EE3001 Technology Assessment

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EE3001 Technology Assessment

• Hari K Garg
• eleghk_at_nus.edu.sg
• 6874-4542
• E4 06 03

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Outline

• Ideas and beyond
• Products
• Markets
• Financial
• Others
• Acknowledgment A/P Wong Poh Kam, Director CET,
  has kindly granted permission to use his
  materials for putting together this presentation.
  

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The Venturing Process

• The process of attracting, organizing
• and rewarding resources to
• turn an idea into a market reality
• Process involves
• Creating and growing a new enterprise to execute
  the tasks needed to launch and grow a new product
  or service in the market
• Structuring a system for rewarding participants
  who enter at different stages

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Typical Stages in the New Venture Creation
Process (Nesheim, 2000)

• Idea
• Kitchen Table
• Founders commitment
• Pullout from employer
• Business plan creation
• Filling management team
• Raising seed capital
• Closing capital and incorporation
• Finding a home
• Start-Up
• Secondary capital rounds
• Launch first product
• Raise working capital
• IPO or other means of exit

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Key Elements of the Venturing Process
Entrepreneurs Perspective

• Get Idea
• Make Commitment
• Prepare Business Plan
• Raise Capital
• Build Team
• Execute
• Plan Exit

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Getting Started Some FAQs

• Which comes first Whether or what? When?
• Getting advice When, from whom, and how much do
  I reveal?
• What should I know about intellectual property?
• Getting a clean pullout from current employer
• Picking partners who, what role, when, with what
  reward? (co-founders vs. advisors, shareholders
  vs. management, fees, stocks and stock options)
• Plan for business vs. Business plan

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Purpose of Business Plan

• As a plan for action
• As a process for clarifying your thoughts and
  soliciting feedback and advice
• As a document for fund raising, staff recruitment
  and partnership development
• As a statement of intended outcome against which
  actual performance will be judged

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Essence of Business Plan

• Defining your Value Proposition
• Execution Strategy to Realize the Value
  Proposition
• Management Team best positioned to Execute
• Projected Financial Performance
• Resource Requirements to achieve the projected
  results

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Outline of a Business Plan

• Executive Summary
• Customer Need and Business Opportunity
• Market and Competitive Analysis
• Business Strategy and Key Milestones
• Product Development Plan
• Marketing Plan
• Operation Plan
• Management and Key Personnel
• Financial Projection
• Risk Factors and Key Assumptions
• The Proposed Offering

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• 3Cs for Venture Success A Framework for
  Assessing the Viability of Business Venture Idea

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• Defining Value Proposition Understanding the
  Three Cs for New Venture Success
• Creating Value
• Communicating Value
• Capturing Value

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• Value Proposition Specifying the 3Cs
• What Customer Values are you creating?
• With what product and/or service offerings?
• In what ways that give you distinctive
  competitive advantage over others?
• You should be able to define the essence of your
  value proposition in one short sentence or short
  paragraph (the shorter, the better)

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• Creating Value
• What are you offering?
• To which customers?
• What customer problems does it solve?
• What customer needs does it satisfy?
• How much will it cost, Who will pay for it and
  for how much?

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• Communicating Value
• How do you reach your customers, partners and
  financiers?
• How do you capture their attention?
• How do you convince them of the usefulness of
  your product/service and viability of your
  business?
• How do you build trust?

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• Capturing Value
• How strong are the 5 competitive forces you are
  up against?
• Existing Rivals offering similar products
• Potential New Entrants
• Close Substitutes
• Powerful Buyers
• Powerful Suppliers
• What critical factors do you have to counter
  these competitive forces?

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The Five Competitive Forces (Porter, 1985)
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• Creating Value Customer Needs
• Sources of Innovative Ideas

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• Creating Value
• What is your offering?
• What is unique/innovative in your offering?
• To which customers?
• What customer problems does it solve?
• What customer needs does it satisfy?
• How much will it cost, how many will pay for it
  and for how much?

