amazon Mom, and Amazon Web Services, all based on a subscription business model.
According to Entrepreneur.com, other potential subscription-based models include services or products geared to older consumers, with 8,000 people turning sixty-five every day. A similar idea offers services to college students. Both ideas would offer family members a subscription that sends monthly gifts or products to either the elderly person or college student. We also see this model offered to pet owners who pay a monthly subscription to receive treats and toys for the family dog. Looking back at Amazon, we see the company offering the ease of repeat purchases for frequently used products such as vitamins and air filters.
Prospurly
Prospurly is a subscription-based company that uses Cratejoy’s subscription platform to sell small-batch artisanal products for bath, body, and home, marketing a natural lifestyle focused on the happiness of living a simple and appreciated life. Conduct your own research on Prospurly and other subscription-based businesses. Read the article, “How I Built a Subscription Business That’s Made over 50k in 6 Months,” on Cratejoy for more information about this company and Prospurly’s move from ideation to profitability.
Other ideas for finding funding include applying for grant funding. The importance of cash and cash management requires in-depth coverage, which is presented in Entrepreneurial Finance and Accounting and Business Structure Options: Legal, Tax, and Risk Issues.
The idea of exploring resources includes many other options besides how to fund a new venture. In a trial run, you would offer your product or service for sale within a limited market on a test basis to evaluate what additional resources are needed to support the success of the venture (Figure 2.9). Examples of places where a trial run fits well, depending on your product, include farmers markets, in-home sales, or through friends and family. The idea is to track the feedback you receive about your product or service. How do people react to the price, the quality of the product, the packaging? You can experiment by selecting one variable to adjust—changing the price, the packaging, the sales pitch, the presentation, or the quantity—to track reactions and make improvements based on this feedback. You may then decide to adjust other variables to gather more information, as well as considering what other resources are needed for the success of the new venture. Financing and ideas to preserve your financial stability are discussed more fully in Entrepreneurial Finance and Accounting.
Step 5: Business Plan
The ability to travel and visit new locations is a privilege and a great opportunity to gain exposure to new experiences and opportunities. In addition to the work involved in preparing for a trip, the act and process of traveling involves constant decision making to achieve your desired goals and outcomes. For instance, should you travel to one location in Glacier National Park and explore that area in depth? Or should you attempt to visit as many areas of the park as possible with your given resources and abilities?
The challenge at this step of your entrepreneurial journey is to remain focused on managing your resources to meet your goals and outcomes as you write your business plan for your new venture. You will need to focus on the skills, experience, and resources necessary for your venture, and the management and decision making required to ensure success and adjust your plan based on changes and new information. Just as you might find a location in Glacier National Park where you want to stay for a couple of nights, a deviation from your original business plan (discussed in Business Model and Plan) will also require adjustments and changes based on new information and insights.
Be honest with yourself by running a reality check about your ability to manage a venture, especially from a personal-capacity perspective. For example, if you start a business, will it be a part-time or full-time venture? Will you start while in school? Or will you wait until after graduation? The timing of opening the venture can be the difference between success and failure. Consider the difference between hiking in Glacier National Park in the middle of winter, when the daytime temperature is thirteen degrees below zero, and hiking in the middle of summer, when the daytime temperature is seventy-nine degrees. The timing of your visit to the park is an important part of your enjoyment and success in reaching your destination. In planning for your trip, you would pay attention to your departure time to ensure enjoyment and success in your adventure. Similarly, as part of your business plan, you would also research the best time to open your venture.
Finally, during your travels, getting lost, overwhelmed, or sidetracked is always possible. If you get lost when traveling, you might refer to social navigation apps such as Google Maps, Waze, or HERE WeGo, to find turn-by-turn directions and information. Or you might refer to a weblink, a printed map, or a local expert or guide familiar with the area. The business plan is your map. You should identify decision points and milestones, significant key accomplishments, in your plan. Milestones could include points such as hitting your breakeven point, the point at which income from operations results in exactly enough revenue to cover costs. If the financial projections in your business plan are unattainable, what is your next move within the plan? If you don’t reach the milestones identified in your business plan, what alternative choices can you make to redirect your venture? The business plan, in its first draft, should inform you whether your venture has a chance at success. If there are negative areas, what can you change? Building this plan before starting the business provides you with knowledge and insights about your idea. Make any necessary changes to the plan to strengthen the possibility of success. Then when you open the venture, track whether the reality of the venture aligns with your business plan’s projections and expectations. The business plan functions as both a road map to help you see where you are going next in building your venture and as a checklist to track whether you are on course or need to make adjustments. When entrepreneurs get off track, they can check out self-help websites, speak with a business coach or counselor, or contact local agencies or organizations, including those affiliated with the federal SBA. Organizations that offer free (or low-cost) small business counseling, mentoring, and training, include:
These and other resources will be discussed in more depth in Building Networks and Foundations. Look at the review questions and the discussion questions at the end of this section to prepare for creating your business plan. Business plans (Figure 2.10) are discussed more fully in Business Model and Plan.
Step 6: Navigation
Once you’ve completed your trip, reflect on the experiences you had. No matter how well you feel you have planned, there is no way you can prepare for all of the potential challenges, changes, and obstacles that may occur: missed or changed flights, poor weather, an unexpected illness, a trail or road closed for repairs, or sudden good fortune. What parts of the trip went well? If you ran into a problem, how did you handle it? Was the problem something you could have anticipated and planned for? Or was it unexpected? What did you learn from the experience? If you were planning a trip to another national park, what would you do differently in your planning stage? Just as seasoned travelers adjust to their circumstances and learn from their experiences, so should you, as an entrepreneur, learn to adjust by meeting and managing challenges head on.
After completing your business plan, you will probably need to adjust your plan (Figure 2.11). You might decide that you will not have enough resources to survive the time until your venture reaches the breakeven point, or you might determine that the location you selected is no longer available. There are multiple variables that require further exploration and research.
By nurturing an entrepreneurial mindset, you will be better prepared when opportunities, challenges, or obstacles surface. Although you won’t be able to predict or plan for every potential scenario along the entrepreneurial journey, an entrepreneurial mindset helps you to be resourceful when opportunities, challenges, or disappointments occur. By unpacking, or by taking an inventory of your available resources, you can also get a better picture of what you may need to unload, retain, or discard, or even if a new direction is the best course of action. On your entrepreneurial journey, evaluating the experience or situation is a perfect opportunity for you to determine how realistic, overambitious, or shortsighted your dreams and goals for your venture may be. This chapter will explore your vision for your future and your venture. Does your vision include a level of flexibility when you discover new information that supports exploring a new area?
Step 7: Launch
The actual launch is the exciting event when you open your business. By this point, you have made improvements to your product through feedback received in your trial run; you’ve identified the value or benefits provided by your product; you’ve identified your target market; and you’ve identified the location of your launch, whether it is a geographical location or an Internet location.
Inc. magazine provides an analysis of the best locations to launch a new venture, with Austin, Texas, taking the lead (see “Surge Cities: These Are the 50 Best Places in America for Starting a Business,” in Suggested Resources). Consider your target market and the resources necessary to support your venture when choosing the location for your launch. Advice from within the entrepreneurial world suggests that sometimes the launch should take place “under the radar,” meaning in a location where you can make mistakes, fine-tune your business model and offerings, and even become successful without competitors noticing that you have created a disruption within the industry. (You will learn more about this in Launch for Growth to Success).
Even as you are launching your venture, many variables will require your attention, just as we covered in Step 7. Navigating through these variables as your venture grows requires constant attention as new potential opportunities arise.
Sixto Cancel and Think of Us
Sixto Cancel successfully faced the harsh challenges of aging out of the foster-care system without adult support or guidance. He imagined a better foster-care system for young people then cofounded the firm Think of Us. Think of Us is a platform that helps young people in foster care build their own personalized digital advisory board of supportive adults who act as a virtual life-coaching group. The adults guide the young people through the foster-care system and ensure that they are able to become independent when they leave the system at age eighteen. For more information about this venture, visit www.thinkof-us.org. | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/02%3A_The_Entrepreneurial_Journey_and_Pathways/2.00%3A_Prelude_to_the_Entrepreneurial_Journey_and_Pathways.txt |
Learning Objectives
By the end of this section, you will be able to:
• Describe the evolution of entrepreneurship through American historical periods
• Understand the nine stages of the entrepreneurial life cycle
Scholars of business and entrepreneurship have long debated how people become entrepreneurs. Are entrepreneurs born or made? That is, are some people born with the natural skills, talent, and temperament to pursue entrepreneurship? Or can you develop entrepreneurship skills through training, education, and experience? These questions reflect the classic debates known as “nature versus nurture” or “born versus made,” which attempt to explain the determinants of a person’s personality and character.
This debate has been around for centuries. In classical Greece, Plato supported the nature argument, whereas Aristotle believed in the nurture perspective. During the eighteenth-century Enlightenment period, Immanuel Kant (1724–1824; supported the supremacy of human reason) and John Locke (1632–1704; opposed authoritarianism) argued their views. Kant firmly believed that obedience was the expected and desired behavior, whereas Locke believed in allowing some degree of freedom and creativity. The focus of the aspects of this argument changed when late-nineteenth-century psychologists sought to understand how individuals obtain knowledge, and as modern psychologists concentrated on additional factors such as intelligence, personality, and mental illness.
Scott Shane, a professor of entrepreneurial studies at Case Western Reserve University, codirected a study using identical twins and fraternal twins as the research subjects. Shane determined that entrepreneurs are about 40 percent born and 60 percent made, meaning that nature—that is, an individual’s DNA—is responsible for 40 percent of entrepreneurial behaviors, whereas nurture is responsible for about 60 percent of entrepreneurial behaviors.14 Although “nature versus nurture” and “born versus made” are parallel arguments, researchers and experienced entrepreneurs suggest a combined viewpoint. You can unite your natural talents and abilities with training and development to achieve a well-rounded entrepreneurial experience and outcome. Once you determine that entrepreneurship is in your future, the next action is to establish a process to follow, such as identifying useful reading materials, attending classes or workshops, finding a mentor, or learning by doing through simulations or firsthand experiences. Firsthand experiences occur throughout our days and lives as we gain relevant experiences and as we develop a mindset to seek out opportunity-recognition behaviors. Completing coursework, such as reading this textbook, and reviewing the suggested resources provided within this textbook are actions that can support your knowledge and awareness of entrepreneurship as a valid option for your future.
Entrepreneurial Personality Test
Review Bill Wagner’s article “What’s Your Entrepreneurial Personality Type?” in Entrepreneur at this link: https://www.entrepreneur.com/article/84134. Then, go to The Entrepreneur Next Door at http://www.theentrepreneurnextdoor.com/ to take the Entrepreneurial Personality Test to find your personality type.
• Think about your results. Are you a generalist or a specialist?
• Once you know this information, what other entrepreneurial personality types do you fit into?
• How can you use this information in your pursuits as an entrepreneur?
• What does this information tell you about selecting members of your startup team?
Historical Perspective
The evolution of entrepreneurship in the United States has spanned centuries. Entrepreneurs have responded to and innovated within the political and economic conditions of their times. The United States’ economic and industrial spirit has inspired generations of entrepreneurial Americans. Understanding this history might help you appreciate the importance of entrepreneurship as you consider your own entrepreneurial journey.
During the late 1700s, the Pembina Band of Chippewa Indians lived along the Red River of the North, which flows through North Dakota and Minnesota, and into Canada. European explorers established trading posts in this region and bargained with the Pembina and others for pemmican, a buffalo or fish jerky created by tribes for survival during harsh winters when food was scarce. The Pembina pemmican was exported internationally through trading with French, Canadian, British, and other explorers.15 The Pembina solved a problem of food scarcity, then leveraged the product to trade for other products they needed that were available through the trading posts.
In the late 1880s, Madam C. J. Walker, an African American hair-care entrepreneur, developed and marketed her products across the United States (Figure 2.12), hiring sales agents and founding the Madam C. J. Walker Hair Culturists Union of America and the National Negro Cosmetics Manufacturers Association in 1917.16 She started her company with a philosophy of “hair culture,” which quickly became popular and eventually led to steady employment for African American women. Another African American, Charles Drew, established the national blood bank in the late 1930s, just before World War II gave rise to the need for quick access to blood.17 He researched transfusion medicine and saw a need that he wanted to fulfill. Drew applied the ideas from his doctoral thesis to create the blood bank and continued to innovate, developing mobile blood donation stations.
Many innovations and entrepreneurial activities are not achieved by one person acting alone. One example is the invention of the cotton gin in 1794, attributed to Eli Whitney, and possibly based on a design by Catherine Greene and African Americans working as slaves. Some scholars believe that the cotton gin had the unintended consequence of hardening the grip of slavery in the South.18 Eli Whitney, a descendant of a British immigrant, leveraged his status as the creator of the cotton gin to manufacture muskets for the US government, becoming known as a pioneer of American industry with a focus on standardization.19
Colonial and Early America: 1607–1776
The earliest concept of an “entrepreneur” can be traced to this era, from the French entreprendre, which translates as “to do something” or “to undertake.”20 Jean-Baptiste Say (1767–1832), a French philosopher, economist, and businessman, supported lifting restraints to encourage business growth, a highly liberal view in the late 1700s. “The entrepreneur shifts economic resources out of an area of lower and into an area of higher productivity and greater yield,” is a concept attributed to Say, as is the word entrepreneur.21
Entrepreneurial-minded persons included merchants, landowners, manufacturers in textile-related trades, shipbuilders, explorers, merchants, and world market traders.22 The first immigrants to the British colonies took advantage of several key inventions developed before this era, such as printing, double-entry bookkeeping, and improvements in ship design and navigational instruments. The first North American patent was granted in 1641 by the Massachusetts General Court to Samuel Winslow for a new process for making salt. The entrepreneurial spirit of the early colonists helped shape an economic landscape that lasted for generations. Some notable pioneering inventors and entrepreneurs are shown in Table 2.2 and (Figure 2.13).
Table 2.1.1: Notable Early US Inventors and Entrepreneurs
Inventor or Entrepreneur Contribution(s) Significance
Pierre-Esprit Radisson (1640–1710), French explorer Founded Hudson’s Bay trading company Offered bartering of furs for textiles and guns
William Penn (1644–1718), colonist Founded Commonwealth of Pennsylvania as a sanctuary for Quakers Early social entrepreneur
Sybilla Masters (1676–1720), inventor Invented method to clean and refine Indian corn grown by early settlers Patent for a process for cleaning and milling Indian corn (1715)
Thomas Hancock (1703–1764), merchant Founded trading house that furnished multiple goods Sought alternative funding sources to finance business interests
Benjamin Franklin (1706–1790), inventor, publisher, statesman Established printing franchises and an infrastructure for his apprentices to launch in other colonies Epitome of an inventor and serial entrepreneur
As entrepreneurship flourished in the American colonies, the economic structure also began to emerge. The prevailing view of economics was associated with the stockpiling of gold and silver. Colonists perceived imports as a reduction of metal wealth—gold and silver money—and felt that exports channeled these metals back to the colonies. To categorize the economic mindset of the time, the Scottish philosopher and economist Adam Smith (1723–1790) wrote An Inquiry into the Nature and Causes of the Wealth of Nations (1776). This influential treatise outlined the concepts of free trade and economic expansion through capitalism, a system in which individuals, people, and companies have the freedom to make decisions and own property as well as benefit from their own efforts, with government playing a secondary role in oversight. This book confirmed Smith as the “father of economics” and modern free trade. Among the most significant concepts that Smith proposed were the “invisible hand” theory of supply and demand in the marketplace; the use of the GDP to measure a country’s level of production and commerce; and the self-interest concept, whereby individuals inadvertently help others as they pursue their own goals.23 The ability to gain personally from entrepreneurial activities is a key factor in supporting entrepreneurial behavior. Smith’s concepts continue to influence modern economics and entrepreneurial activity.
The First Industrial Revolution: 1776–1865
As the colonies expanded, so did opportunities and interest in property ownership, manufacturing, inventions, and innovations. An innovation is any new idea, process, or product, or a change to an existing product or process. The understanding and acceptance of innovation developed around 1730, when the economist Richard Cantillon identified the first academic meaning and characteristics of “entrepreneurship” as the “willingness to bear the personal financial risk of a business venture.”24 The First Industrial Revolution was notable for the explosion of inventive activities by the “great inventors,” who pursued entrepreneurial opportunities to meet market needs, demands, and economic incentives.25
An important thing to keep in mind is that dates of inventions don’t necessarily reflect specific launch dates. Development of these inventions may have been ongoing for years or decades before they were considered market-viable products.
A plethora of inventors and their inventions transformed several industries and economic classes across the growing nation. During this era, the country benefited from inventions that created, expanded, or revolutionized industry and increased wealth and expansion. These revolutionary inventors included Eli Whitney (cotton gin, 1794), Elias Howe (sewing machine, 1845), and Samuel Morse (telegraph, 1830s–1840s) (Figure 2.14). Many other people contributed to these and other inventions.
Although he was not an inventor but an industrialist, Andrew Carnegie provides an interesting example. A manufacturer who focused on the value of innovations and how to implement them, Carnegie adopted newly developed techniques to improve steel production. He also was among the first to implement vertical integration, the strategy of gaining control over suppliers of raw materials and distributors of finished products to expand or control the relevant supply chain. He developed a reliable network of suppliers and distributors to support his steel factories. Carnegie also was one of the first magnates to practice philanthropy. He gave away much of his immense fortune to support community and public library systems, concert halls, museums, and scientific research.26
These entrepreneurial pioneers, and many others like them, sought ways to earn a return on investment on an invention and to protect themselves legally through the patent process. A patent is a legal grant of protection for an inventor over the rights, usage, and commercialization of an invention for a set time period.27 An early US patent was issued in 1790 to Samuel Hopkins for his process of making potash as a fertilizer ingredient.28
The innovations of women, African Americans (slaves or free persons), and other marginalized groups were crucial during this era. As we saw earlier, Sybilla Masters invented a method for grinding Indian corn. She received a patent from the English king in 1715. But because women were not allowed to file for patents or even to own property at that time, the patent was filed in her husband’s name.29 Although the invention of the cotton gin is attributed to Eli Whitney, as we have seen, it may have been based on a design by Catherine Greene and African American slaves. Social and legal discrimination could limit or conceal the identities of actual inventors, especially if they were women or slaves.30 Most patent applicants and awardees were white males. One exception was Mary Dixon Kies, who in 1809 became the first woman awarded a patent for her process of weaving straw with silk or thread. This was a key innovation for the hat industry, due to an embargo on European goods.31 Likewise, many slaves were extremely innovative, but laws and prejudice prevented them from filing independently for patents. Because slaves had no rights, many sought patent submissions under their owners’ names but received no recognition or compensation for their efforts.32 It was not until 1820 that an African American, Thomas Jennings, was granted a patent for a process called “dry scouring” for cleaning fabric.33 As the successes and failures of inventors and innovations expanded, so did the consumer demand for better-performing products and services. This led to the Second Industrial Revolution.
The Second Industrial Revolution: 1865–1920
Although the First Industrial Revolution had a broad scope and a transformative impact, the Second Industrial Revolution helped shape consumer demand for the latest inventions and innovations developed by small and large businesses. The breakthroughs of this era brought applicable innovations in many fields, from chemistry to engineering to medicine.34
The nineteenth-century economists Jean-Baptiste Say and John Stuart Mill (1806–1873) refined and popularized Cantillion’s definition of an entrepreneur to capture the spirit of their era. Their definition of “entrepreneur” describes someone who creates value by effectively managing resources for better productivity, and someone who is a financial risk taker.35
After the US Civil War and into the 1870s, many industries flourished with improvements in production organization (petroleum refinery storage, mass production) and technological systems (electricity and the telephone). Additional inventions included improvements in steel production, chemical dyes, transportation (diesel and gasoline engines, the airplane), assembly-line production, agriculture and food-processing improvements (refrigeration), textiles, and the typewriter (Figure 2.15).36 As entrepreneurial activity, economic prosperity, and productivity demands increased, entrepreneurs and their inventions were highly regarded and sought after, contributing to the belief that the United States was a land of opportunity.
When World War I began, the US economy was in a recession, with Europeans purchasing US materials for the war. When the United States entered World War I in 1917, an economic boom ensued. Unemployment declined from 7.9 percent in 1914 to 1.4 percent in 1918 as the United States produced goods and equipment necessary to support the war efforts of the nation and its allies.37 From an entrepreneurial perspective, World War I contributed to military-related advancements, communication equipment, and improvements in production processes. The American economic landscape began to shift during this era from small independent companies to big corporations. The smaller businesses in the previous era either dissolved or were absorbed by larger corporations. As the stock market crash of October 1929 and the Great Depression of the 1930s struck worldwide, innovation slowed. Consumer confidence waned as economic confidence and production declined, and unemployment rose.
LINK TO LEARNING
Visit the History site on the Great Depression or PBS’s American Experience article on the Great Depression to understand the background and circumstances that led to the stock market crash of 1929, the Great Depression, and how the United States rebounded during this period.
After World War II ended in 1945, American society shifted from reliance on the traditional entrepreneur as a resource to reliance on large organizations that offered stability and job security. Corporations continued to buy up small firms to standardize innovative, large-scale mass production of goods, services, and jobs. The idea of being an entrepreneur gave way to the idea of the “corporate man” with job security and health benefits offered by big employers. Although entrepreneurship did not totally vanish, its growth slowed tremendously compared with previous years and shifted to corporate entrepreneurship, whereby large corporations funded the development of new ideas, opportunities, or ventures through formal research and development processes that focused on the corporations’ own strategies and goals. Figure 2.16 lists some of the corporations that emerged during this period.
As economic views and confidence in how the United States might regain economic prosperity shifted, so did the scholarly meaning of entrepreneurship. One scholar and economist, Joseph Schumpeter (1883–1950), introduced theories and terminology that continue to influence modern entrepreneurial concepts and practices. He originated two critical phrases: entrepreneurial spirit, which is associated with those individuals who are productive self-starters and make things happen, and creative destruction, which he defined as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”38 Schumpeter’s theory that innovation would destroy established corporations to create new ones was not a popularly held or shared view at the time. The thought leaders of this era had different approaches to addressing the rise of corporations as part of the entrepreneurial fabric of the United States. Schumpeter theorized that corporations were better positioned than individuals to support the kinds of research and development that would result in innovations and have economic impact.39 To complement this view, he also proposed the concept that corporate support of entrepreneurs’ visions would result in a sustainable “capitalistic financial system” to support and expand on the free-market system espoused by Adam Smith.40 In contrast, the sociologist and journalist William Whyte (1917–1999) argued that entrepreneurial culture had changed because “American business life had abandoned the old virtues of self-reliance and entrepreneurship in favor of a bureaucratic ‘social ethic’ of loyalty, security and ‘belongingness.’”41
Finally, it is critical to note that the growth of corporations and opportunities expanded beyond the borders of the United States. Corporations faced novel global experiences that supported Schumpeter’s creative destruction theory, as other countries presented new dynamics to address. The annually created Global Entrepreneurship Monitor (GEM) report is a scholarly examination that examines how a group of nineteen countries benefited from venture-capital investments and the factors affecting those investments for entrepreneurial activity. This study addressed the question of entrepreneurial opportunities, entrepreneurial capacity, and entrepreneurial motivation as parts of the engagement within all industries and the direct correlation between venture-capital investment and high-growth startups.42 The GEM report is created annually with timely and relevant information related to entrepreneurship and is available at this website: https://www.gemconsortium.org/. This cultural shift in the American entrepreneurial spirit generated new interest in the training and education of workers, ushering in the knowledge economy.
The Knowledge Economy: 1975 to Today
In the mid-1970s, the promises of corporate life began to lose their appeal to entrepreneurial-minded individuals. One change was established corporations’ shift in focus on innovations from research and development departments to internal entrepreneurial activities by intrapreneurs. An intrapreneur is an employee who acts as an entrepreneur within an organization, rather than going solo. Intrapreneurs contribute entrepreneurial ideas, products, and services, using corporate work time and resources, but on a much less formal basis than past corporate contributions to innovation. Quickly evolving advances in technology have touched every industry, and people with tech know-how have become champions. Firms dominating the technological landscape include Apple, Microsoft, 3M, Alphabet (the parent company of Google), IBM, and Oracle. In today’s David-versus-Goliath culture, these companies once were small startups, but now they command seemingly endless resources. New opportunities have arisen in the world of technology for those willing and able to compete with these giants. All companies, large and small, are interested in a more informed and educated workforce with specialized or advanced degrees in entrepreneurship and business administration. The new entrepreneurs are prepared to develop and lead firms that can become startup superstars. Viewed through our current lens, companies like Apple, Microsoft, Google, and others have become the new Goliaths, but in their startup days, these companies were the disruptors that fought to create new industries or reshape previously established ones.
The Entrepreneurial Process
Your approach to the entrepreneurial process, or the set of decisions and actions that you might follow (as in Figure 2.17) as a guide to developing or adjusting your venture, is fluid, not static. This is because your personal interests, background, experiences, resources, and connections are unique to you—but those areas may change over time. For instance, you and a friend might take an art class together for fun and both discover a hidden talent and eye for creating handcrafted jewelry that everyone loves. One day over lunch, you share some of your frustrations with your friend about an interest in potentially selling your unique creations to a local art gallery. Despite your research, you have few clues about where to start or how to get your art shown in a gallery. During your conversation, you are surprised to learn that your friend has already sold several pieces by following a mentor’s advice. Through several referrals, she figured out that her best option was to create a presence on Etsy, an artisan-focused website for e-commerce, electronic transactions, particularly over the Internet, for the exchange of goods and services. Even though you both started at the same place with similar goals, your results differed because you followed different entrepreneurial pathways. In this case, your friend decided to enter the entrepreneurial process at a different stage than you did. This type of scenario occurs every day and clarifies why ventures differ: The decisions of the entrepreneur or the entrepreneurial team are the heart and success of the venture. Why the entrepreneur is the most crucial resource for a venture will be discussed in more detail in later chapters.
If you decide to take the leap into entrepreneurship, you should follow a certain process before you launch your venture. What is that process? As we discussed previously in the steps of the entrepreneurial journey, you need to think through your goals, prepare and follow an action plan, make sound decisions and adjustments along the way, and persevere through challenges and crises to ensure a successful journey. If that sounds like you have some work to do, you are correct. However, if you follow or recognize the stages in the journey and keep track of the related elements, it could be the most satisfying work of your career. Many people find the entrepreneurial journey fulfilling, in part because they get to define their own paths. The plan to graduate, then find a career working hard to help a company or organization reach its goals, are even more satisfying when you can work for yourself to create your own path and purpose in the world.
Before you create your path, a key action in the entrepreneurial process is developing your entrepreneurial mindset. Recall that an entrepreneurial mindset is about being open, self-reflective, and honest about what you are willing to do and capable of doing to achieve success. For instance, are you comfortable with making sacrifices like spending an evening doing research instead of hanging out with friends or family?
The Entrepreneurial Process: Venture Life Cycle and Product Life Cycle
In general, the entrepreneurial process includes several key stages or some variation of these stages. Keep in mind that these stages do not always follow a sequential pattern, as circumstances and opportunities change. One popular method of understanding and connecting to this entrepreneurial process is to think of your new venture as similar to the human life cycle, the major stages that humans pass through in their life development, and the different growth processes in between.
As we can see in Figure 2.18 and Figure 2.19, the startup stage is similar to the birth of an infant. During the startup stage, or the birth of the idea, the venture requires resources to support the startup as the entrepreneur develops the idea, creates the prototype, and builds the infrastructure to support production. During the startup stage, cash supports building the venture. Meanwhile, the startup is seldom ready to generate sales. Planning for this situation, knowing that cash is needed but not replenished through sales, is an important consideration.
Just as a child grows rapidly in their early years, often a business venture experiences quick growth as the product or service becomes commercialized and experiences strong demand, reflected through increasing sales and stronger knowledge and access to the target market. Again, this stage requires resources to support growth. The difference between this stage and the startup stage is cash is generated through sales activity. In some entrepreneurial ventures, however, the growth stage is about building the venture, rather than generating sales. For ventures like YouTube, the growth stage entails increasing the inventory of videos as well as an increase in people accessing the videos.
Just as humans achieve maturity during their life cycle, the business might reach a point where growth slows and perhaps moves into a decline stage. In our human experience, we can take actions to improve or lengthen the maturity stage of our lives through better life choices, such as nutritious eating habits and exercise, to increase longevity and delay decline. We can also extend the maturity of the business and even move into a rebirth and a new growth phase through insightful decisions, such as adding new features to the product or service, or offering the product or service to a new target market. The goal in our lives, and in this analogy, is continued growth and success. Products can be altered or enhanced to extend the product’s life cycle, which also extends the life cycle of the venture.
Examples of avoiding the decline and death of a business fit well into the concept of product life cycle and are prevalent in technology-related products such as the television, the personal computer, and the cell phone. For example, black-and-white televisions underwent a growth stage after World War II. Color televisions were introduced in the 1950s. As technology improved, television manufacturers have repeatedly moved through the life cycle and avoided declines in sales with new features and adaptations with options such as plasma, LED, and smart technology. An example of a product that started and then quickly declined into the death stage of the business is the eight-track player, a music player available between the mid-1960s to the early 1980s. The eight-track player replaced the reel-to-reel tape recorder as a more accessible product for installation in moving vehicles, from cars to Lear jets, to offer individual music purchased by the vehicle owner for listening while traveling. Even as the eight-track player was becoming popular, moving from the introductory stage into the growth stage of the product life cycle, the compact cassette was being developed. In the early 1980s, the compact cassette format replaced the eight-track player, abruptly ending the product life cycle of the eight-track player.
Some products lend themselves more easily than others to managing the life cycle. The goal is to manage the product for continuous growth, whereas other products, such as the eight-track player, are based on technology that quickly becomes obsolete when a better option becomes available. Other examples of products with short life cycles are categorized as fads, like the hula hoop and pet rocks—fads from the past that were reintroduced to a new generation of consumers and that moved quickly through the product life cycle into the last stage—the death of the product with sales either nonexistent or so few that the product becomes a novelty item.
The life cycles of the venture and of the product are two different concepts but are closely related. The venture will need different resources during each stage of the cycle to support the growth and success of the venture. Knowing what stage of the life cycle the product is in assists in decision making. For example, a decrease in sales triggers the need to enhance the product’s value to extend and continue strong levels of growth. From the venture’s perspective, managing the product life cycle also supports the continued success of the venture.
A successful venture avoids decline or death with the potential to prepare for either the sale of the venture or a public offering of stock, known as an initial public offering (IPO), which gives the company access to significant funds for future growth. Two entrepreneurial IPOs in May 2019 were Zoom and Uber. Zoom is a company that offers video conferencing, web conferencing, webinars, and cross-platform access. Uber is a ride-sharing company. Both entrepreneurial ventures used IPOs to support their future plans for growth.
Think about some of the friends you’ve known since childhood compared with those you’ve met in recent years. Suppose you plan to work on a project together and want to figure out who should handle which parts of the work. You might learn some information about a newer friend’s past experiences through conversations, observations, or other collaborations. Even so, it would not be possible—or necessary—to learn everything about their childhood and how they learned a specific set of skills or acquired certain connections. You would just start your interaction and work with your friend from the current time. The same is the case for a venture. You might start a venture from the idea-generation stage or from infancy as part of the pre-launch stage. Or you might join the process after someone else has already completed the early stages of the business—for example, by purchasing an existing business or entering into a partnership. You might not have been around when the business was launched, but you can continue with the development of the business from the present moment. Just as each stage of human experience involves different concerns and milestones, the same holds true for your venture. The venture is your responsibility to manage during each stage of the development process.
Figure 2.20 provides an overview of each stage and the associated decisions that you might consider or encounter for the entrepreneurial process.
Stage 1: Startup
In stage 1, startup activities are related to your perceptions about a potential idea, how you develop your idea, and how you might recognize appropriate opportunities. At this stage, the crucial activity is defining the opportunity to develop your concept into a realizable business venture with a strong potential for success. In this stage, you work on developing the idea more thoroughly to determine whether it fits your current and future circumstances and goals. You will also work through exercises to distinguish ideas from viable opportunities. Each of these actions is addressed in greater detail in future chapters. The goal of this section is to introduce concepts for a greater understanding of these stages. Key actions or exercises in this stage include:
• Idea development
• Opportunity recognition
• Identification of a market opportunity
• Research and due diligence, or conducting the necessary research and investigation to make informed decisions that minimize risk, such as ensuring you are not duplicating an idea that already exists
Stage 2: Development
Now that you have confidence in your idea, it is time to develop a structure to determine what type of venture will work best for the idea. In Stage 2, you might select a business model (discussed further in Business Model and Plan) and pull together a team (discussed in Building Networks and Foundations) to make your dream venture a reality. The business model identifies how a business will build revenue, deliver value, and receive compensation for that value. Some examples of business models include monthly subscriptions, pre-sale orders, kiosk sales, and other choices. Entrepreneurial decisions in the development stage include many options to consider, including bootstrapping, starting out with limited funds, receiving venture funding from external sources, licensing to receive royalties on a per-item basis, purchasing another business, inheriting a business, franchising either through the purchase of a franchise or building your company with the goal of eventually creating your own franchise, creating a virtual web-based company, using mobile apps that support your business or connect with other businesses, founding a social venture to support a cause, consulting, or freelancing. Choosing among these options or creating your own unique approach to supporting the success of your business will change your results and success level.
Key activities in this stage include:
• Formulation or refinement of your concept
• Design of business model, plan, goals, launch team, and operational structure
• Creation of prototype product to fit market (sample or model for customer feedback)
• Further research and due diligence, as needed
Stage 3: Resourcing
Using knowledge you gained in the first two stages, in the resource stage, you will evaluate the necessary resources to support your new venture. Resources include financial support; support and selection of a manufacturing location or facility (if you are producing a physical product); personnel talents, knowledge, and skills; possible political and community support; and family support, because the new venture will require time commitments that will cut into time with your family. Fundamentals of Resource Planning discusses obtaining resources in more detail.
The key activities in this stage include:
• Gathering pertinent resources, such human and financial capital, investors, facilities, equipment, and transportation
• Establishing connections, networks, and logistics
• Further research and due diligence, as needed
Stage 4: Market Entry
Market entry—the launch of your venture—is often undertaken in a soft launch, or soft open, within a limited market to minimize exposure to unforeseen challenges. As an entrepreneur, you are presenting your new venture to a specific market to see how well it is received and supported. You might make last-minute adjustments at this stage, but the crucial part is to see how the market reacts to your venture. This is an excellent time to scrutinize all aspects of your business for solutions to unexpected problems and improvements in efficiencies, and to track customer reactions to your venture.
One of your most important responsibilities at this point is managing your cash flow, or the money coming into and going out of a business, as cash is essential for the success of the venture. In the early stages of the venture, you will need large amounts of cash to fund the operational activities, because your sales are not yet guaranteed. Production costs, payroll, supplies, inventory, lease payments, and marketing: All of these expenditures involve cash outflows from your venture as part of the startup costs. A successful business needs available cash as well as customers for its products and services, or it will not survive. Key activities at this stage include:
• Assessing management structure and needs, adjusting as necessary
• Managing cash flow
• Launching the entity
• Monitoring progress
• Further research and due diligence, as needed
Stage 5: Growth
The growth stage includes making decisions that support the future growth of your venture. In the growth stage, your decisions reflect the scalability of your venture. There is a big difference between a small-scale venture and a venture that must handle significant levels of sales. At this point, your organizational structure needs an update. You might need new functional levels, such as a finance department, or a human resources department, or perhaps an assistant manager. Other considerations include the size of your facilities. Is the current size, or capacity, appropriate for the growth of the venture? Other questions relate to the appropriateness of your suppliers or inventory providers. Are quality and delivery time meeting your needs? Is the payment system appropriate for your venture? In this stage, you should also monitor the growth of your venture and make appropriate adjustments. For instance, if your venture is not growing as expected, then you might go back to your business plan and see what adjustments you can make. Key actions in this stage include:
• Managing the venture
• Making key adjustments, as needed
• Further research and due diligence, as needed
Stage 6: Maturity
In the maturity stage, your venture has moved into the maintenance phase of the business life cycle. Entrepreneurs monitor how a venture is growing and developing according to the business plan, and its projections and expectations. Is your venture growing faster or slower than you expected? What milestones has it reached? What changes are needed to continue the success of the venture? How can you address those changes? Are you still able to maintain or meet the needs of the venture?
Depending on your situation, you still will need to take action to support the venture. Even if the venture is operating efficiently and in a predictable manner, external changes could compel you to change your venture, for example, by making improvements to the product or service, finding new target markets, adopting new technologies, or bundling features or offerings to add value to the product.
One of the key points to understand at this stage is that ventures can, and often do, fail. Entrepreneurship is about taking calculated risks to achieve a reward. Sometimes your venture may not turn out how you planned. Keeping an open mind and learning from experience presents new opportunities for either changes to the existing venture or even a new venture. Consider these examples of early entrepreneurial failures by people who later went on to achieve great success:
• Bill Gates’s early Traf-O-Data company failed because the product did not work
• Walt Disney was told he lacked creativity and was fired from a newspaper job
• Steve Jobs was once fired by his own company, Apple
• Milton Hershey started three candy companies before he founded the successful Hersey Company
Key actions of this stage include:
• Strengthening market position
• Awareness and willingness to change
• Reaping return on investment (ROI)
Stage 7: Harvest
At some point, your company may outgrow your dreams, ambitions, or interests. At this stage, you are harvesting or collecting the most return on your investment while planning how to retire or make a transition away from this venture. Many entrepreneurs enjoy the excitement of starting and building a venture but are less interested in the routine aspects of managing a company. In the field of entrepreneurship, the entrepreneurial team creates a venture with the goal of harvesting that venture. Harvesting is the stage when all your hard work and ingenuity are rewarded through a sizable return on the invested money, time, and talents of the startup team, including any investors. During this stage, the entrepreneurial team looks for the best buyer for the venture to achieve both a return on investment and a match for the continued success of the venture. Key actions in this stage include:
• Identifying what the entrepreneurial team, and investors, want out of the venture, their ROI
• Planning for your future: What’s next on your entrepreneurial journey?
Stage 8: Exit
The exit stage is the point at which your venture either has fulfilled its purpose as a harvested success that is passed along to the next generation of business owners or has not met your needs and goals. These two situations give rise to vastly different scenarios. In the harvesting of the venture, you might receive a sizable cash payment, or a combination of cash payment and a minority share of stock in the venture’s buyout. In an exit that reflects the closing of the venture, your option is most likely liquidation of assets, which you would sell to pay off any remaining creditors and investors. In both harvesting and liquidation, the challenge for you as an entrepreneur can be to accept the emotional withdrawal from a venture that has consumed your thoughts, time, and energy. The time has come for you to step out of the picture and allow the venture to be cared for by a new “parent” or to close the venture completely. Key actions in this stage include:
• Exit strategy and plan
• Transition to the next generation of owners
Stage 9: Rebirth
For some entrepreneurs, the excitement of creating a new venture supersedes the financial gain from harvesting a successful venture. The thrill of transforming an idea into a realizable opportunity and then creating a thriving venture is difficult to find elsewhere. In the rebirth phase, the entrepreneur decides to seek out another new venture to begin the process all over again. As an experienced entrepreneur, you can create a new type of venture or develop a new spin-off of your original venture idea. At this point, you have become a serial entrepreneur, an entrepreneur who becomes involved in starting multiple entrepreneurial ventures. Key actions in this stage include:
• Redesigning or creating a new venture
• Bringing in a new entrepreneurial team or the team from the previous venture
LINK TO LEARNING
“Drop into” Man Crates to learn about this entrepreneurial venture. Who is their clientele? Does this company sell an experience, a product, or both? What life cycle stage is this business in now? Applying your assessment of the company’s life cycle stage, pretend that you are the CEO of the company. What recommendations do you have for the company’s continued success and growth?
