Confidential – For Classroom Use Only Screening Opportunities.

Confidential – For Classroom Use Only

Screening Opportunities

2Confidential - for classroom use only

Encouraging Idea Generation

If innovation is a key function of companies, then management has a responsibility to encourage the generation of innovative ideas. Both traditional and nontraditional tools can be used for this task. These tools include

1. rewarding innovations

2. establishing a climate of innovation

3. hiring innovative people

4. encouraging the cross-pollination of ideas

5. providing support for innovators

But then the ideas generated must be evaluated to determine which are deserving of further support and resources

Harvard Business Essentials, Managing Creativity and Innovation, (HBS Press: 2003).


Concept ScreeningOnce the initial brainstorming process has yielded numerous ideas as potential solutions to a need, an essential next step is to determine which of these concepts should be further refined and developed.

Performing a comparison of all concepts against the defined need statement and need is central to the concept screening process.

─ Needs may be thought of as the bridge between problems and solutions. Stated another way, a need represents a change in outcome or practice that is required to address a defined problem. This change should be measurable and objective and, importantly, must reflect target audience’s perspective with respect to the desired results….

─ Once a need is translated into a need statement, the most important parameters or criteria that guide the design and development of the solution can be defined…. It is essential to understand that a need should not address how the change in outcome will be accomplished.

Once the raw data from a brainstorming session has been reviewed, “cleaned up,” and labeled, the inventor can begin the task of organizing the ideas.

The ultimate goal of organizing ideas is to divide the concepts into categories that can more readily help an inventor identify gaps, biases, approaches versus concepts, and commonalities so that s/he can determine what to do next. The two primary activities involved in organizing concepts are: (1) grouping or clustering the ideas, and (2) visually organizing them into a concept map.

The first step in the grouping process is to identify the primary organizing principle for creating the clusters. One approach is to create a hierarchy of organizing principles….

Adapted from Stanford Casebook


From Problems to OpportunitiesProcess for Translating Problems into Needs (Opportunities)

1. Translate problem into need statement: Reduce the problem into a simple causal

factor that results in an undesirable outcome.

2. Verify accuracy of need statement against problem: Double-check to be sure the

need statement accurately embodies the problem that has been observed.

3. Confirm that need is solution independent: Evaluate the need statement to be

certain it does not unnecessarily constrain or limit the solution to any particular

technology or approach.

4. Validate that scope of need is not too narrow: Evaluate need statement word by

word to ensure that every word is necessary and does not unnecessarily constrain the

need.

5. Validate that scope of need is not too broad: Evaluate need statement word ay word

to ensure that every word is validated by data and/or observations and that the need has

not been inappropriately generalized.

6. Define need criteria and classify need: Use the detailed information that has been

collected to define what criteria the solution to the need must meet to be successful.

Classify the need and related business opportunity.

Stanford casebook 4


ARINC’s Three R’s

What is the Return expected and why?

What are the Resources required to win?

What are the Risks associated with the project or business?


Traditional Approach to Evaluating Opportunities

Per Marc Dollinger (Indiana), new venture

opportunities should be evaluated by

1. identifying resources

2. analyzing capabilities

3. evaluating competitive advantage

4. developing a strategy

5. reviewing feedback


Screening Opportunities in Stages

Preliminary Screening:

1. personal appeal

2. apparent feasibility

3. price of the venture

4. payoff

Secondary Screening:

1. basic feasibility

2. competitive advantage

3. buyer decisions

4. marketing

5. production

6. people

7. control

8. Financing

Per Karl Vesper (Washington):


Screening Opportunities in Stages


Idea ScreeningTime is the ultimate ally and enemy of the entrepreneur. The ability to quickly and efficiently

reject ideas is a very important entrepreneurial mind-set. Saying no to lots of ideas directly

conflicts with your passion and commitment for a particular idea.

The first, QuickScreen, should enable you to conduct a preliminary review and evaluation of

an idea in an hour.

