Creativity, Opportunity, AND Testing Business Concept and Models CHAPTER 2

Learning Objectives Understand the nature of entrepreneurial opportunity through discovery and creation. Discuss creativity, its challenges, and how to develop creative skills. Explain problem solving as it relates to creativity and entrepreneurship. Understand types of innovation and the innovation process. Explain what a business model is and what it accomplishes. Discuss the process for developing a business model. Explore the testing of a business model through feasibility analysis.

Creativity: What It Means Enables entrepreneurs to differentiate their businesses from competitors Is the basis for invention Is fundamental to problem solving Is a critical skill for recognizing or creating opportunity in a dynamic environment

Creativity Themes Figure 3.1 Source: Adapted from Isaksen, S.G., Stein, M.I., Hills, D.A. & Grayskiewicz, S.S. (1984). “A Proposed Model for the Formulation of Creativity Research,” Journal of Creative Behavior, 18: 67–75.

Creativity: What It Means (cont’d) Four stage creative process: 1. Preparation: looking at a problem from a variety of perspectives 2. Incubation: letting the problem lie in the subconscious for a time 3. Illumination: the discovery of a solution 4. Verification: bringing the idea to an outcome

The Seven Stage Dynamic of the Creative Process Figure 3.2 Source: Adapted from Norman Seeff Productions.

Challenges to Creativity No time for creativity No confidence “Confidence is the expectation of success.”

Developing Creative Skills 1. Design an environment to stimulate creativity ◦ Minimize distractions ◦ Devote time daily to quiet contemplation ◦ Spend time in the places that best promote your creative thinking ◦ Spend time with people in different fields of interest and move out of the comfort zone

Developing Creative Skills (cont’d) 2. Log ideas 3. Put the familiar into a new context 4. Take advantage of a personal network 5. Return to childhood

Creativity and Problem Solving Define the problem ◦ Restate the problem so as to uncover the real problem ◦ Identify the pros and cons for potential solutions ◦ Develop a decision tree

Creativity and Problem Solving (cont’d) Generate ideas for sources of the problem and potential solutions ◦ Quantity over quality initially ◦ Capture every idea ◦ Piggyback on ideas and create new combinations and modifications

Creativity and Problem Solving (cont’d) Other techniques for generating ideas: ◦ Brain writing  Getting ideas down on paper and then organizing ideas and creating themes ◦ Connecting unrelated concepts ◦ Attribute identification ◦ Restating the problem

Focus on Problem Definition Use affirmative judgment Use a set of predefined criteria Effective problem statement contains: ◦ A “how” question ◦ Identification of responsible party ◦ Action verb, representing positive course of action ◦ Targeted or desired outcome

Developing Solutions Use same techniques used to generate and focus ideas Criteria plays critical role in solution identification  Explicit: time limits, budgets, constraints  Implicit: considerations such as intuition, team culture, preferences, prejudices, etc.

Innovation Joseph Schumpeter identified five categories of innovation: 1.A new product or substantial change in an existing product 2.A new process 3.A new market 4.New sources of supply 5.Changes in industrial organization

Innovation and Commercialization Process Figure 3.4

Some Sources of Innovation CustomersUnexpected news events Newspapers and magazinesTrends and patterns of change ObservationNew government regulation Demographic shiftsEmerging industries Small businessesBusiness operations Table 3.2

The Business Model Peter Drucker’s 5 questions form the basis for development of the business model: 1.What is our mission? 2.Who is our customer? 3.What does our customer value? 4.What are our results? 5.What is our plan?

Business Model Components Table 4.1

Why Business Models Fail Flawed logic Limited strategic choices Imperfect value creation and capture assumptions Incorrect assumptions about the value chain

Developing a Concept for a New Business A business concept is a concise description of an opportunity that contains four essential elements: 1.The customer definition 2.The value proposition 3.The product/service 4.The distribution channel

The Value Proposition The benefit that the customer derives from the product or service ◦ It is often intangible. Entrepreneur needs to identify the need or “pain” the customer is experiencing

The Customer Definition The customer is the one who pays for the solution. ◦ This may or may not be the end user of the product or service being offered The customer determines all the other components: ◦ What the entrepreneur will offer ◦ What the value proposition is ◦ How the benefit will be delivered to the customer

The Solution Being Offered A solution to the problem the customer is facing ◦ Most businesses produce both products and services.