Visit the Man Crates site to learn more. | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/02%3A_The_Entrepreneurial_Journey_and_Pathways/2.02%3A_The_Process_of_Becoming_an_Enterpreneur.txt |
Learning Objectives
By the end of this section, you will be able to:
• Understand how venture opportunities present different pathways to entrepreneurship
• Describe methods for finding your personal path to entrepreneurship
When you think of which career pathway (as in Figure 2.21) to follow, you might not think of being an entrepreneur in the same way that you would think of being a nurse, an attorney, or an engineer—but you should. Entrepreneurship offers you the chance to express your creativity and business acumen and to control your destiny. Conversely, if you were to earn an engineering degree, your employment options could involve working for an engineering company. Your job would be relatively secure and structured, with a paycheck and some perks. Or you could leverage your engineering degree into an entrepreneurial venture.
The entrepreneurial journey includes multiple experiences and decisions that will help you reach your entrepreneurial goals. For example, some individuals inherit a family business. If your choice career proves not so ideal or available as planned, entrepreneurship may be an attractive option. However, a growing number of people intentionally choose business ownership as a vehicle for fulfilling their career goals and interests. If you reach this crossroads in selecting your ideal vocation, how do you successfully navigate the entrepreneurial pathway as a career option? Your entrepreneurial journey might travel several paths, each presenting obstacles, twists, and turns before you reach your destination. Many of today’s entrepreneurs have followed different pathways—sometimes conventional, sometimes not—that have led to the creation of various business structures matched to each entrepreneur’s spirit. These businesses include established or adapted business models that met a need, solved a problem, or developed a social solution.
Regardless of the type of entrepreneurial venture you may choose, many pathways can take you to your goal. Venture types differ in their missions and visions. Their purposes range from earning income (for profit) to meeting a community need through tax-exempt status (nonprofit) to solving a social or environmental problem (social enterprise) to combinations of these types (hybrid). Business Structure Options: Legal, Tax, and Risk Issues examines each type in depth.
For many established businesses, the pathway is not always as clear as the entrepreneurial process suggests. This is because entrepreneurs are opportunists, leaders, and initiators: They take calculated risks to create or adapt something to solve a problem or create a response for potential financial gain or intrinsic value. The reality is that these situations or opportunities do not always occur in a logical sequence or order. Instead, entrepreneurial-focused individuals might encounter opportunities, offers, or options that spark a new venture.
Opportunities and Options
If you are ready to launch a venture, you will find numerous situational opportunities to pursue your interests. A situational opportunity is one that becomes available, depending on factors such as where you work, your family obligations, your idea or invention, your unique creative expression, or a recent career search or job change. The evolution of entrepreneurship, your own receptiveness to entrepreneurial thinking, and many existing and emerging platforms make this possible.
As you plan your venture, you should consider opportunities in these areas:
• On the Job. Some workplaces offer intrapreneurial opportunities, or ventures created within the company, for entrepreneurial-minded individuals. The firm 3M, for example, has historically nurtured employee creativity and promoted innovative opportunities for employees. This environment inspired an employee project that resulted in the invention of Post-it notes. Even if a company does not support venture creation, there is also the possibility of taking the entrepreneurial idea out of the company to create your own venture.
• Family Obligations. You might work in a family-owned business or take over after family members retire or transfer ownership to other family members.
• Franchises. You might purchase an existing franchise, a license granted to an entrepreneur to operate under the franchise’s name.
• Web-Based Venture. You might launch a product venture through Etsy, Shopify, or another e-commerce web site.
• Work for Hire, or Independent Contractor. You might launch a consulting business or work as an independent contractor to gain clients, experience, and income on a flexible schedule.
• Unemployment. Being underemployed or unemployed might make entrepreneurship a pathway to economic freedom.
• Purchase. You might purchase an existing business from a retiree, your current company, or a family that owns a business. As a business owner’s life situations change, due to aging or new interests, the business becomes available for new ownership. Working for a company can offer the option of buying out the current owner to become the new owner. Purchasing an existing company provides historical financial data and decisions that support future successes. If you are employed by the company, you have the opportunity of learning details about how the business is managed, an advantage that could support your success in purchasing and managing the company.
• Frustration. You might encounter a currently existing product or situation that needs improvement or a solution, and decide to tackle the situation yourself.
• Serendipity. This is a situation in which various pieces come together to support the creation of a new company or product. The Entrepreneur in Action: Gordon Moore and Fairchild Semiconductor box describes how Gordon Moore (creator of Moore’s Law on the exponential growth of a single silicon chip doubling every year) was working for Shockley Semiconductor in 1956. At that time, he had little-to-no knowledge of semiconductors. However, he quickly learned about semiconductors by applying his PhD in chemistry and physics from Caltech to the semiconductor industry. After one year of employment, Moore and seven other employees left to form Fairchild Semiconductor, financed by Sherman Fairchild. During his eleven-year employment with Fairchild Semiconductor, Moore published a paper describing what we now know as Moore’s Law. His next move was based on recognizing the importance of the microprocessor in transforming the computer and related industries. After frustrations with Fairchild’s lack of support for this new direction, Moore, along with a colleague from Fairchild Semiconductor, Robert Noyce, formed Intel, the second largest semiconductor chip manufacturing company in the world.
Gordon Moore and Fairchild Semiconductor
Sometimes the path to entrepreneurship doesn’t occur as you might plan or think. Consider the story of Gordon Moore, a cofounder of Fairchild Semiconductor: “Like many other scientists and engineers who have ended up founding companies, I didn’t leave Caltech as an entrepreneur. I had no training in business; after my sophomore year in college, I didn’t take any courses outside of chemistry, math, and physics. My career as an entrepreneur happened quite by accident. There is such a thing as a natural-born entrepreneur….But the accidental entrepreneur like me has to fall into the opportunity or be pushed into it. Most of what I learned as an entrepreneur was by trial and error, but I think a lot of this really could have been learned more efficiently.”43
The combination of diversity in educational background and skills, the serendipity of being in the right place at the right time, and facing frustrations with the current situation can combine into recognizing an entrepreneurial opportunity. For Gordon Moore, learning about semiconductors, and creating the company Intel, was the furthest idea of what he pictured for his future. The serendipity of his experiences, knowledge, and intelligence combined to support the creation of Intel. Gordon Moore is reported to have a net worth as of October 2019 of \$10.6 billion.
One core concern of entrepreneurship is how you will fund your venture and where you will find the necessary resources. Although some businesses require significant startup funding, it might surprise you to learn that many ventures have been launched by entrepreneurs who used their own capital, labor, connections, or other resources to start—an approach known as bootstrapping. Some savvy bootstrapping strategies include launching a venture part-time while maintaining a full-time job, using personal savings, bartering for services and materials, and securing pre-orders. Some entrepreneurs seek financial support for their venture through funding from angel investors, venture capitalists, or traditional loans or debt. The advantages and disadvantages of these approaches are covered in Entrepreneurial Finance and Accounting, along with an in-depth discussion of bootstrapping.
Finding Your Entrepreneurial Path
The process and pathways to entrepreneurship can be overwhelming. With so many choices and decisions involved, entrepreneurial choices can seem intimidating, and the route you follow may sometimes produce some anxiety. Before you get consumed with the technical aspects of launching a venture, it is important to start with the most important foundation: finding your personal path to entrepreneurship.
Your Personal Path through Self-Reflection
Your decision to launch a venture should not be taken lightly. Entrepreneurship requires a lot of energy, decision-making skills, tenacity, resourcefulness, and flexibility. As you consider entrepreneurship as a career, you should complete some self-reflection to figure out how, why, and when entrepreneurship may be the right professional path for you. For example, if your personality is introverted—that is, you often find it most energizing to be alone—you might consider a venture that capitalizes on that scenario. (Recall your entrepreneurial self-assessment Are You Ready?: Entrepreneurial Potential Self-Assessment.) It might be helpful to study or meet other entrepreneurs with a venture you find interesting.
Startup Ideas
Visit Medium.com to check out this “Top 10 Business Ideas for Startups” article and then review the startup ideas for introverted personality types at Small Business Trends.44,45 Review the lists of ideas. Next create a list of five or more of your own startup ideas. Often, we gain new insights by reading through other ideas. Your idea might be a spin-off of an original ideas. Or the information you gain could trigger a brand-new idea.
Your Personal Path through Research and Experiments
A key step to finding your personal pathway to entrepreneurship is to conduct research and try out roles related to your desired venture. Researching the potential industry or entrepreneurial options available to you will provide some level of comfort and validate your decisions about what you might do next. One concrete way to do this is to “shadow” a professional in your desired field. This means arranging to be an observer during a standard workday to see firsthand what is involved in running that type of business. You may also be able to secure some experience by serving as an apprentice, intern, or lab assistant, or as an independent contractor or freelancer, an individual who contracts to offer professional services or tasks for a negotiated fee. Informational interviews—whether informal chats with new or established business owners at a trade show or networking event, or a formal question session—can also provide insight.
Your Personal Path through a Soft Launch
One sure pathway to entrepreneurship is to jump in with both feet and experience the process by launching a venture. Although this may seem like a big leap or you may feel you are not ready, remember that entrepreneurship is an experiential discipline that can be understood fully only through hands-on experiences. Launching a venture for a limited time frame or audience to gain experience, insights, and feedback about the target market or consumer—a process known as a soft launch (or soft open)—will provide valuable feedback on how to meet the consumer’s needs or improve on your product to ensure success. You might explore a soft launch by creating a sketch or sample of what you plan to offer and asking friends and potential customers what they think, or by creating a website or app prototype to share with a limited number of people to see if it works as planned (sometimes called a beta test) and get feedback. | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/02%3A_The_Entrepreneurial_Journey_and_Pathways/2.03%3A_Enterpreneurial_Pathways.txt |
Learning Objectives
By the end of this section, you will be able to:
• Identify common frameworks used to shape an entrepreneurial venture
• Compare how some frameworks better fit certain venture types
• Define an action plan and identify tools available for creating an action plan
• Describe some common types of entrepreneurs
In designing a venture that is sustainable or capable of being self-funded, it is helpful to use specific tools to manage information. One such tool is a framework—a structure or outlined process that can be used to accomplish entrepreneurial goals through problem solving, idea generation and validation, and brainstorming.
Selecting a Framework
You can choose any of several popular frameworks to help with the design and integration of your business experience and entrepreneurial thinking. The most widely used frameworks that have been developed as integrative tools to support entrepreneurial thinking include:
• Business Model Canvas (BMC) offers a simple, one-page tool used to design an innovative business model that can be presented to key stakeholders (Figure 2.22). The business model canvas is discussed more fully in Business Model and Plan.
• Lean Strategy Canvas is a spinoff of the BMC that introduces a potential customer feedback loop for continuous product or idea improvement to meet the market’s needs (Figure 2.23). The lean strategy canvas is discussed more fully in Launch for Growth to Success.
• Design Thinking Process supports a systematic, logical approach for addressing and solving problems with multiple solutions (Figure 2.24). Design thinking was first applied in relation to STEM fields—science, technology, engineering, and mathematics. Due to the success of this process, design thinking has become popular in many other areas.
Design thinking approaches problem solving or the creation of a new venture from the perspective of the customer. For example, Amazon provides easy-to-open packages after observing the challenges customers had in opening the delivered products. Design thinking is covered in greater detail in Problem Solving and Need Recognition Techniques with applications to starting an entrepreneurial venture, product design, and improvements to existing products.
• Four Lenses Strategic Framework is used for the development of social enterprises; assesses four strategic areas (stakeholder engagement, resource mobilization, knowledge development, and culture management) to address a social problem and provide sustainable social impact (Figure 2.25).
The typical application of each framework is shown in Table 2.3. The process of selecting the most appropriate framework for your entrepreneurial interests might help you understand how to develop your idea. We recommend that you try all four frameworks before selecting one. Even though each framework is identified for a general class of venture, each one provides a different perspective for developing your venture.
Table 2.3.1: Frameworks
Framework Description Typical Use
Business Model Canvas A one-page tool that maps out nine basic building blocks that are necessary for a successful business model Helps prepare a sustainable business model
Lean Startup Outlines a quick feedback loop through customer input Used for fast-paced industries and quick idea validation
Design Thinking Process Outlines a systematic, results-oriented process to address and solve problems Used for the development of STEM fields with expansion into entrepreneurial ventures, products, and processes; applicable to all areas
Four Lenses Strategic Framework A practitioner-driven model that considers four perspectives to support and develop a client-focused ecosystem Used for the development of social ventures
Applying the Framework through an Action Plan
At some point during your venture development process, it becomes critical to capture your thoughts and intentions in a meaningful and productive way. Creating a customized action plan—an organized, step-by-step outline or guide that pulls together the ideas, thoughts, and key steps necessary to help set the stage for entrepreneurial success—at an early stage will make the entrepreneurial process much smoother and potentially more successful in the long run. Applying an appropriate framework will provide you with a visible, tangible, strong foundation for your future venture. In completing the framework, you should identify gaps as well as ideas for further development, then add both to your action plan. Just as you can choose from several types of frameworks, you can apply any of a variety of action plans. This section introduces some widely used action-planning tools but is not exhaustive. These selected action plans are presented as a way to jumpstart your thinking for the venture creation process.
Action Plans
You may have heard stories about potential entrepreneurs who hesitated to start a venture, largely out of fear of creating a business plan. Historically, business plan creation has required significant amounts of time, resources, and research. Although business plans are still enormously valuable (and are discussed in depth in Business Model and Plan), some useful business-plan-like tools have emerged: These are essentially variations on the development, content, and structure of a traditional business plan or one of its components. One other concern about business plans is how entrepreneurs use them once they are completed. In many cases, when the venture is launched, the entrepreneurial team discovers that the business plan does not reflect the realities that the team faces. A wide range of variables can often negate the value of the business plan. The true benefit of completing the business plan is that it forces the entrepreneurial team to think through their decisions as reflected in the plan. Even if the venture and the business plan change, the process of creating the business plan encourages critical thinking and improved decisions. In real time, you will need to make changes to your business plan and your venture. Throughout the venture’s life span, you should continue your background research and projections to adapt the business plan.
Unlike with the business plan, the purpose of an action plan is to pull together the ideas, thoughts, and actions necessary to help you set the stage for entrepreneurial success. Consider what kind of action plan you need to prepare a holiday meal. We have a vision of the end result—friends and family gathered together to share a delicious, festive meal. We will need to select the right location for the holiday meal, identify the guests to invite, and create a financial budget for the related costs of the holiday meal. Then we would need to create our action plan—similar to a business plan—to identify what actions are necessary to support the event. In our action plan, we would include inviting guests to the event, drawing up a menu and a grocery list, designing a timeline to ensure that all the dishes of the holiday meal are completed in the correct sequence: We want all the food to be ready at the right time. Our action plan would also include the clean-up process and any after-dinner activities that we want at our event. As you can see, both the business plan and the action plan are necessary for success.
Once you select a framework and an action plan, you have the basic tools and information you need to outline the path of your venture. The framework offers a big picture of what you want to create and the resources required for that goal, whereas the action plan provides you with concrete actions for starting along your entrepreneurial path and, later, for supporting the business plan.
Action plans can also result from using the tools listed in Table 2.4. These tools can help you visualize the process necessary to reach your end goal by clarifying the necessary actions. They are also tangible guidelines for innovating, exploring, and creating solutions to entrepreneurial problems or opportunities. You might also use your action plan to get “unstuck” during any challenging phase of the entrepreneurial process. One word of caution regarding these tools: You need to use them to get results. So be sure you are realistic about your interests, abilities, and availability when you create your plans. For example, wireframing is a technique for webpage design used early in the development process in which content, layout, and functionality are identified prior to the actual creation of the webpage. Coincidentally, this is another application of design thinking through the focus on the end user’s interaction with the website. As you can see from this example, searching for popular tools used within specific industries will provide you with support in building your framework. Table 2.4 provides a few examples of action planning tools that are used to delve into the specific topic.
Table 2.3.2: Action Plan Support Tools
Tool Description Use
Vision or Dream Board A visual tool to present the ideal situation that you are working towards achieving Wireframing
Storyboard A scene-by-scene visual of the activity process from start to finish Downloading method (IDEO)
Mind map A visual tool that assists with categorizing brainstorming types of ideas Brainstorming
Hypothesis A proposition or statement as a basis for further testing or investigating Interviewing
Logic Map Visual representation of relationships between various components or variables Questionnaires
The action plan support tools presented in Table 2.4 are a sample list of representative tools that are useful in motivating, inspiring, identifying, and clarifying needed actions. This list is not exhaustive; if you have something that works for you, then use it. Several apps are also available to help you capture ideas to create action plans, as shown in the Suggested Resources. The idea is to find and use a visual or tangible tool that inspires you to get focused, organized, and committed to taking the actions necessary to turn your entrepreneurial dream into a reality. Let’s say you know that you want to start a venture that helps people recover after some type of disaster. You could use one of these action plan support tools, such as a mind map, to help you brainstorm possible needs resulting from a disaster in a city (Figure 2.26). You can categorize the ideas to help people and animals, or to repair the city’s infrastructure. After completing the mind map, you would then consider which areas fit your interests, passions, and skills. From this point, you could identify the type of venture you want to create and the necessary actions to move forward with your idea. Using these types of tools assists in identifying actions that need to be addressed in your action plan.
Types of Entrepreneurs
Recall from The Entrepreneurial Perspective that for some people, the entrepreneurial pathway is clear cut and logical. For example, a career in a biomedical lab may involve research and clinical trials that lead to patent applications for a product to sell in the marketplace, leading to a new venture. Others experience the entrepreneurial pathway through nontraditional methods, as when an unexpected opportunity arises. As the global marketplace continues to evolve, new entrepreneurial opportunities will open for individuals who are open to opportunities that build on creativity and innovation.
Traditional entrepreneurs were perceived as individuals who did not fit in a typical organizational structure or as people who had the brains, creativity, imagination, and money to launch out on their own. However, this perception is changing with increasing support to reduce barriers to enable access to entrepreneurship for all demographic groups. According to a 2018 Capitol Hill discussion on women, minorities, and entrepreneurship, the current entrepreneurial demographics show that only 12 percent of US innovators are women and that US-born minorities accounted for 8 percent, with African Americans making up only one-half of 1 percent of this group.46 According to a National Academies of Sciences report, as cited in the same Capitol Hill discussion, women- and minority-owned small businesses received less than 16 percent of all Small Business Innovation Research (SBIT) program awards. Even though women account for 51 percent of the US population and own 29 percent of businesses, they received only 6 percent of SBIT awards.
Also cited at the Capitol Hill briefing, a 2015 report by the US Department of Commerce showed that women-owned small businesses have a 21 percent lower rate of winning federal contracts. One result from this Capitol Hill briefing was the passage of the Promoting Women in Entrepreneurship Act to require the National Science Foundation to encourage entrepreneurial programs to recruit and support women in commercial activities rather than purely laboratory-based activities. Some of the challenges identified in this discussion for groups other than the traditional entrepreneurs described include life choices such as childbearing, access to funding, and lack of support and follow-through to support women and minorities in their interests related to potential entrepreneurial activities.
Other findings drawn from the Census Bureau data and reported by the Kauffman Foundation found that over 70 percent of Asian, Hispanic, and African American entrepreneurs relied on personal and family savings as their main source of startup capital. Women also face challenges in funding, receiving just 2.2 percent of venture capital funding in 2018.47 A bill called the Support Startup Businesses Act, reintroduced in the US Senate in 2019, would address these challenges by increasing overall funding to help startups, creating more flexibility in funding, and expanding services for startups.48 The panelists ended the Capitol Hill discussion by noting that “bro culture” has proliferated at the expense of women- and minority-based entrepreneurial ideas. Cultural barriers, including historical disenfranchisement of women, minorities, and immigrants, arise from biases, with one speaker noting that investors ask more difficult and probing questions of male entrepreneurs but pose more skeptical questions to women.
Today, opportunities have expanded for businesses and organizations that respond to current challenges, which may include trying to improve a negative situation or finding a need in a positive situation, with an increasing awareness of the benefits provided through entrepreneurial activities. As more global, cultural, and economic issues and opportunities arise, more individuals will explore entrepreneurship as a response to these challenges. For example, noting the challenges that women and minorities face in starting a new venture, Alan Donegan and his team train people on how to turn their entrepreneurial visions into a reality through his PopUp Business School. The point is that opportunities should be available to everyone, as long as we keep an open mind when considering how change contributes to new venture creation.
Barriers to Funding
Given this list of cultural factors and economic factors, what can you do to assist in solving the challenges related to biases? Consider how Alan Donegan’s responded to the need to educate people on how to start their own business. He created a company to address this need. You may also consider reading statistical information such as census data and news reports to identify unique target markets and potential needs that could result in a new venture.
The Kauffman Foundation reports these issues, summarized in Table 2.5.
Table 2.3.3: Potential Barriers to Entrepreneurial Funding49
Potential Barrier Challenges
Geographical barriers Close to 80 percent of about \$21.1 billion in venture-capital funding in the first quarter of 2018 was disbursed in five regional clusters—San Francisco (North Bay Area), Silicon Valley (South Bay Area), New England, New York City metro, and LA/ Orange County—with slightly more than 44 percent in the North and South Bay Areas.
Gender bias Women are substantially less likely to start businesses than men. In 1996, the rate of new entrepreneurs for women was 260 per 100,000 people, compared to 380 per 100,000 for men. In 2017, the rate of new entrepreneurs for women was 270 per 100,000 for men.
Racial and ethnic bias The landscape of entrepreneurship in the United States is marked by significant differences across racial and ethnic groups. Minority-owned firms are found to face significant barriers to capital. For example, minority-owned firms are disproportionately denied when they need and apply for additional credit. One study compared sources of finance and found that new black-owned businesses start with almost three times less in terms of overall capital than new white-owned businesses, and that this gap does not close as firms mature.
Lack of initial wealth Low-income individuals without initial (pre-existing) wealth also face significant barriers to capital. Research on liquidity constraints showed that the top ninety-fifth percentile of wealthy individuals in the United States is more likely to start businesses than other income groups, and that personal and household wealth are important drivers of entry. Research at the neighborhood level found that in New York City, the richer third of neighborhoods had more than twice the rate of self-employment than the poorest third. A higher household net worth of a founder is linked to larger amounts of external funding received, even after accounting for human capital, venture characteristics, and demand for funds.
Shift in the banking industry Large banks have become larger, while there are fewer small and medium-size banks. Larger banks survived the Great Recession with balance sheets restored, while small banks—the ones more likely to lend to entrepreneurs—were limited by both economic conditions and new regulatory barriers
Information asymmetry The persistence of information asymmetry in capital markets between the supply of capital (investors) and the demand for capital (entrepreneurs) gives rise to barriers faced by entrepreneurs. Entrepreneurs face a larger challenge than established businesses in accessing capital because established businesses can leverage their longer track records and existing relationships.
• What challenges do you face in these areas?
• What steps might you take to help mediate those challenges?
As the traditional view of entrepreneurship evolves, different types of entrepreneurship are emerging and are worth noting as you contemplate your entrepreneurial journey. The types presented here are among the most common today, each with its own unique opportunities and challenges.
• College Entrepreneur: As the cost of higher education continues to rise, more college students are seeking ways to reduce reliance on tuition loans by launching a venture. The college entrepreneur might launch an enterprise while attending or after graduating from college. Entrepreneurship courses might require a student to create and launch a venture as part of the curriculum, and this can turn into an actual earnings opportunity.
• Corporate Intrapreneur: If you work for a progressive company that seeks innovative solutions for growth and opportunities, you can become an intrapreneur by organizing the necessary resources to pursue a venture of organizational interest.
• Franchise Entrepreneur: Since a franchise grants a license to an entrepreneur to trade under the franchise’s name, a franchise entrepreneur gains a head start in an industry by launching the franchise.
• Immigrant Entrepreneur: With increasing global unrest, more immigrants are traveling to new countries. In the United States, ethnic communities of immigrants welcome their compatriots and assist them in becoming independent through entrepreneurship. These communities pool together the necessary resources to support the new immigrant until the business is self-sustaining.
• Internet Entrepreneur: As access to technology and its related platforms increases, so do opportunities for Internet-based businesses. Internet entrepreneurs utilize social media platforms, smartphones and tablets, applications (apps), and any other form of accessible technology as their product or venture. The critical structure for these ventures is the inclusion of an e-commerce or online payment processing capability.
• Woman or Minority Entrepreneur: Women have a unique perspective and potential to capitalize on new or already existing niches in many entrepreneurial fields. Many cultural groups, such as Haitians, Cubans, or Jamaicans, also have unique marketplace skills and demands.
• Part-time Entrepreneur: In response to economic downturns, underemployment, and unemployment, more individuals are supplementing income through part-time activities, casually referred to as “side hustles.” These individuals may launch businesses through multilevel marketing firms, such as Avon, Mary Kay, Stella & Dot, and others. This category may also include self-employed freelancers. Examples include writers, graphic designers, artists, web developers, and massage therapists.
• Social Entrepreneur: Some entrepreneurs are driven to offer innovative solutions to existing and emerging social problems, such as poverty, hunger, human trafficking, and environmental degradation. Most social enterprises are structured as nonprofit entities. However, increased interest in for-profit entities that marry business and social goals has given rise to a subcategory has emerged known as a B-corp (see Business Structures Options: Legal, Tax, and Risk Issues), or benefits corporation. The B-corp designation is a voluntary certification that is managed by the nonprofit group B Lab to ensure that corporations adhere to specific guidelines, rules, and accountability. | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/02%3A_The_Entrepreneurial_Journey_and_Pathways/2.04%3A_Frameworks_to_Inform_Your_Enterpreneurial_Path.txt |
action plan
organized, step-by-step outline or guide that pulls together the ideas, thoughts, and key steps necessary to help set the stage for entrepreneurial success
benchmarking
comparing one’s own company’s performance with an industry average, a leader within the industry, or a market segment
bootstrapping
funding strategy that seeks to optimize use of personal funds and other creative strategies (such as bartering) to minimize cash outflows
breakeven point
level of operations that results in exactly enough revenue to cover costs
business model
plan for how venture will be funded; how the venture creates value for its stakeholders, including customers; how the venture’s offerings are made and distributed to the end users; and the how income will be generated through this process
capitalism
system in which individuals, people, and companies have the freedom to make decisions and own property as well as benefit from their own efforts, with government playing a secondary role in oversight
cash flow
money collected by the business through revenue and funding versus money disbursed by the business through expenses
cash management
management of cash inflows and outflows to support cash needs of the venture
corporate entrepreneurship
development of new ideas, opportunities, or ventures through formal research and development processes that focused on the corporation’s strategy and goals
creative destruction
theory developed by Joseph Schumpeter stating that entrepreneurial innovation is the disruptive force that creates and sustains economic growth, though in the process, it destroys established companies and disrupts employment
due diligence
conducting the necessary research and investigation to make informed decisions that minimize risk
e-commerce
electronic transactions, particularly over the Internet, for the exchange of goods and services
entrepreneurial journey
your exploration to discover if entrepreneurship is right for you
entrepreneurial process
set of decisions or actions that can be outlined and followed as a guide to developing or adjusting a venture
entrepreneurial spirit
describes a quality of those individuals who are productive self-starters focused on making changes happen
entrepreneurial venture
any business, organization, project, or operation of interest that includes a level of risk in acting on an opportunity that has not previously been established
framework
structure or outlined process that can be used to accomplish entrepreneurial goals through problem solving, idea generation and validation, and brainstorming
franchising
form of licensing that allows the business (franchisor) to share its business model to expand through various distributors (franchisees) for a fee
independent contractor
(also, freelancer) people or businesses that provide work similar to an employee without being part of the payroll for the contracting business, and who pay their own taxes and pay for their own benefits
innovation
new idea, process, or product, or a change to an existing product or process
intrapreneur
employee who acts as an entrepreneur within an organization, rather than going solo
milestone
significant decision point or significant accomplishment
patent
legal grant of protection for an inventor over the rights, usage, and commercialization of an invention for a set time period
serial entrepreneur
entrepreneur who becomes involved in starting multiple entrepreneurial ventures
situational opportunity
one that becomes available, depending on factors such as where you work, your family obligations, your idea or invention, your unique creative expression, or a recent career search or job change
soft launch
(also, soft open) launching a venture for a limited time frame or audience to gain experience, insights, and feedback about the target market or consumer
target market
specific group of consumers for which a company seeks to provide a good or service
venture
startup company or organization that conducts business or is created to satisfy a need
vertical integration
strategy of gaining control over suppliers of raw materials and distributors of finished products to expand or control the relevant supply chain | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/02%3A_The_Entrepreneurial_Journey_and_Pathways/2.05%3A_Key_Terms.txt |
2.1 Overview of the Entrepreneurial Journey
As you prepare for your journey into entrepreneurship, it is critical to consider the multiple aspects associated with preparing for, experiencing, and completing a journey unique to you. The key is an honest and introspective assessment of how you can make a journey that brings your desired outcomes and results. The seven steps outlined in this section will provide you with a perspective of what you might encounter on your entrepreneurial venture.
2.2 The Process of Becoming an Entrepreneur
The entrepreneurial process provides a flexible guideline for launching a venture with an individualized approach. This process should be a fluid, not static, exercise that adjusts to market needs and demands until you achieve an appropriate fit to reap the rewards of your investment. The material in this section will be covered in greater depth as you progress through the rest of the chapters. For now, gaining a perspective on the entire process provides you with a background understanding of what an entrepreneurial venture involves, from ideation through creating the venture to harvesting the venture with the potential to begin the process all over again with a new idea.
2.3 Entrepreneurial Pathways
Your pathway to entrepreneurship might arise out of necessity, opportunity, or a combination of situations. Being open to the idea of becoming an entrepreneur provides you with the potential to identify a unique opportunity that fits your interests and goals. Entrepreneurs learn to recognize when an opportunity presents itself and how and when it fits with their goals and dreams.
2.4 Frameworks to Inform Your Entrepreneurial Path
You can connect your background, training, and discipline with your entrepreneurial pathway by using frameworks that capture your developmental activities. To achieve your goals, you need some type of plan that outlines the steps you need to take to reach them. Just as there are many types of ventures, there are many versions and types of plans and tools that can assist you in developing the plan that best fits you. As more global issues and opportunities continue to arise, many different types of entrepreneurs have emerged, offering innovative solutions. The diversity of entrepreneurial types provides unique niches for opportunities that might not fit the mainstream or traditional route to entrepreneurial success.
2.07: Review Questions
1.
Why is interest in entrepreneurship growing among those entering or re-entering the workforce?
2.
What is an entrepreneurial mindset?
3.
What does the phrase “entrepreneurial venture” refer to?
4.
What does the process of “cash management” entail for a business?
5.
Why is the entrepreneurial process considered a fluid process rather than a rigid step-by-step guide?
6.
What does the term “creative destruction” mean?
7.
What is the difference between a corporate entrepreneur and an intrapreneur?
8.
What are situational opportunities?
9.
What does an entrepreneurial journey entail?
10.
Under which circumstances might a person choose to bootstrap a venture?
11.
What is an independent contractor?
12.
What does the term “framework” mean in terms entrepreneurship?
13.
What is an action plan? How is it different from a framework?
14.
Why are action plans useful in the development or improvement of a venture?
15.
What are the characteristics associated with traditional entrepreneurship?
16.
What are some biases that minorities and women face in acquiring funding? | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/02%3A_The_Entrepreneurial_Journey_and_Pathways/2.06%3A_Summary.txt |
1.
Review the story of Sixto Cancel and his journey to developing the social venture Think of Us.
1. Consider Sixto’s entrepreneurial journey and the development of Think of Us. What types of challenges or obstacles do you think he had to overcome to complete his journey?
2. Discuss some of the advantages and disadvantages related to Sixto Cancel’s background and his experiences in developing an organization and board.
3. Consider how Sixto Cancel developed his organization. Discuss how he followed or skipped any steps of an entrepreneurial journey.
2.
Explore the websites of Cratejoy and Prospurly, which are discussed in Entrepreneurship in Action: Prospurly. How did these venture founders follow the entrepreneurial journey?
3.
After researching Man Crates, explain how Man Crates has followed the model in Figure 2.20?
4.
What additional ideas can you think of for starting your own business, using Man Crates as a source of inspiration?
5.
Go back to the Work It Out: Startup Ideas Feature Box. Select either an idea that you’ve created or an idea listed on either of the websites. Where could you go to gain more information about this idea? This might mean finding a business where you could shadow someone, or perhaps an internship, or research conducted in some other manner.
6.
Return to the Work It Out: Startup Ideas Feature Box and revisit the links to business ideas, using the same idea that you identified in question 1. What are five other businesses that could be spinoff ideas from your one new idea?
7.
Refer to the case questions in Entrepreneurial Pathways. Select one of the framework tools discussed in this section and apply that framework to your idea.
8.
Why did you select this framework over another framework?
9.
By applying the framework to your idea, what new information did you learn and what information is lacking, or needs further development?
2.09: Suggested Resources
2.1 Overview of the Entrepreneurial Journey
View the YouTube video “The Jitterbug Smart phone” at www.youtube.com/watch?v=tRGAL42gWco to see an example of a product endorsement that geared to a specific target market.
Visit the SBA website to learn more about the local organizations that might assist you to launch or manage a venture: https://www.sba.gov/tools/local-assistance
Caron Beesley. “8 Things You Can Do to Be Taken Seriously as a Young Entrepreneur”: https://kitsapscore.org/2017/08/26/8...-entrepreneur/
“Surge Cities: These Are the 50 Best Places in America for Starting a Business”: https://www.inc.com/surge-cities/bes...-business.html
“How I Built a Subscription Business That’s Made over 50k in 6 Months”: https://www.cratejoy.com/sell/blog/c...on-business-2/
National Association of Women Business Owners: https://www.nawbo.org/resources/wome...ner-statistics
Are you ready to start your entrepreneurial venture? Visit the SBA site and take the Small Business Readiness Assessment: https://eweb1.sba.gov/cams/training/...assessment.htm
2.2 The Process of Becoming an Entrepreneur
Are entrepreneurs BORN or MADE? (Lord Sugard #AND Robert Greene): www.youtube.com/watch?v=HNHUbrVcpRA
Learn about how Man Crates was created: https://www.mancrates.com
For more information about the Pembina tribe and entrepreneurial behavior: https://www.ndstudies.gov/gr4/fronti...er-fur-traders
For more information about Dr. Charles Drew: https://nmaahc.si.edu/blog-post/color-blood
For more information about the creation of the cotton gin: https://www.history.com/topics/inven...nd-eli-whitney
For more information on how to start a business: https://www.pbs.org/newshour/show/th...t-without-debt
For more information on Global Entrepreneurship: https://www.gemconsortium.org/
Take the Myers Briggs test to discover your personality type: https://www.idrlabs.com/test.php
2.3 Entrepreneurial Pathways
50 Business Ideas for Introverted Entrepreneurs: https://smallbiztrends.com/2016/09/b...ntroverts.html
2.4 Frameworks to Inform Your Entrepreneurial Path
YouTube Video: Business Model Canvas Explained: www.youtube.com/watch?v=QoAOzMTLP5s
The Four Lenses Strategy Framework website: www.4lenses.org
Evernote, a cross-platform app that allows you to create, update, and synch notes: https://evernote.com/about
YouTube Video: We have a dream, B-corp overview and mission: www.youtube.com/watch?time_c...&v=V-VFZUFJwt4
Business Model Canvas Strategyzer: https://www.strategyzer.com/canvas
For more information on the diversity of entrepreneurs in the United States: https://www.entrepreneur.com/article/286574
For more information on entrepreneurship and resource providers supporting entrepreneurship: www.kauffman.org/eship-summi...17/overview#1g
For a list of resources available to support entrepreneurship: https://www.kauffman.org/what-we-do/...data-resources | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/02%3A_The_Entrepreneurial_Journey_and_Pathways/2.08%3A_Case_Questions.txt |
Martin Shkreli, an aspiring pharmaceutical entrepreneur and former hedge fund manager, made headlines in 2015 when he capitalized on a profitable and controversial business opportunity. As the founder and CEO of Turing Pharmaceuticals, Shkreli obtained the expired patent for a lifesaving drug used to combat HIV. He raised the US market price overnight from \$13.50 to \$750 per pill—a 5,000 percent increase. When criticism by the medical community, the public, and politicians led to demands for a return to the original pricing, Shkreli defended his decision as a smart business practice that contributed to his firm’s bottom line. Eventually, he agreed to reverse the price but later reneged on his promise, offering instead to provide discounted pricing to hospitals.
The damage to Shkreli’s reputation, however, was already complete. The BBC described him as the “most-hated” CEO in America due to his business decisions, obnoxious behavior, and negative social media rants.1 Infectious disease specialists and patient advocates rejected Shkreli’s argument that his “price adjustment strategy” was helpful for patients since those being treated would need the drug long after being released from the hospital. Although the pricing strategy was not illegal, Shkreli was eventually investigated and found guilty of securities fraud that involved falsely raising money from hedge fund investors and stealing money from his drug company to repay investors.2
3.01: Ethical and Legal Issues in Entrepreneurship
Learning Objectives
By the end of this section, you will be able to:
• Develop the ability to identify ethical and legal issues
• Develop an approach to resolve ethical/legal dilemmas once identified
What does it mean to be both ethical and socially responsible as an entrepreneur? When Martin Shkreli decided to increase the price overnight of a lifesaving HIV drug from \$13.50 to \$750 per pill, the public immediately characterized his actions as unethical. However, he viewed his position as responsible behavior that served the best interests of his company and his shareholders. Although Shkreli’s decision to raise prices was within legal limits, his actions were critically judged in the court of public opinion.
As an entrepreneur, should Shkreli’s concerns be with ensuring the sustainability of his business or with providing patients with a more affordable (less profitable) lifesaving drug? This fundamental question raises a number of related questions about the ethics of the situation. Was the decision to raise the price of the HIV drug by 5,000 percent in the best interest of the business? Was Shkreli aware of all aspects (ethical, legal, financial, reputational, and political) of the decision he made? To critically examine the decisions of an individual such as Shkreli, one needs an enhanced awareness of the multitude of stakeholders to be considered, as opposed to only shareholders.
Stakeholders
A comprehensive view of business and entrepreneurial ethics requires an understanding of the difference between shareholders, a small group who are the owners (or stockholders), and stakeholders, a large group that includes all those people and organizations with a vested interest in the business. Serving the needs of the shareholders, as perhaps Shkreli thought he was doing, is based on a limited view of organizational purpose. This view, known as the “shareholder primacy” doctrine, stems from a famous Michigan Supreme Court case involving the Ford Motor Company and two shareholders named the Dodge brothers (who would go on to form the Dodge Motor Company).3 This case established a precedent that lasted for decades, built on the premise that the only thing that should matter to a CEO and their company is shareholder profits. However, this concept has gradually been replaced by a more progressive viewpoint, mandating the consideration of all stakeholders when making key business decisions that have potentially far-reaching consequences. As an example of this new awareness, the Business Roundtable, a group of CEOs from the biggest and most successful companies in the US, recently released a new statement addressing business ethics. The CEOs prefaced this statement saying, “Together with partners in the public, private and non-profit sectors, Business Roundtable CEOs are committed to driving solutions that make a meaningful difference for workers, families, communities and businesses of all sizes.”4
Business Roundtable Official Statement on the Purpose of a Corporation5
Read the following statement on the purpose of a corporation from Business Roundtable: “Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all. Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide healthcare; generate and deliver energy; and offer financial, communications and other services that underpin economic growth. While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:
• Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
• Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
• Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
• Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
• Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.
Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”
• Question: Does it appear that Shkreli, in the preceding pharmaceutical example, considered all the stakeholders as the Business Roundtable Statement recommends, or did he follow the older shareholder primacy doctrine approach?
