SCORE Luncheon Remarks

Solidifying a Business Concept
& Opportunity Assessment

Richard DeMartino, Ph.D.
Director, Albert J. Simone Center
for Innovation and Entreprenuership
E. Philip Saunders College of Business

11:45 A.M., Friday, January 19 2009
Oak Hill Country Club

Ideas vs. Opportunities

• A good idea is the first step….
• Most new businesses don’t emerge from a FLASH of brilliance
• Most take many iterations and revisions
• What does the customers want….
• Most business don’t make what they initially set out to make…
• Polaroid Corporation:  started out making products with polarizing light waves….

Ideas vs. Opportunities

• Misunderstanding of what it takes to be successful in a business
• Inventors seem prone to the fallacy
• Psychological ownership to the invention and not the business
• Narrowness of focus
• The focus needs to be on building the business—not just one aspect—the idea

What Drives Opportunities

• Significant opportunities spawned by changes in the circumstances, chaos, confusion, inconsistencies, lags, knowledge and information gaps, etc.
• Solves a problem
• Provides value to the customer

What Drives Significant Opportunities: some examples

• Regulatory Changes (US government)
• Dramatic changes in microprocessor /telecommunications technology
• Fragmented Mom & Pop Industries with little expertise in finance or SOP
• Growth in Service Industries
• Focus on Customer Service
• Many other examples
• Underserved/Unknown Niche Markets
• Increase in Niche Markets due to Globalization

Some Helpful Concepts Associated with Solidifying the Business Concept

Three Big Ideas

• Company Vision
• Value Proposition
• Business Model

Some Confusing Terms

• Value Proposition
• Business Model
• Value Extraction Model
• Value Chain Analysis
• Strategic Competitive Options (how do we compete!?!)
• Core Competencies

“Why Should We Let You Live?”

Value Proposition

• Customer Value Proposition
• Answers – why I should do business with you  - and not the competition
• Value = customer benefit – cost
• Important
• Credible
• Sustainable
• Usually applies to the overall enterprise – but..
• Can be product / platform specific
• Can be industry segment specific
• How about customer specific?

Value Proposition
(3 components)

• The Who (target market) Question
• The Benefits Question
• What are the benefits
• Not Value, but benefits: which is price/performance related
• The Price Question
• Price visa vie the competition

At its core, this is a marketing concept….

Critical Customer Questions

• Who are your customers?
• Why do they do business with you?
• Why don’t they do business with competition?
• What benefits do they enjoy?
• What do they tell others about you?
• What is the probability that they will continue to do business with you?

Defining a Business Model

• Answers the question: “Who are the customers and how do you plan to make money by providing them with value”
• Value Proposition …plus…
• Sustained Profit…
• According to McKinsey Consultant Joan Magretta compelling business models pass two tests:
  
• Test I
• The narrative test:  Can a story be told which describes who your customers are, what they value, and how you will make money providing them value
• Making something that satisfies an unmet need
• Selling something in an innovative way

• Test II
• The numbers test:  Does the business model’s story and assumptions hold up when you put numbers to it.

Value Extraction Model
How do you make money

• Razor and Blades
• Printers
• Napster

Value Chain Analysis

• Value chain-The separation of the business system into a series of value generating activities through which a firm develops competitive advantage

Strategic Options

• Product/service differentiation
• Cost/value
• Focus (Differentiation or Cost Leadership)
• Niche Markets
• Hybrid

Porter Matrix

Core Competencies

• The unique skills and capabilities of a company
• What you do well
• Customer Focus?
• Differentiated products/services?
• Operational efficiency?
• Is it institutionalized?
• Plans in place for continuous improvement?

Strategic Framework

Screening Opportunities

Market and Personal Implications

Screening Opportunities

• Personal Factors
• Fit between the forces
• Is this what the lead entrepreneur wants to do?
• What is the downside?  Can the entrepreneur weather failure?
• What is the entrepreneurs passion?

Screening Opportunities

• Industry and Market Issues
• Market
• Identifies a customer need
• Customers are reachable
• A niche market
• Something that provides value to the customer
• Something that can be defined
• Lower Potential Items
• Not a focused/defined market
• Failure to move beyond—one produce is also a poor indication of market success

Screening Opportunities

• Industry and Market Issues
• Market Structure
• Number of sellers
• Product differentiation (is the product a commodity)
• Conditions of Entry and Exit
• Number of buyers
• There are opportunities with fragmentation
• Boston real-estate example

Screening Opportunities

• Industry and Market Issues
• Market Size
• Large but not too large
• At least $100 million for high growth potential businesses
• Do not want the market to be too large or mature—competition from Fortune 500 Companies is unwanted

Screening Opportunities

• Industry and Market Issues
• Market Capacity
• Under supply is good
• Market Share Attainable
• Would like to attain a 20% market share
• Cost Structure

Screening Opportunities

• Economics/Finance
• Profits after tax
• Time to breakeven and a positive cash flow
• ROI potential
• 25% a year is attractive for investors
• Capital Requirements
• Depends on the Industry/Market
• Internal Rate of Return for Entrepreneurs
• 5 to 10 X initial investment

Screening Opportunities

• Competitive Advantage Issues
• Variable and fixed costs
• Degree of control
• Are suppliers powerful
• Is a competitor dominant
• Entry Barriers