The Distribution Channel How do you deliver the benefit to the customer? Must create a clear and concise concept statement (or “elevator pitch”) ◦ Not difficult but requires ability to parse words

The Entrepreneur's Story A compelling story has a beginning, middle, and end. ◦ How they identified or created the opportunity ◦ Challenges they overcame ◦ Where they are now

Building a Business Model 1. What are the size and importance of the revenue streams that the business model can generate? 2. What costs most affect the model, and what is their size and importance to the model? In other words, what are the cost drivers for the business? 3. How much capital is required to execute the business model and what is the timing of the cash needs? 4. What are the critical success factors to achieving the goals of the business model?

Building a Business Model (cont’d) Changes may occur in several ways: ◦ Incrementally expand the existing model ◦ Revitalize an established model ◦ Take an existing model into new areas ◦ Add new models via acquisition ◦ Use existing core competencies to build new business models ◦ Reinvent the business model

Building a Business Model Figure 4.1

Building a Business Model—Stages Stage 1: Identify position in value chain ◦ The value chain consists of all the companies that contribute to the development and distribution of a good. ◦ Upstream is the top of the value chain and upstream from manufacturers (e.g. supplier/producer of raw materials). ◦ Downstream refers to the intermediaries such as distribution and retailers, and are “downstream” from the manufacturers and assemblers. ◦ Location of the company within the value chain normally reflects the entrepreneur’s capabilities and risk-taking propensity.

Building a Business Model—Stages (cont’d) Stage 2: Calculate how to create value for the customer ◦ Rely on market research Stage 3: Identify revenue sources ◦ Subscription or membership ◦ Volume or unit-based ◦ Licensing and syndication ◦ Transaction fee ◦ Advertising

Building a Business Model—Stages (cont’d) Stage 4: Determining expenses and cost drivers ◦ Marketing or advertising cost structure ◦ Inventory cost structure ◦ Office or retail space cost structure ◦ Support centered cost structure ◦ Direct cost structure

Building a Business Model—Stages (cont’d) Stage 5: Develop the competitive strategy ◦ Effective competitive strategy either: 1.Differentiates the new venture from existing ventures 2.Creates a niche in the market that other companies are not serving 3.Has access to other resources that others in the industry do not Stage 6: Test the model through feasibility analysis

Analyzing the Feasibility of a Business Model All opportunities involve uncertainty, which is characterized by varying degrees of risk. Risks to be reduced are associated with: ◦ Customer, size of the market, technical feasibility of the product, and ability of the founding team to successfully execute the venture Risks can be identified and dealt with. Uncertainty means outcomes are unknown so subjective probabilities must be applied.

Feasibility and the Business Plan Split view amongst entrepreneurs on the value of the business plan. Investors moving away from written business plans of past to brief, well-constructed executive summary or an effective pitch.

The Outcomes of Feasibility Analysis  Determination of whether the business model appears feasible Entrepreneur looks at the forecasted outcomes in four ways: 1.What is the probability a change in the forecast will occur 2.What is the magnitude of the change if it occurs 3.What is the impact of the change on the business 4.What can be done to mitigate the change or reduce the impact substantially

Feasibility Analysis: Testing the Business Model Figure 4.4

Preparing for Feasibility Analysis Three critical success factors: 1.Is there a customer and market of sufficient size to make the concept viable and able to grow? 2.Do the capital requirements to start and operate to a positive cash flow make sense? 3.Can an appropriate startup or founding team be assembled to effectively execute the concept?

The Feasibility Tests Areas to be analyzed: ◦ Industry and market/customer ◦ Product/service ◦ Founding team ◦ Financial needs assessment

Quick Screen for Multiple Options Quick screen ideas before undertaking a thorough feasibility study on any one of the concepts: 1.Start with a concept statement 2.Examine the industry 3.Identify the market – customer & competitors 4.Identify how the product/service benefits the customer 5.Examine founding/management team capabilities 6.List all resources needed by the business