The aim of this chapter is twofold: first, to assist entrepreneurs in understanding the significance of ethics and the role that entrepreneurs play in developing an ethical and responsible organization. This includes the ability to recognize and identify both ethical dilemmas and legal issues that might arise. Second, we want to enable entrepreneurs to develop a moral compass that allows them to lead their business organization in a manner consistent with ethical and legal principles. An example of an ethical business organization is one that follows the Statement of Purpose by the Business Roundtable. This means creating a business environment in which each member of the organization is encouraged, enabled, and supported to develop the ethical capabilities to habitually and systematically differentiate between right or wrong. This also means that the organization, as a total system, provides consistent, meaningful, and timely consequences for unethical behavior and irresponsible actions.
LINK TO LEARNING
Read this article from Forbes to see a list of companies recently deemed the most ethical in the world.
Being an Ethical Entrepreneur
Whenever you think about the behavior you expect of yourself, in both your professional and personal life, you are engaging in a philosophical dialogue with yourself to establish the standards of behavior you choose to uphold—that is, your ethics. You may decide you should always tell the truth to family, friends, customers, clients, and stakeholders, and if that is not possible, you should have very good reasons why you cannot. You may also choose never to defraud or mislead your business partners. You may decide, as well, that while you are pursuing profit in your business, you will not require that all the money earned comes your way. Instead, there might be sufficient profits to distribute a portion of them to other stakeholders in addition to yourself—for example, those who are important because they have helped you or are affected one way or another by your business. This group of stakeholders might include employees (profit sharing), shareholders (dividends), the local community (time), and social causes or charities (donations).
Being successful as an entrepreneur may therefore consist of much more than simply making money and growing a venture. Success may also mean treating employees, customers, and the community at large with honesty and respect. Success may come from the sense of pride felt when engaging in honest transactions—not just because the law demands it, but because we demand it of ourselves. Success may lie in knowing the profit we make does not come from shortchanging others. Thus, business ethics guides the conduct by which entrepreneurs and their companies abide by the law and respect the rights of their stakeholders, particularly their customers, clients, employees, and the surrounding community and environment.
LINK TO LEARNING
Read the Ten Principles of the United Nations Global Compact that urges corporations to develop a “principled approach to doing business.” The principles cover human rights, labor, the environment, and corruption.
Nearly all systems of moral, ethical, spiritual, and/or religious beliefs stress the building blocks of engaging others with respect, empathy, and honesty. These foundational beliefs, in turn, prepare us for the codes of ethical behavior that serve as ideal guides for business. Still, we need not subscribe to any particular faith to hold that ethical behavior in business is necessary. Just by virtue of being human, we all share obligations to one another, and principal among these is the requirement that we treat others with fairness and dignity, including in our commercial transactions.
For this reason, we use the words ethics and morals interchangeably in our discussion. We hold that “an ethical person” conveys the same sense as “a moral person.” Ethical conduct by entrepreneurs/business owners is not only the right way to behave, but it also burnishes our own professional reputation as business leaders of integrity.
Integrity—that is, unity between what we say and what we do—is a highly valued trait. But it is more than just consistency of character. Acting with integrity means we adhere strongly to a system of ethical values. Such values often serve as the foundation for the creation of ethical codes, or codes of conduct. A code of ethics acts to guide conduct and may be derived from a variety of sources. It could be a personal, internal code of conduct, or an official code adopted by a business organization. Or it could be an external code based on one’s profession (e.g., CPAs, attorneys, CFPs, and others have professional codes of ethics), or a more broadly applicable external code such as that of the Business Roundtable or Business for Social Responsibility. Being a professional of integrity means consistently striving to be the best person and professional that you can be in all your interactions with others. Integrity in business brings many advantages, not the least of which is that it is a critical factor in allowing businesses and society to function properly. It is also a fundamental basis for developing and maintaining trust, which is vital to all contractual and informal commitments between businesses and all their key stakeholders.
Successful entrepreneurs and the companies they represent will take pride in their enterprise if they engage in business with transparency, intentionality, and integrity. To treat customers, clients, employees, and all those affected by a venture with dignity and respect is ethical. In addition, ethical business practices serve the long-term interests of businesses because customers, clients, employees, and society at large will be much more willing to patronize a business and work hard on the business’s behalf if that business is perceived as caring about the community it serves. And what type of firm has long-term customers and employees? One whose track record gives evidence of honest business practices.
Research on the performance of the World’s Most Ethical Companies (WMEC) indicates a positive association between ethical conduct and successful long-term financial performance. These businesses often outperform their market expectations, both in periods of market growth and decline. The WMEC list of companies shows an average annual excess return of more than 8 percent higher than expected profitability. This may be due to a variety of reasons, including what researchers term a positive effect on business culture, stakeholders, and reputation.6 In other words, being ethical beneficially influences employees, investors, and customers.
Which Corporate Culture Do You Value?
Imagine that upon graduation, you have the good fortune to face two entrepreneurial opportunities. The first is with a startup known to value a hard-nosed, no-nonsense business culture in which keeping long hours and working intensely are highly valued. At the end of each year, the company plans to donate to numerous social and environmental causes. The second entrepreneurial opportunity is with a nonprofit recognized for a very different culture based on its compassionate approach to employee work-life balance. It also offers the chance to pursue your own professional interests or volunteerism during a portion of every workday. The earnings plan with the first opportunity pays 20 percent more per year.
• Which of these opportunities would you pursue and why?
• In what ways might company contributions to a cause carry more power to impact the cause? In what ways might individual contributions be more powerful? Think of examples for each scenario.
• How important an attribute is income, and at what point would a higher income override for you the nonmonetary benefits of the lower-compensated opportunity?
Many people confuse ethical and legal compliance. However, these concepts are not interchangeable and call for different standards of behavior. The law is needed to establish and maintain a functioning society. Without it, our society would be in chaos. Compliance with legal standards is mandatory. If we violate these standards, we are subject to punishment as established by the law. Therefore, compliance generally refers to the extent to which a company conducts its business operations in accordance with applicable regulations, statutes, and laws. Yet this represents only a baseline minimum. Ethical observance builds on this baseline and reveals the principles of an individual business leader or a specific organization. Ethical acts are generally considered voluntary and personal—often based on our individual perception of what is right and wrong.
Some professions, such as medicine and the law, have traditional and established codes of ethics. The Hippocratic Oath, for example, is embraced by most professionals in healthcare today as an appropriate standard always owed to patients by physicians, nurses, and others in the field. This obligation traces its lineage to ancient Greece and the physician Hippocrates. Businesses are different in not having a mutually shared standard of ethics. This is changing, however, as evidenced by the array of codes of conduct and mission statements many companies have adopted over the past century. These beliefs have many points in common, and their shared content may eventually produce a code universally claimed by business practitioners. What central point might constitute such a code? Essentially, a commitment to treat with honesty and integrity customers, clients, employees, and others affiliated with a business.
The law is typically indebted to tradition and precedent, and compelling reasons are needed to support any change. Ethical reasoning often is more topical and reflects the changes in consciousness that individuals and society undergo. Often, ethical thought precedes and sets the stage for changes in the law.
Behaving ethically requires that we meet the mandatory standards of the law, but that is not enough. For example, an action may be legal that we personally consider unacceptable (consider how many viewed Shkreli’s legal price hike). Entrepreneurs today need to focus not only on complying with the letter of the law but also on going above and beyond that basic mandatory requirement to consider their stakeholders and do what is right.
The Equifax Data Breach
In 2017, from mid-May to July, hackers gained unauthorized access to servers used by Equifax, a major credit reporting agency, and accessed the personal information of nearly one-half of the US population.7 Equifax executives sold off nearly \$2 million of company stock they owned after finding out about the hack in late July, weeks before it was publicly announced on September 7, 2017, in potential violation of insider trading rules. The company’s shares fell nearly 14 percent after the announcement, but few expect Equifax managers to be held liable for their mistakes, face any regulatory discipline, or pay any penalties for profiting from their actions. To make amends to customers and clients in the aftermath of the hack, the company offered free credit monitoring and identity-theft protection. On September 15, 2017, the company’s chief information officer and chief of security retired. On September 26, 2017, the CEO resigned, days before he was to testify before Congress about the breach. Numerous government investigations and hundreds of private lawsuits have been filed as a result of the hack. Equifax will pay at least \$650 million, with the possibility of more, to resolve most claims stemming from the data breach. The settlement covers 147 million consumers, just under one-half of the population of the United States.8
• Which elements of this case might involve issues of legal compliance? Which elements illustrate acting legally but not ethically? What would acting ethically and with personal integrity in this situation look like?
To return to the case of Martin Shkreli, let’s examine it through some foundational theoretical lenses, based on ethical theories. Normative theories of ethics are primarily concerned with establishing standards or criteria that delineate what is considered ethical behavior. Common examples of normative ethical theories are utilitarianism, duty-based ethics (also known as Kantian ethics and/or deontology), and virtue ethics. These ethical theories, discussed in the following paragraph, provide a systematic means of examining and evaluating business conduct.
From an ethical theory perspective, Kantian or duty-based ethics emphasizes the underlying intent or reason behind a decision and whether that decision is good or bad. For example, if the decision to raise the price of a lifesaving drug by 5,000 percent is moral and if it is intended to add value, then an individual is obligated to raise the price. Utilitarian ethics focuses on the usefulness or utility of the decision. If the decision to raise the price adds value and usefulness for shareholders, then that decision should be made. The Protestant work ethic looks at the decision from the viewpoint of capitalism, free markets, and a sense of duty to ensure maximum return on investment. If the decision deals with a change that is financially sound and beneficial, if there are an adequate number of customers that need and value the HIV product and are willing to pay that price, then that decision should be made. Proponents of virtue ethics claim that ethics consists of a series of innate but latent virtues that an individual needs to develop over time. These virtues consist of trust and derivatives of trust such as truthfulness. In this perspective, if the price hike is fair and equitable, if it is responsible to behave in this way, and if it does not cause harm to the society, then the price should be raised.
While it remains with the courts to determine the underlying intent, legal implications, and consequences of Shkreli’s decision, evidence from this and other case studies shows that some corporate leaders have not developed ethical capabilities, or they have not internalized a moral compass that enables them to differentiate between right and wrong.
Developing a Moral Compass
A moral compass is a state of mind where an individual has developed the needed capabilities to differentiate between right and wrong, or between just and unjust in challenging circumstances. When individuals are able to act in an ethical manner systematically, habitually, and without struggling to decide how to act or what to do in difficult situations, they have internalized that moral compass. It can be said that these individuals possess a good character, are able to earn trust, and have qualities that are deemed necessary for leadership.
To develop and internalize a moral compass, an entrepreneur and the members of the organization need to continually exercise and develop their ethical “muscles.” These ethics-based muscles include qualities such as trust, truthfulness, respect, responsibility, commitment, care, love, and justice. However, as you will learn, an entrepreneur needs to first provide the organizational framework and foundation in which individuals and business units regularly exercise these qualities. This framework and foundation include that everyone receive the right training, be given the opportunity to identify and close gaps in their behavior, receive recognition and incentives that reinforce good ethical behavior, and receive consistent, timely, and substantial consequences when they fail to act responsibly. These and other actions begin to help individuals develop and internalize an ethical compass.
LINK TO LEARNING
A white-collar criminal convicted of fraud, this interview with Mark Faris shows his admission that greed, arrogance, and ambition were motivating factors in his actions. He also discusses the human ability to rationalize our behavior to justify it to ourselves. Note his proposed solutions: practicing ethical leadership and developing awareness at an individual level via corporate training.
Legal Issues in Entrepreneurship
Unlike working in a large corporate environment with an established structure, entrepreneurs often create and operate a new business venture by their own rules. The pressure to create a new venture, within constraints and limitations, inspires entrepreneurs to find innovative ways to meet potential market demands. At the same time, the challenge to meet these expectations can create temptations and ethical pressures as entrepreneurs make a variety of decisions. Common areas rife with potential legal issues include contracts, torts, employment, intellectual property, conflicts of interest, full disclosure/truthfulness in product or service claims and performance, and antitrust/competition law (Figure 3.2).
Intellectual Property: Patents, Copyrights, and Trademarks
There are multiple reasons why an entrepreneur should be aware of intellectual property rights under the law. For example, if a new startup business comes up with a unique invention, it is important to protect that intellectual property. Without such protection, any competitor can legally, even if not ethically, copy the invention, put their own name or company brand on it, and sell it as if it were their own. That would severely curtail the entrepreneur’s ability to make money off a product that s/he invented. Intellectual property (IP) rights are created by federal law and protect small businesses from problems such as this. IP law also helps establish brand awareness and secure secondary revenue streams.
Intellectual property (IP) is the output or result of the creative work of one or more individuals to turn a unique idea into a practical and value-added product/service; this manifestation of original ideas is legally protected. IP applies to anything that is the exclusive right of a firm, will help differentiate that organization, and will contribute to a sustained competitive advantage. This creative work can result in a product idea, a new invention, an innovative pivot, or an improvement in an existing product or service. IP can take the form of a patent, a copyright, a trademark, or a variation thereof called a trademark secret.
To develop a sustained competitive advantage, an entrepreneur is responsible to protect, provide the needed safeguards, and continually grow a firm’s IP. These responsibilities include understanding, differentiating between, and dealing with the different types and technical aspects of a firm’s IP. It also means that the entrepreneur should be concerned with the nontechnical aspect of IP, which is to develop a culture of creativity that enables the organization to deliver a continuous stream of new IP.
From a technical aspect, there are two different types of patents: utility and design patents (Figure 3.3). A utility patent protects a brand-new product idea or invention under US law for a period of twenty years (see the discussion on patents in Entrepreneurial Journey and Pathways. A few examples of utility patents would be Nikola Tesla’s electric magnetic motor, dynamo-electric machine, electrical transmission of power, and his system of electrical distribution patents. A design patent protects the ornamental aspects of a product idea. Examples include the design of a new font, a soft drink bottle, or the design features of Apple’s iPhone. In the US, design patents are typically protected for a period of fourteen years.
Copyrights and trademarks are also protected IP (Figure 3.4). A copyright grants the creator of a work the exclusive right to reproduction of the work for a specified period of time (usually the life of the author plus seventy years). A trademark is a registration that provides the owner the ability to use a name, symbol, jingle, or character in conjunction with a specific product or service, and prevents others from using those same symbols to sell their products. A trademark can be protected for an unlimited number of ten-year renewable terms as long as it is still in use. Finally, there is a special category of IP known as a trade secret. This concept refers to proprietary information, processes, or other internal knowledge that contribute to an organization’s competitive advantage in a market. However, unlike patents, copyrights, and trademarks, a trade secret is not included as a protected category under federal IP law. A trade secret is dependent on being kept a secret by the business that owns it and is enforced through contract law.
Entrepreneurs should pay especially close attention to the legal implications of how patent law can affect a business. Patent laws are strictly enforced and are intended to protect inventions. This protection is afforded because a continuous stream of innovations can be a major source of revenue for a firm as well as a vehicle for developing a sustained competitive advantage. A legal patent gives an exclusive right to its patent holder or proprietor to use the invention in any shape or form they deem necessary. It also gives the patent holder the exclusive right to block or withhold access to others, or to sell the right to use the patent. This period of protection ranges from fourteen to twenty years, and is essentially a government-granted monopoly, after which, protection usually expires and competition is opened up to anyone (e.g., generic drugs).
Regardless of its type, a firm has the exclusive rights to the ownership of its IP. To protect those rights, it is important that a firm meticulously and immediately document each IP, the process and timeline by which each IP was developed, the resources used to develop the IP, the details of who owns and has access to the IP, and how others can obtain and use the IP.
An entrepreneur should consider these questions when growing and protecting a firm’s IP.
• Is IP law relevant to my business, and if so, how can it help me?
• How do we identify what IP to protect?
• What are the steps we need to take to get protection?
Less formally, the development of a culture of creativity and innovation is one of the most important responsibilities of an entrepreneur. This responsibility will enable the entrepreneur to develop a sustained competitive advantage. This means you should not be satisfied with an occasional spark of creativity from a designated individual, department, or functional area within your organization (such as research and development). You need to nurture an environment in which every member of your organization is able to be creative, add value, and be engaged in the continuous improvement of the firm. One example of this dynamic is the culture of continuous improvement at Toyota (Kaizen) (see Launch for Growth to Success). In this culture, every member of the organization is expected to be creative and continually improve the processes they are engaged with on a daily basis.
The story of Nikola Tesla—a Serbian-American inventor, engineer, and physicist—offers a cautionary tale for why entrepreneurs need to be attuned to both the technical aspects of a venture’s IP and its culture of creativity. Having filed 300 patents, Tesla is considered by many to be one of the fathers of modern electricity. After immigrating to the United States, Tesla was employed by the Continental Edison Company and began to develop AC technology. However, Edison preferred DC technology and was not supportive of Tesla’s ideas. Tesla had to quit, teaming up with Westinghouse to open the Tesla Electric Light company, bringing his valuable creativity and ideas with him to his new venture.9 Eventually, Tesla’s AC became the American standard, not Edison’s DC.
Contracts and Torts
Every entrepreneur enters into contracts, usually on a regular basis, and thus should have an understanding of basic contract concepts. Likewise, most businesses are likely to have some involvement with tort law: that area of law that protects the rights of people not to be harmed physically, financially, or in any other way, such as a breach of privacy. Some areas of the business world involve a combination of tort law and contract law, such as litigation involving the wrongful termination of an employee.
Contracts can be formal or informal agreements. Ideally, you should use written contracts whenever you enter into a substantial transaction with another party. Oral agreements are enforceable in most situations; however, proving their terms can be difficult. If you are in the midst of a startup, chances are you are moving quickly. Perhaps you don’t have the time, or the money, to hire a lawyer to prepare a formal written contract. In that event, you should at least follow-up with all parties via traditional mail or email to document the key terms of your agreement. That way, if a dispute arises, you’ll have documentation to fall back on.
Torts are a potential area of risk for entrepreneurs. Financial liability often results from the assumption of and exposure to risk; therefore, this is an important issue for entrepreneurs to manage. This is especially true for the concept of vicarious liability, which is the area of the law that imposes responsibility upon one person for the failure of another, with whom the person has a special relationship (e.g., employer and employee) to exercise reasonable care. Most employers understand they run a risk that their employees may commit a tort, and that they are responsible when employees cause harm to others (customers or coworkers) while on duty, working on company property, and using company equipment. However, many employers are not aware that employers can actually be liable for harm caused by an employee if that employee caused harm within the scope of his or her job duties. For example, if an employer asks an employee to drop something off at FedEx or UPS after work hours, and that employee negligently causes an auto accident, even if the employee is driving their personal vehicle and not a company car, the employer could be liable for damages. It is an all-too-common situation that could have serious liability consequences for an entrepreneurial business if adequate insurance is not procured.
Antitrust
Antitrust laws (or competition laws) were developed to ensure that one competitor does not abuse its position and power in the market to exclude or limit competitor access to the market. A few examples of antitrust laws are the Sherman Act, the Clayton Act, the Federal Trade Commission Act, and the Bayh-Dole Act. These acts were created to encourage competition and provide options for consumers. In effect, these laws make it illegal for a competitor to make agreements that would limit competition in the market.
The antitrust concept is important to the entrepreneur’s ability of entrepreneurs to form new startup businesses that are able to compete with larger, more established corporations (which may try to discourage competition). Table 3.1 summarizes the contributions of these acts to supporting antitrust efforts. It is important to note that any deviation from these laws may result in long and costly legal problems.
Table 3.1.1: Antitrust Acts
Antitrust Act Protection
Sherman Act (1890) Prohibits attempts to monopolize
Clayton Act (1914) Prohibits price fixing, related practices
Federal Trade Commission Act (1914) Prohibits unfair business practices
Bayh-Dole Act (1980) Encourages development of inventions
An example of illegal competition would be the competition and patent war between Intel Corporation and American Micro Devices (AMD). In 2009, AMD filed a suit against Intel claiming that the company had used “leveraging dominance” to exclude AMD from effectively competing in the marketplace through exclusionary pricing, discounts, and similar practices. This claim was later settled by the two firms and resulted in Intel paying AMD \$1.25 billion in damages.
Conflict of Interest
A conflict of interest occurs when an individual (or company) has interests in multiple areas (financial investments, work obligations, personal relationships), and the interests may conflict with each other. Employees, for example, have an interest in producing expected work for their employer. A conscious or deliberate attempt to avoid, ignore, or marginalize that which is rightfully due an employer by addressing other interests would be a conflict of interest. This could be as simple as using company time or resources to work on a personal project that has not been sanctioned and will not add value to the company. It could also mean using the tangible and intellectual resources of a company on something that will benefit your private interests instead of your employer’s. This action is unethical since you are not giving the employer what they are due, which are your time, talents, and services in exchange for agreed-upon compensation. Consider the example of Mike Arrington, a Silicon Valley lawyer and entrepreneur who created a blog called TechCrunch. Arrington became the go-to source for tech enthusiasts and investors. His coverage of Silicon Valley-based startup companies could help ensure the successful launch of a new business or product. However, he was criticized for routinely covering stories about the companies he invested in and consulted for. Although he provided full disclosures of his interests, rival critics challenged his conflicts of interest. How could he simultaneously be both an investor and an independent journalist blogging about the very companies in which he had a financial interest? He was in a classic conflict of interest position.10 Similar cases involving business reporters and potential conflicts of interest include The Wall Street Journal, Business Week, Time magazine, and the L.A. Herald Examiner.
Another situation in which potential conflicts arise is in the area of professional services, which attracts many young potential business owners. Perhaps you want to start your own CPA accounting firm, or CFP financial advisory firm, or IT consulting firm. A professional must be very cautious about conflicts of interest, especially in areas in which you owe a fiduciary duty to your clients. This requires a very high duty of conduct and full disclosure, one that prohibits being involved in both sides of a transaction. For example, as an IT consultant, do you recommend to a client that they buy a software product, when unknown to them, you own stock in that company? Or as a financial advisor, are you getting commissions on both ends of a transaction?
Fraud: Truthfulness and Full Disclosure
Ethical entrepreneurs consistently strive to apply ethics-based concepts in practice, including truthfulness and full disclosure. These two concepts are not only part of an ethical approach to doing business but are also underlying requirements of several areas of law including fraud. A business that makes/sells a product or service has responsibility for fully disclosing the truth about its products/services.
The underlying facts, reality, and evidence behind something are the truthfulness of a matter. An individual who is being truthful is exercising the capability of being factual about a subject matter, dealing with reality, and aware of evidence. Truthful individuals earn a level of credibility and reliability over time because what they say and what they do are in alignment. A corollary of truthfulness is fairness, which means to be impartial, unbiased, and in compliance with rules and standards of right and wrong behavior. Fairness deals with doing what is right, just, and equitable. From the standpoint of application, the quality of being truthful forms the foundation for fairness.
Disclosure describes sharing the needed facts and details about a subject in a transparent and truthful way. This information should be adequate, timely, and relevant to allow the recipient to understand the purpose and intent behind a product/service and to make a good decision about the value of that product/service. Any deliberate attempt to hide, change, or bend the truth is an unethical and irresponsible action subject to criminal investigation.
One example of a firm that has repeatedly run into several serious, embarrassing, and costly legal issues is Eli Lilly. In one instance, this company admitted in court that they had illegally marketed Zyprexa, which was primarily intended and approved by the US Food and Drug Administration office (FDA) to treat depression, to be used for off-label (not cleared by FDA to market and advertise) ailments such as sleep disorders, Alzheimer’s disease, and dementia. As a result, in 2009, Eli Lilly was fined \$1.4 billion by the office of criminal investigation of the US Department of Justice.11 | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/03%3A_The_Ethical_and_Social_Responsibilities_of_Entrepreneurs/3.00%3A_Prelude_to_the_Ethical_and_Social_Responsibilities_of_Entrepreneurs.txt |
Learning Objectives
By the end of this section, you will be able to:
• Define and describe corporate social responsibility (CSR) and social entrepreneurship
• Identify types of social entrepreneurship ventures, and the key values accompanying them
To understand the role of a socially responsible entrepreneur, it is important to first look at the major tenets of corporate social responsibility (CSR) and the underlying reason why this concept was conceived. Few directives in business can override the core mission of maximizing shareholder wealth, and today, that particularly means increasing quarterly profits. Such an intense focus on one variable over a short time (i.e., a short-term perspective) leads to a short-sighted view of what constitutes business success.
Measuring true profitability, however, requires taking a long-term perspective. We cannot accurately measure success within a quarter of a year; a longer time is often required for a product or service to find its market and gain traction against competitors, or for the effects of a new business policy to be felt. Satisfying consumers’ demands, going green, being socially responsible, and acting above and beyond the basic requirements all take time and money. However, the extra cost and effort will result in profits in the long run. If we measure success from this longer perspective, we are more likely to understand the positive effect ethical behavior has on all who are associated with a business.
Corporate Social Responsibility (CSR)
If you truly appreciate the positions of your various stakeholders, you will be well on your way to understanding the concept of corporate social responsibility (CSR). CSR is the practice by which a business views itself within a broader context: as a member of society with certain implicit social obligations and environmental considerations and issues. As previously stated, there is a distinct difference between legal compliance and ethical responsibility, and the law does not fully address all ethical dilemmas that businesses face. CSR ensures that a company is engaging in sound ethical practices and policies in accordance with the company’s culture and mission, above and beyond any mandatory legal standards. A business that practices CSR cannot have maximizing shareholder wealth as its sole purpose, because this goal would necessarily infringe on the rights of other stakeholders in the broader society. For instance, a mining company that disregards its CSR may infringe on the right of its local community to clean air and water if it pursues only profit. In contrast, CSR places all stakeholders within a broader contextual framework.
An additional perspective of CSR is that ethical business leaders opt to do good at the same time that they do well. This is a simplistic summation, but it speaks to how CSR plays out within any corporate setting. The idea is that a corporation is entitled to make money, but it should not only make money. It should also be a good civic neighbor and commit itself to the general prospering of society as a whole. It ought to make the communities of which it is part better at the same time that it pursues legitimate profit goals. These ends are not mutually exclusive, and it is possible—indeed, praiseworthy—to strive for both. When a company approaches business in this fashion, it is engaging in a commitment to CSR.
An interesting example of an entrepreneurial company that is committed to CSR is the New Belgium Brewing Company (NBBC), maker of Fat Tire Beer, among other brands. The NBBC is 100 percent employee owned, which makes this company different from the more traditional corporation in which investors own the company rather than the employees. This type of company with employee ownership means that the workers benefit directly from the profits generated by their efforts for the company, a sort of democratized capitalism. The NBBC is focused on sustainability. It has a brewery in Fort Collins, CO, where the brewery produces almost 20 percent of its own electricity—a large percentage for a commercial factory—through solar panels and wastewater. It makes a corporate commitment to contribute to causes related to sustainability, for example, to bicycle-related organizations supplying people with green personal transportation options. According to the company’s director of CSR, the NBBC considers social and environmental well-being to be a high priority of the company.12
From a historical perspective, the development of CSR has been somewhat like a rollercoaster ride, characterized by low points with extreme ethical failures (see Table 3.2) followed by high points in which corporate conduct improved, largely as a result of statutory laws and/or agency regulations enacted in response to failures. After such scandals, we also saw a number of voluntary ethics-based ideas begin to find their way into the corporate world, such as CSR and corporate citizenship. While these concepts have provided strategies and tools to strengthen the ethical foundations of businesses, scandals do continue, and new approaches to address them emerge. Ethical failures such as the Michael Milken/Drexel Burnham Lambert scandal, the Enron collapse, and many others, including the recent 2008/2009 mortgage industry/derivatives scandal, led Congress to enact new laws. Examples of statues enacted by the federal government in response to ethical failures include laws such as the Sarbanes-Oxley Act, the Insider Trading and Securities Fraud Enforcement Act, and the Dodd-Frank Act.
In addition to the enactment of statutory reforms, various government agencies have also promulgated new regulations in an attempt to prevent companies from engaging in unethical, illegal, and otherwise damaging activities. Examples of agencies that have created new regulations in response to ethical failures in the business sector include the Securities and Exchange Commission (SEC), the Public Company Accounting Oversight Board (PCAOB), the Consumer Financial Protection Bureau (CFPB), and the Financial Industry Regulatory Authority (FINRA).
The concept of doing what’s right ethically, following the law, and giving back to society are closely related concepts (see Table 3.2).
Table 3.2.1: Corporate Social Responsibility, Ethics, and Law.
Area of Responsibility Desired Outcome Compliance
Legal Comply with laws/regulations Required by government
Financial Profits Required by shareholders
Ethical Act fairly/avoid doing harm Expected by stakeholders
Social/philanthropic Be a good “corporate citizen” Desired by society
Notice which duties, or responsibilities, are mandatory versus discretionary.
Examples of organizations that have experienced ethical lapses causing serious and costly multi-billion-dollar problems can be seen in Table 3.3. Each has had a profound and far-reaching impact on the lives of individuals, on the communities and society in which they operate, and/or on the global environment. These problems—which have resulted in loss of lives, loss of jobs, property damage, depletion of life savings, and environmental devastation—resulted from issues of quality and ethics.
Table 3.2.2: Examples of Multi-Billion Dollar Corporate Responsibility Problems
Organization Area of Failure
Chevron Corporation Amazonian toxic waste disposal disaster
Volkswagen Group Diesel emissions scandal
Takata Corporation Defective airbag problems
General Motors Defective ignition switch problem
Wells Fargo Financial Services Unethical banking practices
BP P.L.C. (British Petroleum) Gulf of Mexico oil spill disaster
ENRON Corporation Illegal accounting practices
Union Carbide India Bhopal chemical disaster
Pfizer, Elli Lilly Fraudulent marketing practices
US Corps of Engineers Hurricane surge protection disaster
Toyota Motor Corporation Uncontrollable vehicle acceleration
Nike Corporation Breach of code-of-conduct/labor laws
Intel Corporation European union antitrust case
Flint Michigan Flint, Michigan, water disaster
Phar-Mor, Inc. Largest accounting fraud
Bernard L. Madoff Investment Securities, LLC Madoff Ponzi scheme
One vulnerability in the corrective measures discussed to address the scandals listed in Table 3.3 is that they do not necessarily prevent the repeat of ethical deviations because they are primarily compliance and fear based. In some instances, instead of preventing unethical activity, the system has enabled unethical leadership to take minimum actions and merely pay fines rather than correct their actions or change their approach.
General Motors’ Failure to Consider Stakeholders
General Motors (GM) has struggled with its brands and its image. Over the years, it has jettisoned some of its once-popular brands, including Oldsmobile and Pontiac, sold many others, and climbed back from a 2009 bankruptcy and reorganization. The automaker was hiding an even bigger problem, however: The ignition switch in many of its cars was prone to malfunction, causing injury and even death. The faulty switches caused 124 deaths and 273 injuries, and GM was finally brought to federal court. In 2014, the company reached a settlement for \$900 million and recalled 2.6 million cars.
The case exemplifies the tension between the concept that “the only goal of business is to profit, so the only obligation that the business person has is to maximize profit for the owner or the stockholders” on one hand, and the ethical obligations a company owes to its other stakeholders on the other.13 GM’s failure to consider its stakeholders and consumers when choosing not to report the potential for malfunction of the ignition switches led to an ethical breakdown in its operations and cost the company and its customers dearly. In addition, by treating customers as only a means toward an end, the company turned its back on a generation of loyal buyers.
• What virtues and values shared by its long-time customers did GM betray by failing to disclose an inherent danger built into its cars?
• How do you think that betrayal affected the company’s brand and the way car buyers felt about the firm? How might it have affected its shareholders’ views of GM?
In recent years, many organizations have embraced CSR, in which the company’s expected actions include not only producing a reliable product, charging a fair price with fair profit margins, and paying a fair wage to employees, but also caring for the environment and acting on other social concerns. Many corporations work on prosocial endeavors and share that information with their customers and the communities in which they do business. CSR, when conducted in good faith, is beneficial to corporations and their stakeholders. This is especially true for stakeholders that have typically been given low priority and little voice, such as the natural environment and community members who live near corporate sites and manufacturing facilities. CSR in its ideal form focuses managers on demonstrating the social good of their new products and endeavors. It can be framed as a response to the backlash that corporations face for a long track record of harming the environment and communities in their efforts to be more efficient and profitable.
The trend to adopt CSR may represent an opportunity for greater engagement and involvement by groups mostly ignored until now by the wave of corporate economic growth reshaping the industrialized world.
Social Entrepreneurship
Social entrepreneurship describes ventures launched by entrepreneurs who are first and foremost advocates or champions for a social cause. However, they are able to leverage that cause as a platform to develop and maintain an economically viable organization. These individuals are primarily driven and motivated by a higher vision or grander purpose. This new breed of entrepreneur leverages the power of their position, their standing in the community, and the potential synergy and wealth-creation power of an enterprise as a vehicle or platform to advance their social goals and personal agenda. These social causes often include a solution for a costly and chronic social problem or pain, a social wrong or injustice that must be corrected, or a global issue that has been either overlooked or marginalized by society or organizations.
While the primary goal and end-state for a socially responsible entrepreneur is to generate wealth, the dominant goal for a social entrepreneur is to serve a specific cause as they generate wealth to support that cause. This means a social entrepreneur works to advance society instead of accumulating greater wealth for the shareholder. Social entrepreneurs often share qualities such as a selfless attitude, a sense of obligation and responsibility towards someone or something, a strong commitment to make a change, and a resilience to withstand failure.
There are numerous examples of companies that have embraced the concept of CSR. In fact, some entrepreneurs have created startups based primarily on the idea of giving back, many of whose ventures have become well-known. The list includes, to name a few, TOMS Shoes (discussed in a feature box in this chapter), Bombas Socks, and Warby Parker Eyewear. Each of these companies follows a CSR approach and donates one product for each one purchased, (shoes, socks, glasses). Some companies go the extra mile and become officially certified as B-corporations, which is a CSR-type of designation. (See Business Structure Options: Legal, Tax, and Risk Issues for more discussion of B-corps).
Environmental Entrepreneurship
Similar to social entrepreneurship, environmental entrepreneurship advocates for a meaningful and beneficial social cause that is also economically viable. This environmental focus deals with such initiatives that preserve our ecosystem such as clean and renewable energy, waste management, programs to counteract climate change, improved water supplies, protection of biodiversity, and reduction of environmental degradation and deforestation.14 These initiatives are financially sound from a business standpoint and, at the same time, don’t pollute, waste, destroy, and leave a negative environmental footprint.
There are multiple ways in which an entrepreneur can demonstrate a commitment to environmental awareness. One way is to own a company that directly helps clean up the environment, such as Ocean Cleanup, the nonprofit started by a twenty-five-year-old entrepreneur to clean up the Great Pacific Garbage Patch. Another option is to own a traditional private sector company that pledges to operate in an environmentally responsible way, such as Patagonia, committed to responsible sourcing and other initiatives. A third option is to become part of an advocacy organization, an example of which is E2. E2 is “a national, nonpartisan group of business leaders, investors and others who advocate for smart policies that are good for the economy and good for the environment.”15 This group strives to influence policies at the state, regional, and federal levels dealing with energy, climate, oceans, water, transportation, and smart growth. These policies are primarily intended to improve air, water, public health, as well as job creation in these areas. One example of an initiative that has resulted from this group deals with passing the nation’s first automobile emissions standards.
In recent decades, corporations have responded to stakeholder concerns about the environment and sustainability. In 1999, Dow Jones began publishing an annual list of companies for which sustainability was important. Sustainability, in this context, is the practice of preserving resources and operating in a way that is ecologically responsible in the long term.16 The Dow Jones Sustainability Indices “serve as benchmarks for investors who integrate sustainability considerations into their portfolios.”17,18 There is a growing awareness that human actions can, and do, harm the environment. Destruction of the environment can ultimately lead to reduction of resources, declining business opportunities, and lowered quality of life.
Enlightened entrepreneurs realize that profit is only one positive effect of business operations. Operating a successful business creates opportunities for entrepreneurs to give back to society in responsible ways. In addition to safeguarding the environment, other ethical contributions that entrepreneurs can consider include establishing schools and health clinics in impoverished neighborhoods and endowing worthwhile philanthropies in the communities in which companies have a presence.
During the last few decades, there has been an explosion of studies on how business activities affect our planet. In one study, Tony Juniper points out that population growth, with its accompanying demand for natural resources and the impact of environmental disasters, has had a profound and lasting impact on the planet. Juniper states that we have increased our consumption of natural resources tenfold, increased grain production fourfold, increased freshwater usage fivefold, increased fish capture fourfold, doubled our consumption of earth’s renewable production, and increased the concentrations of greenhouse gases in the atmosphere.19
In prior sections, we briefly discussed the devastating environmental impact of oil companies such as Texaco and Chevron. When you drill for oil in one of the most biodiverse corners of the world, the Ecuadorian rainforest of the Amazon, and dump 18.5 billion gallons of oil byproducts and waste into the Amazon’s rainforest and streams, you are definitely leaving a negative footprint on our planet. If you meticulously study the local wildlife, vegetation, and other natural characteristic of a region before clearing a region to conduct your business (e.g., harvest the trees for lumber, plants for medication, or drill for oil) and then restore the region to its original natural form when done, you are neutralizing your footprint on the planet. However, it you enhance and strengthen the region, open up schools, provide jobs, educate the local population to preserve and strengthen their natural resources, and take other actions to improve the region, you are in fact leaving a positive footprint on the planet. Entrepreneurs should learn the impact made by all aspects of their company, weigh the choices, and consider adopting a policy that does no harm and possibly leaves a positive footprint on the planet.
LINK TO LEARNING
Elon Musk, founder of the electric car manufacturer Tesla and other companies, recently spoke at a global conference held at the Panthéon-Sorbonne University in Paris. Watch this video of Musk explaining the effects of carbon dioxide emissions on climate change in clear and simple terms.
Sustainability
Sustainability deals with actions and a way of life that considers the continuity of future generations. It is deeply rooted in doing what is moral/ethical. For example, it is unjust to take actions that benefit the current generation at the detriment of future generations. What this means is that a sustainable entrepreneur is also driven by and is an advocate for a socially responsible approach to owing and running a business, leveraging the economic potential of renewable and readily available resources to add value to the world in which it operates. However, sustainability means more than just environmental awareness. A simple definition of sustainability is the ability to be maintained at a certain rate or level. This means not only the environment, but also natural resources, human resources, product supply chains, and multiple related concepts. Thus, as an entrepreneur aware of issues related to sustainability, one would want to consider a wide range of issues. Examples might include the responsible use of electricity or water, or participating in supplier diversity/responsible sourcing programs, or funding worker wellness initiatives. The idea of sustainability, at its root, is to think long term as opposed to short term.
Given the prominence of the sustainable environment movement worldwide, no well-managed business today should be conducted without an awareness of the tenuous balance between the health of the environment and corporate profits. It is quite simply good business practice for executives to be aware that their enterprise’s long-term sustainability, and indeed its profitability, depend greatly on their safeguarding the natural environment. Ignoring this interrelationship between business and the environment not only elicits public condemnation and the attention of lawmakers who listen to their constituents, but it also risks destroying the viability of the companies themselves. Virtually all businesses depend on natural resources in one way or another.
Responsible Entrepreneurs and Social Entrepreneurship Opportunities
The ability to establish a new venture is an exciting opportunity and privilege. To intentionally plan and establish a new venture in a responsible manner promotes the continuation of a better world. Development of a new venture that supports an awareness and sensitivity to immediate and long-term impacts reflects upon the entrepreneur’s personal and organizational values and goals.
Some entrepreneurs start businesses with a community project in mind. A community project venture leverages the available power, synergy, talents, capabilities, and resources of the community to add value and change the world in a positive way. This approach uses the creativity, viewpoints, and feelings of community members to innovate and add value to the local area. An example is that of an entrepreneur who started a company with the idea of giving back to the community.