…it is vital to have a realistic view of the vulnerabilities and realities, as well as the

opportunity’s compelling strengths. Often the iterative process of carefully examining different

ideas through many eyes, within and outside your team, often triggers creative ideas and

insights about how the initial business concept and strategy can be altered and molded

to significantly enhance the value chain, free cash flow characteristics, and risk-reward

relationships and thus the fit. This process is central to value creation and the development

of higher-potential ventures, but it is far from cut and dried.

Ultimately the fit issue boils down to this: Do the opportunity, the resources required (and

their cost), the other team members (if any), the timing, and balance of risk and reward

work for me? Jeffrey A. Timmons and Stephen Spinelli, New Venture Creation (McGraw-Hill Irwin: 2009).


The Timmons Model

Value creation is determined by

1. Market demand is a key ingredient to measuring an opportunity, e.g.: – Is customer payback less than one year?

– Do market share and growth potential equal 20 percent annual growth and is it durable?

– Is the customer reachable?

2. Market structure and size help define an opportunity, e.g.: – Emerging and/or fragmented?

– $50 million or more, with a $1 billion potential?

– Proprietary barriers to entry?

3. Margin analysis helps differentiate an opportunity from an idea, e.g.: – Low cost provider (40 percent gross margin)?

– Low capital requirement versus the competition?

– Break even in 1-2 years?

– Value added increase of overall corporate P/E ratio?

For an idea to become an opportunity, market size, market structure, and margin analysis

must lead to definition of market segments, market metrics, and competitive landscape


QuickScreenI. Margin and Market Related Issues

Jeffrey A. Timmons and Stephen Spinelli, New Venture Creation (McGraw-Hill Irwin: 2009).

Criterion Higher Potential Lower Potential

Need/want/problem Identified Unfocused

Customers Reachable and receptive Unreachable/loyal to others

Payback to users Less than one year More than one year

Value added or created IRR 40%+ IRR less than 20%

Market size Greater than $100 million Less than $10 million

Market growth rate More than 20% Less than 20%, contracting

Gross margin More than 40% and durable

Less than 20% and fragile

Overall Potential:1. Market Higher Average Lower2. Margins Higher Average Lower


QuickScreenII. Competitive Advantages: Relative to the Current and Evolving Set of Competitors



Fixed and variable costs Lowest Highest

Degree of controlPrices and costChannels of supply and distribution

Stronger Weaker

Barriers to competitors’ entryProprietary advantageLead time advantage (product, technology, people, resources, location)

Can createDefensibleSlow competition

Weak/noneNoneNone

Service chain Strong edge No edge

Contractual advantage Exclusive None

Contacts and networks Key access Limited

Overall Potential:1. Costs Higher Average Lower2. Channel Higher Average Lower3. Barriers to entry Higher Average Lower4. Timing Higher Average Lower


QuickScreenIII. Value Creation and Realization Issues



Profit after tax 10-15% or more and durable Less than 5% and fragile

Time to breakeven Less than 2 years More than 3 years

Time to positive cash flow Less than 2 years More than 3 years

ROI potential 40% - 70%+ and durable Less than 20% and fragile

Value High strategic value(i.e. when a company in the value chain you would enter could substantively benefit from the launch of your business)

Low strategic value

Capitalization requirements Low - moderate; fundable Very high; difficult to fund

Exit mechanism IPO, acquisition Undefined; illiquid investment

Overall Potential:1. Timing Higher Average Lower2. Profit/free cash flow Higher Average Lower3. Exit/liquidity Higher Average Lower


QuickScreenIV. Overall Potential


Go No Go Go If…

Margins and markets

Competitive advantages

Value creation and realization

Fit (i.e. opportunity, resources, team)

Risk-reward balance

Timing

Other compelling issues:a.b.c.d.e.


