Creativity, Opportunity, AND Testing Business Concept and Models

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

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. Learning Objectives

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: What It Means

Figure 3.1 Creativity Themes 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.

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

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

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

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

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

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

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 Creativity and Problem Solving (cont’d)

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 Focus on Problem Definition

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. Developing Solutions

Joseph Schumpeter identified five categories of innovation: • A new product or substantial change in an existing product • A new process • A new market • New sources of supply • Changes in industrial organization Innovation

Figure 3.4 Innovation and Commercialization Process

Table 3.2 Some Sources of Innovation

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

Table 4.1 Business Model Components

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

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

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 Value Proposition

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 Customer Definition

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

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 Distribution Channel

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

What are the size and importance of the revenue streams that the business model can generate? • 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? • How much capital is required to execute the business model and what is the timing of the cash needs? • What are the critical success factors to achieving the goals of the business model? Building a Business Model

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 (cont’d)

Figure 4.1 Building a Business Model

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

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: • Differentiates the new venture from existing ventures • Creates a niche in the market that other companies are not serving • Has access to other resources that others in the industry do not • Stage 6: Test the model through feasibility analysis Building a Business Model—Stages (cont’d)

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. Analyzing the Feasibility of a Business Model

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. Feasibility and the Business Plan

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

Figure 4.4 Feasibility Analysis: Testing the Business Model

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

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

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

Creativity, Opportunity, AND Testing Business Concept and Models