The Story of the TOMS Shoes Entrepreneur in His Own Words by Blake Mycoskie
Read Blake Mycoskie’s own telling of how he founded TOMS Shoes: “In 2006 I took some time off from work to travel to Argentina. I was twenty-nine years old and running my fourth entrepreneurial startup: an online driver’s education program for teens. Argentina was one of the countries my sister, Paige, and I had sprinted through in 2002 while we were competing on the CBS reality program The Amazing Race. I met a woman volunteering on a shoe drive who explained that many kids lacked shoes, even in relatively well-developed countries like Argentina, an absence that didn’t just complicate every aspect of their lives—including essentials like attending school and getting water from the local well—but also exposed them to a wide range of diseases. Her organization collected shoes from donors and gave them to kids in need. Their complete dependence on donations meant that they had little control over their supply of shoes. My first thought was to start my own shoe-based charity, but instead of soliciting shoe donations, I would ask friends and family to donate money to buy the right type of shoes for these children on a regular basis. I have a large family and lots of friends, but it wasn’t hard to see that my personal contacts could dry up sooner or later. And then what? These kids needed more than occasional shoe donations from strangers. Then I began to look for solutions in the world I already knew: business and entrepreneurship. An idea hit me: Why not create a for-profit business to help provide shoes for these children? Why not come up with a solution that guaranteed a constant flow of shoes, not just whenever kind people were able to make a donation? And for every pair I sell, I’m going to give a pair of new shoes to a child in need. There will be no percentages and no formulas. It was a simple concept: Sell a pair of shoes today, give a pair of shoes tomorrow. Something about the idea felt so right, even though I had no experience, or even connections, in the shoe business. I did have one thing that came to me almost immediately: a name for my new company. I called it TOMS. I’d been playing around with the phrase “Shoes for a Better Tomorrow,” which eventually became “Tomorrow’s Shoes,” then TOMS. (Now you know why my name is Blake but my shoes are TOMS. It’s not about a person. It’s about a promise—a better tomorrow.) I got a break with an article about my new startup, TOMS, in the LA Times, it was a headline story. By the end of that day, we’d received 2,200 orders. That was the good news. The bad news was that we had only about 160 pairs of shoes left sitting in my apartment. On the website we had promised everyone four-day delivery. What could we do? Craigslist to the rescue. I quickly posted an ad for interns and soon I had selected three excellent candidates, who began working with me immediately. We ended up selling 10,000 pairs of shoes that first summer—all out of my Venice apartment.”
Blake Mycoskie. “How I Did It: The TOMS Story.” Entrepreneur. 2011. https://www.entrepreneur.com/article/220350
(This excerpt from Entrepreneur magazine was written by Blake Mycoskie in his own words.)
There are multiple types of business entities that function with a social purpose in mind. Nonprofit organization entrepreneurs (as well as those starting for-profit companies such as the TOMS story) have the potential to look beyond their own financial gains. These organizations typically partner with federal, state, or local government organizations, public and private institutions, foundations, or individuals with financial means and community standing to serve the greater public. One example of a nonprofit initiative is the National Kidney Foundation of Arizona.20 This organization seeks solutions for kidney and urinary diseases through education, prevention, and treatment.
A cooperative venture leverages the talents, finances, and intellectual resources of the members of an organization to operate and deliver value to the members of the organization. One difference between a cooperative and a nonprofit corporation is how money flows back into the community. In a nonprofit organization, the managers cannot distribute profits to members or investors; the remaining money stays in the nonprofit. In contrast, a cooperative generally can distribute profits to members based on member participation/temporary ownership. One example of a cooperative would be the Unity One Credit Union, which is a member-owned, not-for-profit cooperative, working for its members’ benefit.
Two other types of entities that are essentially the same are known as social enterprises or social purpose businesses. These entities are primarily driven by a meaningful social cause. Social entrepreneurs are able to meet their strategic organizational goals and objectives by delivering a value-added product/service that closes a gap, addresses a problem or pain, or corrects a social injustice. A social enterprise is typically designed to be financially self-sufficient. One example of a social entrepreneur and a social enterprise is the Grameen Bank founded by Muhammed Yunus, a Nobel Peace Prize laureate who defined the term micro-lending and micro-finance. Grameen Bank thrives on giving small loans to those individuals who have very little to no collateral and wish to start a business to support their family.21
A social purpose business is often referred to as a B- or benefit Corporation (also discussed in Business Structure Options: Legal, Tax, and Risk Issues). The process of becoming a certified B-corporation is a formal process that involves compliance with various standards and an audit of this compliance (managed by the B-Corp organization).22 The essence of these new B-corporations is that “they recognize the imperative to do no harm and create positive impact throughout the value chain.”23 According to the B-Corp organization, these certified businesses are legally required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment. As of 2019, there are approximately 3,000 certified B-corps in 65 countries, covering 150 different industries.24
One example of a certified B- (or benefit) corporation is Kickstarter, the crowdfunding website. Kickstarter is one of the world’s largest funding communities for creative projects—everything from films, games, restaurants, and music to art, design, and technology—and offers entrepreneurs a way to raise funds when they cannot borrow from a bank.
A hybrid venture uses a combined business strategy to enable the organization to deliver profitable and socially valued products and services. The hybrid business model attracts different investors and capitalizes on a variety of investment opportunities, while supporting a mission centered on a socially meaningful cause and grander purpose. One example is Embrace Innovations, a manufacturer of incubators for infants born prematurely, originally established as a nonprofit entity. Embrace, an example of a relationship between academic and business, was started as part of a special course at Stanford University. The Stanford Design for Extreme Affordability Program consists of a course for student teams seeking further support (the Social Entrepreneurship Lab and the Design Lab). This project was launched in 2007, the company was formed in 2008, and the first version of the product launched in 2011. The product is currently being distributed to clinics in India, where dozens of babies have already benefited. Partnerships have been formed with several multinational organizations to distribute the product.25
LINK TO LEARNING
Female entrepreneur Stacey Edgar started Global Girlfriend on a very small budget and a larger social cause. Through hard work by a team of people, she built a business organization founded on the premise of wanting to have a social impact. The company eventually supported up to 100 different women-led organizations in over thirty countries. Her goal was for the company not only to touch the lives of end customers, but also change the supply chain of retail apparel distribution. It is an example of a successful entrepreneurial startup spreading the message of women’s empowerment.
When launching a social enterprise, you need to consider both the technical aspects of launching an enterprise as well as the underlying cause or purpose that has driven you to launch a social enterprise. As you develop your business model, marketing strategy, and other elements to support your venture, it is crucial to ensure your grander purpose remains the foundation of your business planning and decisions.
Identifying Your Values and Mission
The values we choose to honor are the essence of ourselves, and we carry them with us wherever we live, work, and play. As we noted, the entrepreneurial path you choose should reflect your values, whether you create a for-profit or nonprofit organization. It also is possible that you might establish a for-profit company and volunteer extensively on your own or on behalf of your firm in the nonprofit sector. Whatever your entrepreneurial path, it remains important not to let your well-considered values be diminished by others who do not prize loyalty or industriousness, for instance. Entrepreneurship is not a contest in which the person who finishes with the biggest portfolio or fastest jet skis wins anything other than an empty prize. It is far better to treat others with integrity and respect, and be surrounded by the true emblems of a successful career—family, friends, and colleagues who will attest to the dignity with which you have worked. In the final analysis, if you achieve a life of honor, then you have succeeded.
How do you keep personal values like integrity, fairness, and respect close at hand? The best way is by writing them down, prioritizing them, and fashioning them into a personal mission statement. Most companies have mission statements, and people can have them, too. Yours will guide you on your path, clear away distractions on the road, and help you correct any missteps. It should be flexible, too, to account for changes in yourself and your goals. Your mission statement is not a global positioning system so much as a compass that guides you toward discovering who you are and what drives you (Figure 3.5).
Let us write your mission statement. Because it will reflect your values, start by identifying a handful of values that matter most to you. You can do this by answering the questions in Table 3.4; you may also find it beneficial to keep a journal and update your answers to these questions regularly. Additionally, the US Department of Labor has a free online self-assessment called the Interest Profiler. The Interest Profiler can help you find out what your interests are and how they relate to the world of work. The Interest Profiler can help you focus on avenues of interest that you might want to explore as an entrepreneur.
LINK TO LEARNING
Click on the O*Net Profiler link and take the self-assessment. It’s quick, fun, and easy.
Table 3.2.3: Identifying Your Values
1. Of all the values that matter to you (e.g., honesty, integrity, loyalty, fairness, honor, hope), list the five most important.
2. Next, write down where you believe you learned each value (e.g., family, school, sports team, belief community, work).
3. Write a real or potential challenge you may face in living each value. Be as specific as possible.
4. Commit to an action in support of each value. Again, be specific.
Now you can incorporate these values into your business mission statement, which can take the form of a narrative or action. There are many formats you can follow, but the basic idea is to unite your values with the goals you have set for your life and career. You can, for instance, link the benefit you want to create, the market or audience for which you want to create it, and the outcome you hope to achieve.26 Keep your statement brief. Richard Branson, founder of the Virgin Group, wants “to have fun in [my] journey through life and learn from [my] mistakes.” Denise Morrison, CEO of Campbell Soup, aims “to serve as a leader, live a balanced life, and apply ethical principles to make a significant difference.”27 Your own statement can be as simple as, for instance, “to listen to and inspire others,” or “to have a positive influence on everyone I meet.”
LINK TO LEARNING
Read this blog, “The Ultimate Guide to Writing Your Own Mission Statement,” by Andy Andrews for more information about creating a personal mission statement.
Watch the TEDx talk “How to Know Your Life Purpose in Five Minutes” about the self and identifying values to learn more.
Putting Your Values and Mission Statement to the Test
There may be no better place to put your personal values and mission to the test than in an entrepreneurial role. Startups cannot be run on concepts alone. More than almost any other kind of venture, they demand practical solutions and efficient methods. Entrepreneurs usually begin by identifying a product or service that is hard to come by in a particular market or that might be abundantly available but is overpriced or unreliable. The overall guiding force that inspires the startup then is the execution of the company’s mission, which dictates much of the primary direction for the firm, including the identification of underserved customers, the geographic site for operations, and the partners, suppliers, employees, and financing that help the company get off the ground and then expand. In a brand-new organization, though, where does that mission come from?
The founder or founders of a firm develop the company’s mission directly from their own personal beliefs, values, and experience; this is particularly true for nonprofits. Sometimes the inspiration is as simple as the recognition of an unmet need, such as the rising global demand for food. Bertha Jimenez, an immigrant from Ecuador who was studying engineering at New York University, could not help but be concerned that while craft breweries were riding a wave of popularity in her adopted city, they were also throwing away a lot of barley grain that still had nutritional value but that no one could figure out how to reuse it. After a few attempts, Jimenez and two friends, also immigrants, finally hit on the idea of making flour out of this barley grain, and thus was born the Queens, New York–based startup Rise Products, whose website proclaims that “Upcycling is the future of food.”
Rise Products supplies local bakers and pasta makers with its protein- and fiber-packed “super” barley flour for use in products from pizza dough to brownies. It has also sent product samples on request to Kellogg, Whole Foods, and Nestlé, as well as to a top chef in Italy. Jimenez and her fellow cofounders say, “In the long term, we can bring this to countries like ours. We want to look at technologies that won’t be prohibitive for other people to have.”28
If we were to diagram the relationship between founders’ values and the entrepreneurial mission, it would look something like this:
personal values → personal mission statement → entrepreneurial mission statement
Just as a personal mission statement can change over time, so can the company mission be adapted to fit changing circumstances, industry developments, and client needs. TOMS Shoes, profiled earlier, is an example of a business that has expanded its mission to also offer eyeglasses and improved access to clean water to people in developing countries, in addition to its original mission of shoes for the needy. It calls itself the “One for One” company, promoting founder Blake Mycoskie’s promise that “With every product you purchase, TOMS will help a person in need.”29
The point is, if you have clarified your personal values and mission statement, there is almost no limit to the number of ways you can apply them to your business goals and decisions to “do good and do well” in your entrepreneurial career. The purpose of business is relationships, and the quality of relationships depends on our acceptance of self and concern for others. These are developed through the virtues of humility on one hand and courage on the other. The demanding but essential task of life is to practice both. In that way—perhaps only in that way—can we be truly human and successful business professionals. | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/03%3A_The_Ethical_and_Social_Responsibilities_of_Entrepreneurs/3.02%3A_Corporate_Social_Responsibility_and_Social_Entrepreneurship.txt |
Learning Objectives
By the end of this section, you will be able to:
• Describe workplace challenges in an entrepreneurial culture
• Distinguish between reactive and proactive approaches to managing ethics
• Describe the foundations and framework of an organizational culture of ethical excellence
• Define the components of an ethical workplace
Successful entrepreneurs understand that the workplace of 2020 is quite different from that of 2000, just twenty years ago. As the heading to this section suggests, progressive entrepreneurs want to create a workplace culture of ethical excellence. However, doing that means understanding a changing workforce, both in terms of demographics and values. Millennials, born between 1983 and 1995, now outnumber baby boomers in the workforce, and by 2025, will compose three-quarters of all workers on a global basis.31 Entrepreneurs and managers who are in a position to hire and supervise millennial workers must adjust to the differing expectations and demands of a mid-twenty-first century workplace. This is especially true with regard to CSR/ethics. What matters most to millennials, according to a recent New York Times article, is that work aligns with their values.32
Approximately 60 percent of millennial workers would agree to work for 15 percent less money just for the chance to work for a company whose business values parallel their personal values.33 It turns out that millennials don’t just want a job, they want a job that matters—one in which they can do rewarding work that achieves a worthwhile outcome. In other words, they want the work they do to mean something. Furthermore, according to an article in the Texas Bar Journal by career coach and consultant Martha Newman, millennial workers place a high value on workplace policies that promote open communication, collaboration, and participation in short- and long-term decision making with their employer.34 Newman also says that millennials expect a degree of work-life balance; career isn’t all that matters in their life.
What this means for entrepreneurs who manage employees is that they must adjust. For example, an owner can create a workplace in which there is a culture ensuring that people matter as much as money, where there is work-life balance with things like flexible scheduling, and where good work is recognized and rewarded. There’s an adage that says, “People don’t quit their job, they quit their bosses.” If you don’t want a very high turnover rate among your workforce, be the kind of boss that millennials want to work for and with.
Entrepreneurial Culture
A fairly common characteristic of successful startups is charismatic, driven founders with competitive mentalities. After all, it takes a thick skin and powerful ego to get through the inevitable disappointments that confront a startup leader. Often, however, companies discover that a different leadership ethos is necessary as they grow. Could entrepreneurs still succeed if they also embraced a humanistic leadership style at the outset, or would this invariably undermine the already low initial odds of success? It is a difficult problem with which many firms wrestle. Dedicated employees may be put off by demanding leaders who are harsh, giving little back to loyal workers even after achieving success. New employees may decide the working climate is less congenial than they anticipated and simply leave.
One question an ethical entrepreneur should ask is this: Do my employees feel like they can speak freely? In reality, at many companies, according to SHRM (Society for Human Resource Management), human resources departments often find it difficult to get employees to complete employee workplace climate (satisfaction) surveys.35 Workers often believe that if management really wants to find out who said what, they easily could, although the surveys are supposed to be anonymous. The difference between ethical and unethical entrepreneurial management is whether they want to find out. Whether it involves small, mid-size, or large companies, management should encourage employees to speak out, whether as an anonymous whistleblower or in person to their supervisor. Absence of this type of encouragement often allows unethical business practices to flourish, such as was seen in the Wells Fargo case example.
LINK TO LEARNING
Although no single set of traits identifies the ideal startup leader, a demanding, driven nature is a fairly common characteristic. Consider these brief profiles of entrepreneurs: first, a profile on Walt Disney and then video showing a contrasting view from Kerrie Laird at Vodafone.
After watching the videos, consider this thought experiment: Suppose the cult of the charismatic—but dogmatic—entrepreneurial leader such as Walt Disney or Steve Jobs were replaced by one steeped in a commitment to employee empowerment that Kerrie Laird claims for Vodafone? Could this change the culture at startups? If it could, do you believe that change would be for the better or worse?
These observations identify what may be unique to entrepreneurial culture. This is a combination of personality and management style often identified with those business leaders who strike out on their own, bring a startup to life, and shape its initial business practices and culture on the job. If the enterprise is successful, the principles and philosophy of the founder become enshrined in the lore of the company, so that long after his or her departure, succeeding leaders find themselves beholden to the management philosophy exemplified from the early days of the firm.36 As you seek the right leadership style to implement in your entrepreneurial plans, begin by asking precisely what kind of leader you would prefer to work for if you were not the boss. The answer you provide may very well be the best model to follow as you develop your own leadership personality.
The first employees of a startup realize what is at stake as the company tiptoes into new entrepreneurial waters. The founder may be the boss, but those associated with him or her sense a collaborative spirit that directly joins them to the founder as well as to each other. There can be a genuine fraternity among those who have been with the firm since day one or shortly thereafter. Founding members of an entrepreneurial business are also often willing to undergo the strains and rigors attached to a startup in return for an ownership stake in the company that allows them to profit handsomely from its later growth and success.
Newer staff, however, may not share this mindset. They may simply be seeking a secure position with a growing business rather than a chance to get in on the ground floor of a risky startup. They will not necessarily have the tolerance for the demanding hours, chaos, and abrasive personalities that can characterize the early days of an enterprise. Can entrepreneurial founders shape a company’s culture so that it can accommodate talented employees who are looking for a corporate culture that supports some work-life balance?
Consider also the ethical practices of an entrepreneur and the ethical expectations of employees. Suppose that one of the distinguishing features woven into the fabric of the startup is the respect extended to customers or clients. An entrepreneur typically promises always to hold customers in the highest regard, never lie to them, and serve them well. Furthermore, suppose this entrepreneur successfully instills this same ethos among all employees from the outset. Respect for customers is intended to become a distinguishing feature of the business; even if it causes monetary loss to the company, this entrepreneur will neither cheat a client nor misrepresent the company’s services. Finally, presume that this ethos is embedded into the culture of the company while it is still in startup mode.
Now suppose the company becomes successful. This may signal the hardest time of all for the entrepreneur. Growth often accompanies success, and growth means, among other things, more employees. Not all these new hires will be as committed to the same degree of responsibility for customers. They will not necessarily set out to cheat clients, but they might lack the founder’s enthusiasm for the most honorable treatment of customers. How can an entrepreneur ensure that the initial commitment carries over to the second generation of leadership? He or she cannot simply order it to happen—human nature usually does not respond so easily. So entrepreneurs must do their best to ensure that their version of customer service, one that prioritizes respect for clients, is passed along to new employees. It may be ingrained in the longest-serving employees, but it must be nurtured to the point where it has the same significance for the newest hires.
As a leader, you need to plan and follow-up to ensure your organization follows the values and ethical principles you uphold. This planning process goes beyond taking a few simple actions such as hiring the right people, providing consequences, or setting expectations. It goes beyond communicating a few niceties and encouraging sound bites such as establishing trust and working with uncompromising integrity. It needs more than the application of a few popular concepts and slogans such as CSR, conscious capitalism, or servant leadership. It also needs more than the effective communication of a few success criteria and expectations.
There are effective techniques that can support the infusion of ethical principle into the daily work life of employees. Sometimes known as anchoring strategies, ethical values can become part of the business culture through the implementation of employee training, and reward/recognition programs. The Society for Human Resource Management (SHRM) website has a toolkit for entrepreneurs and managers that provides useful ideas on infusion and anchoring strategies.
LINK TO LEARNING
View the toolkit for understanding and developing organizational culture to learn more.
While the use of popular management approaches can be successful, they can be inadequate to stop unethical behavior. Instead, you need a plan to nurture and develop a culture where ethical qualities and capabilities such as truthfulness, justice, responsibility, and compassion are developed and internalized as a moral compass. It also demands that these qualities and capabilities are infused into the fabric of organization, adhered to habitually, and are integrated into the organization’s daily operations.
Proactive versus Reactive Approaches
Creation of an ethical workplace environment has both reactive and proactive components. The reactive side enables an entrepreneur to identify and address reckless behavior, irresponsible actions, and ethical deviations as they occur. However, there may be times that a reactive approach, which can be heavy-handed, may not be the best approach for addressing ethical deviations.
In contrast, a proactive approach to developing an ethical workplace strives to prevent reckless behavior, irresponsible actions, and ethical deviations by establishing and nurturing a culture of ethics, responsibility, and compliance. It also demands that you establish a workplace environment of ethics where every member of the organization is able to proactively develop, internalize, and apply a moral compass. This approach serves to operationalize popular—but often silent or nebulous—concepts such as truthfulness, fairness, trust, integrity, commitment, innovation, and excellence, leading to a sustained competitive advantage.
Developing the Foundation and Framework of an Ethically Responsible Organization
An entrepreneur must build a foundation for developing an organization grounded in ethics and responsibility. Foundational building blocks enable an entrepreneur to systematically add the greatest value to society, and to do so responsibly. Additionally, for entrepreneurs modifying their businesses or taking over new ventures, building a foundation of ethical conduct should neither disrupt normal business operations nor add significant overhead, since the main concepts are infused into the fabric of the organization.
To develop an organization’s foundation for ethics and a framework for management, an entrepreneur needs to incorporate three essential ethical qualities—trust, fairness, and excellence—into the organization’s core values (see Table \(1\)). Additional ethical qualities, dependent on the enterprise’s specific goals, might include responsibility, commitment, compassion, and so on. The entrepreneur should infuse these qualities into all aspects of organizational governance and daily operations, and track these values to ensure they are being integrated into planning, and are met and enforced by all business units.37,38,39 The application and implementation of these three core qualities will begin to shape the framework and establish a foundation of ethics and responsibility.
Table \(1\) illustrates and approach to building a foundation for ethics-based behaviors, principles, and effective collaboration
Excellence
• Have a grander purpose
• Create a culture that eliminates internal competition
• Focus on excellence
Fairness
• Foster openness
• Demonstrate impartiality
• Protect the welfare of all stakeholders
• Maintain a system of accountability
Trust
• Provide and expect feedback
• Base decisions on truth and consensus
• Clash different ideas, not different individuals
• Listen with patience and respect
• Separate yourself fromyour thoughts and views
Second, the organization should consider what ethical principles it wants to prioritize. Examples of ethical principles might include:
• Service and advancement of society
• Collaborative excellence
• Gender equity
• Elimination of prejudices
Once the framework and foundation for an ethical and high-performing organization has been established, other qualities and principles can easily be integrated as needed to further strengthen this framework, differentiate the organization, and develop a sustained competitive advantage. It also enables leadership to align other aspects of organizational governance with ethics and responsibility. For example, if leadership wants to leverage the power of diversity to develop a sustained competitive advantage, they would adopt the principles of equality of sexes, the elimination of prejudices, and the principle of oneness of humanity. If leadership wants to develop and use teamwork and collaboration as a strategic competitive advantage, they would integrate the behaviors and principles for collaborative excellence and working cohesively as one.
The framework and foundation of ethics and responsibility will enable the entrepreneur to consistently manage the needed qualities and principles for success in all aspects of daily operations. These aspects include research and development, engineering, manufacturing, sales, marketing, planning, decision-making, problem solving, conflict management, and other aspects of organizational governance. To demonstrate what this means in practice, the leadership of each of functional area could serve as role models, raise awareness, and encourage individuals to internalize a line of ethical reasoning, asking questions such as, “Is my decision right or wrong (good or bad)?” “Am I dealing with factual information or is conjecture?” “What is the consequence of my action?” “Is my decision fair and equitable?” “Did I give the individual what they are due?” “Would I want to be treated this way?” “Will this action help me achieve the best results for the collective?” This mindset, line of reasoning, and congruence between individual and organizational ethics is often lacking, which leads to ethical deviations.40,41,42,43,44,45 Establishing the foundation outlined here enables each member of the organization to exercise sound moral judgment, develop ethical capabilities, and internalize a moral compass. It also allows employees to be aligned with the company’s grander purpose, vision, mission, and values that then translates into actions.
Develop a Grander Purpose
Once the entrepreneur has designed and configured the organization to develop a sustained competitive advantage in a responsible manner, he/she needs to develop a higher vision or a grander purpose for the organization. This grander purpose is not the same as a mission or vision (although they may overlap). It is not financially motivated, it is not product/service centric, and it is not shareholder driven. Instead, the grander purpose defines and highlights the reasoning for a firm’s long-term existence and success; it provides guidance and direction during decision-making, problem solving, and conflict resolution; it provides the motivation for individuals to achieve excellence and the sense of urgency for social change; and it enables individuals to be part of a larger cause. For example, the integration of the right grander purpose into the operations of an organization could have prevented the manufacturing of toys made with lead-based paint or the poisoning of the Flint, Michigan, water supply. The grander purpose provides a mechanism to help individuals calibrate their day-to-day activities against a more meaningful and stable target.46
Develop a Culture of Collaborative Excellence
The establishment of a framework and foundation for ethical behavior opens up the organization for effective and meaningful teamwork and collaboration. Many existing approaches to collaboration, while demonstrating successes and benefits, also are sometimes inadequate in addressing complex group interactions dealing with mistrust, competition, politics, and ideological differences. A successful culture of collaboration should convince individuals to find the best ideas, leverage diversity, grow new solutions, gain wholehearted support, develop champions of change, nurture a safe environment, and encourage people to express all ideas.
An effective process for encouraging collaboration takes time to build; however, it’s worth it because it will provide the inspiration and motivation needed to accomplish tasks and exceed expectations. The organization should also have consequences in place for ineffective collaboration, which may be evidenced in gossip, backstabbing, self-centered behavior, and biases or prejudices. Such consequences could include probation plans and one-on-one meetings that work to determine the root cause and identify steps forward.
Creativity is also key for a team to think differently. There must be freedom in the workplace for creativity to blossom. When developing a culture of creativity, entrepreneurs should consider these issue and challenges:
• How can we creative a culture of creativity and innovation?
• How can we encourage the members of the organization to collaborate and leverage each other’s creativity?
• How can we reward and recognize people for their creativity?
Human Resources Development
A human resources development plan enables a company to continually grow its intellectual resources, enables individuals to develop ethical capabilities, strengthens individual creativity and organizational innovation, provides a steady stream of capable human resources for its leadership pipelines, and enables the firm to leverage and harvest those human resources to advance society in a responsible manner. This is achieved by providing a new employee assessment process where every member of the organization is given the needed opportunities and is expected to collaborate with their superior(s) to own and manage their lifelong development plan (LDP). At a minimum, an LDP should:
• Include short-term and long-term career goals and objectives
• Help identify, continually develop, and leverage individual strengths
• Enable individuals to identify and measurably close gaps in deliverables, behavior, and professional improvement
• Clarify major deliverables and success indicators
In sum, an LDP becomes the primary instrument to assist individuals to achieve excellence by raising performance, closing gaps in assessment, and aligning the individual with the grander purpose, vision, mission, goals, needs, and objectives.
Growing Collaboration and Creativity
Entrepreneurs are entrusted with the growth and development of their people. This growth and development should not be stopped, delayed, or marginalized in any shape or form. Instead, an entrepreneur needs to learn how to use the available resources to systematically train, develop, and deliver a steady stream of responsible individuals who are able to grow within the company as well as grow the company. List three strategies an entrepreneur could use to achieve the following major objectives:
1. Develop the best, the brightest, and most creative and motivated people who have a strong sense of right and wrong
2. Develop individuals who have a strong sense of ownership, responsibility, and commitment to achieve and sustain a competitive edge
3. Leverage these intellectual forces and the synergy within the organization to generate the greatest value and wealth for all stakeholders.
Develop Ethical and Responsible Leadership/Management
Significant research shows that the culture of the organization is mostly shaped by its leadership values—by how leaders develop the bonds of trust, by how they motivate their people, by their responsible decisions and actions, and by how they empower, delegate, and monitor tasks. A recent Harvard Business Review article, by a group of professors and entrepreneurs, synthesized the research of experts including Edgar Schein, Shalom Schwartz, Geert Hofstede, and other leading scholars on this topic.47 The article indicates that the attributes of a business’s leaders define that organization’s culture. A business’s culture is essentially defined as the social order within an organization that helps shape attitudes and behaviors—delineating what type of behavior is encouraged and/or discouraged.
While it is possible for a company to hire individuals who possess these attributes, the organization should have a plan in place to systematically train and develop responsible leaders. At minimum, this should include the development and management of a leadership pipeline, the nurturing of ethical and intellectual capabilities, and rewards and consequences that enable a leader to develop and internalize a moral compass.
Entrepreneurs Must Not Just Talk the Talk but Walk the Walk
As both a leader and an entrepreneur, you need to have a good understanding of ethics and responsibility, and be able to apply the major tenets of concepts such as CSR. To build and maintain trust, it is important that these concepts not start and end with mere empty words and gestures. Rather, entrepreneurs need to exemplify and model these concepts, and apply them through meaningful, consistent, and timely actions. In sum, an entrepreneur needs to live the values they wish to see in others. They need to become the embodiments of trust, respect, responsibility, commitment, and other key qualities. These core values need to be infused into the fabric of the organization.
Entrepreneurs have been placed in a position of power and responsibility. They need to use their position, power, social standing, and the synergy of the vast financial and intellectual resources at their disposal to move and shake the world in a meaningful way. For example, imagine for a moment using the resources of companies such as Apple, Google, Microsoft, Amazon, and Facebook, whose combined worth is estimated to be close to \$2.2 trillion, to address complex and difficult global issues dealing with education, poverty, hunger, and other chronic problems.
Develop Internal/External Organizational Alignment and Cohesion
Key to ethical organizational success is the alignment and cohesion between individuals, groups, and the enterprise as a whole. This alignment starts with the development of a grander purpose that enables the entrepreneur and the organization to serve, add value, and advance the society in which it operates. It ensures individuals and units within the company understand the grander purpose, mission, vision, and the goals and objectives of the company, and it provides each member or the organization the opportunity to serve and fit into that grander purpose, mission, and vision. It is further strengthened by asking individuals to achieve excellence in their own right instead of competing with each other. It sets clear expectations about how people are to treat and deal with each other to deliver results. It deals with the alignment of corporate values with the espoused values, and the alignment between what leadership says and does. When combined, these and other alignments can enable individuals and groups to stay on track and reach the company’s goals efficiently.
Unilever “Enhancing Livelihoods” through Project Shakti
According to management guru Peter Drucker, whose ideas significantly contributed to the foundations of thought about the workings of the modern business corporation, workers “need to know the organization’s mission and to believe in it.” How do organizations ensure this commitment? By satisfying workers’ values.48 A program undertaken by Unilever, the Dutch-British multinational company co-headquartered in Rotterdam and London, illustrates the kind of values-oriented corporate endeavor Drucker describes. Project Shakti is a Unilever CSR initiative in India that links CSR with financial opportunities for local women.49 It is considered a leading example of micro-entrepreneurship, and it expands the concept of sustainability to include not only environmental issues but also economic opportunities and financial networking in underdeveloped areas.
The goal, according to Unilever, is to give rural Shakti women the ability to earn money for themselves and their families as micro-entrepreneurs. Unilever’s subsidiary in India, Hindustan Lever, has started training programs for thousands of women in small towns and villages across India to help them understand how to run their own small sole proprietorships as distributors of the company’s products. With support from a team of rural sales managers, women who had been unable to support themselves are now becoming empowered by learning how a supply chain works, what products Hindustan Lever produces, and how to distribute them. The sales managers also act in a consulting capacity to help with business basics, money management, negotiations, and related skills that help the women run their businesses effectively.
Project Shakti has enlisted more than 100,000 rural participants, which includes about 75,000 women. The project has changed their lives in ways that are profound, and not only because of the income earned. The women now have increased self-esteem based on a sense of empowerment, and they finally feel they have a place in Indian society. According to the Unilever Sustainable Living Plan, Project Shakti is one of the best and most sustainable ways the company can address women’s social concerns. It allows Unilever to conduct business in a socially responsible manner, helping women help themselves while extending the reach of its products.
• Do you believe Unilever sponsors the Shakti program to help women, boost its own profits, or both? Explain your answer.
• How is this program an example of both corporate and personal sustainability?
Develop a Culture of Creativity and Innovation
The next building block is developing a culture of creativity and innovation. This means going beyond a spark of creativity from select individuals or business units, and instead nurturing a culture where every member of the organization is continually creative and the organization is innovative. This also means providing the means and opportunities for individuals to be engaged, creative, and contributing members on a full-time basis. What makes this possible results from the prior building blocks. Innovation requires good leadership and management; a meaningful and effective process for teamwork and collaboration; a culture of learning and improvement; a consistent and measurable process to encourage, recognize, compensate, and track innovation; and company-wide focus on the training and development of the sense of creativity.50
Develop a Culture of Delivering Responsible Results
Measurable results compose the final building block of a framework for ethics and responsibility. This involves developing systems and indicators that will demonstrate how your business is achieving ethical standards and progressively improving as it adds value to society. While the details of which indicators to select is left up to the discretion of the entrepreneur, this building block defines success in terms of ten dimensions of business excellence, shown in Figure 3.7.
Figure \(1\): serves as an easy-to-understand guide for entrepreneurs seeking to create a culture of excellence. Focusing on these ten dimensions can help a business achieve excellence, from which a company may derive multiple benefits. Examples of reasons why a company strives to achieve excellence include strengthening alignment between company values and those of stakeholders, balancing goals versus measures of success, clarifying strategic focus versus operational concerns, selecting areas within the company wherein improvement is needed, and shifting from a preoccupation with daily activities and processes to focus on outcomes. Companies seek excellence with regard to internal and external outcomes, both of which are important. Thus, whether examining internal aspects such as finance and operations, or external aspects such as product quality and customer service, each of these ten areas is an ingredient of company excellence.
Creating an Ethical and Responsible Workplace Environment
A safe, healthy, and productive workplace is an environment in which an individual has a high level of trust and confidence that if they give their best, they will see a number of results and be afforded a number of things in exchange for their hard work. This concept resembles an employer-employee contract. This contract includes the following employee expectations:
1. They are treated with the respect, dignity, and courtesy they deserve as a human being.
2. They are given the needed support, equal opportunities, and resources to excel.
3. They are given what they deserve and what they are due in a fair and equitable way.
4. They are provided a safe, secure, and prejudice-free work environment.
5. They are not pushed, pressured, or expected to behave irresponsibly.
This type of workplace environment enables individuals to continually grow and develop to their full potential and then leverage that potential to add value to their own lives, careers, and society. This type of environment is one in which individuals are not afraid to speak their mind; they feel safe to discuss problems and concerns, and feel free to question and reject that which is wrong.
Prejudice
Prejudice is often thought of as a negative attitude and/or feeling toward an individual based solely on one’s membership in a particular group. Prejudice is common against people who are members of unfamiliar cultural groups. In employment, it can be the root cause of unfair discrimination.51 One factor essential to the development of a safe and healthy work environment is that it strives to be a place free of prejudice. This is an environment where everyone is treated with the respect and dignity they deserve and are afforded equal opportunities for growth, development, and advancement both within and outside of the organization. For example, it is important to look at the merit or value of the work done by an individual and the manner by which those results have been delivered. It is unethical to treat people differently based on their race, gender, age, nationality, and other differentiating factors. To develop trust and respect, everyone needs to be afforded the same opportunities.
Competition and Collaboration
Effectively managing a workforce includes a systematic approach to appraisal of employee performance. A manager/entrepreneur must decide how to do this within their company. A forced ranking system is one in which scoring employee performance is competitive and can pit employees against each other instead of fostering a collaborative work environment. Some employers have switched to a system that does not require forced rankings and attempts to downplay the competitive nature of assessment, focusing instead on individual continuous improvement. There is a legitimate difference of opinion on this issue. According to a Wall Street Journal article by the accounting and consulting firm Deloitte,52 executives are split on whether it is an effective practice. Jack Welch, former CEO at General Electric, was a proponent of it, whereas others see it as counterproductive. Companies that have discontinued the process include Microsoft and GE.
In an environment of collaborative excellence, individuals are encouraged to express their ideas and viewpoints in an unfettered and respectful way, where the merit of each idea is weighed against the merit of other ideas. In this environment, individuals are not reprimanded for being creative, taking calculated and reasonable risks, or challenging management or leadership.
Anonymous Whistleblower Hotlines
Most large companies now have anonymous hotlines that employees may call to report ethical violations. What are some other concrete and actionable ways you can develop a safe environment where every member of your organization is able to question authority, point out a wrong, and stop an unethical decision/action?
One example of a problem that can arise in an overly competitive environment or culture created by an organization would be the faulty ignition switch scandal at GM. According to Valdes-Depena, and Yellin,53 GM knew about this problem in 2001. However, it took the company over twelve years, more than 100 deaths, and 30 million vehicles being recalled to finally admit that there was a problem. In 2014, GM admitted that a faculty ignition switch may result in the engine of a vehicle being shut down while in drive, resulting in accidents, severe injuries, or death.54 If GM had developed an effective environment of collaboration, individuals from leadership, management, sales, marketing, engineering, manufacturing, and human resources, as well as major stakeholders, might have collaborated and prevented the ignition switch problem.
Diversity
Entrepreneurs need to appreciate, respect, and learn to effectively leverage the unique and diverse qualities that each individual brings to the table. These qualities can be used to innovate, make better decisions, solve complex problems/conflicts, move an organization cohesively in a single direction, or rapidly change direction when needed. If used correctly, these differences enable an entrepreneur to develop a sustained competitive advantage by looking at the different thoughts, ideas, and viewpoints to make better and more informed decisions.
Diversity, in terms of a legal concept, deals with innate characteristics such as an individual’s sex, color, race, national origin, religion, and age. It might also include educational background, cultural background, socioeconomic background, and potentially even political affiliations. However, diversity in terms of an ethical concept rather than purely a legal one also deals with a number of not-so-obvious characteristics such as the diversity of behavior, thought-process, comprehension, attitudes, temperaments, and learning styles. Combined, these differences can be beneficial to a business organization and result in high-level performance by the workforce as a whole.
Diversity may be an actual legal requirement depending upon what type of business an entrepreneur enters. For example, if you plan on doing any government contracting work, whether local, state, or federal, the chances are that your business will have to meet a diversity standard. Many private companies also have diversity clauses in the supply chain contracts related to supplier diversity initiatives.
Building Diversity
For each of the following, identify two examples of a concrete action or activity an entrepreneur could implement to achieve the stated goal.
1. Introduce the concept of diversity and highlight the significance, the value, and the benefits of a diverse work environment.
2. Set clear expectations for individuals to value diversity, the concept of unity in diversity, and show how others can leverage the power of diversity to innovate.
3. Exemplify, role model, and live good ethical behavior that strengthens diversity such as the elimination of prejudice of all kinds and expect others to do the same around you.
4. Ensure that you design the hiring process, including job descriptions, recruiting, interview questions, and other related steps, with diversity in mind.
5. Provide training to educate people on the concept of prejudice, the different forms of prejudices, and the negative aspects of prejudices.
6. Provide opportunities for building ethical capacities such as becoming truthful, trustworthiness, and a just individual.
7. Provide consistent, meaningful, substantial, and timely consequences for prejudicial behavior in organizations.
Gender Equality
As an entrepreneur, you need to recognize the significance, value, and impact of the principle of equality of men and women on developing a sustained competitive advantage. Then you need to incorporate this principle into the fabric of your organization. Aside from being the right thing to do, one reason why this principle is so important is that close to one-half of the planet is female (and has traditionally been marginalized in the business world).55,56 If you overlook this fact, you will also be potentially overlooking one-half of the talent that can help you excel and develop a sustained competitive advantage. In turn, this will result in a loss of trust and confidence. A second and more important reason would be that any deviation from this principle goes against the whole concept of ethics and responsibility. Moreover, this principle will help your organization attract the best and brightest employees.