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• An Innovative Business Idea must be translated
  into a Better Offering to some Customers
• What is innovative about your offering?
• Improving Existing Product/Process
• better quality/performance
• reduce cost
• Changing the existing rule of competition
• disruptive technologies
• new business model
• Serving new market segments/customer needs
• Creating a whole new industry
• Creating new market segmentation

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• Opportunities for Business Innovation
• Technological Innovation (product/process)
• Underserved/Inefficient Markets
• Latent or Newly Emerging Customer Needs
• Changing Enabling Conditions (legal, political,
  social, cultural, infrastructural)
• Under-utilized or New Sources of Information

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• Routes to Innovative Business Idea
• Product-focused (Product/service in search of
  improvement)
• Technology-push (Solution in search of a problem)
• Customer-driven (Problem in search of a solution)
• Competitor-targeted (Find and attack competitor
  weaknesses)
• Market anticipation (Bet on new emerging needs)
• Information-leverage (Information in search of
  new uses)

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• Customer-Driven Approach to Business Innovation
• Who is the Customer? How does the Innovation
  solve his Needs or Problems?
• Defining customer value
• Segmenting the market
• Decision on which segments to Focus
• Identifying Lead-User
• But avoid the Christensen Lock-in effect...
• ...and understand the need for Crossing the
  Chasm from lead-user to mass customers

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• Changing the Rule of Competition through
  Disruptive technologies the Abernathy-Clark
  model
• Four Types of technological innovation regular,
  niche, revolutionary, architectural
• Choose a form of innovation that disrupts
  existing competencies of industry incumbents
• Capitalize on the Defender Dilemma of incumbent
  industry leaders

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MAPPING THE IMPACT OF TECHNOLOGICAL CHANGE
disrupt existing/create new linkages
Niche Creation
Architectural
Markets/Customer Linkage
Technology/Production
Conserve/entrench existing competence
disrupt obsolete existing competence
Regular
Revolutionary
conserve/entrench existing linkages
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• Changing the Rule of Competition through New
  Business Model the Meta-intermediary Model
• Unglue the physical and information value chain
  in the existing business model
• Exploit the new information and communications
  technologies (ICT) to glue back the value
  chains with a new navigator that transforms the
  old reach vs. richness trade-off and shifts
  navigator affiliation from seller to buyer,
  dis-intermediating the old navigators in the
  process

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• Anticipating New Market Space
• analyze latent, unarticulated customer needs
• project technological trends and scenarios
• forecast changing enabling conditions (e.g.
  deregulation, demographic trends, diffusion of
  enabling infrastructure, etc.)
• goal is to identify unserved, emerging market
  needs

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• Leveraging information in new ways
• Extract information from existing operational
  information chains
• Apply information to new domains to create new
  businesses
• Overcome imprisonment of information
• Need to manage privacy concerns carefully

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Business InnovationThe Example of American
Airlines

• Computer Reservation System
• Customer loyalty program (Frequent Flyer System)
• Cross-sharing of loyalty programs with other
  hospitality businesses
• Co-Branding with credit cards
• Yield Management System
• Internet Portal for travel (Travelocity)
• Mining of Database on Passengers
• Procurement Portal
• What are the sources and impacts of these
  innovations?

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• Facilitating the Generation of Innovative
  Business Ideas
• Try Multiple Approaches
• Look out for Serendipity
• Promote diversity
• Encourage Creative Tensions
• Iterate through divergence vs. convergence phases

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• Whatever the approaches used to generate
  Innovative Business Ideas,
• need to meet Reality Test
• customer value creation
• value capture against competition
• need iteration to refine idea

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• Capturing Value Market
• Competitive Analysis

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• Capturing Value
• How strong are the 5 competitive forces you are
  up against?
• Existing Rivals offering similar products
• Potential New Entrants
• Close Substitutes
• Powerful Buyers
• Powerful Suppliers
• What critical factors do you have to counter
  these competitive forces?

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• How does your business idea provide Unfair
  Competitive Advantages?
• Establishing First Mover Advantages
• first to recognize opportunity
• speed of execution
• establish dominant design, set de facto standards
• first to critical mass of users
• Erecting Barriers to Entry
• technology/other forms of proprietary
  intellectual capital
• disruptive effects on incumbents
• lock in major customers with high switching cost
• rapid pace of continuous innovation, market
  expansion
• strategic partnership to build largest coalition

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• Sustaining innovative advantage is hard
• First-to-Market is insufficient There is no
  existing competitor does NOT mean there will be
  no competitor in the future
• especially where IP protection is inadequate
• First Mover Disadvantages?
• pioneer gets arrows in the back
• fast followers can learn from mistake of pioneer,
  reap staff training and customer education
  benefits
• potential technological leapfrogging
  opportunities by later entrants
• Supplier/buyer power may block innovation and buy
  time for their own forward/backward integration
  entry