Secondary ScreenIndustry and Market

Market:

Need

Customers

User benefits

Values added

Product life

Market structure

Market size

Growth rate

Market capacity

Market share obtainable by Year 5

Cost structure

Economics

Profits after tax

ROI potential

Capital requirements

Internal rate of return potential

Free cash flow characteristics:

Sales growth

Asset intensity

Spontaneous working capital

R&D/capital expenditures

Gross margins

Time to breakeven – cash flow

Time to breakeven – P&L

Management Team

Entrepreneurial team

Industry and technical experience

Integrity

Intellectual honesty

Personal Criteria

Goals and fit

Upside/downside issues

Opportunity costs

Desirability

Risk/reward tolerance

Stress tolerance

Harvest Issues

Value added potential

Valuation multiples and comparables

Exit mechanism and strategy

Capital market context

Fatal Flaw Issues

Competitive Advantage Issues

Fixed and variable costs

Control over costs, prices, and distribution

Barriers to entry:

Proprietary protection

Response/lead time

Legal, contractual advantage

Contacts and networks

Key people

Strategic Differentiation

Degree of fit

Team

Service management

Timing

Technolo9gy

Flexibility

Opportunity orientation

Pricing

Distribution channels

Room for error



Summary: Screening Opportunities in Stages

The best approach is to screen opportunities in stages

Per Jeffrey Timmons,

– Entrepreneurs should focus on a few, superior ideas

– Reject quickly and efficiently ideas that do not fit

– Conduct preliminary review and evaluation of any new idea that survives the initial screening

Good opportunities are both desirable and attainable. The opportunity must have high potential and must fit the entrepreneurs in terms of

– market and industry– economics– harvest issues– personal issues– competitive advantage and strategic differentiation– management team– fatal flaw issues


Stage Gates


Introduction: Stage Gate Processes

Stage gate – a decision point on whether a project is proceeding as planned and a go, no-

go or hold decision is made.

– A stage gate is intended to identify one or more essential breakthroughs that make continuation

of the project feasible. There are several things that a stage gate is not. It is not a deliverable,

report, or deadline. It is not a phase, nor is it a level of effort.

If, for example, the project is to speed up a calculation by orders of magnitude, and the

ability to accomplish that speedup is dependent on new approaches to algorithms, how

many cores provide an optimum calculation platform from the new multi-core processor

designs, and the interaction between these two items, then the work might be described as

1) testing several potential algorithm approaches to see which shows the highest potential

for supporting the speedup, and 2) testing a variety of the resulting approaches with

existing multi-core processors to identify if there are limits to optimality; and the stage gates

might be described as 1) if none of the algorithm approaches show potential for order-of-

magnitude speedups then place project on hold or stop, and 2) if the algorithm application

to the selected multi-core processors shows no/low potential for order-of-magnitude

speedup, then place the project on hold or stop. www.bpa.gov/corporate/business/innovation/docs/2008/Stage_Gate_Definition.doc

18


Example: Exxon Stage-Gate Processes

Stage AOpportunity Identification Gate A

Stage BEnabling Science and

Idea GrowingGate B

Stage 1

LeadDefinition

Stage 2

Pre-DevelopmentAssessment

Stage 3

Development

Stage 4

Validation

Stage 5

Commercialization

Gate 1

Gate 4

Gate 2 Gate 3

Melissa Schilling, Managing Technology (New York: Norton, 1995)19


Robert Cooper’s Stage-Gate Model

Gate 1 Gate 2 Gate 3 Gate 4 Gate 5

Idea Screen:• Does the idea

merit any work

Second Screen:• Does the idea

justify extensive investigation?

Decision to Develop:• Is the business

case sound?

Decision to Test:• Should the project

be moved to external testing?

Decision to Launch:• Is the product

ready for commercial launch?