The principle of gender equality does not deny differences between men and women. This principle primarily asks that we give each member of society fair and equal opportunities for growth, development, and advancement. It also recognizes that women have been historically marginalized or excluded from the business world. This claim holds true today and is applicable to even to the most advanced countries in the world (e.g., the discrepancy of pay between women and men in Western societies). Therefore, women need to be afforded the same opportunities for education, rewards, recognitions, and promotions as men.
Trust and Ethical Accountability
Finally, the development of safe environments also deals with an environment where individuals are able to develop unbreakable bonds of trust, where they don’t feel they have to constantly watch their backs, where individuals are free to point out misconduct without being reprimanded, and where individuals feel they will be given what they are due or deserve. This dimension of the development of a safe work environment deals with making sure individuals feel they are being treated in a fair and equitable manner and that their need for the development of an ethical and moral work environment is being met.
Sherron Watkins and Enron
Enron is one of the most infamous examples of corporate fraud in US history. The scandal that destroyed the company resulted in approximately \$60 billion in lost shareholder value. Sherron Watkins, an officer of the company, discovered the fraud and first went to her boss and mentor, founder and chairperson Ken Lay, to report the suspected accounting and financial irregularities. She was ignored more than once and eventually went to the press with her story. Because she did not go directly to the SEC, Watkins received no whistleblower protection. (The Sarbanes-Oxley Act was not passed until after the Enron scandal. In fact, it was Watkins’s circumstance and Enron’s misdeeds that helped convince Congress to pass the law.57)
Now a respected national speaker on the topic of ethics and employees’ responsibility, Watkins talks about how an employee should handle such situations. “When you’re faced with something that really matters, if you’re silent, you’re starting on the wrong path…go against the crowd if need be,” she said in a speech to the National Character and Leadership Symposium (a seminar to instill leadership and moral qualities in young men and women).
Watkins talks openly about the risk of being an honest employee, something employees should consider when evaluating what they owe their company, the public, and themselves. “I will never have a job in corporate America again. The minute you speak truth to power and you’re not heard, your career is never the same again.”
Enron’s corporate leaders dealt with the looming crisis by a combination of blaming others and leaving their employees to fend for themselves. According to Watkins, “Within two weeks of me finding this fraud, [Enron president] Jeff Skilling quit. We did feel like we were on a battleship, and things were not going well, and the captain had just taken a helicopter home. The fall of 2001 was just the bleakest time in my life, because everything I thought was secure was no longer secure.”
• Did Watkins owe an ethical duty to Enron, to its shareholders, or to the investing public to go public with her suspicions? Explain your answer.
• How big a price is it fair to ask a whistleblowing employee to pay?
Ideally, it is best that entrepreneurs exemplify good ethical behavior, expect their people to do the same, and help the members of the organization develop a moral compass. However, it is equally as important that business owners take action and put in place the right checks and balances that verify that the organization’s people are complying with its policies and principles of ethical behavior.
Organizations should set up systems that monitor compliance. In addition, you should develop a leadership pipeline that ensures that individuals would be placed in the pipelines only if they exhibit good ethical behavior, working with each business unit manager to ensure this is happening. Individual assessments should clearly assess ethical behavior and provide rewards, recognitions, and promotions for good ethical behavior, and consequences and training/solutions for actions that do not meet company standards. You should provide meaningful, substantial, and timely consequences for lack of acceptable behavior, such as removing an executive from a leadership pipeline when it has been established that they will not govern responsibly.
Importantly, members of the organization should not be intimidated to blindly follow or accept the existing monitoring system without question. An entrepreneur needs to cultivate an environment where they expect, support, and encourage every member of their organization to be inquisitive, be creative, question authority, and search for the underlying truth in all matters. It must be noted that questioning authority does not mean anything goes; it simply means that employees are expected to think on their own. Accountability should be encouraged; it is both an ethical and legal issue.
An example of a system of accountability that is appropriate for entrepreneurs is one proposed by an article in the Harvard Business Review.58 A sound approach to accountability requires a multistep process that includes establishing expectations, ensuring employees have the capability to do it, measurement of results, feedback, and consequences for unethical behavior. In addition to an ethical approach, remember that there are federal laws mandating accountability. The most well-known of these is the Sarbanes-Oxley Act,59 discussed elsewhere in this chapter, and other chapters in this text. Also called the Corporate and Auditing Accountability, Responsibility, and Transparency Act, the Sarbanes-Oxley Act requires publicly traded companies to have an internal system of control that emphasizes transparency and accountability.
If You Make a Mistake
If you or your organization makes a mistake or misstep, you must decide how to address it. In general, you are faced with the choice of paying now or paying a hundredfold later. A closer look at the largest, most expensive, and most devastating corporate failures of our times shows that these failures have resulted in the loss of life, property, and/or monumental environmental disasters. For the most part, these corporate failures have been caused by one or more ethical deviations on behalf of leadership. To combat these problems, entrepreneurs need to start by first being responsible, accepting their failures, and admitting when they have made mistakes. This admittance needs to be genuine, transparent, prompt, truthful, and authentic if they wish stakeholders to accept and believe their remorse. Once that first step is taken, they need to take immediate steps to proactively address the problems they have caused. Many leaders or entrepreneurs have learned the hard way that they need to be open and transparent with their stakeholders at the outset. Failure to rapidly admit mistakes can and has resulted in paying a very steep price when exposed. The actions that an entrepreneur needs to take include:
1. Admitting their mistakes, failures, and shortcomings to all stakeholders
2. Effectively communicating the nature of the problem to major stakeholders
3. Informing the stakeholders of the impact, side effect, and causes of the problem
4. Taking necessary and immediate steps to address the issue and stop the bleeding
5. Conducting a thorough and unbiased root-cause analysis to identify the underlying cause
6. Addressing any people and systemic gaps that caused the problem in the first place
7. Putting in place measures that will prevent the repeat of the same mistakes
To summarize, the best approach is that you admit your mistakes and shortcomings, pay the price, fix and uproot the problem, and systematically prevent the repeat of the same mistakes. A few examples of corporate mistakes and shortcomings that were quickly addressed before turning into severe problems would be the Tylenol poisoning and the customer accounts stolen at Target. A few examples of a problem that were not handled correctly and resulted in multi-billion-dollar problems are GM’s faulty ignition switch problem, Volkswagen’s emission control fraud, and Wells Fargo’s account fraud.
Taking the Ethical High Road
To go beyond a glowing commitment report, a shining website, or a few meaningless words in a code-of-conduct on corporate responsibility, an entrepreneur needs to follow the rule of law, the spirit of the law, and do the right thing at all times and under all circumstances. To achieve this, entrepreneurs need to develop and internalize a moral compass that prevents them from doing the wrong and unethical thing despite the consequences.
One classic example of doing the right thing which has been studied as a case study in business schools is attributed to Johnson & Johnson (J&J). In 1982, J&J found out that someone had tampered with and laced their Tylenol capsules with potassium cyanide.60 To address this problem, safeguard their brand name, and prevent negative press, J&J removed all of their Tylenol products from the shelves. | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/03%3A_The_Ethical_and_Social_Responsibilities_of_Entrepreneurs/3.03%3A_Developing_a_Workplace_Culture_of_Ethical_Excellence_and_Accountability.txt |
anchoring strategies
in the ethical context, the process of making ethics a foundation (anchor) of your business so that decision makers act keeping in mind key ethical considerations
antitrust laws
prevent companies from abusing position or power in the market through exclusion or limitation of competitor access to the market
business ethics
conduct by which companies and their agents abide by the law and respect the rights of their stakeholders, particularly their customers, clients, employees, and the surrounding community and environment
conflict of interest
when an individual or organization has interests in multiple areas that come into conflict with each other
copyright
grants the creator of a work the exclusive right to reproduce the work, typically for a specified period of time
corporate social responsibility (CSR)
practice in which a business views itself within a broader context, as a member of society with certain implicit social obligations and responsibility for its own effects on environmental and social well-being
design patent
protects product design
disclosure
sharing the needed facts and details about a subject in a transparent and truthful way
diversity
inclusion of many types of employees, regardless of differences (race, religion, gender, disability, LGTBQ, socioeconomic, cultural)
environmental entrepreneurship
entrepreneurial ventures focused on identifying an environmental problem and creating a product or process to solve that problem
ethics
standards of behavior to which we hold ourselves in our personal and professional lives
fairness
impartial, unbiased compliance with rules and standards of what is right, just, and equitable
integrity
adherence to a code of moral values implying trustworthiness and incorruptibility because there is unity between what we say and what we do
intellectual property
legally protected result of creative work to turn a unique idea into a product or service
prejudice
way of thinking about or treating employees in a manner that favors or hinders one person or group over another, usually in a way considered to be unfair
social entrepreneurship
entrepreneurial ventures focused on identifying a societal problem and creating a product or process to solve that problem
sustainability
practice of preserving resources and operating in a way that is ecologically responsible in the long term
trade secret
proprietary information, processes, or other internal knowledge that contribute to an organization’s competitive edge in a market
trademark
registration that provides the owner the ability to use a name, symbol, jingle, or character in conjunction with a specific product or service, and prevents others from using those same symbols to sell their products
truthfulness
underlying facts, reality, and evidence on a matter
utility patent
protects product ideas
3.05: Summary
3.1 Ethical and Legal Issues in Entrepreneurship
The first section of this chapter explores the relationship between entrepreneurship, ethics, social responsibility, and the law. At times, ethical conduct and legal conduct may seem intertwined; in other circumstances, they are quite different. This section discusses how ethical considerations can provide a moral compass for entrepreneurs seeking to find a balance between making money and doing the right thing. Keep in mind, however, that unlike legal mandates, following ethical business practices is more often a voluntary matter for business owners and operators. On the other hand, laws are important to follow, or you and your business might well be held legally liable (civilly or criminally). Sometimes, making a mistake is only an ethical lapse; other times, the mistake also constitutes a violation of the law (e.g., the Equifax case discussed).
3.2 Corporate Social Responsibility and Social Entrepreneurship
This section explored examples of entrepreneurship in which social responsibility plays a key role in the organization. Causes such as sustainability/environmental awareness are often important to an entrepreneur and his/her workforce. Most startup businesses want to make money, and in fact, as this section demonstrates, it’s quite possible to make money and carry out a social responsibility goal simultaneously. Some social entrepreneurship companies go the extra mile and become certified B-corporations, as opposed to C-corps or S-corps, which are tax distinctions. If an entrepreneur elects to become a B-corporation, it means that it has satisfied an outside organization’s audit, proving that he/she truly acts in a socially responsible manner.
3.3 Developing a Workplace Culture of Ethical Excellence and Accountability
This section of the chapter covers the area of employment. We explored how entrepreneurs can make their company one for which people want to work: where being ethical is a highly regarded trait. This type of approach to employment includes both ethical and legal considerations, such as no discrimination, fair pay, encouraging/rewarding ethical behavior, and creating an atmosphere of collegial teamwork. This approach to creating a socially responsible workplace requires a long-term commitment to being an ethical employer, which is not always easy. For example, it may mean, even though you are the boss or owner, admitting you made a mistake, accepting responsibility for it, and correcting it. You do not want to be the type of boss who can never say I got that wrong, and I’ll do better next time. | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/03%3A_The_Ethical_and_Social_Responsibilities_of_Entrepreneurs/3.04%3A_Key_Terms.txt |
1.
Full and truthful disclosure ________.
1. is often required under tort law
2. is a matter of ethics, not a legal requirement
3. is a risky business practice because it helps the competition
4. is a strictly personal choice
2.
Common IP law-mandated periods of protection are ________.
1. copyrights are protected for twenty years
2. patents are protected for fifty years
3. trademarks are protected for renewable ten-year periods
4. trade secrets are protected for fifteen years
3.
Acting ethically includes acting with which of the following?
1. integrity
2. disclosure
3. transparency
4. All of these options are correct.
4.
Antitrust law:
1. may help small entrepreneurs by ensuring big companies do not have monopolies
2. may hurt small entrepreneur by requiring them to disclose trade secrets
3. only applies to businesses with over 500 employees
4. None of these options are correct.
5.
Patents ________.
1. are similar to trade secrets under IP law
2. allow a temporary monopoly for an invention
3. are protected under IP law for a period of ninety-nine years
4. None of these options are correct.
6.
An example of a company(s) that have been fined millions of dollars for legal/ethical violations includes ________.
1. Enron
2. TOMS
3. British Petroleum
4. a and c
7.
The B-corporation moniker ________.
1. requires government certification
2. requires no certification
3. can only be used after an audit and certification by the B-corp organization
4. is a social media concept used primarily for marketing purposes
8.
What differentiates a social entrepreneurial enterprise from a traditional entrepreneur?
1. commitment to reduce pollution
2. pledge to undertake sustainable supply chain sourcing
3. effort to recycle water, waste, and other byproducts
4. All of these options are correct.
9.
Core qualities for building a foundation of ethics-based behaviors include ________.
1. trust
2. fairness
3. excellence
4. All of these options are correct.
10.
Millennial workers ________.
1. often do not place salary as their first priority
2. want work-life balance
3. usually expect their employer to have an ethical value system
4. All of these options are correct.
11.
A diverse workforce ________.
1. is always optional
2. is usually required for government contracting
3. is always required under Title VII
4. is never required
3.07: Discussion Questions
1.
How can ethics-based concepts such as truthfulness and fairness be integrated into the fabric of the organization?
2.
How can we nurture an environment where each member of the organization develops and internalizes a moral compass?
3.
Evaluate how an entrepreneurial business startup might benefit from the enforcement of antitrust laws against a large competitor.
4.
Discuss ways in which intellectual property, such as trademarks, can add value to a small business. How would you protect your ability to monetize intellectual property?
5.
In this section of the chapter, there is an example of a customer data breach via computer hacking. Discuss the biggest risks of storing customer or company information online. What are some of the steps you would take to prevent a data breach?
6.
Can a social enterprise work on a social issue and at the same time be profitable?
7.
How will you ensure that your organization learns to develop and deliver products and services that reduces your carbon footprint?
8.
Referring to Table 3.3 listing cases of corporate fraud, which company example do you think is one of the worst examples of unethical conduct? Is this because it involved the most money stolen, the most people cheated, or the most devious methods?
9.
If an entrepreneur values sustainability and environmental awareness, does that mean the bottom line will suffer? Alternatively, is there a way to protect the environment and still make a profit?
10.
You have learned about B-corporations. If you started a new business, would you commit to the rather stringent audit process necessary to become a B-corporation? Why or why not?
11.
How can an entrepreneur maximize the benefits of a diverse workforce to develop a competitive advantage?
12.
How can you combat the negative impact of biases and prejudices in your organization?
13.
What would you do, as an entrepreneur, to make your employees feel you value their input and that they are free to speak honestly?
14.
Explain why diversity is something that should matter to an owner. What would you do to try to achieve it?
15.
Some small entrepreneurs do not have the budget for a full-fledged human resources department; however, that makes compliance with employment laws challenging. What steps would you take to comply with federal and state employment law if you do not have a full-time attorney or human resources specialist on staff? | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/03%3A_The_Ethical_and_Social_Responsibilities_of_Entrepreneurs/3.06%3A_Review_Questions.txt |
1.
In 2017, it became apparent that Wells Fargo had created over 2 million falsified customer accounts without the customers’ consent, approval, or knowledge. John Stumpf, Wells Fargo CEO, who resigned amid this scandal, denied any leadership involvement and wrongdoing. He blamed his employees and fired over 5,300 employees over this scandal. Research this case and answer the following questions.
1. What organizational and company-culture factors convinced employees to create false accounts?
2. Why did the employees not question leadership?
2.
In 2017, the US Environmental Protection Agency found that Volkswagen had installed a “defeat device”—software in the vehicle that detects that an emissions test is in progress, controls the engine, reduces emissions, and enables the vehicle to pass the test for US emissions standards. Martin Winterkorn, CEO of Volkswagen, denied any wrongdoing, was later forced to resign, and admitted they had cheated. Research this case and answer the following questions.
1. What organizational and cultural factors convinced Volkswagen employees to cheat?
2. Why did the workforce not question leadership?
3.
If you were to create a top-ten list of the world’s greatest corruption scandals, the problems of Petrobras (Petróleo Brasileiro) in Brazil surely would make the list. The majority state-owned petroleum conglomerate was a party to a multibillion-dollar scandal in which company executives received bribes and kickbacks from contractors in exchange for lucrative construction and drilling contracts. The contractors paid Petrobras executives upward of 5 percent of the contract amount, which was funneled back into slush funds. The slush funds, in turn, paid for the election campaigns of certain members of the ruling political party, Partido dos Trabalhadores, or the Workers Party, as well as for luxury items like race cars, jewelry, Rolex watches, yachts, wine, and art.30 The original investigation into these practices was known as Operation Car Wash (Lava Jato) and began in 2014 at a gas station and car wash in Brasília, where money was being laundered. It has since expanded to include scrutiny of senators, government officials, and the former president of the republic, Luiz Inácio Lula da Silva. The probe also contributed to the impeachment and removal of Lula’s successor, Dilma Rousseff. Lula and Rousseff are members of the Workers Party. The case is complex, revealing Chinese suppliers, Swiss bank accounts where money was hidden from Brazilian authorities, and wire transfers that went through New York City and caught the eye of the US Department of Justice. In early 2017, the Brazilian Supreme Court justice in charge of the investigation and prosecution was mysteriously killed in a plane crash. It is hard to imagine a more tragic example of systemic breakdown and individual vice. The loss of trust in government and the economy still affects ordinary Brazilians. Meanwhile, the investigation continues.
1. Is this Brazilian company scandal unique to that culture?
4.
In the fall of 2016, Samsung Electronics experienced a massive public relations disaster when its Galaxy Note 7 smartphones started exploding due to faulty batteries and casings. Initially, the company denied there were any technical problems. Then, when it became obvious the exploding phones posed a safety and health threat (they were banned from airplanes), Samsung accused its suppliers of creating the problem. In reality, the rush to beat Apple’s iPhone 7 release date was the most likely reason corners were cut in production. Samsung finally owned up to the problem, recalled more than two million phones worldwide, and replaced them with new, improved Galaxy Note 7s. The company’s response and its replacement of the phones went a long way toward defusing the disaster and even boosting the company’s share price. Samsung focused on the customer (i.e., customer safety and satisfaction) with the motive of doing the ethically responsible thing.
1. Although some might argue the company could have done far more and much more quickly, perhaps it still acted reasonably. What do you think?
5.
Sometimes engaged employees go above and beyond in the interest of customer service, even if they have no “customers” to speak of. Kathy Fryman is one such employee. Fryman was a custodian for three decades at a 100-year-old school in the Augusta (KY) Independent School District. She was not just taking care of the school building, she was also taking care of the people inside.61 Fryman fixed doors that would not close, phones that would not ring, and alarms that did not sound when they should. She kept track of keys and swept up dirty floors before parents’ night. That was all part of the job of custodian, but she did much more. Fryman would often ask the nurse how an ill student was doing. She would check with a teacher about a kid who was going through tough times at home. If a teacher mentioned needing something, the next day it would show up on his or her desk. A student who needed something for class would suddenly find it in his or her backpack. Speaking of Fryman, district superintendent Lisa McCrane said, “She just has a unique way of making others feel nurtured, comforted, and cared for.” According to Fryman, “…I need to be doing something for somebody.” Fryman’s customers were not there to buy a product on which she would make a commission. Her customers were students and teachers, parents and taxpayers. Yet she provided the kind of service that all employers would be proud of, the kind that makes a difference to people every day.
1. Is there a way for a manager to find, develop, and encourage the next Fryman, or is the desire to “do something good for somebody” an inherent trait in some employees that is missing in others?
2. Employees who display Fryman’s zeal often do so for their own internal rewards. Others may simply want to be recognized and appreciated for their effort. If you were the superintendent in her district, how would you recognize Fryman? Could she, for example, be invited to speak to new hires about opportunities to render exceptional service?
6.
Please view the video ABC Nightline-IDEO Shopping Cart on YouTube. This video demonstrates how an entrepreneurial mindset combined along with a collaborative process can be used to deliver the most innovative products.
1. After watching the IDEO YouTube video, list the different factors that has enabled IDEO to become an industry example for corporate innovation.
2. What top principles and behaviors that has contributed to the development of a culture of collaborative excellence?
3.09: Suggested Resources
3.1 Ethical and Legal Issues in Entrepreneurship
SBREFA Small Business Resource Center. This is a great site for help with understanding legal requirements and regulatory compliance.
https://www.dol.gov/agencies/oasam/b...nce-assistance
US Department of Labor, Office of the Assistant Secretary for Administration & Management.
3.2 Corporate Social Responsibility and Social Entrepreneurship
List of Social Enterprise Business Models or Frameworks: http://www.thesedge.org/socent-spotl...business-ideas
TedTalk video: Carol Sanford at TEDxBerkeley 2014. “The Responsible Entrepreneur: Four Game Changing Archetypes”: www.youtube.com/watch?v=Dqza5Uo1cFE
Global Entrepreneurship Monitor (GEM): www.gemconsortium.org
Social Enterprise and Entrepreneurship (SEE) the Change: https://seethechange.ca
3.3 Developing a Workplace Culture of Ethical Excellence and Accountability
Society for Human Resource Management: https://www.shrm.org | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/03%3A_The_Ethical_and_Social_Responsibilities_of_Entrepreneurs/3.08%3A_Case_Questions.txt |
We enter the world as curious beings. However, as we grow up, we are told to color inside the lines and that real animals can’t talk—direction that can squelch creativity. Many successful entrepreneurs work to unlearn some of those messages in order to tap into creative thinking. What do you do when you are given a task that requires you to be creative? Do you get out your art supplies and start drawing? Do you pull out your phone or get on your computer and head straight for a search engine? Steve Jobs, the Apple founder and well-known innovator, had a preference when it came to creative contemplation, and it had nothing to do with art supplies or smartphones. Jobs did some of his best creative thinking when he went on a walk, or a walking chat.
Why did Jobs prefer walking as a way to develop new ideas? A Stanford University study found that walking improves creative thinking.1 When you launch an entrepreneurial journey and set out to innovate and create, or when you hit a sticking point that requires a creative solution, it may be time to take a walk. Better yet, if you can find a friend, walk and talk. It might energize your creativity and lead to innovation and, possibly, to invention.
4.01: Tools for Creativity and Innovation
Learning Objectives
By the end of this section, you will be able to:
• Describe popular, well-supported, creative problem-solving methods
• Understand which innovation or problem-solving methods apply best in different settings
• Know where to look for emerging innovation practices, research, and tools
Creativity, innovation, and invention are key concepts for your entrepreneurial journey. Fostering creativity and innovation will add essential tools to your entrepreneurial toolkit. In this chapter, first you’ll learn about a few practical tools that can assist you in your efforts to create and innovate. Then, we’ll define and distinguish creativity, innovation, and invention, and note the differences between pioneering and incremental innovation. Finally, we’ll cover models and processes for developing creativity, innovation, and inventiveness. The science, study, and practice of creativity and design thinking are constantly evolving. Staying on top of well-documented, successful approaches can give you a competitive advantage and may remind you that entrepreneurship can be fun, exciting, and refreshing, as long as you keep your creative spirit alive and in constant motion.
Creative Problem-Solving Methods
Creative thinking can take various forms (Figure 4.2). This section focuses on a few creative thinking exercises that have proven useful for entrepreneurs. After discussing ideation practices that you can try, we conclude with a discussion of an in-depth innovation exercise that can help you develop a habit of turning creative ideas into innovative products and services. In this section, outcomes are vital.
Three ideation practices are discussed here. Several others are offered in links at the end of this section. The first ideation practice comes from Stanford’s Design School.2 The objective is to generate as many ideas as possible and start to develop some of those ideas. This practice is the quintessential design thinking practice, or human-centric design thinking exercise, and it consists of five parts: accessing and expressing empathy, defining the problem, ideating solutions (brainstorming), prototyping, and testing (Figure 4.3). Empathy is the human ability to feel what other humans are feeling, which in the context of creativity, innovation, and invention is essential to beginning a process of human-centric design. Practicing empathy enables us to relate to people and see the problem through the eyes and feelings of those who experience it. By expressing empathy, you can begin to understand many facets of a problem and start to think about all of the forces you will need to bring to bear on it. From empathy comes the ability to proceed to the second step, defining the problem. Defining the problem must be based on honest, rational, and emotional observation for human-centric design to work. Third in the process is brainstorming solutions. The other two ideation exercises or practices in this section delve more deeply into brainstorming (also discussed in Problem Solving and Need Recognition Techniques), what it means, and how you can brainstorm creatively beyond the basic whiteboard scribbling in almost every organization. Designing for other people means building a prototype—the fourth step—and to test it. Once you apply this process to developing a product or service, you need to return to the empathetic mindset to examine whether you have reached a viable solution and, thus, an opportunity.
LINK TO LEARNING
Watch this video on human-centered design for more information, including an explanation of the phases involved.
To delve more deeply into ideation as a practice, we introduce here the Six Thinking Hats method (Figure 4.4).3 There are different versions of this ideation game, but all of them are quite useful for encouraging thought by limiting the mindset of those involved in the game. Being encouraged to embody one mode of thinking frees you from considering other aspects of a problem that can limit creativity when you are looking for a solution. The six hats are:
• White Hat: acts as information gatherer by conducting research and bringing quantitative analysis to the discussion; sticks to the facts
• Red Hat: brings raw emotion to the mix and offers sensibilities without having to justify them
• Black Hat: employs logic and caution; warns participants about institutional limitations; also known as the “devil’s advocate”
• Yellow Hat: brings the “logical positive” of optimism to the group; encourages solving small and large problems
• Green Hat: thinks creatively; introduces change and provokes other members when needed; new ideas are the purview of the Green Hat
• Blue Hat: maintains the broader structure of the discussion and may set the terms by which progress will be judged; makes sure the other hats play by the rules, or stay in their respective lanes, so to speak
You can apply the Six Thinking Hats exercise to force structure on a discussion where, without it, several members of the group might try to wear several hats each. This game is not always easy to implement. If members cannot follow the rules, the process breaks down. When it works best, the Blue Hat maintains control and keeps the practice moving quickly. What you and your group should experience is a peculiar freedom arising from the imposition of limitations. By being responsible for only one mode of thinking, each participant can fully advocate for that point of view and can think deeply about that particular aspect of the solution. Thus, the group can be deeply creative, deeply logical, deeply optimistic, and deeply critical. This practice is meant to move entire groups past surface-level solutions. If you practice this exercise well, the challenges of implementing it are well worth the effort. It gives you the opportunity to vet ideas thoroughly while keeping many personality clashes at bay. If the participants stay in character, they can be accused only of acting in the best interests of their hat.
Your instructor may have your group members try different hats in different ideation exercises so you all can more fully develop each mindset.4 This exercise forces you out of your most comfortable modes of thinking. You and your classmates can recognize in each other skills that you may not have realized you possess.
The third ideation practice is quite simple. If stagnant thinking has begun to dominate an ongoing discussion, it can be helpful to inject an ideation framework. This is the “statement starters” method.5 Ask, “How might we ________?” or “What if we ________?” in order to open up new possibilities when you seem to have reached the limits of creativity. This method is more than simply asking “Why not?” because it seeks to uncover how a problem might be solved. For entrepreneurs, the simplest form of framing a problem in the form of a question can be eye opening. It assumes open possibilities, invites participation, and demands focus. Statement starters assume that, at least, there might be a solution to every problem. Ideation is about starting down new paths. This mode of thought applies to social problems as well as consumer pain points (discussed later). Creating a list of statement starters can help entrepreneurs examine different possibilities by simply adopting different points of view when asking questions. For example, the question, “How might we keep rivers clean?” is similar to the question, “How might we prevent animal waste runoff from entering our city’s waterways?” but the implications of each question are different for different stakeholders. Recall that stakeholders are individuals who have a vital interest in the business or organization. Statement starters almost always lead to a discussion of stakeholders and how they might be involved in finding solutions, offering support, and perhaps one day purchasing or contributing to dynamic, disruptive inventions or changes in social practice.
LINK TO LEARNING
Are you curious about ways to improve your ability to think creatively? Consider trying out some of the creative thinking exercises provided at this site.
Matching Innovation Methods to Circumstances
Searching for innovation methods will often reveal many of the same, or similar, creativity exercises as we’ve just discussed. To go beyond ideation exercises, we will conclude with a foundation of thinking that can help when you are tackling all sorts of innovation problems. Simply put, open innovation involves searching for and finding solutions outside of the organizational structure. Open innovation is somewhat difficult to pin down. The educator and author Henry Chesbrough was one of the first to define it: “Open innovation is ‘the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively.’”6 In other words, firms built on a structure of open innovation look beyond their own research and development capabilities to solve problems. This outlook can guide all sorts of product and service development processes. Open innovation models also allow innovations to be shared widely so that they can seed other innovations outside the original firm or institution.
Open innovation takes an optimistic view of sharing information and ideas across a society connected by instantaneous communication networks. It is also a shift from the classic research and development model. In a sense, you allow others to solve problems in your business, startup, or social entrepreneurship project. In this reciprocal world, you are open to the reality that information is difficult to keep under wraps. You may seek patents for your intellectual property, particularly in fixed product or service practice form, but you should expect, or even encourage, the widespread circulation of key elements of your solutions. This makes sense: If, as an entrepreneur or an innovative corporation, you are going to look beyond your own ideation, research, and development capabilities for solutions, you must expect that others will look to your solutions for ideas to borrow.
The open innovation model is far easier to describe in idealistic terms than it is to put into practice without ethical consequences. Unfortunately, industrial and corporate espionage, theft of intellectual property, and lawsuits are commonplace. Nevertheless, inspiration in innovation can come from myriad sources when constant streams of information are available to anyone with a high-speed data connection. Open innovation is a simple but essential framework for future innovation and for managing, even possibly guiding, disruption in an industry as discussed previously (i.e., disruptive innovation). Table 4.1 provides some examples of companies using disruptive technology.
Table 4.1.1: Examples of Disruptive Technology
Company Disruptive technology
Amazon Speed based delivery
Multiple delivery processes from drones to strategically located fulfillment centers
Disruptive technology including processing the customer order before the customer has even finished the purchase, so that the product is already moving toward delivery
Uber and Lyft Ride sharing versus taxi driving
Apps and Beacon and Amp-color coded alert communication system disrupted the taxi system
Bitcoin Digital currency not connected to a specific country or monetary standard
Value based on market forces
Toyota E-Palette Remote controlled driverless electric shuttle that brings the service to the customer rather than the customer going to the service
Another element of the open innovation model is the connection between academic research and practical solutions. Reciprocal influence between academia, which often moves slowly, and leading corporate and entrepreneurial forces, which often focus too narrowly on short-term gains, could offer the balance this rapidly changing world needs. If you can manage to plug into the exchange of ideas between longstanding institutions and disruptive technological innovators, you may be positioned to effect positive change on society and to develop products that are received as useful and elegant, wildly new and creative, and essential to the human experience at the same time.
Staying on Top of Emerging Practices
Consider searching for ideation and innovation practice links using a web browser and comparing those results to what you can find in the academic literature via Google Scholar or other academic databases. To adopt a truly open innovation mindset, it is essential to leave yourself open to all sorts of influences, even if it demands time and much cognitive energy. The financial, social, and personal rewards may be great. | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/04%3A_Creativity_Innovation_and_Invention/4.00%3A_Prelude_to_Creativity_Innovation_and_Invention.txt |
Learning Objectives
By the end of this section, you will be able to:
• Distinguish between creativity, innovation, and invention
• Explain the difference between pioneering and incremental innovation, and which processes are best suited to each
One of the key requirements for entrepreneurial success is your ability to develop and offer something unique to the marketplace. Over time, entrepreneurship has become associated with creativity, the ability to develop something original, particularly an idea or a representation of an idea. Innovation requires creativity, but innovation is more specifically the application of creativity. Innovation is the manifestation of creativity into a usable product or service. In the entrepreneurial context, innovation is any new idea, process, or product, or a change to an existing product or process that adds value to that existing product or service.
How is an invention different from an innovation? All inventions contain innovations, but not every innovation rises to the level of a unique invention. For our purposes, an invention is a truly novel product, service, or process. It will be based on previous ideas and products, but it is such a leap that it is not considered an addition to or a variant of an existing product but something unique. Table 4.2 highlights the differences between these three concepts.
Table 4.2.1: Creativity, Innovation, and Invention
Concept Description
Creativity ability to develop something original, particularly an idea or a representation of an idea, with an element of aesthetic flair
Innovation change that adds value to an existing product or service
Invention truly novel product, service, or process that, though based on ideas and products that have come before, represents a leap, a creation truly novel and different
One way we can consider these three concepts is to relate them to design thinking. Design thinking is a method to focus the design and development decisions of a product on the needs of the customer, typically involving an empathy-driven process to define complex problems and create solutions that address those problems. Complexity is key to design thinking. Straightforward problems that can be solved with enough money and force do not require much design thinking. Creative design thinking and planning are about finding new solutions for problems with several tricky variables in play. Designing products for human beings, who are complex and sometimes unpredictable, requires design thinking.
Airbnb has become a widely used service all over the world. That has not always been the case, however. In 2009, the company was near failure. The founders were struggling to find a reason for the lack of interest in their properties until they realized that their listings needed professional, high-quality photographs rather than simple cell-phone photos. Using a design thinking approach, the founders traveled to the properties with a rented camera to take some new photographs. As a result of this experiment, weekly revenue doubled. This approach could not be sustainable in the long term, but it generated the outcome the founders needed to better understand the problem. This creative approach to solving a complex problem proved to be a major turning point for the company.8
People who are adept at design thinking are creative, innovative, and inventive as they strive to tackle different types of problems. Consider Divya Nag, a millennial biotech and medical device innovation leader, who launched a business after she discovered a creative way to prolong the life of human cells in Petri dishes. Nag’s stem-cell research background and her entrepreneurial experience with her medical investment firm made her a popular choice when Apple hired her to run two programs dedicated to developing health-related apps, a position she reached before turning twenty-four years old.9
Creativity, innovation, inventiveness, and entrepreneurship can be tightly linked. It is possible for one person to model all these traits to some degree. Additionally, you can develop your creativity skills, sense of innovation, and inventiveness in a variety of ways. In this section, we’ll discuss each of the key terms and how they relate to the entrepreneurial spirit.
Creativity
Entrepreneurial creativity and artistic creativity are not so different. You can find inspiration in your favorite books, songs, and paintings, and you also can take inspiration from existing products and services. You can find creative inspiration in nature, in conversations with other creative minds, and through formal ideation exercises, for example, brainstorming. Ideation is the purposeful process of opening up your mind to new trains of thought that branch out in all directions from a stated purpose or problem. Brainstorming, the generation of ideas in an environment free of judgment or dissension with the goal of creating solutions, is just one of dozens of methods for coming up with new ideas.10
You can benefit from setting aside time for ideation. Reserving time to let your mind roam freely as you think about an issue or problem from multiple directions is a necessary component of the process. Ideation takes time and a deliberate effort to move beyond your habitual thought patterns. If you consciously set aside time for creativity, you will broaden your mental horizons and allow yourself to change and grow.11
Entrepreneurs work with two types of thinking. Linear thinking—sometimes called vertical thinking—involves a logical, step-by-step process. In contrast, creative thinking is more often lateral thinking, free and open thinking in which established patterns of logical thought are purposefully ignored or even challenged. You can ignore logic; anything becomes possible. Linear thinking is crucial in turning your idea into a business. Lateral thinking will allow you to use your creativity to solve problems that arise. Figure 4.5 summarizes linear and lateral thinking.
It is certainly possible for you to be an entrepreneur and focus on linear thinking. Many viable business ventures flow logically and directly from existing products and services. However, for various reasons, creativity and lateral thinking are emphasized in many contemporary contexts in the study of entrepreneurship. Some reasons for this are increased global competition, the speed of technological change, and the complexity of trade and communication systems.12 These factors help explain not just why creativity is emphasized in entrepreneurial circles but also why creativity should be emphasized. Product developers of the twenty-first century are expected to do more than simply push products and innovations a step further down a planned path. Newer generations of entrepreneurs are expected to be path breakers in new products, services, and processes.
Innovation
Examples of creativity are all around us. They come in the forms of fine art and writing, or in graffiti and viral videos, or in new products, services, ideas, and processes. In practice, creativity is incredibly broad. It is all around us whenever or wherever people strive to solve a problem, large or small, practical or impractical.
We previously defined innovation as a change that adds value to an existing product or service. According to the management thinker and author Peter Drucker, the key point about innovation is that it is a response to both changes within markets and changes from outside markets. For Drucker, classical entrepreneurship psychology highlights the purposeful nature of innovation.13 Business firms and other organizations can plan to innovate by applying either lateral or linear thinking methods, or both. In other words, not all innovation is purely creative. If a firm wishes to innovate a current product, what will likely matter more to that firm is the success of the innovation rather than the level of creativity involved. Drucker summarized the sources of innovation into seven categories, as outlined in Table 4.3. Firms and individuals can innovate by seeking out and developing changes within markets or by focusing on and cultivating creativity. Firms and individuals should be on the lookout for opportunities to innovate.14
Table 4.2.2: Drucker’s Seven Sources of Innovation15
Source Description
The unexpected Looking for new opportunities in the market; unexpected product performance; unexpected new products as examples
The incongruity Discrepancies between what you think should be and what is reality
Process need Weaknesses in the organization, product, or service
Changes in industry/market New regulations; new technologies
Demographics Understanding needs and wants of target markets
Changes in perceptions Changes in perceptions of life events and values
New knowledge New technologies; advancements in thinking; new research
One innovation that demonstrates several of Drucker’s sources is the use of cashier kiosks in fast-food restaurants. McDonald’s was one of the first to launch these self-serve kiosks. Historically, the company has focused on operational efficiencies (doing more/better with less). In response to changes in the market, changes in demographics, and process need, McDonald’s incorporated self-serve cashier stations into their stores. These kiosks address the need of younger generations to interact more with technology and gives customers faster service in most cases.16
Another leading expert on innovation, Tony Ulwick, focuses on understanding how the customer will judge or evaluate the quality and value of the product. The product development process should be based on the metrics that customers use to judge products, so that innovation can address those metrics and develop the best product for meeting customers’ needs when it hits the market. This process is very similar to Drucker’s contention that innovation comes as a response to changes within and outside of the market. Ulwick insists that focusing on the customer should begin early in the development process.17
Disruptive innovation is a process that significantly affects the market by making a product or service more affordable and/or accessible, so that it will be available to a much larger audience. Clay Christensen of Harvard University coined this term in the 1990s to emphasize the process nature of innovation. For Christensen, the innovative component is not the actual product or service, but the process that makes that product more available to a larger population of users. He has since published a good deal on the topic of disruptive innovation, focusing on small players in a market. Christensen theorizes that a disruptive innovation from a smaller company can threaten an existing larger business by offering the market new and improved solutions. The smaller company causes the disruption when it captures some of the market share from the larger organization.18,19 One example of a disruptive innovation is Uber and its impact on the taxicab industry. Uber’s innovative service, which targets customers who might otherwise take a cab, has shaped the industry as whole by offering an alternative that some deem superior to the typical cab ride.
One key to innovation within a given market space is to look for pain points, particularly in existing products that fail to work as well as users expect them to. A pain point is a problem that people have with a product or service that might be addressed by creating a modified version that solves the problem more efficiently.20 For example, you might be interested in whether a local retail store carries a specific item without actually going there to check. Most retailers now have a feature on their websites that allows you to determine whether the product (and often how many units) is available at a specific store. This eliminates the need to go to the location only to find that they are out of your favorite product. Once a pain point is identified in a firm’s own product or in a competitor’s product, the firm can bring creativity to bear in finding and testing solutions that sidestep or eliminate the pain, making the innovation marketable. This is one example of an incremental innovation, an innovation that modifies an existing product or service.21
In contrast, a pioneering innovation is one based on a new technology, a new advancement in the field, and/or an advancement in a related field that leads to the development of a new product.22 Firms offering similar products and services can undertake pioneering innovations, but pioneering the new product requires opening up new market space and taking major risks.