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Positioning against incumbent competitors

• Avoiding direct competition
• Attack blind spot or area of weaknesses of
  incumbents
• Changing the rule of competition
• Build strategic alliances with key partners
• Focus, focus

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• Capturing value from customers
• Working with lead-users
• Betting on small customers with high-growth
  potential
• Multiple Revenue models
• Penetration Pricing vs. Skimming strategy

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• Communicating Value
• Marketing the Venture

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• Communicating Value
• How do you reach your customers, partners and
  financiers?
• How do you capture their attentions?
• How do you convince them of the usefulness of
  your product/service nd viability of your
  business?
• How do you build trust?

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Communicating Value is more than Marketing (as
conventionally defined)

• Marketing of your products/services vs. marketing
  of your venture itself
• New, unproven products or underlying
  technologies/processes, standards
• New, unknown organization
• Will the business last? Can it be trusted?
• Marketing to Customers vs. Gaining Entry into a
  Business Ecological System
• Developing relationships with Buyers, Sellers,
  Competitors, Distributors, Supporting Services,
  Strategic Alliance Partners

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Marketing your products/services

• Marketing creating and keeping customers
• Marketing vs. Selling vs. Business Development
• Sensing Identifying customers, their needs and
  (dis-)satisfaction
• Offering Product positioning (branding, product
  features, pricing, packaging vs. competitive
  offers)
• Selling Reach customers with your offering
  (advertising, promotion, direct vs. channels)
• Fulfillment Get customer orders fulfilled
• Customer Care After Sales Support/Services

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Marketing Strategic Consideration

• Market Segmentation and Choice of Focus
• Targeting Your First Customers
• Promotion, Pricing, Partnership PR to Gain
  Initial Entry
• Anticipating and Countering Competitive Reaction
• Brand Development and Other Entry Barrier
  Building Mechanisms to Defend Position
• Market Growth/Diversification/Internationalization
  Strategy
• Expansion of Partnership, Affiliation and JV
  Strategies to Sustain Growth/Diversification
• Maintaining Exploiting Options for Multiple
  Revenue Models
• Building Market Sensing Mechanisms to Learn and
  Adapt

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Generic Market Growth/Diversification Strategies

• Backward Integration
• Forward Integration
• Product Line Expansion
• Customer Development
• Diversification (combination of the last two)

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Marketing your Venture

• Brand Building
• defining your product positioning
• choose an appropriate name and brand image
• Promoting your Venture
• Targeting your message to the right audience
• PR more important than advertising initially
• Guerrilla marketing methods
• Networking
• Selling your Innovative Edge
• Underdog vs. Establishment
• Innovative attacker vs. Defender
• Educational leadership in promoting the new
  industry

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• Growing your Venture The Bowling Pin Analogy
• first target
• sequencing
• leverage

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• Business Models and Financial Projection

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Quantifying the Attractiveness and Financing
Requirements of the Business

• Key Business Milestones
• Projection of Revenue Growth
• Cost Analysis Projection
• Projection of Profit and Loss
• Cash Flow Analysis
• Projection of Financing Requirements
• Risk/Sensitivity Key Success Factors Analysis

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Financial Projection Process for Start-Up Plan
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Key Business Milestones

• Timeline of deliverables from start-up to exit
• completion of product prototype
• establishment of production facilities, marketing
  channels, partnership, etc.
• product launches
• market entry for each major market
• etc.

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Revenue Projection Model

• Sources of revenue
• customer sales, advertising, licensing fees,
  affiliate programs, etc.
• Base year revenue assumptions
• size of potential market, market share
  captured, unit price, etc.
• Growth assumptions
• total market growth rate, market share change,
  new vs. retained customers, price trend, etc.

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Basis for Revenue Assumptions

• market research (your own, others) on market size
  growth, customer behaviour, purchase
  propensity, price sensitivity etc.
• competitive intelligence on competitor pricing,
  market share, customer base etc.
• benchmark vs. comparable companies and
  industries, why superior performance

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Cost Projection Model

• Product development cost
• RD, patenting, product development, etc.
• Sales and marketing cost
• business development, advertising, promotion,
  sales, etc.
• Production/operation cost
• raw materials/inputs, operations, logistics, etc.
• General Admin Cost
• admin overheads, rentals utilities, etc.

