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Patterns of Entrepreneurship Management 5th Edition, Chapter 2

The Art of Innovation -Developing

Ideas and Business Opportunities

Idea to

Opportunity

Evaluating the

Opportunity

Why Innovate

Presentation Outline

Idea to

Opportunity

Evaluating the

Opportunity

Why Innovate

Chapter 2 • Why Innovate?

– Macro-economic Trends

– Types of Innovation

– Framework

– Frameworks for Innovation

• Making an Idea an Opportunity

• Evaluating the Opportunity

– Questions

– Opportunity Costs

– Framework

Why Innovate?

• The Growth of the Internet

• Shift to a Service Economy

• Reduction of International Trade Barriers

• International Free-Flows of Capital

• Rapid Technological Obsolescence

Idea to

Opportunity

Evaluating the

Opportunity

Why Innovate

Chapter 2

Types of Innovation

• The S-Curve of Innovation

• Derivative vs. Radical

• Disruptive Innovation

- Candles to Incandescent Lighting

• Incremental Innovation

- Evolution of Designer Candles

Idea to

Opportunity

Evaluating the

Opportunity

Why Innovate

Chapter 2

Derivative Innovation gives

Incremental Improvements

Time

Performance

The S-Curves with Incremental Innovation

Derivative Innovation

Idea to

Opportunity

Evaluating the

Opportunity

Why Innovate

Chapter 2

S-Curves for a Disruptive Innovation

Disruptive Innovation

Leads to Radical Changes

Time

Performance

Time to adopt radical innovation –

before performance advantages.

Disruptive Innovation

Idea to

Opportunity

Evaluating the

Opportunity

Why Innovate

Chapter 2

Time

Candles

Incandescent Lamps

Discharge Lamps

LED’s P

e rf

o rm

a n c e

Waves of Disruption in Lighting

New Disruptive Technologies Changed the

Lighting Industry Many Times – What’s Next?

Idea to

Opportunity

Evaluating the

Opportunity

Why Innovate

Chapter 2

Models for Innovation

• Analogs

- Leafbusters

• Intersection of Technology Trends

- Netflix and Streaming Video

• “Points of Pain”

- SmartPak

• Analysis of Existing Businesses

- SuperFast Pizza

Idea to

Opportunity

Evaluating the

Opportunity

Why Innovate

Chapter 2

Where Ideas for Opportunities Originate

Improving

Existing

Technology,

Product, or

Service

15%

Vision of

Opportunity

11%

Present Work

Environment

47%

Secondary

Sources:

Brainstorming,

Trade

Publications,

Commerce

Business Only,

Idea Brokers,

Venture Capital

Firms,

Technology

Transfer

Agencies

27%

Idea to

Opportunity

Evaluating the

Opportunity

Why Innovate

Chapter 2

Converting an Idea into an Opportunity

What is an Opportunity?

• Identifying which business ideas have

real commercial potential is one of the

most difficult challenges that an

entrepreneur will face.

Seize the Opportunity

• Know what factors create opportunity out

of an initial idea.

Idea to

Opportunity

Evaluating the

Opportunity

Why Innovate

Chapter 2

The Five Phases to Success

•Recognize the Opportunity and ACT

•Investigate the Need

•Develop the Plan

•Determine the Resources Needed

•Manage the Business

Idea to

Opportunity

Evaluating

the Opportunity

Why Innovate

Chapter 2

Questions to Evaluate the Business Opportunity

• What indicators suggest the idea may be the

basis of a valuable and viable opportunity?

• What are the conditions that enable the

opportunity to be successful?

• How might the future of the initial product

or service change over time?

• How long (in terms of time) is the window

of opportunity?

• How big is the opportunity?

Idea to

Opportunity

Evaluating the

Opportunity

Why Innovate

Chapter 2

Evaluating the Opportunity

Does the Opportunity……

Fill a need that customers will value?

Show evidence of customer acceptance?

Show that a substantial market exists now?

Indicate that your solution is much better than the competition?

Show a significant upside potential?

Can be achieved with reasonable costs?

Idea to

Opportunity

Evaluating the

Opportunity

Why Innovate

Chapter 2

Frameworks for Evaluating an Opportunity - 1

Market Issues:

Criterion Stronger Opportunity Weaker Opportunity

Need Identified Unclear

Customers Reachable; receptive Unreachable or loyalties

established

Payback to user/customer Less than one year Three years or more

Product life cycle Long; recover investment Short; recover investment

Industry structure Competition or emerging Aggressively competitive

Potential market size $100 million sales Less than $10 million sales

Market growth rate Growing at 30% to 50% Contracting less than 10%

Gross margins 30% to 50% Less than 20%; volatile

Market share attainable (year 5) 20% or more Less than 5%

Idea to

Opportunity

Evaluating the

Opportunity

Why Innovate

Chapter 2

Frameworks for Evaluating an Opportunity – 2

Financial and Harvest Issues:

Criterion Stronger Opportunity Weaker Opportunity

Profits after tax 10% to 15% or more; durable Less than 5%; fragile

Time to:

Break-even

Positive cash flow

ROI potential

Under 2 years

25% or more per year

More than 3 years

Less than 15-20% per year

Value

Capital requirements

High strategic value

Low to moderate; fundable

Low strategic value

Very high; unfundable

Exit mechanism Present or envisioned harvest

options

Undefined; illiquid

investment

Idea to

Opportunity

Evaluating the

Opportunity

Why Innovate

Chapter 2

Frameworks for Evaluating an Opportunity - 3

Competitive Advantage Issues:

Criterion Stronger Opportunity Weaker Opportunity

Fixed and Variable Costs

Production, marketing

distribution

Lowest

Highest

Degree of Control

Prices, channels of

resources/distribution

Moderate to strong

Weak

Barriers to Entry

Proprietary protection

Response/lead time

Yes

6 months to one year

None

Legal contractual advantage Proprietary of exclusivity None

Sources of differentiation Numerous Few or none

Competitors mindset and

strategies

Live and let live; not self

destructive

Defensive and strongly

reactive

Idea to

Opportunity

Evaluating the

Opportunity

Why Innovate

Chapter 2

Frameworks for Evaluating an Opportunity - 4

Management Team and Risk Issues:

Criterion Stronger Opportunity Weaker Opportunity

Management team Existing, strong, proven

performance

Weak, inexperienced,

lacking key skills

Contacts and networks Well-developed; high

quality; accessible

Crude; limited; inaccessible

Risk Low High

Fatal Flaws None One or more

Idea to

Opportunity

Evaluating the

Opportunity

Why Innovate

Chapter 2