Pioneering Innovation in the Personal Care Industry
In his ninth-grade biology class, Benjamin Stern came up with an idea to change the personal care industry. He envisioned personal cleaning products (soap, shampoo, etc.) that would contain no harsh chemicals or sulfates, and would also produce no plastic waste from empty bottles. He developed Nohbo Drops, single-use personal cleansing products with water-soluble packaging. Stern was able to borrow money from family and friends, and use some of his college fund to hire a chemist to develop the product. He then appeared on Shark Tank with his innovation in 2016 and secured the backing of investor Mark Cuban. Stern assembled a research team to perfect the product and obtained a patent (Figure 4.6). The products are now available via the company website.
Is a pioneering innovation an invention? A firm makes a pioneering innovation when it creates a product or service arising from what it has done before. Pokémon GO is a great example of pioneering innovation. Nintendo was struggling to keep pace with other gaming-related companies. The company, in keeping with its core business of video games, came up with a new direction for the gaming industry. Pokémon GO is known worldwide and is one of the most successful mobile games launched.23 It takes creativity to explore a new direction, but not every pioneering innovation creates a distinctly new product or capability for consumers and clients.
Entrepreneurs in the process of developing an innovation usually examine the current products and services their firm offers, investigate new technologies and techniques being introduced in the marketplace or in related marketplaces, watch research and development in universities and in other companies, and pursue new developments that are likely to fit one of two conditions: an innovation that likely fits an existing market better than other products or services being offered; or an innovation that fits a market that so far has been underserved.
An example of an incremental innovation is the trash receptacle you find at fast-food restaurants. For many years, trash cans in fast-food locations were placed in boxes behind swinging doors. The trash cans did one job well: They hid the garbage from sight. But they created other problems: Often, the swinging doors would get ketchup and other waste on them, surely a pain point. Newer trash receptacles in fast-food restaurants have open fronts or open tops that enable people to dispose of their trash more neatly. The downside for restaurants is that users can see and possibly smell the food waste, but if the restaurants change the trash bags frequently, as is a good practice anyway, this innovation works relatively well. You might not think twice about this everyday example of an innovation when you eat at a fast-food restaurant, but even small improvements can matter a lot, particularly if the market they serve is vast.
Invention
An invention is a leap in capability beyond innovation. Some inventions combine several innovations into something new. Invention certainly requires creativity, but it goes beyond coming up with new ideas, combinations of thought, or variations on a theme. Inventors build. Developing something users and customers view as an invention could be important to some entrepreneurs, because when a new product or service is viewed as unique, it can create new markets. True inventiveness is often recognized in the marketplace, and it can help build a valuable reputation and help establish market position if the company can build a future-oriented corporate narrative around the invention.24
Besides establishing a new market position, a true invention can have a social and cultural impact. At the social level, a new invention can influence the ways institutions work. For example, the invention of desktop computing put accounting and word processing into the hands of nearly every office worker. The ripple effects spread to the school systems that educate and train the corporate workforce. Not long after the spread of desktop computing, workers were expected to draft reports, run financial projections, and make appealing presentations. Specializations or aspects of specialized jobs—such as typist, bookkeeper, corporate copywriter—became necessary for almost everyone headed for corporate work. Colleges and eventually high schools saw software training as essential for students of almost all skill levels. These additional capabilities added profitability and efficiencies, but they also have increased job requirements for the average professional.
Some of the most successful inventions contain a mix of familiarity and innovation that is difficult to achieve. With this mix, the rate of adoption can be accelerated because of the familiarity with the concept or certain aspects of the product or service. As an example, the “videophone” was a concept that began to be explored as early as the late 1800s. AT&T began extensive work on videophones during the 1920s. However, the invention was not adopted because of a lack of familiarity with the idea of seeing someone on a screen and communicating back and forth. Other factors included societal norms, size of the machine, and cost. It wasn’t until the early 2000s that the invention started to take hold in the marketplace.25 The concept of a black box is that activities are performed in a somewhat mysterious and ambiguous manner, with a serendipitous set of actions connecting that result in a surprisingly beneficial manner. An example is Febreeze, a chemical combination that binds molecules to eliminate odors. From a black box perspective, the chemical engineers did not intend to create this product, but as they were working on creating another product, someone noticed that the product they were working on removed odors, thus inadvertently creating a successful new product marketed as Febreeze.
Did Henry Ford Invent the Assembly Line?
Very few products or procedures are actually brand-new ideas. Most new products are alterations or new applications of existing products, with some type of twist in design, function, portability, or use. Henry Ford is usually credited with inventing the moving assembly line Figure 4.7(a) in 1913. However, some 800 years before Henry Ford, wooden ships were mass produced in the northern Italian city of Venice in a system that anticipated the modern assembly line.
Various components (ropes, sails, and so on) were prefabricated in different parts of the Venetian Arsenal, a huge, complex construction site along one of Venice’s canals. The parts were then delivered to specific assembly points Figure 4.7(b). After each stage of construction, the ships were floated down the canal to the next assembly area, where the next sets of workers and parts were waiting. Moving the ships down the waterway and assembling them in stages increased speed and efficiency to the point that long before the Industrial Revolution, the Arsenal could produce one fully functional and completely equipped ship per day. The system was so successful that it was used from the thirteenth century to about 1800.
Henry Ford did not invent anything new—he only applied the 800-year-old process of building wooden ships by hand along a moving waterway to making metal cars by hand on a moving conveyor (Figure 4.7).
Opportunities to bring new products and processes to market are in front of us every day. The key is having the ability to recognize them and implement them. Likewise, the people you need to help you be successful may be right in front of you on a regular basis. The key is having the ability to recognize who they are and making connections to them. Just as those ships and cars moved down an assembly line until they were ready to be put into service, start thinking about moving down the “who I know” line so that you will eventually have a successful business in place.
The process of invention is difficult to codify because not all inventions or inventors follow the same path. Often the path can take multiple directions, involve many people besides the inventor, and encompass many restarts. Inventors and their teams develop their own processes along with their own products, and the field in which an inventor works will greatly influence the modes and pace of invention. Elon Musk is famous for founding four different billion-dollar companies. The development processes for PayPal, Solar City, SpaceX, and Tesla differed widely; however, Musk does outline a six-step decision-making process (Figure 4.8):
1. Ask a question.
2. Gather as much evidence as possible about it.
3. Develop axioms based on the evidence and try to assign a probability of truth to each one.
4. Draw a conclusion in order to determine: Are these axioms correct, are they relevant, do they necessarily lead to this conclusion, and with what probability?
5. Attempt to disprove the conclusion. Seek refutation from others to further help break your conclusion.
6. If nobody can invalidate your conclusion, then you’re probably right, but you’re not certainly right.
In other words, the constant underlying Musk’s decision process is the scientific method.26 The scientific method, most often associated with the natural sciences, outlines the process of discovering an answer to a question or a problem. “The scientific method is a logical organization of steps that scientists use to make deductions about the world around us.”27 The steps in the scientific method line up quite nicely with Musk’s decision-making process. Applying the scientific method to invention and innovation makes sense. The scientific method involves becoming aware of a problem, collecting data about it by observing and experimenting, and coming up with suggestions on how to solve it.
Economists argue that processes of invention can be explained by economic forces. But this hasn’t always been the case. Prior to 1940, economic theory focused very little on inventions. After World War II, much of the global economy in the developed world needed to be rebuilt. New technologies were developing rapidly, and research and development investment increased. Inventors and economists alike became aware of consumer demand and realized that demand can influence which inventions take off at a given time.28 However, inventors are always up against an adoption curve.29
The Rogers Adoption Curve was popularized through the research and publications of the author and scientist Everett Rogers.30 He first used it to describe how agricultural innovations diffused (or failed to) in a society. It was later applied to all inventions and innovations. This curve illustrates diffusion of an innovation and when certain people will adopt it. First is the question of who adopts inventions and innovations in society: The main groups are innovators, early adopters, early and late-majority adopters, and “laggards” (Rogers’s own term).31 The innovators are the ones willing to take a risk on a new product, the consumers who want to try it first. The early adopters are consumers who will adopt new inventions with little to no information. Majority adopters will adopt products after being accepted by the majority. And finally, laggards are often not willing to readily adopt change and are the hardest to convince to try a new invention.32
Rogers’s second way of looking at the concept is from the point of view of the invention itself. A given population partially or completely adopts an invention or rejects it. If an invention is targeted at the wrong population or the wrong population segment, this can dramatically inhibit its chances of being adopted widely. The most critical point of adoption often occurs at the end of the early adoption phase, before the early majority steps in and truly confirms (or not) the diffusion of an invention. This is called the diffusion chasm (though this process is usually called the diffusion of innovations, for our purposes, it applies quite well to new inventions as we define them here).
The diffusion curve depicts a social process in which the value of an invention is perceived (or not) to be worth the cost (Figure 4.9). Early adopters generally pay more than those who wait, but if the invention gives them a perceived practical, social, or cultural advantage, members of the population, the popularity of the invention itself, and marketing can all drive the invention over the diffusion chasm. Once the early majority adopts an innovation (in very large numbers), we can expect the rest of the majority to adopt it. By the time the late majority and the laggards adopt an innovation, the novelty has worn off, but the practical benefits of the innovation can still be felt.
Inventors are constantly trying to cross the diffusion chasm, often with many products at a time. Crossing the diffusion chasm is a nearly constant concern for business-focused or outcomes-focused inventors. Inventors put many of their resources into an invention during the innovation and early adoption stages. Inventions may not turn a profit for investors or the inventors themselves until they are well into the early majority stage of adoption. Some inventors are pleased to work toward general discovery, but most in today’s social and cultural context are working to develop products and services for markets.
One shortcoming of the diffusion of innovations model is that it treats inventions and innovations as though they are finished and complete, though many are not. Not all inventions are finished products ready for market. Iterative development is more common, particularly in fields with high levels of complexity and in service-oriented ventures. In the iterative development process, inventors and innovators continuously engage with potential customers in order to develop their products and their consumer bases at the same time. This model of business learning, also known as the science of customer development, is essential.33 Business learning involves testing product-market fit and making changes to an innovation or invention many times over until either investment funding runs out or the product succeeds. Perhaps the most accurate way to summarize this process is to note that many inventions are hit-or-miss prospects that get only a few chances to cross the diffusion chasm. When innovators follow the build-measure-learn model (discussed in detail in Launch for Growth to Success), they try to work their way across the diffusion chasm rather than making a leap of faith.
Razors
The safety razor was an innovation over the straight razor. Safety razor blades are small enough to fit inside a capsule, and the location and type of handle was altered to suit the new orientation of handle to blade (Figure 4.10). Most contemporary razors are themselves innovations on the safety razor, whether they have two, three, four, or more blades. The method of changing razor blades has evolved with each innovation on the safety razor, but the designs are functionally similar.
The electric razor is a related invention. It still uses blades to shave hair off the face or body, but the blades are hidden beneath a foil or foils. Hairs poke through the foils when the razor is pressed against the skin, and blades moving in various directions cut the hairs. Although electric razors use blades as do mechanical razors, the new design and the added technology qualified the electric razor as an invention that offered something new in the shaving industry when Jacob Schick won the patent for a shaving machine in 1930.34 Still other innovations in the shaving genre include gender-specific razors, beard trimmers, and, more recently, online clubs such as Dollar Shave Club and Harry’s Shave Club.
Think about the conceptual difference between innovation and invention. Is the safety razor a pioneering innovation or an incremental one? What makes the electric razor an invention, as we define it here? What makes it stand out as a leap from previous types of razors? Do you think the electric razor is a “sure thing”? Why or why not? Consider the availability of electricity at the time the first electric razors were being made. Why do you think the electric razor made it over the diffusion chasm between early adopters and early majority adopters? Do you think the electric razor was invented iteratively with small changes to the same product in response to customer preferences? Or did it develop in a series of black box inventions, with each one either diffusing or not? | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/04%3A_Creativity_Innovation_and_Invention/4.02%3A_Creativity_Innovation_and_Invention-_How_They_Differ.txt |
Learning Objectives
By the end of this section, you will be able to:
• Describe and apply the five stages of creativity
• Discuss innovation as a system for problem solving and much more
• Outline the sequence of steps in developing an invention
The previous section defined creativity, innovation, and invention, and provided examples. You might think of creativity as raw; innovation as transforming creativity into a functional purpose, often meant to eradicate a pain point or to fulfill a need; and invention as a creation that leaves a lasting impact. In this section, you will learn about processes designed to help you apply knowledge from the previous section.
The Creative Process: The Five Stages of Creativity
Raw creativity and an affinity for lateral thinking may be innate, but creative people must refine these skills in order to become masters in their respective fields. They practice in order to apply their skills readily and consistently, and to integrate them with other thought processes and emotions. Anyone can improve in creative efforts with practice. For our purposes, practice is a model for applied creativity that is derived from an entrepreneurial approach (Figure 4.11).35 It requires:
1. Preparation
2. Incubation
3. Insight
4. Evaluation
5. Elaboration
Preparation
Preparation involves investigating a chosen field of interest, opening your mind, and becoming immersed in materials, mindset, and meaning. If you have ever tried to produce something creative without first absorbing relevant information and observing skilled practitioners at work, then you understand how difficult it is. This base of knowledge and experience mixed with an ability to integrate new thoughts and practices can help you sift through the ideas quicker. However, relying too heavily on prior knowledge can restrict the creative process. When you immerse yourself in a creative practice, you make use of the products or the materials of others’ creativity. For example, a video-game designer plays different types of video games on different consoles, computers, and online in networks. She or he may play alone, with friends in collaboration, or in competition. Consuming the products in a field gives you a sense of what is possible and indicates boundaries that you may attempt to push with your own creative work. Preparation broadens your mind and lets you study the products, practice, and culture in a field. It is also a time for goal setting. Whether your chosen field is directly related to art and design, such as publishing, or involves human-centric design, which includes all sorts of software and product design efforts, you need a period of open-minded reception to ideas. Repetitive practice is also part of the preparation stage, so that you can understand the current field of production and become aware of best practices, whether or not you are currently capable of matching them. During the preparation stage, you can begin to see how other creative people put meaning into their products, and you can establish benchmarks against which to measure your own creative work.
Incubation
Incubation refers to giving yourself, and your subconscious mind in particular, time to incorporate what you learned and practiced in the preparation stage. Incubation involves the absence of practice. It may look to an outsider as though you are at rest, but your mind is at work. A change of environment is key to incubating ideas.37 A new environment allows you to receive stimuli other than those directly associated with the creative problem you are working on. It could be as simple as taking a walk or going to a new coffee shop to allow your mind to wander and take in the information you gathered in the previous stage. Mozart stated, “When I am, as it were, completely myself, entirely alone, and of good cheer—say, traveling in a carriage, or walking after a good meal, or during the night when I cannot sleep; it is on such occasions that my ideas flow best and most abundantly.”38 Incubation allows your mind to integrate your creative problem with your stored memories and with other thoughts or emotions you might have. This simply is not possible to do when you are consciously fixated on the creative problem and related tasks and practice.
Incubation can take a short or a long time, and you can perform other activities while allowing this process to take place. One theory about incubation is that it takes language out of the thought process. If you are not working to apply words to your creative problems and interests, you can free your mind to make associations that go deeper, so to speak, than language.39 Patiently waiting for incubation to work is quite difficult. Many creative and innovative people develop hobbies involving physical activity to keep their minds busy while they allow ideas to incubate.
Insight
Insight or “illumination” is a term for the “aha!” moment—when the solution to a creative problem suddenly becomes readily accessible to your conscious mind. The “aha!” moment has been observed in literature, in history, and in cognitive studies of creativity.40 Insights may come all at once or in increments. They are not easily understood because, by their very nature, they are difficult to isolate in research and experimental settings. For the creative entrepreneur, however, insights are a delight. An insight is the fleeting time when your preparation, practice, and period of incubation coalesce into a stroke of genius. Whether the illumination is the solution to a seemingly impossible problem or the creation of a particularly clever melody or turn of phrase, creative people often consider it a highlight in their lives. For an entrepreneur, an insight holds the promise of success and the potential to help massive numbers of people overcome a pain point or problem. Not every insight will have a global impact, but coming up with a solution that your subconscious mind has been working on for some time is a real joy.
Evaluation
Evaluation is the purposeful examination of ideas. You will want to compare your insights with the products and ideas you encountered during preparation. You also will want to compare your ideas and product prototypes to the goals you set out for yourself during the preparation phase. Creative professionals will often invite others to critique their work at this stage. Because evaluation is specific to the expectations, best practices, and existing product leaders in each field, evaluation can take on many forms. You are looking for assurance that your standards for evaluation are appropriate. Judge yourself fairly, even as you apply strict criteria and the well-developed sense of taste you acquired during the preparation phase. For example, you might choose to interview a few customers in your target demographics for your product or service. The primary objective is to understand the customer perspective and the extent to which your idea aligns with their position.
Elaboration
The last stage in the creative process is elaboration, that is, actual production. Elaboration can involve the release of a minimum viable product (MVP). This version of your invention may not be polished or complete, but it should function well enough that you can begin to market it while still elaborating on it in an iterative development process. Elaboration also can involve the development and launch of a prototype, the release of a software beta, or the production of some piece of artistic work for sale. Many consumer-product companies, such as Johnson & Johnson or Procter & Gamble, will establish a small test market to garner feedback and evaluations of new products from actual customers. These insights can give the company valuable information that can help make the product or service as successful as possible.
At this stage what matters most in the entrepreneurial creative process is that the work becomes available to the public so that they have a chance to adopt it.
LINK TO LEARNING
Test marketing can reveal much information about the potential users of a product. Visit the Drive Research site on test markets for more information.
Innovation as More than Problem Solving
Innovative entrepreneurs are essentially problem solvers, but this level of innovation—identifying a pain point and working to overcome it—is only one in a series of innovative steps. In the influential business publication Forbes, the entrepreneur Larry Myler notes that problem solving is inherently reactive.41 That is, you have to wait for a problem to happen in order to recognize the need to solve the problem. Solving problems is an important part of the practice of innovation, but to elevate the practice and the field, innovators should anticipate problems and strive to prevent them. In many cases, they create systems for continuous improvement, which Myler notes may involve “breaking” previous systems that seem to function perfectly well. Striving for continuous improvement helps innovators stay ahead of market changes. Thus, they have products ready for emerging markets, rather than developing projects that chase change, which can occur constantly in some tech-driven fields. One issue with building a system for constant improvement is that you are in essence creating problems in order to solve them, which goes against established culture in many firms. Innovators look for organizations that can handle purposeful innovation, or they attempt to start them. Some innovators even have the goal of innovating far ahead into the future, beyond current capacities. In order to do this, Myler suggests bringing people of disparate experiential backgrounds with different expertise together. These relationships are not guarantees of successful innovation, but such groups can generate ideas independent of institutional inertia. Thus, innovators are problem solvers but also can work with forms of problem creation and problem imagination. They tackle problems that have yet to exist in order to solve them ahead of time.
Let’s examine one multilevel approach to innovation (Figure 4.12). The base is problem solving. The next level up in the pyramid, so to speak, is prevention. The next level is working toward continuous improvement, and at the top of such efforts is creating the capacity to direct the future of your industry or multiple industries so that you can weather disruption in your career or even to create it.
Even if you are not interested in shaping the future of whole industry sectors, developing future-focused innovation practices still is a good idea. It will help you prepare for disruption. The pace of technological change is such that workers at all levels need to be prepared to innovate. Innovation leaders, such as the marketing guru Guy Kawasaki, have built on psychological principles to suggest new ways to approach innovation. According to Kawasaki, innovative products include five key qualities: deep, indulgent, complete, elegant, and emotive—DICEE (Figure 4.13).42 You can strive to infuse individual innovations with these qualities in practical ways.
Deep
Deep products are based on the logic of innovation that we’ve just established and anticipate users’ needs before they have them. These types of innovations often have masterful designs that are intuitive for new users while still being capable of completing complex tasks. Adobe is an innovative corporation working in several fields, such as software, marketing, and artificial intelligence. Adobe often creates software applications with basic functions that are easily accessible to new users but that also enable experienced users to innovate on their own.43 Creating a platform for innovation is a hallmark of deep, forward-thinking innovation.
Indulgent
Innovations with lasting power engage users in ways that make them feel special for having purchased the product or for having found the service. Indulgence refers to a depth of quality that does not come from being the fastest solution to a problem. Indulgence may even sound like a negative trait. In humans, it certainly can be, but for someone using an innovative product, feeling indulgent can relate to a richness of experience with the user interface (UI). The UI of a product, particularly a software product, is what the user sees and interacts with. A feeling of indulgence imbues your product with a sense of value and durability that reassures users and encourages them to use your product confidently.
Complete
Kawasaki’s vision of a complete product includes the services wrapped around it and underlying it such that users understand the product well enough to be comfortable using it. Information about how it works and how it is meant to work is readily available. Thus, product innovation must include marketing and other communication efforts. For Kawasaki, this builds the “total user experience.”44 If you truly have solved a problem in the marketplace, users will understand what that problem is and how your product and related services deliver.
Elegant
Elegance also is part of a product’s UI. It refers to intuitive design that immediately makes sense to consumers. Elegance conveys more information with fewer words. Elegant design is not afraid of negative space or of the occasional pause. Elegant innovations solve problems without creating new ones. For Kawasaki, elegance is the difference between a pragmatic, good innovation and something great.
Emotive
Emotive innovations evoke the intended emotion and demand to be admired and shared. In other words, truly great innovations create fandoms, not just consumer bases. You can’t force people to love your product, but you can give them experiences that create a sense of excitement and anticipation of what you might come up with next.
Developing an Invention
The general process of inventing involves systematic and practical steps that might include linear and nonlinear thinking. You might think that only people with innate artistic skills are creative and that only geniuses become innovators and inventors, but much of creativity is driven by being immersed in a practice. You can build and foster your own creativity. Your idea of an inventor might be someone like Johannes Gutenberg, who developed the printing press. The spread of printing ultimately redrew the map of Europe and resulted in the foundation of new centers of learning. Gutenberg’s supposed spark actually was more of a slow burn. He was creative and innovative—one of history’s most famous inventors—but his printing press, like all other inventions, was a synthesis of existing technologies. Gutenberg’s most important innovation was his use of moveable, interchangeable metal type instead of entire hand-carved wooden blocks of text (Figure 4.14). Perfecting his printing process took decades and left him all but broke.45 The notion of the inventor’s single stroke of genius is mostly myth. The people that history remembers usually worked very hard to develop their creativity, to become familiar with the processes and tools that were ripe for innovation in their time, and ultimately to make something so unique that society recognizes it as an invention.
The old adage claims that “necessity is the mother of invention,” but an innovator needs experience in a field, creative effort, and knowledge to be a successful inventor. Entrepreneurship means taking your efforts and knowledge, and finding a market where your invention can first survive, then thrive.
One model for developing an invention is the first five steps of a plan adapted from Sourcify.com, which specializes in connecting product developers with manufacturers.46 This process is succinct and includes suggestions for building a team along the way (Figure 4.15).
Step 1: Educate Yourself
Before your inventive product can do battle with other inventions, you will need to educate yourself. To prepare yourself to weather the competition, you need to learn as much as you can about the current investing climate, current product development opportunities, and current leadership approaches. Even if you are not deeply interested in leadership dogma, it helps to know what the current trends are in leadership and product development. To succeed as an inventor in a vast marketplace, you need to understand the rules, written and unwritten, of the industry and competitive landscape. The product development process can be quite involved. The process can vary by industry and by availability of resources.
Part of educating yourself is also gaining an understanding of your own strengths and weaknesses, and how those relate to your leadership style. A leadership style inventory can help you better understand your approach to leading others. This is just one example of many that exist to give you a starting point. As the inventor of your product or service, you will manage/lead others as you attempt to make your idea a reality. Also, the environment can constantly change. For this reason, it is important to understand the basic tenets of leadership and management in a dynamic work atmosphere. Many sources will give you insights into the challenges of management.
LINK TO LEARNING
A leadership style inventory can help you understand your leadership style and how to adapt your own style to other situations and people.
Another key step in educating yourself is to find out which kinds of contributors you are going to need to build a successful entrepreneurial team. Building a team is essential to making your invention a reality. Even those who invent alone—and they are quite rare—must have a development team, a manufacturing and/or service team, a marketing team, and other members with specific skill sets such as coders, graphic designers, test marketers, and more.
Step 2: Stay Organized
Most tip sheets for inventors suggest that you find a method for organizing your creativity so that you don’t spend time trying to remember previous ideas, plans, and decisions. You must organize information related to your business idea, your business plan, and your potential teammates in the process.
Contact management software has been popular for decades. Nowadays, you can investigate many other productivity and team-chat tools. Research ways to organize information about the people you plan to work with and hope to work for. The team-chat program Slack (www.slack.com) enables you to create specific topics for team members to discuss and collaborate on. Slack offers several features to help keep employees connected. Insightly (www.insightly.com) is a customer relationship management tool to stay better connected to your customers. Ryver and Glip incorporate task management. Flock and Microsoft Teams offer a host of features, with Microsoft leveraging its corporate position to bring about deployment in more than 200,000 organizations. Select the tool set that works best for you and consider paying for the software that offers the precise team communication functionality and utility you need.47
Step 3: Conduct Market Research
Market research is an obvious must, but many entrepreneurs fail to go as deeply as they should in researching their competition. You must be aware of current and future competitors so that you are prepared to compete in the marketplace when you are actually ready. Being the best on paper now won’t be much use when you enter the marketplace with an MVP in six to eight months in competition with competitors’ new products and updates.
What should you consider with regard to team development when you’re looking at the competition? Within the legal limits of any noncompete clauses, you should be shopping the competition for potential team members. The best leaders are always seeking talented people. If you sense that someone would be a good fit for your team, that they have not only the skill set but also the temperament that would help put your invention in the market, do not be afraid to reach out to them. How you reach out is something you must research for each industry. In some industries, you will have to be highly secretive. Part of market research is understanding the market well enough to understand the soft skills you need to find contributors who are already working in the industry or in an adjacent one
Step 4: Conduct Patent Research
If you expect to apply for a patent, take the time to read up on policies and procedures. Officials in the US Patent Office, or in similar bureaus in other countries, decide whether an invention is worthy of receiving a patent. A patentable invention must meet the criteria of being novel, useful, and nonobvious; it must be proven to be workable.48 Those three standards—novel, useful, and nonobvious—are subjective. So is the concept of invention, but conceptualizing invention this way sets a high bar for entrepreneurs who truly wish to make a social impact. Developing an invention that is patentable also creates a barrier against competition, which can make the difference between business success and failure. There are two types of patents. Utility patents last twenty years, and design patents usually last fourteen years. If a patent is granted, the inventor has a window of time in which to secure further funding, work to produce the product, and try to gain mass-market adoption.49 After all is said and done, you can apply your creativity to social innovations, product innovations, or service innovations. If you can combine enough innovations, add your unique creativity, and create something that survives the diffusion chasm, you can truly invent something new.
The patent basics page of the US Patent and Trademark Office’s website is roughly forty pages long.50 The utility patent process includes a thirteen-step flow chart51 that outlines the process. The patent office encourages you to use a registered patent attorney or agent. If you are skilled and diligent enough to secure a patent, you should expect to pay fees and file paperwork to maintain it for years after it is granted. We’ve already discussed the keys to securing a patent, but to reiterate, here is how an invention is defined in US patent law: “In the language of the statute, any person who ‘invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent,’ subject to the conditions and requirements of the law.”52
When building a team to make your invention a reality, finding a patent lawyer or agent is key. Even those who have advocated for hiring patent attorneys in the past now suggest that hiring a patent agent might work. What’s the difference? Patent attorneys often bill by the hour, but they offer a full suite of legal advice. As the author Stephen Key indicates, patent agents are narrowly focused on helping you get and defend your patent.53 The other limitation that Key mentions is that patent agents may write a patent application in such a way that you are less prepared to protect your invention against future legal challenges. Key quotes Gene Quinn, a leading attorney on intellectual property and patent law: “By the time you realize that you are sitting on a million-dollar invention it will be too late to do anything about it.…Patent agents as a general rule tend to be very good at describing what it is that you as an inventor show up with.” What they tend to be much less good at is describing what your invention could be. They also frequently will use terms that are more concrete and limiting than would a patent attorney. Attorneys are taught the art of being hyper-specific, which is necessary at times, but also the art of being anything but specific.”54 Patents cannot be vague, but they can be written with just the right amount of specificity to protect against similar products that may arise and threaten your market share.
Step 5: Develop a Prototype
Developing a prototype can be the most fun or the most tedious part of inventing. Much of your attitude toward developing a prototype depends on available resources, technology, and expertise. In this text, we reference the concept of the lean startup from time to time. In the lean startup model, the prototype is most often an MVP. As we saw earlier, an MVP is a version of your invention that may not be polished or complete in terms of how you envisioned it, but it functions well enough and looks good enough that you can begin to market it with reasonable hopes that it will be adopted. For other inventions, you may need to build a more advanced prototype. This requires serious investment capital, but the payoff is that users will interact with a version of the product that looks and functions more like what you had in mind during your ideation phase. As an inventor, you are responsible for establishing quality control minimums for your product. You may have to compromise on your vision, but you should not compromise on basic functionality or basic levels of quality in materials.
You have many options at the prototype development stage. You can build the prototype yourself or with a small team. You can partner with design/invention firms that specialize in helping inventors create, but you must be very careful and involve your legal representation when working with such firms to be sure that you maintain the patents and other rights to your invention. Many inventors have partnered with such firms only to see their intellectual property stolen. Another option is to get funding for your invention on Kickstarter or some other crowdfunding site, but again you must beware that establishing such a campaign puts your idea in the public sphere. “Copycatters are monitoring crowdfunding platforms like Kickstarter and watching for trendy products to go viral,” according to Amedeo Ferraro, an intellectual property attorney.55 Competing companies, particularly in foreign markets, actively scout Kickstarter and similar platforms for new ideas that they can manufacture and bring to market before your crowdfunding project has run its course. Perhaps most chilling is this comment regarding legal protections that do not function, even when inventors take precautions to protect their intellectual property when working with some Chinese firms: “But even with these protections, there’s no guarantee that you can stop someone from copycatting your product. [One U.S. intellectual property lawyer] said that the problem lies not in China’s courts but enforcing rulings. Winning a case against one factory is relatively easy. But suing every factory and winning is expensive and time consuming.”56 For this reason, some inventors prefer to start small and local, if possible. It can be better for them to start with a trusted team striving for a small profit and a good market position than to see the market flooded with copycat products. | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/04%3A_Creativity_Innovation_and_Invention/4.03%3A_Developing_Ideas_Innovations_and_Inventions.txt |
brainstorming
generation of ideas in an environment free of judgment or dissension with the goal of creating solutions
creativity
development of original ideas
design thinking
method to focus the design and development decisions of a product on the needs of the customer, typically involving an empathy-driven process to define complex problems and create solutions that address those problems
diffusion chasm
most critical point of adoption, which often occurs at the end of the early adoption phase, before the early majority steps in and truly confirms (or not) the diffusion of an invention
disruptive innovation
process that significantly impacts the market by making a product or service more affordable and/or accessible often by smaller companies in an industry
empathy
human ability to feel what other humans are feeling, which in the context of creativity, innovation, and invention is essential to beginning a process of human-centric design
ideation
purposeful process of opening up one’s mind to new trains of thought that branch out in many directions from a stated purpose or problem
incremental innovation
innovation that modifies an existing product or service
innovation
new idea, process, or product, or a change to an existing product or process
invention
truly novel product, service, or process that, though based on ideas and products that have come before, represents a leap, a creation truly novel and different
iterative development
process in which inventors and innovators continuously engage with potential customers in order to develop their products and their consumer bases at the same time
lateral thinking
free and open thinking in which established patterns of logical thought are purposefully ignored or even challenged
linear thinking
logical, step-by-step process
minimum viable product (MVP)
early version or prototype of a product that may not be polished or complete but that functions well enough that you can begin to market it or test it with potential users
open innovation
searching for and finding solutions outside of the organizational structure
pain point
problem that people have with a product or service that might be addressed by creating a modified version that solves the problem
pioneering innovation
one based on a new technology, a new advancement in the field, and/or an advancement in a related field that leads to the development of a new product
scientific method
most often associated with the natural sciences, outlines the process to discover an answer to a question or a problem
user interface
what the user sees and interacts with
4.05: Summary
4.1 Tools for Creativity and Innovation
There are many practical approaches to being creative and developing innovations. Many programs and models encourage creative thinking. Some of the best encourage entrepreneurs to think like the stakeholders they hope their products and services will help. Human-centered design begins with empathizing with the people experiencing a problem or pain point. It continues through steps meant to clearly define problems and examine solutions through careful testing. Returning to empathy is essential in the human-centric design protocol. The Six Thinking Hats method of ideation can open up deep avenues of creative thought directed at solving problems by limiting the roles individuals in a group play. This reinforces the idea that creative thinking is a practice, that it can be guided, and that sometimes a combination of open thinking and rule following is ideal for collaborative creativity. The statement starter method of creative thinking frames every problem as though there must be a solution. This type of open thinking is an effective way to begin a creative journey that can lead to innovation and invention of products or services for social benefit.
4.2 Creativity, Innovation, and Invention: How They Differ
Creativity is defined as the ability to develop something original, particularly an idea or an artistic representation of an idea. Innovation occurs when an individual or a firm applies something new to an existing product or service that adds value. Innovation can be planned or spontaneous, incremental or pioneering. Some pioneering innovations rise to the level of being unique inventions—truly novel products, services, or processes that, though based on ideas and products that have come before, represent a leap.
The diffusion curve is related to iterative innovations versus black box innovations. Innovators and inventors conduct the iterative innovation process by engaging with potential consumers on a near-continuous basis in order to develop the product and the consumer base at the same time, thus bridging the diffusion chasm. Black box innovations either jump the chasm or not, depending on the social perceptions through which they are perceived by potential users, the quality of the product itself, and marketing strategies.
4.3 Developing Ideas, Innovations, and Inventions
Whether an entrepreneur has innate creativity or not, practice can help improve creative efforts. One practice model includes preparation, incubation, insight, evaluation, and elaboration. Entrepreneurs can use their creativity to solve problems and innovate. However, innovators strive to anticipate and prevent problems, rather than react to them. The innovation pyramid begins with problem solving at the base, moving up to prevention, then continuous improvement, and finally directing the future of an industry. Innovative products are DICEE: They are deep, indulgent, complete, elegant, and emotive.
Building and fostering your own creativity often involves linear and nonlinear thinking. Models are available that help develop inventions, such as Sourcify.com’s five steps: Educate yourself, stay organized, conduct market research, conduct patent research, and develop a prototype. This model has guidelines for working with teams as well. These models allow you to apply your knowledge of creativity, innovation, and invention in an entrepreneurial context. Seek inspiration from inventors who have come before and learn from the modes of thought and models of practice that guide inventors today. | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/04%3A_Creativity_Innovation_and_Invention/4.04%3A_Key_Terms.txt |
1.
The question “How might we find a way to make use of DVDs and other physical media as users adopt streaming services for films and television over time?” is an example of which form of ideation?
1. statement starter
2. open innovation
3. design thinking
4. brainstorming
2.
The creative process that begins with empathy is known as ________.
1. Stanford’s model of human-centric design
2. build-measure-learn
3. open innovation
4. disruptive innovation
3.
In the Six Hats exercise, new ideas are the purview of the ________.
1. Black Hat
2. Blue Hat
3. Green Hat
4. Red Hat
4.
________ is thinking strategically, often to create human-centered products.
1. Creativity
2. Innovation
3. Invention
4. Design thinking
5.
An innovation that is not developed in tandem with consumers but that is introduced in a society or in a targeted market as completed and “finished” is often referred to as a “________.”
1. design thinking
2. iterative development
3. black box
4. corporate narrative
6.
If linear thinking is the idea that progress follows or should follow a set of established, logical steps, ________ is free and open thinking where established patterns of logical thought are purposefully ignored or even challenged.
1. design thinking
2. iterative development
3. corporate narrative
4. lateral thinking
7.
The model for building ________ also includes steps for team building, suggesting that the most complex developments require more than the lone mad scientist in a lab, despite what is often depicted in popular culture.
1. creativity in an individual
2. innovations
3. inventions
8.
Problem solving is part of but not the entire model for building innovations. True or False?
1. true
2. false
9.
DICEE is a model for ________ that focuses on going beyond problem solving to get at the underlying qualities of what makes certain new products “sticky” in ways that make people true fans.
1. creativity in practice
2. innovative products
3. inventions
4. building creative teams
4.07: Discussion Quetions
1.
Open innovation can be criticized for being vague and encouraging corporations to attempt to commit corporate espionage to look for solutions to problems shared by multiple firms in the same field. Is open innovation all it is cracked up to be? Is it truly new? Does it encourage intellectual property theft?
2.
At what point is a product truly inventive? Can you think of products that some people think are inventions but that other people consider mere variations of previous products?
3.
What is the value of creative efforts that are not meant for sale and that are never turned into products for the marketplace?
4.
Critics of contemporary society suggest that there is something akin to a “technology cult” around the world. Some people treat innovation and inventiveness as cure-alls even as social conditions such as poverty, environmental degradation, and hunger persist. Can innovation cure all of society’s ills? If so, what is standing in the way? Why hasn’t the modern era solved basic human needs and human rights problems with technology?
5.
Can you think of a product you or someone you know adopted early only to watch it fall into the diffusion chasm between early adopters and early majority adopters? What was that product, and why do you think it failed to make it across that gap?
6.
What makes a model for creativity necessary? Isn’t creativity the opposite or the absence of structure?
7.
Why does the model for innovation stress that it does not end with problem solving?
8.
Why does the section on invention focus so much on building a team? Aren’t most inventors and truly creative people famous for working solo?
4.08: Case Questions
1.
Open innovation means more than searching online for others who are attempting to solve the same problems you are and trying to take inspiration from other corporations and other entrepreneurs. It also involves forming partnerships, supporting new ventures, investing in business accelerators, and acquiring firms that innovate in ways that are valuable to your firm or to your entrepreneurial effort (assuming you can raise the capital to acquire a firm while you develop your invention).7 Think of an example of a firm (other than Samsung, the example from Merit Morikawa’s article, and Apple, the “easy” answer) that has engaged in all of these practices. What seems to drive these different modes of open innovation? When are they most appropriate? When are they not appropriate ethically?
2.
Read this article to prepare for answering this question: https://www.brookings.edu/blog/brook...-are-we-ready/. (Brennan Hoban. “Artificial Intelligence Will Disrupt the Future of Work. Are We Ready?” Brookings. May 23, 2018.)
Many signs point to growing automation across a variety of industries in the coming decades. In many cases, disruptive technologies will force people to innovate. Based on the DICEE innovation model, explain how humans will be needed on the design side of innovation to create human-centric products. In what ways can you create a career that is “disruption-proof”?
4.09: Suggested Resources
4.1 Tools for Creativity and Innovation
The World’s 25 Best Design Schools: https://www.businessinsider.com/the-...chools-2012-11
Open Innovation Community: http://openinnovation.net/
The Seven All-Time Greatest Ideation Techniques: http://www.innovationmanagement.se/2...on-techniques/
Ideation Method: Mash-Up: https://www.ideou.com/pages/ideation-method-mash-up
LUMA Institute’s LUMA System of Innovation: www.youtube.com/watch?v=qDyElJ0xe2o
Ideation Method: Top Five: http://www.designkit.org/methods/15
4.3 Developing Ideas, Innovations, and Inventions
Additional information about product development: https://www.smartsheet.com/all-about...opment-process
A summary of various leadership styles and traits that are essential for a changing business environment: https://www.christinespeaks.com/mana...mic-leadership | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/04%3A_Creativity_Innovation_and_Invention/4.06%3A_Review_Questions.txt |
Like many college students, Chris Johnson ate a lot of ramen noodles, and like many college students, cooking meant microwaving something in his dorm room. At the time, ramen noodle companies did not print microwave instructions on the package, and there was a lack of microwave cookware in which to prepare the popular college food fare.