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Basis for Cost Projection Assumptions

• Macro-economic and industry trends affecting cost
  (inflation rate, interest rate, rental rate etc.)
  
• cost engineering estimates, supplier data
• competitive intelligence on cost performance of
  key competitors
• benchmark vs. comparable companies and industry
  averages, why superior performance

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Key Business Ratios

• Conventional Financial Ratios
• Revenue growth rate
• Profitability ratios
• gross margins, ROS, ROA, ROE
• Activity ratios
• AR turnover, collection turnover, inventory
  turnover, etc.
• Debt Liquidity ratios
• Debt to net worth, current ratio, quick ratio,
  etc.
• but Start Ups are often evaluated using other
  Non-conventional performance measures as well

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Non-Conventional Measures (Intellectual
Capital Acquisition)

• Customer capital user base, market leadership,
  brand, customer profile database, etc.
• Innovation capital proprietary
  technology/know-how, patent portfolio
• Process capital difficult to imitate or
  replicate business processes, systems
• Human capital quality of key personnel,
  execution track-record

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Risk/Sensitivity Analysis and Identification of
Key Success Factors

• Key sources of risks and sensitivity of financial
  projection to those risks
• technical performance
• execution delay
• market readiness
• earlier competitive entry
• disruptive technological threats
• financing risk, etc.
• Identification of Key Success Factors
• key drivers of financial performance projection
• key milestones and indicators to monitor

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Common Pitfalls

• Under-estimation of cost
• cost of acquisition of customer often higher than
  assumed
• obsolescence of inventory and equipment
• many hidden costs unanticipated
• Over-optimistic estimation of revenue
• potential market usually lt assumed
• crossing the chasm problem
• new entries, competitor reaction usually gt
  faster price erosion, smaller market share
  captured than assumed
• customer retention (churn) problem
• Inadequate provision against risks

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Financing Requirements

• Capital requirement long term fixed asset
  acquisition working capital
• Fast growth (high burn rate) gt high capital
  requirements
• Capital requirement can be met by
• operating surplus (bootstraps)
• borrowings (bank loans, supplier credits etc.)
• equity investment (founders, external investors)
• Equity capital most important for start-up

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High Tech Start-Up Business Models

• Conventional model fast revenue growth with
  profitability track records for IPO
• Internet Boom model fast customer acquisition
  and market leadership for IPO use market cap to
  grow through acquisition or fast customer growth
  for acquisition by larger firms
• The New Wisdom fast growth with P2P (Path to
  Profitability) for IPO, or fast growth with
  attractive intellectual property for acquisition

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SUMMARY

• People is your most important asset
• Building the Management Team
• Bringing on-board people with experience,
  connection
• At least one person should have a sales/marketing
  background
• Assemblying an Advisory Board
• Choosing Value-Adding Investors
• Angel investors
• Venture Capitalists
• Corporate Investors
• Teaming up with Strategic partners
• Securing Key First Customers
• Leveraging Former Employers

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Idea The Starting Point of It All

• From Idea to Value Proposition
• 100-word summary of idea
• Elaboration/clarification of Idea
• Generation of related Ideas
• Critique of Idea
• Drafting of Value Proposition
• Make Elevator Pitch

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• Summing Up Crystalizing your
• Value Proposition

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• Condensing your Idea into Value Proposition
• The product/service idea
• The target customers
• Your distinctive competitive advantages

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• Presenting your Idea
• The elevator pitch
• The executive summary (lt 2 pages)
• The short powerpoint presentation (lt 8 slides)
• The long powerpoint presentation
• The detailed Business Plan

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• Refining your Idea
• Solicit feedback
• Further Market Research/Competitor Analysis
• Potential customer reality check
• Team-work in presentation session
• Get a coach/mentor
• Practice, practice
• Approach Multiple Sources of Funding

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Others

• Handling of Sensitive Information
• where possible, protect your Intellectual
  Property before Public Disclosure
• Non-Disclosure Agreement (NDA)
• Strategic use of trade-marking and branding
• Block diagram approach
• Do not put negotiable details in writing