Risk, Return, Product Design

Risk & Uncertainty “Failure is the opportunity to begin again, more intelligently.” Henry Ford Regret – the amount of loss a person can tolerate A Game of Chance :

Regret Function V = U – RU = upside U > RR = downside or regret  = risk-adjusted const. Entrepreneur can forgo one year income ($50,000) and willingly invest savings ($60,000), then regret is $110,000 For = 1, we are neutral. For = 2, we are risk averse. If,  = 2, required upside is U > 2(110,000) > $220,000

Risk Value of potential losses Uncertainty of those losses (Lottery Variations) SBA – ½ of all small businesses are acquired by another firm or leave the market within four years

Question What might be the sources of uncertainty for a new venture ?

Risk video

Sources of uncertainty Market uncertainties ??? Organization / Management uncertainties Product / Process uncertainties Regulation / Legal uncertainties Financial uncertainties

Sources of uncertainty Market uncertainties Customer Market size / growth potential Competitors Organization / Management uncertainties Product / Process uncertainties Regulation / Legal uncertainties Financial uncertainties

Sources of uncertainty Market uncertainties Organization / Management uncertainties Capabilities Talent Strategies Product / Process uncertainties Regulation / Legal uncertainties Financial uncertainties

Sources of uncertainty Market uncertainties Organization / Management uncertainties Product / Process uncertainties Cost Technology Design Regulation / Legal uncertainties Financial uncertainties

Estimating Risk / Reward Describe most likely scenario, expected reward and estimated probability Describe worst case scenario, expected loss and estimated probability Describe best-case scenario, expected reward and estimated probability Determine how much the entrepreneurial team (investors) can afford to lose.

Estimating Risk / Reward A leading aircraft manufacturer, you wish to bid on a new jet trainer for the dept. of defense. Specs call for front-back seating, mach 2.0 at 400 ft. To even hope to bid, you will have to develop a new avionics package with forward looking radar and hire 100 new engineers. Estimate the risk / reward.

Return Versus Risk

Scale and Scope Scale – the extent of the activity of a firm as described by its size Scalability – how big a firm can grow in various dimensions to provide more service. qmqm Cost per Unit Economies of Scale Diseconomies of Scale

No FEAR Tom Peters & FEAR YouTube - Famous Failures

Scale and Scope Scope – the range of products offered or distribution channels utilized Economies of Scope Google – economies of scale Amazon – economies of scope Wal-Mart – economies of scale and scope

Network Effects Network economies – arise in industries where a network of complementary products is determinant of demand PC software PC eBay: buyers sellers buyers Others ??

Product Design / Development IDEA: locate and describe new ideas without binding users too closely to the old ways of doing things. Entrepreneurs must find the balance between novelty and familiarity, between impact and acceptance (Palm Pilot docking cradle – PDA extension of PC)

Research & Development (Concept Develop) Product Design Build Prototype Test Prototype / Market Satisfactory Yes No Finalize Design

Establish Product Goals and Attributes Identify components & parameters available Identify set of physical and social constraints Write Performance Specifications Write Performance Specifications Write Performance Specifications Write Performance Specifications R&D

Product Development Usability – measure of the quality of user’s experience when interacting with product Ease of learning Efficiency of use Memorability Error frequency Satisfaction (VCR, DVD – poor usability)

Product Development Dominant Design – single architecture that establishes dominance in a particular class IBM _PC compatible VHS

Disruptive Applications Disruptive Application – a new product that establishes an entirely new category and dominates that category Sony Walkman

Question Why did the digital video recorder (DVR) take so long to become popular? What key features finally made use of the DVR acceptable to the customer base?

Question Why did the digital video recorder (DVR) take so long to become popular? What key features finally made use of the DVR acceptable to the customer base? Users browse a listings grid on the TV and press a record button to select each show they want to record. How would you design a DVR to sell widely and reach a mass market?

Question Consider the CD jewel box (or similar) with its easily cracked hinge, cranky release mechanism, and stubborn cellophane wrapping. Suggest a redesign of a storage box for CDs and DVDs.

Question Using the product design method, complete an outline of the steps necessary to design a small electric car that can compete favorably with the GEM.