Many entrepreneurial ideas aim to solve small everyday problems. In his quest to find a better way to prepare ramen noodles, Chris Johnson invented the Rapid Ramen Cooker.
Johnson is now the CEO of Rapid Brands. He founded his company in 2013 with the Rapid Ramen Cooker. Johnson pitched his idea on the TV show Shark Tank. Although he negotiated with investor Mark Cuban for an ownership stake in the company, Johnson wound up not taking the deal. Instead, he made a deal with Walmart to position the Ramen cooker on the retailer’s shelves. Rapid Brands sold more than 4 million Rapid Ramen Cookers in its first two years at Walmart and other retailers. Johnson has since introduced several new products, including cookers for eggs, hot dogs, and brownies.1
Finding an entrepreneurial opportunity and persisting until your business becomes successful is not easy and involves risk. But whether you start a new venture because you came up with an idea to solve an everyday problem, or whether you are deliberately searching for an opportunity because you want to start your own business, doing the research beforehand will help mitigate risk and determine the venture’s likelihood of success.
5.01: Entrepreneurial Opportunity
Learning Objectives
By the end of this section, you will be able to:
• Define entrepreneurial opportunity
• Discuss Joseph Shumpeter’s theories of opportunity
• Identify key drivers of opportunity
Aspiring entrepreneurs can come up with ideas all day long, but not every idea is necessarily a good idea. For an idea to be worth pursuing, we must first determine whether the idea translates into an entrepreneurial opportunity. Entrepreneurial opportunity is the point at which identifiable consumer demand meets the feasibility of satisfying the requested product or service. In the field of entrepreneurship, specific criteria need to be met to move from an idea into an opportunity. It begins with developing the right mindset—a mindset where the aspiring entrepreneur sharpens his or her senses to consumer needs and wants, and conducts research to determine whether the idea can become a successful new venture.
In some cases, opportunities are found through a deliberate search, especially when developing new technologies. In other instances, opportunities emerge serendipitously, through chance. But in most cases, an entrepreneurial opportunity comes about from recognizing a problem and making a deliberate attempt to solve that problem. The problem may be difficult and complex, such as landing a person on Mars, or it may be a much less complicated problem such as making a more comfortable pillow, as entrepreneur Mike Lindell did by inventing My Pillow.
Theories of Opportunity
In the twentieth century, economist Joseph Schumpeter, as shown in Figure 5.2, stated that entrepreneurs create value “by exploiting a new invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for products, by reorganizing an industry” or similar means.2
According to Schumpeter, entrepreneurial innovation is the disruptive force that creates and sustains economic growth, though in the process, it can also destroy established companies, reshape industries, and disrupt employment. He termed this force creative destruction. Schumpeter described business processes, including the concept of downsizing, as designed to increase company efficiency. The dynamics of businesses advances the economy and improves our lifestyle, but the changes (sometimes through technology) can make other industries or products obsolete. For instance, Schumpeter provided the example of the railroad changing the way companies could ship agricultural products quickly across the country by rail and using ice “cold cars,” while at the same time, destroying the old way of life for many ranchers who wrangled cattle from one location to their intended commercial destination.
Today, we might think of the displacement of taxi drivers by ride-sharing services such as Uber and Lyft as a modern-day example of this concept. To own and operate a New York City cab, for instance, one must buy what is called a taxi medallion, which is basically the right to own and operate a cab. Drivers take out loans to buy these medallions, which cost hundreds of thousands of dollars. But now, ride-sharing services have eaten in to the taxi industry, all but destroying the value of the medallions, and the ability of taxi drivers to make the same money they were before the popular services existed. This change has left many taxi drivers in financial ruin.3 Schumpeter argued that this cyclic destruction and creation was natural in a capitalist system, and that the entrepreneur was a prime mover of economic growth. To him, the goal was to progress, and progression starts with finding new ideas. He identified these methods for finding new business opportunities:
1. Develop a new market for an existing product.
2. Find a new supply of resources that would enable the entrepreneur to produce the product for less money.
3. Use existing technology to produce an old product in a new way.
4. Use an existing technology to produce a new product.
5. Finally, use new technology to produce a new product.
We can understand theories of opportunity as related to supply or demand, or as approaches to innovations in the use of technology. The first situation is a demand opportunity, whereas the remaining situations are supply situations. The final three incorporate technological innovations. Supply and demand are economic terms relating to the production of goods.
Supply is the amount of a product or service produced. Demand is the consumer or user desire for the outputs, the products, or services produced. We can use the ideas from Schumpeter to identify new opportunities. Our focus is on identifying where the current or future supply and the current or future demand are not being met or are not aligned, or where technological innovation can solve a problem.
More recent research has expanded on the concept of technological entrepreneurial opportunities, identifying several areas: creating new technology, utilizing technology that has not yet been exploited, identifying and adapting technology to satisfy the needs of a new market, or applying technology to create a new venture.4
Regardless of which of Schumpeter’s paths entrepreneurs pursue, before investing time and money, the business landscape requires a thorough investigation to see whether there is an entrepreneurial opportunity. Remember, entrepreneurial opportunity is the point at which identifiable consumer demand meets the feasibility of satisfying the requested product or service. “Feasibility” in this definition includes identifying a sizable target market interested in the product or service that has sufficient profitability for the venture’s financial success.
Chester Carlson
Chester Carlson, a physicist, inventor, and patent attorney, spent ten years searching for a company to develop and manufacture a new photographic machine for office use to make copies faster and for less money. Carlson went on to found the XEROX Corporation, the company that made the first photocopy machines. Can you imagine a school or office today without a photocopy machine? The companies that Carlson approached with his invention missed the opportunity to invest. For Carlson, it was the beginning of a technology product development company that has been granted more than 50,000 patents worldwide.
Today, Xerox continues to innovate. Visit the innovation section of its website (www.xerox.com/en-us/innovation) and consider how one of the inventions it’s developing now could spur creative destruction in an industry, according to Schumpeter’s theory.
Identifying Opportunity
A good place to begin your entrepreneurial quest is to read as much as you can, especially with new technology developments, even outside the field you work in. Remember that as technologies start to emerge, we often do not yet understand their commercial potential. For example, microwave technology was first applied in radars to track military submarines. But, thanks to a curious man named Percy Spencer and the accidental melting of a peanut bar in his pocket one day while tinkering with the technology, the microwave was born. It would take a few decades for it to be produced at a price the mass market could afford.5
Think of drones, too. When they were invented, the multiple uses for this technology were not yet identified. Now, drone technology is being used by real estate firms, package delivery services, agriculture, underwater search and scientific research, security, surveillance, and more. Being tuned in to new experiences and information can lead to identifying opportunities. Entrepreneur Fred Smith found a system to solve the problem of overnight package delivery in founding Federal Express.6 As a college student, he wrote a paper for an economics class where he discussed his business idea. He earned only a C on his paper, by the way. He received his bachelor’s degree in 1966 and went on to found Federal Express a few years later, which, in 2019, generated almost \$70 billion in revenue.7 Prior to starting Federal Express, Smith was in the US Marine Corps serving in Vietnam where he observed the military’s logistics systems.8 This is where he honed his interest in shipping products while in the military. Many entrepreneurs start their business after working for someone else and seeing a better way to operate that business, and then start their own competing business.
Note that entrepreneurs need to be careful about starting competing businesses. See Telling Your Entrepreneurial Story and Pitching the Idea and Business Structure Options: Legal, Tax, and Risk Issues for information on noncompete clauses and agreements. Indeed, some entrepreneurs, like Smith, conduct research as an idea percolates, paying attention to new experiences and information to further advance their idea into an entrepreneurial opportunity. However, they must ensure that the existing product, service, or business process is not covered by any active and protected intellectual property (patent, trademark, copyright, or trade secret), as discussed in Creativity, Innovation, and Invention and Fundamentals of Resource Planning.
Identifying consumer needs may be as simple as listening to customer comments such as “I wish my virtual orders could be delivered more quickly.” or “I can never seem to find a comfortable pillow that helps me sleep better.” You can also observe customer behavior to gather new ideas. If you are already in business, customer feedback can be a simple form of market research.
When purchasing an existing business or franchise, the process is a bit different. The first step will usually be searching for a business that suits your experience, personal preferences, and interests. You will still want to conduct research to understand the industry, the local market, and the business itself. Then, you will begin to examine all available company financial data. If purchasing a franchise, you may want to contact other franchise owners and discuss their experience in working with the franchisor.
ENTREPRENEUR IN ACTION
How Spanx Founder Developed Resilience and Persistence9
Another entrepreneur, Sara Blakely (Figure 5.3), admits that for the seven years she spent selling fax machines in the 1990s, many times, she became so frightened of approaching sales prospects that she would burst into tears and then have to drive around the block to collect herself before she could complete the next sales call.
One day in 1998, she was putting on pants and looked in the mirror and did not like how she looked. So, Blakely came up with the idea to wear a pair of control-top pantyhose underneath—but she cut the feet out. Blakely liked the look and comfort of the footless hose and decided to patent her own body-shaping footless version. Just a few years later, Blakely founded her company, Spanx, Incorporated, which since has gone on to launch more than 200 styles of body-shaping garments. This is another case of an entrepreneurial company born out of a simple way to solve an everyday problem.
Blakely is also a master of resilience, which is a quality of many successful entrepreneurs. When she was sixteen years old, right around the time her parents separated, she witnessed a good friend get hit and killed by a car. Her father gave her a set of motivational tapes to listen to: How to Be a No-Limit Person by Wayne Dyer. She found the tapes so helpful that she memorized all of them and still gives copies of the tapes as gifts.
As a child, her father encouraged his children to respect the valuable lessons we can learn through failure. Obviously, it helped Blakely at a young age develop persistence and determination. That persistence and determination helped her develop a business idea into a billion-dollar enterprise.
• Was Blakely’s idea a demand or a supply idea?
• What industry information would Blakely need as she was researching this idea?
When researching supply and demand, you should also consider political factors. For example, changes in tax laws can inform decisions. One example is a tax credit that encourages alternative energy use, such as electric or hybrid vehicles. For 2019, the IRS tax credit is between \$2,500 and \$7,500 per new electric vehicle, with a concurrent phase-out of the plug-in electric vehicle tax credit. Changes in the tax code can therefore influence buyer behavior or the demand for vehicles. Another example is the Residential Energy Efficient Property Credit of up to \$4,000 for solar electronic appliances such as solar water heaters and solar panels and for small wind turbines, through the end of 2021.10 Tax incentives do not usually last more than a few years (the tax subsidy for corn farmers to produce ethanol, an ingredient in automotive fuels, is a notable exception due to heavy lobbying by the farming industry), so it is important that entrepreneurs do not rely on these incentives as a permanent “pillar” of their value proposition and business model.
Let’s say you have an interest in machinery and art. Taking these two areas of interest, and knowing about this tax credit, you recognize that you have the talents to create artistic backyard wind turbines to create energy for a homeowner. Of course, you will still need to determine whether this is merely an idea, or if the conditions are in place to move forward in translating this idea into an entrepreneurial opportunity.
Drivers of Opportunity
Some recent drivers for change in the entrepreneurial space include new funding options, technological advancements, globalization, and industry-specific economics.
• Increased access to capital through social media sources like crowdsourcing (see the chapter on Problem Solving and Need Recognition Techniques for a more detailed discussion of crowdsourcing) is having a significant impact on entrepreneurship in that it enables underserved people and communities—such as women, veterans, African Americans, and Native Americans, who otherwise might not be able to start and own a business—to become entrepreneurs.
• Technological advancements continue to provide new opportunities, ranging from drones to artificial intelligence, advancements in medical care, and access to learning about new technology. For example, drone technology is being used to map and photograph real estate, deliver products to customers, and provide aerial security and many other services. Cell phones have spawned many new business opportunities for a wide range of cell phone accessories and related products, ranging from cell phone cases to apps that help make our cell phones faster for business and personal use.
• Increased globalization drives entrepreneurship by allowing importing and exporting to flourish. Globalization also helps spread ideas for new products and services to a world market instead of a local or regional market. Combined with the Internet and computer technology, even small businesses can compete and sell their products around the globe.
• Economic factors could include a strong economy that fuels other businesses. For example, growth in the housing market fuels growth for many housing-related products and services, ranging from interior decorating to landscaping as well as furniture, appliances, and moving services.
David Pridham, CEO of the patent advisory board and transaction firm Dominion Harbor Group in Dallas, cites six reasons that current conditions are excellent for startups:
1. Venture capital investment, which you will learn more about in Entrepreneurial Finance and Accounting, has surged to the highest level ever, totaling \$148 billion in 2018.
2. The concern over patent protection is improving with better trade protection of intellectual property rights.
3. Artificial intelligence could be a tremendous opportunity based on a McKinsey report projection, estimating artificial intelligence to become a \$13 trillion industry by 2025.
4. The explosive growth in freelance workers has been a boon to startups and small businesses.
5. Another hot sector is technology-driven advancements such as self-driving vehicles.
6. Intellectual property now accounts for 38.2 percent of our total Gross Domestic Product (GDP) in the United States. That totals \$6 trillion per year, more than any other nation’s GDP except for China.11
In addition, Silicon Valley Bank (SVB) Financial Group surveyed new startup businesses in 2017 and found that 95 percent indicated they believe that business conditions will be the same or better. In addition, 83 percent plan to increase their workforce, and 24 percent found fundraising not to be a challenge.12 These numbers represent the highest levels of optimism among entrepreneurs over the most recent five-year period.
Some other economic indicators favor entrepreneurship. According to the 2019 Goldman Sachs Economic Outlook, consumer confidence is up, business confidence is up, interest rates remain reasonable and steady, more people are working, and wages are higher.13 When the economy is strong, there are generally more opportunities available and more potential customers with money to purchase your products and services; but of course, there are no guarantees.
LINK TO LEARNING
There are debates about so-called kill zones—markets that the tech giants like Facebook and Amazon control through aggressive anticompetitive tactics. Some argue that these zones have frightened off investors and stifled competition. But others maintain that investment in young tech startups is as strong as ever and that the creative effects of big tech companies outweigh their destructive forces.
Read this article on how tech giants make it difficult for startups from The Economist and then this blog post refuting the idea that tech giants kill startups from The American Enterprise Institute and see what you think about the issue. | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/05%3A_Identifying_Entrepreneurial_Opportunity/5.00%3A_Prelude_to_Identifying_Entrepreneurial_Opportunity.txt |
Learning Objectives
By the end of this section, you will be able to:
• Describe opportunity screening
• Identify common sources of research data
• Explain how to research and verify business opportunities
• Identify industry and consumer sources of opportunities
In order to discover how reasonable your business idea is, you need to research many aspects of the concept. Opportunity screening is the process by which entrepreneurs evaluate innovative product ideas, strategies, and marketing trends. Focusing on the viability of financial resources, the skills of the entrepreneurial team, and the competition, this screening helps determine the potential for success in pursuing the idea and can help refine planning.
Common Sources of Research Data
As you embark on researching whether your idea is viable, a good place to start is with the sources recommended by the US Small Business Administration. These include US Census data (www.census.gov/academy), which provides insight into the population in your market area, such as the metropolitan statistical area data, as well as statistics on the economy and trade. For most entrepreneurs, research will also include asking potential customers, specifically your target customers, questions about products they like and don’t like, how a product or service could be improved, how the customer buying experience could be improved, and even where customers might go to purchase products and services instead of your business.
Small business marketers can use several no-cost or low-cost methods, including surveys, questionnaires, focus groups, and in-depth interviews. Of course, you do not need to be an expert in these areas. Business assistance is available to you from the Small Business Administration, the Service Corps of Retired Executives (SCORE), and your local Small Business Development Center. You may also have a local college or university business department that provides assistance to local area businesses.
LINK TO LEARNING
The Small Business Administration website and SCORE website are rich resources of information for entrepreneurs.
You will likely begin with secondary research—that is, data that are already available through some published source. There may be articles, research reports, or reliable Internet sources where you can research information about your industry, products, and customers. If you have the funds, you can also purchase research reports from firms that specialize in gathering research on certain topics or products. Secondary research has the advantage of being quickly available. However, secondary research often is not specific enough to provide all the details you need to know about your idea. For example, secondary research (this is research that has been developed from primary sources that is almost as useful as primary, direct research) might report how often consumers purchase shampoo, where they purchase shampoo, and what brands of shampoo they purchase. But if you want to understand the details of how people shampoo—for example, whether they shampoo then repeat, use a separate conditioner, or use a combination shampoo/conditioner product—then you would want to conduct primary research. Primary research is needed when secondary research does not address the questions you want to explore while investigating your business idea.
Primary research gathers data that do not yet exist. The information is specific to the business, product, or consumer. It takes time and money to obtain primary data. Some of the methods used to gather primary research data include developing a survey questionnaire, using secret shoppers, or using focus groups. Survey questionnaires can be simple, such as a customer comment card included on a receipt, or extensive, including dozens of detailed questions. Secret shoppers can be used by hiring a shopping service or using friends, family members, and even your customers. One local small business owner gave a friend gift certificates that could be used at his ice cream business in exchange for the friend reporting back on product quality, service, and other key issues.
Researching and Verifying the Entrepreneurial Opportunity
Whether you start your own business, buy an existing business, or purchase a franchise, researching the industry, your target market, and examining the economic and funding options are all part of performing due diligence. Due diligence is the process of taking reasonable steps to verify that your decisions are based on well-researched and accurate information. It means thoroughly researching potential pursuits, asking detailed questions, and verifying information.
Different industries have different meanings for due diligence. For example, in the legal industry, due diligence involves understanding the terms of a transaction and contract. In business finance, due diligence refers to raising capital or the work involved in merger and acquisition transactions. In the entrepreneurship field, research is necessary to verify whether the idea is really an opportunity, considering the entire process of starting the venture and funding the venture.
One of the more common questions entrepreneurs must ask is whether now is a good time to start a business. This question of timing is addressed in the investigation to determine whether the idea is merely interesting or fits the criteria of being an entrepreneurial opportunity.
An idea can move to a recognized opportunity when the following criteria are met. Figure 5.4 shows these three factors:
• Significant market demand
• Significant market structure and size
• Significant margins and resources to support the venture’s success
Significant market demand means that the idea has value by providing a solution to a problem that the target market is willing to purchase. This value can result from a new product or service that fills an unmet need, a lower price, improved benefits, or greater financial or emotional value. This value can also result from capitalizing on “nonconsumption.” For example, in the 1980s, the Disney Corporation realized that it was losing an opportunity to entice visitors to come to their theme parks from 9 p.m. to 9 a.m. when they were closed. So the company started having “school nights” when schools and students could use the parks at a discount.
Significant market structure and size involve growth potential and drivers of demand for the product or service. Barriers to entry are manageable, meaning that entering the industry or creating a new industry is not exceptionally difficult. If the industry already exists, there must be room within the industry for your venture to gain market share by providing a value that creates a competitive advantage.
Significant margins and resources involve the potential for achieving profit margins at a high-enough level that the work of starting the venture (including the entrepreneur’s time and energy) is worth the risks involved. If the operating costs are too high and the profit margin is too low, it is important to analyze whether the idea is truly feasible. Significant margins also include the capital requirements—how much money is needed to start the venture—as well as the technical requirements, the complexity of the distribution system, and similar resources.
Determining whether an idea has significant market demand, significant market structure and size, and significant margins and resources to support the venture’s success represents the most basic concerns when screening a business idea as an entrepreneurial opportunity.
Keep in mind that these three criteria are based partially on creating a for-profit venture. If your entrepreneurial venture is focused on solving a societal problem, you want to know that the identified problem is realistic and that there is a need for solving it. In a for-profit venture, significant market structure and margins relate to the expectation that the venture will have significant sales with significant profit margins to sustain and grow. There are also examples of profitable entrepreneurial ventures, like YouTube, that did not have any sales, but there was still an expectation that harvesting or selling YouTube would result in a significant profit for the entrepreneurial team. You can read more about Google’s purchase of YouTube at https://www.theringer.com/2016/10/10...s-69fdbe1c8a06.
After confirming that a business idea is an entrepreneurial opportunity, the entrepreneur should ask more detailed questions in the next phase of screening the business. Here are some examples:
• Would other people value your product or service?
• Does your product or service solve a significant problem?
• Is the market for the product definable/specific?
• Does the market have unique needs or expectations that align with your entrepreneurial opportunity?
• Is the timing right to start the venture?
• Are there infrastructure or supporting resources that need to be commercialized or created prior to your launch of the venture?
• What resources are needed to start the venture?
• What is the competitive advantage your venture offers within the industry and is this competitive advantage sustainable?
• What is the timeline between starting the venture and the first sale?
• How long before the venture becomes profitable and do you have the resources to support this timeline?
A good starting point in your opportunity screening research is to begin learning about the demographics of the market you are targeting (your target market). Demographics are statistical factors of a population, such as race, age, and gender.
The government collects census data demographics,14 which can provide a snapshot of the population in your city or town. Census data include the total population, a breakdown of the population by age, gender, race, and income, and some other useful data.
LINK TO LEARNING
The US Census website and your local chamber of commerce can help you learn more about the demographics of your target market or region.
For example, if you were considering opening a new ice cream store with unique flavors preferred by children, census data could tell you the number of children living in the area, the ratio of boys to girls, their ages, and the general income levels of the families in town. The census data would help you determine the size of the market and potential target market, local market growth, income levels, and key demographics that might fit the potential customer profile. Of course, there is other information you might want to collect, such as the percentage of the population that had lactose intolerance. If you found that a significant portion of your market was lactose intolerant, this could be your identified opportunity: You could create a lactose-free ice cream store or expand with a variety of lactose-free flavors. The census data also help identify where to locate your entrepreneurial venture. For example, if your lactose-free ice cream was expensive because of the necessary ingredients, you would not want to open your store in a low-income area.
There is a vast amount of data and information available through the Internet that can support your success in making informed decisions as you explore the feasibility of opening a successful venture. Or you can purchase more detailed consumer data through providers such as Claritas Research, which gathers information on demographics, consumer lifestyles, attitudes, and behaviors (https://claritas360.claritas.com/myb...egments/?ID=70). For many small business startups that cannot afford sophisticated research data, the entrepreneur will probably have to rely on census data along with information that the local economic development council is able to provide.
T-Shirt Startup
Create your own t-shirt line to target your classmates.
• What would be the theme?
• How much would you charge?
• Where would you sell the shirts?
• What are the expected sales of the business?
• What are the resources needed to get started?
After analyzing demographic data, the entrepreneur can then develop and conduct some basic research, which could range from observing customers to shopping at potential competitors. Entrepreneurs can also uncover business opportunities by asking questions of, and listening to, their customers, if they are working within the industry or looking for new entrepreneurial opportunities with a similar target market. Sometimes an easy and inexpensive customer survey can uncover problems and opportunities. Entrepreneurs can also gather information using their social media accounts and customer sales records.
For example, imagine a men’s clothing store in Denver that maintained a detailed customer database that they used primarily to order the colors and sizes their customers were most likely to purchase. A marketing consultant begins researching customer data and finds a number of former customers who had not shopped at the store for a year or more. The consultant uncovers some lapses in service that had cost the store thousands of dollars in sales. Store management, working with the information from the consultant, develops a direct marketing campaign that helps bring back former customers and adds new customers, resulting in a substantial sales increase.
The lesson here is that research is important at all stages of the business—before you start your business and consistently thereafter. Markets change as new people move in or out of an area, styles and preferences change over time, and new technology can radically impact what customers want to buy. We all know of businesses like Blockbuster or Xerox that ignored evolving technology, to the detriment of their success. Constantly tracking changes in the external environment and competitive arena is an ongoing activity that supports the continued success of the venture.
A popular tool for market analysis is a product from Claritas Research called Potential Rating Index for Zip Markets (PRIZM), which characterizes census data according to certain lifestyle traits, even down to the neighborhood level. As an example, let’s see how PRIZM can help us better understand the consumer market of a small town in Massachusetts. Oxford, Massachusetts (zip code 01540), has a population of 11,653, with slightly more half being female; a median income of \$70,444; and a median age of 42.3 years. PRIZM data give us a better understanding of consumers than census data do in Oxford by examining the five dominant lifestyle segments from within PRIZM’s sixty-six segments. The PRIZM segments are based on socioeconomic rank determined by characteristics such as income, education, occupation, and home value. A thorough analysis of available data could suggest the most likely products and sources consumers in this zip code market would likely purchase.
Entrepreneurs might also obtain data from economic development agencies, the local chamber of commerce, the state small business development center, or industry associations. Of course, lots of data can be found with a good search on your computer. Your university reference librarian can tell you what resources they have available and which resources would best fit your research question(s) and area of focus for your idea.
Elon Musk’s SpaceX
There have been many instances in which products have been promised but fail in their implementation. Space travel—think Elon Musk’s venture SpaceX (Figure 5.5)—is an example of a bold concept that is still in the feasibility phase. Is it even possible to send humans to Mars? This is an extreme but interesting example for considering product feasibility.
Another application of the SpaceX technology is to develop satellite-based Internet access that can provide service to billions of people who do not already have Internet service.15 However, the project will require new satellite networks, and it may take twenty years to fully develop.
• What short-term and long-term considerations are necessary in the project?
• As the concept will take twenty years of satellite development, how can technological changes be incorporated into the development of the idea?
• Given the description of an entrepreneurial opportunity, does this idea fit that definition
What should you do if your idea does not fit these criteria—significant market demand, market structure and size, and margins and resources—and your passion to develop the idea into an opportunity and new venture is still strong? This is also part of the entrepreneurial process. You, as the lead entrepreneur, are charged with the task of identifying the obstacles to turning your idea into an opportunity and what actions are necessary to overcome these. This could mean adjusting the idea, adding new features, or even removing some features. Adding new features should focus on increasing the value or benefit offered by the product or service, or creating a tighter alignment with the needs of the target market. Removing features could decrease the production costs or even the complexity in using the product.
As part of your research to verify whether your idea is truly an entrepreneurial opportunity, researching your state’s laws and regulations is essential. Conduct an Internet search for your state’s business regulations applicable to your business. You will need to comply with these laws, as well as purchase any licenses and permits necessary for your business. You should also check with your local or county government for additional local regulations, including zoning and signage laws. Remember that laws vary by state, so what is legal in one state may not be legal in another, or there might be stricter regulations. For emerging industries, the regulations and laws can fluctuate as industries evolve. This is especially true for emerging industries such as the sale and distribution of medical marijuana.
Getting a License or Permit to Start a Business
When starting a business, be sure that you have all the required licenses and permits, keeping in mind that you may need licenses from federal, state, county, and local government agencies. You can start with the SBA website at https://www.sba.gov/business-guide/l...ction-header-0. Another helpful resource is Fundera, an online financial resource that provides information about obtaining business licenses in all fifty states and links to essential government organizations for each state: https://www.fundera.com/blog/business-license. And try nav.com as well: https://www.nav.com/blog/266-busines...by-state-5008/.
States regulate a larger number of business activities than the federal government. Business activities that are regulated locally include auctions, construction, dry cleaning, farming, plumbing, restaurants, retail, and vending.
• Select a business in a regulated industry and research what would be needed to start the venture in a specific locale.
Many estimates indicate that half of all new businesses will no longer exist within the first five years, but good research can help you avoid your business becoming a statistic.16 On the surface, this fact can be daunting. However, there are many reasons why a business no longer exists that can reflect a positive outcome, such as the sale of a business or a merger with another business. Another example is when an entrepreneur intentionally starts a venture knowing that there is a short-term timeline for success, with the expectation that new technology will replace the gap that the venture originally filled. Most entrepreneurs are not big risk-takers but understand that there are no guarantees in starting a new business venture. Instead, entrepreneurs tend to take calculated business risks based on the best research they can gather. At some point, however, the entrepreneur recognizes that despite all the good research they have gathered, they still need to take a leap of faith when starting their new venture.
Why Small Businesses Fail
Why do half or more of new small businesses no longer exist after the first five years? In many cases, it is failure of the business. The Small Business Institute at Thomas College in Maine has cited factors in Table 5.1 as the most common reasons for small business failures. Many business development agencies have compiled similar lists.
Table 5.1.1: Ten Reasons for Small Business Failure. Understanding some of the factors that lead to business failure can help you be aware of those as you research your idea and opportunity.
Reason Description
Low sales Entrepreneurs may have overestimated sales, assuming they could take sales away from established competitors.
Lack of experience Running a business is hard, and a new business can be especially challenging, as it is difficult to prepare adequately for the unexpected.
Insufficient capital When calculating how much money you will need to start your new business venture, be sure to account for the time it will take before your business breaks even and be sure also to allow for some contingency funds for when the unexpected happens.
Poor location For some types of businesses, location is critical. Of course, location may be less important for a home-based business and not at all important for an Internet business.
Poor inventory management Too much inventory results in the business becoming cash-strapped and unable to buy advertising or other important goods and services.
Overinvestment in fixed assets Especially when starting a business, it is usually less expensive to lease or purchase used equipment, thereby saving cash for meeting operational expenses.
Poor credit arrangement management Start your venture small and limit the amount of money you need to borrow. Work with your banker from the beginning by sharing your business plan and vision for the business with the banker and, most important, show that you are proactive in planning for when you will need to borrow money.
Personal use of business funds The owner should pay him/herself a minimal salary and not dip into business funds. If the business has done well, the owner will earn additional funds at the end of the year.
Unexpected growth Surprisingly, some businesses fail because the business owner cannot manage growth. Growing a new venture, especially if the growth is at a higher rate than expected, can create surprising challenges. For example, if creating a product, you need to consider the capacity of the factory where you are producing the product. If you are at 100 percent capacity and your orders increase, you will need to think about what actions can support this increase in demand. If you cannot meet the demand, you will have unhappy customers and negative publicity that will reflect negatively on your leadership and managerial skills. Your lack of planning for this surge in sales may open opportunities for someone else to start a competing business.
Competition Many small business owners underestimate their competition. Remember, if there is money to be made, there will be competition! Larger competitors can beat you every day of the week on price, so find another way to challenge competitors.
• Given the preceding reasons for small business failure, what can be done to head off such failure?
• Why is it necessary to assemble a team of professional advisors to address financial, personnel, legal, accounting, and other business issues?
• Why is it vital to identify suppliers and personnel to be able to provide a product or service?
• What factors are important when considering whether a product should be manufactured internally or outsourced to a third party?
WHAT CAN YOU DO?
Let us analyze, as an example, opportunity recognition displayed by a company called Sweet Beginnings. Eddie Griffin, Kevin Greenwood, and Tiffany Chen were all residents of Chicago who were seeking jobs and a fresh start on life after serving time in prison. They wanted a chance to rebuild their lives and the ability to support themselves financially. Unfortunately, the odds were against them in their North Lawndale community: There was a 40 percent unemployment rate, 57 percent of residents had criminal histories, the average annual income was only \$25,000, and the area was known for drugs, sex workers, and gangs. Statistically, they were destined to return to the criminal justice system.
But fate intervened in the form of Brenda Palms Barber, who knew all of these statistics. Palms Barber was the Executive Director of the North Lawndale Employment Network (LEN). When employers refused to hire Griffin, Greenwood, and Chen, whom she had coached, she researched what it would take to open various businesses, including a temp agency, a landscaping company, and a delivery service, with the intent to offer employment to LEN clients. A recommendation from a board member’s connection led her to consider, of all things, raising bees. It was not until she learned that the ins and outs of the apiary profession are passed on by word of mouth that she felt it was ideal for her clients who often faced learning challenges due to limited academic experience.
In 2005, Palms Barber founded Sweet Beginnings, a social enterprise that employs former inmates and teaches them job skills by running an apiary business directly in the heart of North Lawndale. The Sweet Beginnings brand, Bee Love (shown in Figure 5.6), sells honey and honey-infused skincare products in airports, hotels, and supermarkets, including Whole Foods. Palms Barber recognized that the skills her potential employees learned in the streets were transferrable to running and managing the business.17,18,19
Palms Barber also realized that a product gap existed between customer needs and products offered. She identified the niche market of customers who wanted all-natural skin care products and liked the idea of purchasing them from a social enterprise. Bee Love positioned itself for success as an appealing, high-end natural product to environmentally conscious consumers willing to pay a premium for it.
Palms Barber recognized an opportunity when she identified the societal problem of employment for people who had experienced incarceration. In seeking solutions to this problem, she encountered roadblocks from employers’ resistance to hiring ex-prison inmates. She then researched other possible solutions including business startups. The idea of raising bees at first seemed an unusual solution to the problem of employment for her unique clients. In her due diligence, she identified a gap between customer preferences for all-natural skin care products and currently available offerings. Combining these ideas resulted in the opening of Bee Love. The fits between the clientele of ex-inmates, apiary, and skin care products supported the opening of this unique venture. Exploring the gaps was part of the process of finding the right solution and realizing that the idea of starting a business to support ex-inmates was an actual opportunity worth developing into a new venture.
Industry Sources of Opportunity
Your research process should include learning everything you can about the industry you plan to enter. This will help you to identify opportunities. An excellent source for industry information is the business reference section of your college library. Industry averages are available in reference books and can also be found at Dun & Bradstreet/Hoovers (www.hoovers.com/industry-analysis.html). The industry analysis contains important information including a brief description of the industry and its characteristics, the competitive landscape, along with products, operations, and technology.
Industry sources reveal knowledge about a specific industry from the perspective of identifying unmet needs or areas for improvement within that industry. For example, Airbnb reshaped the hotel industry by connecting travelers with property owners, so that the travelers could rent the property when the owner was not using it. As Airbnb has grown, the company has made improvements to their offerings in meeting the needs of the traveler’s demand based on property location and in categorizing the supply (the homeowner’s property) for increased efficiency, meeting the needs of both the property owner and the traveler. Researching specific industries from supply and demand perspectives, and noticing unused supplies, as we saw in the Airbnb example, also applies to other industries, such as a sandwich shop. What happens to the unsold bread at the end of the day when there is an excess supply? For Stacy Madison and her pita sandwich food cart, unsold bread presented an opportunity to create pita chips by turning an oversupply into sliced and seasoned pita chips.20
Almost every industry is worth investigating from the perspective of identifying unused resources or extra resources that could be restructured for what are known as a shared economy or a gig economy. A shared economy considers that there are times when an asset in not in use. This down time when the asset is not in use provides an opening for someone else to use that asset, like Airbnb. Other companies, like Uber, Lyft, DoorDash, and Postmates, support the gig economy in aligning a person’s choices for when they want to work with the flow of the work demand. A gig economy is an open or fluid market system with temporary positions made up of independent short-term workers. In these examples, we can see the alignment of supply and demand. The entrepreneurial opportunity happens in providing a platform to assist in connecting the supply and demand.
The tech sector, for example, is continually adapting to change. Items such as 3D printers and mobile devices are making the technology landscape expand. As new products come to market, the need for applications and increased efficiency abound. Several other industries are experiencing growth, including health care and nutrition. According to Global Market Insights (2019), the clinical nutrition market will exceed \$87,530.7 million dollars by 2025.21 This same source reported that this industry was valued at over \$10,562.7 million in 2018, a significant increase over the previous seven years. Drivers in this industry include sedentary lifestyles and related health issues, such as obesity. The result of these societal changes is an increase in clinical nutrition products and home healthcare services. According to business management author, professor, and corporate consultant, Peter Drucker, entrepreneurs excel at finding and developing potential business opportunities created by social, technological, and cultural changes.
Consumer Sources of Opportunity
Consumer sources of opportunities relate to changes in our society, such as new habits or behaviors brought about by exposure to new information. For example, most people feel the pressure related to having less free or unrestricted time. Figure 5.7 tracks the average number of hours worked by country per worker per year.
The International Labour Organization and Bureau of Labor Statistics report that most people in the United States work more than forty hours per week, work significantly more hours per year than workers in many other countries, and are vastly more productive than they were half a century ago.22
Another consideration is tracking where our time is spent during commuting. The average commute time in major cities in the United States is twenty-six minutes, ranging from thirty-eight minutes in New York City to the shortest commute time of twenty minutes in Buffalo, New York.23 When we add in commute times, work hours, and other required activities like sleeping and eating, we find that people struggle to find time for relaxation and personal activities. This large trend leads to recognizing that our working population in the United States and other countries would value novel approaches to completing tasks and making life simpler. For instance, several businesses have looked at making life easier and saving the consumer time, such as Amazon’s One-Click-Checkout, grocery delivery, and product recommendations. Other examples include mobile businesses like pet grooming that come to your home, or diaper delivery services that pick up used diapers, wash and dry them, and return clean diapers to your home. Understanding consumer needs and problems opens the possibility of creating a business that addresses those needs or problems.
Another consumer trend is the demand for affordable housing. One solution involves offering more affordable “tiny homes” that make home ownership more accessible (Figure 5.8).24 As one entrepreneurial opportunity materializes into a new product, spin-off ideas may also arise. The tiny home concept attracted the attention of groups that assist homeless veterans. The Veterans Community Project in Kansas City, has developed a community of forty-nine tiny homes for homeless veterans and the project is so successful that more than 500 cities around the country are building tiny home housing projects for veterans there.25
Vestergaard
Vestergaard has a mission to prevent diseases, especially for vulnerable populations around the world, and to contribute to a healthier and more sustainable planet through good actions.
LifeStraw is a product that Vestergaard launched in 2005, making water safe to drink in areas where clean water is not readily available and redefining beliefs around safe drinking water. LifeStraw uses a combination of a hollow fiber membrane, a filtration process, and in some products, a second filtration process to remove chemicals like chlorine, lead, and pesticides.
• Apply the concepts of supply and demand in describing LifeStraw from the perspective of an entrepreneurial opportunity.
• What are three drivers that support the creation of LifeStraw? | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/05%3A_Identifying_Entrepreneurial_Opportunity/5.02%3A_Researching_Potential_Business_Opportunities.txt |
Learning Objectives
By the end of this section, you will be able to:
• Understand the elements of a competitive analysis
• Describe tools you can use to refine and focus your planning (three circles, SWOT, PEST)
• Recognize social media’s role in saving time and money on research
• Understand how a business model helps determine the feasibility of an opportunity
Conducting a competitive analysis helps you focus your idea and identify your unique selling proposition and competitive advantage.
Competitive Analysis
A competitive analysis should provide the entrepreneur with information about how competitors market their business and ways to penetrate the market by entry through product or service gaps in areas that your competitors do not serve or do not serve well. More importantly, competitive analysis helps the entrepreneur develop a competitive edge that will help create a sustainable revenue stream. For example, a big company like Walmart primarily competes on price. Small companies typically cannot compete on price, since the internal efficiencies and volume sales available to large corporations like Walmart are not available to small companies, but they may be able to compete successfully against Walmart on some other important variable such as better service, better-quality products, or unique buying experiences.
When preparing the competitive analysis, be sure to identify your competitors by product line or service segment. For an entrepreneur, this activity can be difficult when the industry does not yet exist. In the case of Bee Love, Palms Barber didn’t have direct competitors, but she did have related competitors of traditional skin care products. Her unique idea of all-natural, honey-based skin care products created a new market. The competitive analysis might need to focus on substitute products rather than direct competitors. There are two main tools used in analysis of competitors: a competitive analysis grid and the “three circles” approach.
Competitive Analysis Grid
The competitive analysis grid should identify your competitors and include an assessment of the key characteristics of the competitive landscape in your industry, including competitive strengths and weaknesses and key success factors.
Table 5.2 provides an example of what a competitive analysis might look like for a bicycle shop in a tourist locale.
Table 5.3.1: Competitive Analysis Grid for Sid’s Cycle Shop in Branson, Missouri
Key Characteristics Sid’s Cycle City Cycle SpokeMasters Target
Strengths Product knowledge, Repair service Repair service High quality, Top brands Price, hours (open seven days per week and online)
Weaknesses Limited selection Poor customer service Pricing, no entry-level products Low-end quality, no repair facilities
Product Quality Level Low-middle Middle-high High-end Entry-level
Price Point Middle Middle-high High price Lowest price
Location of the business Suburban strip-mall on busy highway Outskirts of town on route 280 Downtown side street Branson Mall
Promotion Weekly ad in local newspaper, some radio and Internet/social media Advertising in local paper during season, Internet/social media Sponsors major bike race in area, Internet, social media Advertises online and in Sunday newspaper (seasonally), Internet)
This competitive analysis grid captures some of the main aspects of competitors within a given market.
As you complete an analysis for your venture’s competitors, identify what contributes to the competitor’s success. In other words, why do people purchase from the company? Some possible reasons include no nearby competitors, lower prices than competitors, a wider variety of products, offering services not offered elsewhere, or branding and marketing that appeals to the target market. Your analysis should inform you of a combination of key success factors within the industry (what it takes to be successful in the industry) and of what your competitors are not offering that is valued by your target market.
Another frequently used tool is a SWOT analysis (strengths, weaknesses, opportunities, and threats), which focuses on analyzing your venture’s potential and builds on the knowledge gained from the competitive analysis grid and the three circles. You will need to identify the strengths your venture will need to support the competitive advantage identified through the competitive analysis tools. The weaknesses can be identified based on your current and foreseeable expectations. For a new venture, the opportunities and threats sections are based on current factors in the external environment that come from your research. In this context, opportunities are facts, changes, or situations within the external environment that could be favorably leveraged for the venture’s success.
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Using SWOT Analysis to Evaluate Entrepreneurial Opportunity
One way to evaluate a business idea is to prepare a SWOT analysis (Figure 5.9). Note that strengths and weaknesses are internal to the entrepreneur, while opportunities and threats are external factors. Strengths are capabilities and advantages of the entrepreneur, including education, experience, and personal or professional contacts. Weaknesses are disadvantages of the entrepreneur, which could include lack of knowledge or experience. Opportunities are positive events that the entrepreneur can develop to his or her benefit. This could include development of new technologies, changes in consumer tastes and preferences, market growth, and new laws and regulations. Threats can be anything that could potentially harm the business or prevent the business from becoming successful such as competition, negative changes in economic conditions, and new laws or regulations.
• If you were starting a new business venture, what strengths would you be able to leverage to help your business be successful?
• Provide some examples of personal or professional weaknesses an entrepreneur might face when starting a new business.
• Discuss three occurring events such as new laws and regulations, changes in consumer tastes and preferences, or developing new technologies that could provide business opportunity for a new business venture.
Another tool that can be used to analyze opportunities and threats section is called PEST analysis (political, economic, societal, technology). In this analysis, we identify issues in each of these categories. Figure 5.10 shows an example of the topics that could be placed in a PEST analysis. The chapter on Fundamentals of Resource Planning discusses this tool as it relates to resource procurement.
Each of these categories should be completed with relevant facts related to your entrepreneurial opportunity. After completing this analysis, you then determine if these facts, or factors, would be placed in the opportunity section or the threat section of the SWOT.
Three Circles Tool
Another tool that can be used in competitive analysis is the three circles tool (Figure 5.11). The goal is to identify competitors’ strengths and competitive advantages with any overlaps among competitors. Then, you would identify values or features not offered by competitors. This gap in value or offered services helps to identify your unique selling proposition and thereby your competitive advantage.
The unique selling proposition is important to the marketing plan and is often used as a slogan. It should also align with the value communicated by the product or company brand. These concepts are different from your venture’s competitive advantage; the competitive advantage describes your venture’s unique benefit, which supports growth of the venture, whereas the unique selling proposition describes the product or service itself, rather than the venture. Although these concepts are different, there should be alignment between the concepts.
For example, Amazon has a competitive advantage in its virtual presence, knowledge of the market, knowledge and application of technology, and knowledge of the industry. Through these competitive advantages, Amazon offers unique combinations of benefits to their customers, such as one-click checkout and algorithm-based recommendations using data mining to track an individual customer’s preferences. Amazon’s unique selling proposition becomes making the purchase as easy and as accurate as possible, whereas their competitive advantage lies in their ability to foresee future advances and act on those predictions, even to the point of shaping the industry.
The competitive advantage results from the analysis of the strengths and unique aspects of a venture, an analysis of the industry, including competitor’s advantages, customer needs, and what the venture provides within this competitive landscape. The unique selling proposition should support the competitive advantage, just as the competitive advantage needs to support the unique selling proposition.
Social Media’s Role in Research
For almost all new business ventures, two key issues related to research are time and money. Large-scale research projects can take months or longer, and cost a significant amount of money. Social media can offer some opportunities to overcome these concerns. Ray Nelson, writing for Social Media Today, reports several ways that social media can provide speedy, low-cost market research: tracking trends in real-time, helping the entrepreneur “learn the language” of their potential customers, discovering unnoticed trends by engaging consumers, and performing market research using a very cost-efficient means.26 If the entrepreneur can perform social media research on his or her own, the cost will primarily be in terms of time. But the time it will take to conduct research through social media platforms such as Facebook or Twitter is usually well spent. This research should include learning the unique selling proposition of competitors, understanding their competitive advantage, and identifying what the customer values, which can be rather difficult. For example, before Amazon recognized that people are busy, were we aware that we wanted faster check-out processes for making purchases? Or were we aware that we wanted the package delivered to our home to be easier to unwrap? And yet, if we asked Amazon shoppers what they value in shopping at Amazon, we will receive answers that support an easier and faster process.
Another technique would be to read through customer reviews on Amazon (or another company related to your entrepreneurial venture) to find out what customers like and don’t like about existing products and brands. You can also develop your own surveys on an app like SurveyMonkey and send them to customers and prospective customers. This usually works when sent to persons who have a strong interest in the product or issue rather than randomly sending out surveys.
Business Models and Feasibility
Part of the analysis in determining if your idea is an actual entrepreneurial opportunity is identifying a feasible business model. A business model is a plan for how the venture will be funded; how the venture creates value for its stakeholders, including customers; how the venture’s offerings are made and distributed to the end users; and how income will be generated through this process. Basically, a business model describes how a venture will create a profit by describing each of these actions. The business model at this stage is composed of four components: the offering, customers, infrastructure, and financial viability (Figure 5.12). A fuller version of the business model is covered in Business Model and Plan.
The offering refers to the product or service you will be selling, the value proposition, and how you will reach and communicate with your target customers. The customer value proposition includes a detailed description of the products and services you will offer to customers, and what benefits (value) the customer will derive from using your product or service. The customer benefit could be the ability to do something more easily, more quickly, or at a lower cost than customers could before. The benefit could also solve a problem no one else has solved.
Writing a Customer Value Proposition
It is helpful to write out your customer value proposition. Then you have a draft to review and tweak as your ideas develop. Here is a general structure you can follow:27
• Start with a headline-style statement that describes how your offering benefits the customer.
• Provide a few sentences or a brief paragraph that explains the offering in more detail. Be sure to make clear what the offering is, who the customer is, and why you are offering it.
• Consider including a bulleted list or checklist highlighting 3–5 features of the product or benefits the customer will receive.
• If possible, add a graphic that engages interest or reinforces the idea.
Customers are the people you will be serving, including potential customers from one or more market segments, or subsections of the market categorized by similar interests or needs. Products seldom appeal to everyone, so the entrepreneur needs to determine, through high-level segmentation and targeting analysis, which segments of the market would make the most sense for the business, and the market environment and dynamics. Some products might appeal to market segments based on age or income, whereas other products might appeal to customers based on their lifestyle. A sign of a potential market opportunity is when a certain market is experiencing rapid growth. This could be a city with a fast-growing population, or it could be a style or consumer trend that is really taking off. The chapter on Entrepreneurial Marketing and Sales goes into more detail about these topics.
Infrastructure refers to all the resources the entrepreneur will need to launch and sustain the business venture. These include people, products, facilities, technology, suppliers, partners, and finances, all of which the entrepreneur must have to fulfill the customer value proposition.
Financial viability relates to the long-term financial sustainability of an organization to fulfill its mission. This goes back to our definition of an entrepreneurial opportunity. Knowing that the venture solves a sizable and significant problem that the target market is willing to purchase is a key piece in determining financial viability. This category also addresses how the venture will create profits.
For example, would a subscription-based business model fit the target market and venture’s success? Currently, we see a significant growth in startups offering subscription services. What are the benefits to this sales method? For the venture, this model increases upfront cash to support the growth of the venture, especially when customers pay a year in advance for products that will be delivered over the subsequent twelve months. Receiving the payment prior to completing the sales provides the venture with operating cash to support current and future growth. The benefit to the customer in this situation is fewer transactions. The customer knows that the payment covers the next twelve months’ worth of benefits (the received product or service) with no further purchases until the subscription runs out.
Another choice involves deciding whether to have a physical location, a virtual location, or both. Financial viability means exploring the benefits and drawbacks of various methods in creating your business model.
Researching Target Markets with Census Data
Practice conducting research by going to www.census.gov and two other sources to identify a specific target market for a product that interests you. Include the target market’s:
• Disposable income. You might ask whether the target market has sufficient disposable income to purchase this product.
• Demographics
• Psychographics (the combination of buying personality behaviors and demographics)
• How you as the entrepreneur could reach this target market.
When you have a business idea that you have been researching and find that there is a large enough market that has a need that your idea meets, that this target market has the willingness and ability to satisfy the need through purchasing the provided solution, that you have access to the necessary resources to build an infrastructure for your business, that you have the right mix of products and services with a sound value proposition, and that you can secure funding, you have a real opportunity. This chapter has introduced you to all of these concepts. Further chapters delve into them in more depth. | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/05%3A_Identifying_Entrepreneurial_Opportunity/5.03%3A_Competitive_Analysis.txt |
business model
plan for how venture will be funded; how the venture creates value for its stakeholders, including customers; how the venture’s offerings are made and distributed to the end users; and the how income will be generated through this process
competitive advantage
describes your venture’s unique benefits that poise it for growth
creative destruction
theory developed by Joseph Schumpeter stating that entrepreneurial innovation is the disruptive force that creates and sustains economic growth, though in the process, it destroys established companies and disrupts employment
customers
people the business will be serving, including potential customers from one or more market segments
demand
need or desire for the outputs, the product or services
demographics
statistical factors of a population or group, such as information about age, gender, income, race, or ethnicity
entrepreneurial opportunity
point at which identifiable consumer demand meets the feasibility of satisfying the requested product or service and meets the following conditions: significant market demand, significant market structure and size, significant margins, and resources to support the venture’s success
financial viability
long-term financial sustainability of an organization to fulfill its mission
gig economy
market system in which independent contractors fill a variety of positions
infrastructure
all resources the entrepreneur will need in order to launch and sustain a business venture
offering
actual product or service, its value proposition, and how you will reach and communicate with your target customers
opportunity screening
process used to evaluate innovative product ideas, strategies, and marketing trends, focusing on financial resources, skills of the entrepreneurial team, and competition
primary research
research that involves gathering new data
secondary research
research that uses existing data
shared economy
economy in which some assets are not in use, which may present an entrepreneurial opportunity
supply
amount of a product or service produced
SWOT analysis
strategic analytical tool used to help a potential venture or existing company identify its strengths, weaknesses, opportunities, and threats related to business competition
unique selling proposition
marketer’s rationale as to why a product or service is different/better than the competitor’s products
5.05: Summary
5.1 Entrepreneurial Opportunity
Entrepreneurial opportunity exists when consumer demand meets the feasibility of bringing the product or service to market. Joseph Schumpeter, an early scholar of entrepreneurship, identified creative destruction—when innovation is disruptive and creates potential entrepreneurial opportunities. Schumpeter’s focus on economics led him to categorize potential opportunities based on supply, demand, or changes in how technology is used.
Burgeoning entrepreneurs should be engaged with industries of interest to remain informed and aware of opportunities to research. Additionally, they should be attentive to drivers of opportunity, such as emerging funding options, technological advancements, and economic factors.
5.2 Researching Potential Business Opportunities
Researching the viability of your entrepreneurial idea will help you determine whether the venture is currently worth pursuing. Use primary and secondary research to determine whether there is adequate demand, market structure and size, and the needed margins and resources to launch and sustain the enterprise. Entrepreneurs researching options should also be aware of industry and consumer sources of opportunities.
5.3 Competitive Analysis
A competitive analysis helps determine the viability of your idea by considering how feasible it is within a specific competitive landscape. Tools such as a competitive analysis grid, a SWOT analysis, a PEST analysis, and the three circles approach can help you further examine issues and refine your plans.
5.06: Review Questions
1.
What is entrepreneurial opportunity?
2.
What are five methods through which an entrepreneur can create new economic opportunities, according to Joseph Schumpeter?
3.
What are some factors that might indicate it is a good time to start a business?
4.
When should an entrepreneur explore opportunities?
5.
What should a potential entrepreneur research before starting a business?
6.
What kind of information is available in census data and how might that data be useful?
7.
Compare and contrast supply-based opportunities and demand-based opportunities.
8.
How can using a PEST analysis contribute to discovering new patterns of trends for recognizing entrepreneurial opportunities?
9.
What is a SWOT analysis and how is it useful?
10.
What is a unique selling proposition?
11.
What is a business model?
5.07: Discussion Quetions
1.
Explain the difference between an idea and an entrepreneurial opportunity. Why is it important to recognize if your idea is truly an entrepreneurial opportunity or only an idea?
2.
Is now a good time to start a business? Why or why not?
3.
If you were thinking about starting a clothing store for teens and young women in your hometown, what census information do you think would be useful to you?
4.
What new patterns or behaviors have you noticed within your society or the country’s society?
5.
What unused resources are present in your own life that could be translated into a shared economy idea for a new venture?
6.
What spin-off ideas can you think of that support a gig economy? For example, what services or products might gig employees value or gig employers value?
7.
What are some of the reasons for business failures? If you were starting a business, what are some actions you could take to increase your potential for success?
8.
Many entrepreneurs like Chris Johnson, who invented the ramen noodle cooker and Palms Barber had ordinary problems they were trying to solve. What are some examples of ordinary problems you could solve if you could invent a product?
9.
How do social enterprises like Bee Love help the community? What problem was Palms Barber trying to solve? What problems did the company end up solving? | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/05%3A_Identifying_Entrepreneurial_Opportunity/5.04%3A_Key_Terms.txt |
1.
Mandy Tillman was a high school student who lived in a rural area of Oklahoma. Mandy was only fourteen years old but wanted to make some extra money for her family’s trip to the Grand Canyon the following summer. While shopping with her parents, she noticed there was only one place in town to buy flats with flowers and vegetables for spring planting, and there was not much of a selection. Mandy made a note of the various types of plants and flowers the store sold and how much they sold for.
When Mandy got home from shopping with her parents, she went online to see how much the seeds and equipment would cost. Her parents liked the idea of Mandy earning some money of her own to spend on vacation and made a large area in the basement available for her to start her plants.
1. What else should Mandy know about this business before getting started?
2. What else do you think Mandy needs to start this business?
3. Do you see any potential problems with this business idea?
4. What are some ways Mandy can sell her plants?
5. Is this a business idea or an entrepreneurial opportunity?
2.
Research the eyeglass company Warby Parker.
1. What is Warby Parker’s business model?
2. What is the value proposition offered by Warby Parker?
3. Describe Warby Parker’s target market? What resources did you use to identify their target market?
4. If Warby Parker did not exist and you decided that you wanted to open a direct to consumer eyeglass company, what would be the top five factors you would research to determine if your idea was truly an entrepreneurial opportunity?
3.
Travis and Katelyn loved backpacking and had hiked the Appalachian Trail twice. Although they had been backpacking for several years, each time they went out on the trail, they learned something new. Almost every backpacker they met was quick to offer a good tip on the best clothing or equipment for the trail. Travis and Katelyn decided to start a backpacker’s blog and sell advertising space to manufacturers and retailers of backpacking gear.
1. If you were launching a company to help back packers trek through the wilderness, what products would you provide and what would be their unique selling propositions?
2. What benefit would you build into your website that would attract backpackers to your website? Consider how you would distinguish your website from competitor websites.
3. Using PEST around your knowledge of backpacking and interest in starting a business related to backpacking, identify one fact for each of the PEST categories that could be useful in identifying new information or patterns to support this business.
4. How would you change your business model based on your answers to the previous question?
5.09: Suggested Resources
American Fact Finder (market research): http://factfinder2.census.gov/main.html
FedStats (statistics from more than 100 federal agencies): https://www.usa.gov/statistics
FindLaw Small Business Center (business forms): https://smallbusiness.findlaw.com/
National Federation of Independent Business: https://www.nfib.com/business-resources
The Small Business National Center: https://sites.google.com/a/uca.edu/sbanc/home
The U.S. Small Business Administration (SBA): www.sba.gov
Top Franchises of 2019: https://www.entrepreneur.com/franchise500/2019
U.S. patent and Trademark Office: https://www.uspto.gov/
General Business Statistics: https://www.census.gov/eos/www/naics/, http://www.census.gov/library/public...tab/131ed.html
Economic Indicators: https://www.bls.gov/cpi/, bea.gov
Employment Statistics: https://stats.bls.gov/bls/employment.htm
Income Statistics: https://www.bls.gov/cps/earnings.htm, https://www.bls.gov/data/#employment
Money and Interest Rates: https://www.federalreserve.gov/releases/h15/, https://www.federalreserve.gov/data.htm
Production and Sales Statistics: https://www.bea.gov/data/consumer-spending/main,
Statistics of specific Industries: https://www.census.gov/eos/www/naics/, https://www.census.gov/programs-surveys/susb.html
https://www.sba.gov/business-guide/p...ction-header-5 | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/05%3A_Identifying_Entrepreneurial_Opportunity/5.08%3A_Case_Questions.txt |
Portions of the material in this section are based on original work by Geoffrey Graybeal and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-...repreneurship/.
Marah Lidey and Naomi Hirabayashi met when they worked together at DoSomething.org, a youth-oriented global nonprofit organization. They considered each other aspirational peers—accessible friends they looked up to and leaned on. While working together, they got the idea to turn the support they gave each other into a product idea: an inspirational platform that would send users a motivational text message each day. In 2015, Hirabayashi and Lidey began to focus on turning their idea into a reality. They conducted a test with seventy individuals before publicly releasing Shine in beta in October 2015. They formally left DoSomething.Org in April 2016 and their startup venture, Shine, was born.
The problem Shine tackles is that “self-help is broken” and its value proposition addresses in part what is known as “the confidence gap,” often cited as a barrier that holds women back when it comes to advancing in their careers, raising money, investing, and planning retirement. Shine has four pillars it is built to address: mental health, confidence, daily happiness, and productivity. As of 2018, the Shine community had two million users from 189 countries. What began as a motivational text message service has since evolved to include an app and additional services such as Shine Talks and audio challenges.
Hirabayashi and Lidey recognized a need—or an entrepreneurial opportunity. You learned about identifying opportunities in the chapter on Identifying Entrepreneurial Opportunity. This chapter will explore what happens next—the problem solving and need recognition techniques that entrepreneurs employ to carry the idea forward, and to solve issues that arise as the enterprise advances. Problem solving is essential to the genesis of entrepreneurship. At the same time, problem-solving techniques can be used in management and in an individual’s everyday personal life.
6.01: Problem Solving to Find Entrepreneurial Solutions
Learning Objectives
By the end of this section, you will be able to:
• Define problem solving in the context of entrepreneurship
• Describe and compare the adaptive model and the innovative model of problem solving
• Identify the skills entrepreneurs need for effective problem solving
• Identify types of problem solvers
As you’ve learned, entrepreneurs often visualize an opportunity gap, a gap between what exists and what could exist, as Hirabayashi and Lidey did with Shine. Entrepreneurial problem solving is the process of using innovation and creative solutions to close that gap by resolving societal, business, or technological problems. Sometimes, personal problems can lead to entrepreneurial opportunities if validated in the market. The entrepreneur visualizes the prospect of filling the gap with an innovative solution that might entail the revision of a product or the creation of an entirely new product. In any case, the entrepreneur approaches the problem-solving process in various ways. This chapter is more about problem solving as it pertains to the entrepreneur’s thought process and approach rather than on problem solving in the sense of opportunity recognition and filling those gaps with new products.
For example, as we read in Identifying Entrepreneurial Opportunity, Sara Blakely (as shown in Figure 6.2) saw a need for body contouring and smoothing undergarments one day in the late 1990s when she was getting dressed for a party and couldn’t find what she needed to give her a silhouette she’d be pleased with in a pair of slacks. She saw a problem: a market need. But her problem-solving efforts are what drove her to turn her solution (Spanx undergarments) into a viable product. Those efforts came from her self-admitted can-do attitude: “It’s really important to be resourceful and scrappy—a glass half-full mindset.”1 Her efforts at creating a new undergarment met resistance with hosiery executives, most of whom were male and out of touch with their female consumers. The hosiery owner who decided to help Blakely initially passed on the idea until running it by his daughters and realizing she was on to something. That something became Spanx, and today, Blakely is a successful entrepreneur.2
Before getting into the heart of this chapter, we need to make a distinction: Decision making is different from problem solving. A decision is needed to continue or smooth a process affecting the operation of a firm. It can be intuitive or might require research and a long period of consideration. Problem solving, however, is more direct. It entails the solution of some problem where a gap exists between a current state and a desired state. Entrepreneurs are problem solvers who offer solutions using creativity or innovative ventures that exploit opportunities. This chapter focuses on different approaches to problem solving and need recognition that help potential entrepreneurs come up with ideas and refine those ideas.
Two Problem Solving Models: Adaptive and Innovative
There are two prominent established problem-solving models: adaptive and innovative. A renowned British psychologist, Michael Kirton, developed the Kirton Adaption-Innovation (KAI) Inventory to measure an individual’s style of problem solving.3 Problem-solving preferences are dependent on the personality characteristics of originality, conformity, and efficiency, according to Kirton. The KAI inventory identifies an individual’s problem-solving approach by measuring agreement with statements that align with characteristics, such as the ability to produce many novel ideas, to follow rules and get along in groups, and to systematically orient daily behavior. The results categorize an individual as an innovator or an adaptor. Innovators are highly original, do not like to conform, and value efficiency less than adaptors.
The first and more conservative approach an entrepreneur may use to solve problems is the adaptive model. The adaptive model seeks solutions for problems in ways that are tested and known to be effective. An adaptive model accepts the problem definition and is concerned with resolving problems rather than finding them. This approach seeks greater efficiency while aiming at continuity and stability. The second and more creative approach is the innovative model of entrepreneurial problem solving, which uses techniques that are unknown to the market and that bring advantage to an organization. An innovative problem-solving style challenges the problem definition, discovers problems and avenues for their solutions, and questions existing assumptions—in a nutshell, it does things differently. It uses outside-the-box thinking and searches for novel solutions. Novelty is a shared trait of creative entrepreneurship, and it’s why entrepreneurs gravitate toward this method of problem solving. According to Dr. Shaun M. Powell, a senior lecturer at the University of Wollongong, Australia: “Creative entrepreneurs are notable for a distinctive management style that is based on intuition, informality and rapid decision making, whereas the more conventional thinking styles are not in accord with the unique attributes of creative entrepreneurs.”4 This way of problem solving doesn’t alter an existing product. It is the creation of something entirely new.
For example, healthcare facilities have long been known as a source of methicillin-resistant Staphylococcus aureus (MRSA), a deadly infection that can have long-term effects on patients. Vital Vio, led by Colleen Costello, has developed white light technology that effectively disinfects healthcare facilities by targeting a molecule specific to bacteria. The light, safe to humans, can burn constantly to kill regenerative bacteria. An adaptive problem-solving model would seek to minimize harm of MRSA within a hospital—to respond to it—whereas the Vital Vio is an entirely new technique that seeks to eliminate it. Adaptive solutions to MRSA include established processes and protocols for prevention, such as having doctors, nurses, and other healthcare providers clean their hands with soap and water, or an alcohol-based hand rub before and after patient care, testing patients to see if they have MRSA on their skin, cleaning hospital rooms and medical equipment, and washing and drying clothes and bed linens in the warmest recommended temperatures.5
LINK TO LEARNING
Visit Inc. Magazine for support and advice for up-and-coming startups to learn more. Examples of how “Dorm Room” entrepreneurs spot and pursue opportunities are shared along with tips and advice for making your startup a success.
Problem-Solving Skills
While identifying problems is a necessary part of the origin of the entrepreneurial process, managing problems is an entirely different aspect once a venture is off the ground and running. An entrepreneur does not have the luxury of avoiding problems and is often responsible for all problem solving in a startup or other form of business. There are certain skills that entrepreneurs possess that make them particularly good problem solvers. Let’s examine each skill (shown in Figure 6.3) .
Critical Thinking
Critical thinking is the complex analysis of a problem or issue with the goal of solving the problem or making a decision. The entrepreneur analyzes and peels away the layers of a problem to find the core of an issue facing a business. The entrepreneur focuses on the heart of the problem and responds reasonably and openly to suggestions for solving it. Critical thinking is not only important for developing entrepreneurial ideas: it is a sought-after asset in education and employment. Entrepreneur Rebecca Kantar dropped out of Harvard in 2015 to found the tech startup Imbellus, which aims to replace standardized college admissions tests like the SAT with interactive scenarios that test critical-thinking skills. Many standardized tests may include multiple choice questions asking for the answer to a straightforward knowledge question or math problem. Kantar seeks to create tests that are more concerned with the analytic ability and reasoning that goes into the process of solving the problem. Imbellus says it aims to test “how people think,” not just what they know. The platform, which has not yet launched, will use simulations for its user assessments.6
LINK TO LEARNING
Read more about problem solving and EnterpriseWorks/Vita’s story at Harvard Business Review.
Communication
Communication skills, the ability to communicate messages effectively to an intended recipient, are the skills entrepreneurs use to pool resources for the purposes of investigating solutions leading to innovative problem solving and competitive advantage. Good communication allows for the free association of ideas between entrepreneurs and businesses. It can illustrate a problem area or a shared vision, and seeks stakeholder buy-in from various constituencies. Networking and communication within an industry allow the entrepreneur to recognize the position of an enterprise in the market and work toward verbalizing solutions that move an organization beyond its current state. By “verbalizing,” we mean communication from and with the company/entity. Internal communications include company emails, newsletters, presentations, and reports that can set strategic goals and objectives, and report on what has been accomplished and what goals and objectives remain, so that employees within an organization are knowledgeable and can work on solving problems that remain within the organization. External communications could include press releases, blogs and websites, social media, public speeches, and presentations that explain the company’s solutions to problems. They could also be investor pitches complete with business plans and financial projections.
Ideation exercises, such as brainstorming sessions (discussed in Creativity, Innovation, and Invention, are good communication tools that entrepreneurs can use to generate solutions to problems. Another such tool is a hackathon—an event, usually hosted by a tech company or organization, which brings together programmers and workers with other degrees of specialization within the company, community, or organization to collaborate on a project over a short period of time. These can last from twenty-four hours to a few days over a weekend. A hackathon can be an internal company-wide initiative or an external event that brings community participants together. A business model canvas, which is covered in Business Model and Plan and other activities outlined in other chapters can be used internally or externally to identify problems and work toward creating a viable solution.
Networking is an important manifestation of useful communication. What better method is there of presenting one’s concept, gaining funding and buy-in, and marketing for the startup than through building a network of individuals willing to support your venture? A network may consist of potential employees, customers, board members, outside advisors, investors, or champions (people who just love your product) with no direct vested interest. Social networks consist of weak ties and strong ties. Sociologist Mark Granovetter studied such networks back in the 1970s, and his findings still apply today, even if we include social media networks in the definition too. Weak ties facilitate flow of information and community organization, he said, whereas strong ties represent strong connections among close friends, family members, and supportive coworkers.7 Strong ties require more work to maintain than weak ties (as illustrated by the strong lines and weak dotted lines in Figure 6.4) and in a business context, they don’t lead to many new opportunities. Weak ties, in contrast, do open doors in that they act as bridges to other weak ties within functional areas or departments that you might not have had access to directly or through strong ties.8
In fact, many young entrepreneurs, including tech entrepreneur Oliver Isaacs, realize college is a great place to begin building teams. Isaacs is the founder of viral opinion network Amirite.com, which is widely credited as the place where Internet memes started and online slang got a foothold.9 Amirite.com consists of a large network of pages and partnerships on Facebook and Instagram that reach 15 million users each month. Isaacs recommends using your alumni network to build a team and customer base for your own venture because you never know if you’re talking to a future employee or partner.
Sharing of ideas and resources is highly valued in the entrepreneurial process. Communication is a vital skill in problem solving because the ability to identify and articulate the problem (define the problem space) is necessary to adequately address a problem. A problem can be too vague or broad or narrow. Thus, communicating the problem is important, as is conveying the solution.
Decisiveness
Decisiveness is as it sounds: the ability to make a quick, effective decision, not letting too much time go by in the process. Entrepreneurs must be productive, even in the face of risk. They often rely on intuition as well as on hard facts in making a choice. They ask what problem needs to be solved, think about solutions, and then consider the means necessary to implement an idea. And the decisions must be informed with research.
For example, as explained in Adam Grant’s book The Originals, the co-founders of Warby Parker, a venture-backed startup focused on the eyewear industry, started their company while they were graduate students. At the time they knew little about the industry, but after conducting some detailed research, they learned that the industry was dominated by one major player—Luxottica. They used this information and other data to refine their strategy and business model (focusing mainly on value, quality, and convenience via an online channel). By the time they decided to launch the business, they had thought through the key details, and they attained rapid early success. Today Warby Parker has over 100 retail stores in the US, is profitable, and is valued at almost \$2 billion.
Decisiveness is the catapult to progress. Amazon founder Jeff Bezos preaches the importance of decisiveness throughout his organization. Bezos believes that decisiveness can even lead to innovation. Bezos advocates for making decisions after obtaining 70 percent of the information you need to do so: “Being wrong may be less costly than you think, whereas being slow is going to be expensive for sure,” Bezos wrote in a 2017 annual letter to stockholders.10
LINK TO LEARNING
Read this LinkedIn blog post on decisiveness to learn more.
Ability to Analyze Data
Data analysis is the process of analyzing data and modeling it into a structure that leads to innovative conclusions. Identifying Entrepreneurial Opportunity covered much of the sources of data that entrepreneurs might seek. But it is one thing to amass information and statistics. It is another to make sense of that data, to use it to fill a market need or forecast a trend to come. Successful founders know how to pose questions about and make meaning out of information. And if they can’t do that themselves, they know how to bring in experts who can.
In addition to public sources of broad data, a business can collect data on customers when they interact with the company on social media or when they visit the company website, especially if they complete a credit card transaction. They can collect their own specific data on their own customers, including location, name, activity, and how they got to the website. Analyzing these data will give the entrepreneur a better idea about the interested audience’s demographic.
In entrepreneurship, analyzing data can help with opportunity recognition, creation, and assessment by analyzing data in a variety of ways. Entrepreneurs can explore and leverage different data sources to identify and compare “attractive” opportunities, since such analyses can describe what has happened, why it happened, and how likely it is to happen again in the future. In business in general, analytics is used to help managers/entrepreneurs gain improved insight about their business operations/emerging ventures and make better, fact-based decisions.
Analytics can be descriptive, predictive, or prescriptive. Descriptive analytics involves understanding what has happened and what is happening; predictive analytics uses data from past performance to estimate future performance; and prescriptive analytics uses the results of descriptive and predictive analytics to make decisions. Data analysis can be applied to manage customer relations, inform financial and marketing activities, make pricing decisions, manage the supply chain, and plan for human resource needs, among other functions of a venture. In addition to statistical analysis, quantitative methods, and computer models to aid decision-making, companies are also increasingly using artificial intelligence algorithms to analyze data and make quick decisions.
Understanding of Business and Industry
Entrepreneurs need sound understanding of markets and industries. Often times, they are already working in a large organization when they see growth opportunities or inefficiencies in a market. The employee gains a deep understanding of the industry at hand. If the employee considers a possible solution for a problem, this solution might become the basis for a new business.
For example, consider a marketing agency that used traditional marketing for thirty years. This agency had an established clientele. An executive in the organization began studying social media analytics and social media. The executive approached the owner of the business to change processes and begin serving clients through social media, but the owner refused. Clients within the agency began to clamor for exposure on social media. The marketing executive investigated the possibility of building an agency in her locale servicing clients who wish to utilize social media. The marketing executive left the organization and started her own agency (providing, of course, that this is in compliance with any noncompete clauses in her contract). Her competitive advantage was familiarity with both traditional and social media venues. Later, the original agency started floundering because it did not offer social media advertising. Our intrepid executive purchased the agency to gain the clientele and serve those wishing to move away from traditional marketing.
A similar experience occurred for entrepreneur Katie Witkin. After working in traditional marketing roles, the University of Wisconsin-Madison graduate, pictured in Figure 6.5, left agency life behind four years out of college to cofound her own company, AGW Group. In 2009, Witkin had been interning at a music marketing agency that didn’t have a social media department. She knew, both from her time at college and from observing industry trends, that social media was changing the way companies connected with customers. For her own venture, she expanded the focus to all supporting brands to manage all things digital. Today, the cultural and marketing communications agency has fifteen employees and big-name clients ranging from HBO to Red Bull.11
Resourcefulness
Resourcefulness is the ability to discover clever solutions to obstacles. Sherrie Campbell, a psychologist, author, and frequent contributor to Entrepreneur magazine on business topics, put it this way: “There is not a more useful or important trait to possess than resourcefulness in the pursuit of success. Resourcefulness is a mindset, and is especially relevant when the goals you have set are difficult to achieve or you cannot envision a clear path to get to where you desire to go. With a resourcefulness mindset you are driven to find a way. An attitude of resourcefulness inspires out-of-the-box thinking, the generation of new ideas, and the ability to visualize all the possible ways to achieve what you desire. Resourcefulness turns you into a scrappy, inventive and enterprising entrepreneur. It places you a cut above the rest.”12
Entrepreneurs start thinking about a business venture or startup by talking to people and procuring experts to help create, fund, and begin a business. Entrepreneurs are risk takers, passionate about new endeavors. If they don’t have a college degree or a great deal of business experience, they understand there are many resources available to support them in the endeavor, such as the Service Corps of Retired Executives (SCORE) and the Small Business Administration (SBA). There are many sources available to fund the business with little or no debt and options, as you will see in the chapter on Entrepreneurial Finance and Accounting. The entrepreneur follows a vision and researches opportunities to move toward a dream.
For example, in the late 1990s, Bill McBean and his business partner Billy Sterett had an opportunity to buy an underperforming auto dealership that would make their company the dominant one in the market. Neither wanting to take cash from other ventures nor wanting to borrow more money and tie themselves to more debt, the entrepreneurs were resourceful by finding another path forward to obtaining the money necessary for the acquisition they both coveted. They changed banks and renegotiated their banking payback requirements, lowering their interest payments, reducing fees, and lowering their monthly payments, ultimately freeing up a significant amount of cash that allowed them to buy the new company.13
Types of Problem Solvers
Entrepreneurs have an insatiable appetite for problem solving. This drive motivates them to find a resolution when a gap in a product or service occurs. They recognize opportunities and take advantage of them. There are several types of entrepreneurial problem solvers, including self-regulators, theorists, and petitioners.
Self-Regulating Problem Solvers
Self-regulating problem solvers are autonomous and work on their own without external influence. They have the ability to see a problem, visualize a possible solution to the problem, and seek to devise a solution, as Figure 6.6 illustrates. The solution may be a risk, but a self-regulating problem solver will recognize, evaluate, and mitigate the risk. For example, an entrepreneur has programmed a computerized process for a client, but in testing it, finds the program continually falls into a loop, meaning it gets stuck in a cycle and doesn’t progress. Rather than wait for the client to find the problem, the entrepreneur searches the code for the error causing the loop, immediately edits it, and delivers the corrected program to the customer. There is immediate analysis, immediate correction, and immediate implementation. The self-regulating problem solvers’ biggest competitive advantage is the speed with which they recognize and provide solutions to problems.
Theorist Problem Solvers
Theorist problem solvers see a problem and begin to consider a path toward solving the problem using a theory. Theorist problem solvers are process oriented and systematic. While managers may start with a problem and focus on an outcome with little consideration of a means to an end, entrepreneurs may see a problem and begin to build a path with what is known, a theory, toward an outcome. That is, the entrepreneur proceeds through the steps to solve the problem and then builds on the successes, rejects the failures, and works toward the outcome by experimenting and building on known results. At this point, the problem solver may not know the outcome, but a solution will arise as experiments toward a solution occur. Figure 6.7 shows this process.
For example, if we consider Marie Curie as an entrepreneur, Curie worked toward the isolation of an element. As different approaches to isolating the element failed, Curie recorded the failures and attempted other possible solutions. Curie’s failed theories eventually revealed the outcome for the isolation of radium. Like Curie, theorists use considered analysis, considered corrective action, and a considered implementation process. When time is of the essence, entrepreneurs should understand continual experimentation slows the problem-solving process.
Petitioner Problem Solvers
Petitioner problem solvers (Figure 6.8) see a problem and ask others for solution ideas. This entrepreneur likes to consult a person who has “been there and done that.” The petitioner might also prefer to solve the problem in a team environment. Petitioning the entrepreneurial team for input ensures that the entrepreneur is on a consensus-driven path. This type of problem solving takes the longest to complete because the entrepreneur must engage in a democratic process that allows all members on the team to have input. The process involves exploration of alternatives for the ultimate solution. In organizational decision-making, for example, comprehensiveness is a measure of the extent a firm attempts to be inclusive or exhaustive in its decision-making. Comprehensiveness can be gauged by the number of scheduled meetings, the process by which information is sought, the process by which input is obtained from external sources, the number of employees involved, the use of specialized consultants and the functional expertise of the people involved, the years of historical data review, and the assignment of primary responsibility, among other factors. Comprehensive decision-making would be an example of a petitioner problem-solving style, as it seeks input from a vast number of team members.
A charette—a meeting to resolve conflicts and identify solutions—is another example that employs a petitioner problem-solving approach. Often times, a developer of a new project might hold a community charette to aid in the design of a project, hoping to gain approval from elected officials. In the building example, this could consist of the developer and his team of architects, project designers, and people with expertise in the project working alongside community members, business executives, elected officials, or representatives like staff members or citizen-appointed boards like a planning board. Such an activity is representative of a petitioner problem-solving approach, as opposed to a developer representative designing the project with no input from anyone else.
In summary, there is no right or wrong style of problem solving; each problem solver must rely on the instincts that best drive innovation. Further, they must remember that not all problem-solving methods work in every situation. They must be willing to adapt their own preference to the situation to maximize efficiency and ensure they find an effective solution. Attempting to force a problem-solving style may prevent an organization from finding the best solution. While general entrepreneurial problem-solving skills such as critical thinking, decisiveness, communication, and the ability to analyze data will likely be used on a regular basis in your life and entrepreneurial journey, other problem-solving skills and the approach you take will depend on the problem as it arises.
There are a number of resources online that can help analyze your problem-solving abilities. Mindtools.com is one such resource. These are useful to learn your general problem-solving tendencies before being called upon to apply them in a real-world setting. One of the problem-solving techniques available from mindtools.com offers that problems can be addressed from six different perspectives. Called CATWOE, the approach is an acronym for Customers, Actors (people within the organization), Transformative, Worldwide, Owner, and Environment (organizational).
LINK TO LEARNING
Learn more about the CATWOE technique for problem solving. | textbooks/biz/Business/Entrepreneurship/Entrepreneurship_(OpenStax)/06%3A__Problem_Solving_and_Need_Recognition_Techniques/6.00%3A_Prelude_to_Problem_Solving_and_Need_Recognition_Techniques.txt |
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