Scoping Building the Business Case

Development Testing and Validation

Launch

• Preliminary market assessment

• Preliminary technical assessment

• Preliminary financial and business assessment

• Action plan for Stage 2

• User needs and wants study

• Competitive analysis

• Value proposition defined

• Technical feasibility assessment

• Operations assessment

• Product definition• Financial analysis

• Technical development work

• Rapid prototypes• Initial customer

feedback• Prototype

development• In-house product

testing• Operations process

development• Full launch and

operations plans

• Extended in-house testing

• Customer filed trials• Acquisition of

production equipment

• Production trials• Test market/trial sell• Finalized launch

and operations plans

• Post launch and life cycle plans

• Market launch and rollout

• Full production• Selling begun• Results

monitoring• Post launch and

life cycle plans under way

Idea

Melissa Schilling, Managing Technology (New York: Norton, 1995)

20


Robert Cooper’s Stage Gate ModelThe need for lean, rapid and profitable new product development has never been greater. Product life

cycles are shorter, competition is more intense and customers are more demanding. Companies that fail

to innovate face a grim future. The problem is that winning with new products is not easy. An estimated

46% of the resources that companies devote to the conception, development and launch of new products

go to projects that do not succeed - they fail in the marketplace or never make it to market.

Leading companies have overhauled their product innovation processes, incorporating the critical

success factors discovered through best practice research, in the form of a Stage-Gate new product

development process. According to several independent research studies (i.e. Product Development &

Management Association, AMR Research, Booz-Allen Hamilton, etc.) between 70-85% of leading U.S.

companies now use Stage-Gate to drive new products to market.

A Stage-Gate System is a conceptual and operational road map for moving a new-product project from

idea to launch. Stage-Gate divides the effort into distinct stages separated by management decision

gates (gatekeeping). Cross-functional teams must successfully complete a prescribed set of related

cross-functional activities in each stage prior to obtaining management approval to proceed to the next

stage of product development. http://www.prod-dev.com/stage-gate.php

21


Contd.How Does the Stage-Gate® Process Work?

Product innovation begins with an idea and ends with the successful launch of a new

product. The steps between these points can be viewed as a dynamic process.

Stage-Gate divides this process into a series of activities (stages) and decision

points (gates).

Stages are where the action occurs. The players on the project team undertake key

activities to gather information needed to advance the project to the next gate or

decision point. Stages are cross-functional (there is no research and development or

marketing stage) and each activity is undertaken in parallel to enhance speed to

market. To manage risk, the parallel activities in a certain stage must be designed to

gather vital information - technical, market, financial, operations - in order to drive

down the technical and business risks. Each stage costs more than the preceding

one, resulting in incremental commitments. As uncertainties decrease, expenditures

are allowed to rise and risk is managed.

http://www.prod-dev.com/stage-gate.php

22


Stages and GatesStage 0 - Discovery: Activities designed to discover opportunities and to generate new product ideas.

Stage 1 - Scoping: A quick and inexpensive assessment of the technical merits of the project and its market prospects.

Stage 2 - Build Business Case: This is the critical homework stage - the one that makes or breaks the project. Technical, marketing and business feasibility are accessed resulting in a business case which has three main components: product and project definition; project justification; and project plan.

Stage 3 - Development: Plans are translated into concrete deliverables. The actual design and development of the new product occurs, the manufacturing or operations plan is mapped out, the marketing launch and operating plans are developed, and the test plans for the next stage are defined.

Stage 4 - Testing and Validation: The purpose of this stage is to provide validation of the entire project: the product itself, the production/manufacturing process, customer acceptance, and the economics of the project.

Stage 5 - Launch: Full commercialization of the product - the beginning of full production and commercial launch.

Stages The structure of each stage is similar:– Activities: The work the project leader and the team must undertake based upon their project plan.– Integrated analysis: The project leader and team’s integrated analysis of the results of all of the functional activities,

derived through cross-functional interaction.– Deliverables: The presentation of the results of the integrated analysis, which must be completed by the team for

submission to the gate.

Gates – The structure of each gate is similar:– Deliverables: Inputs into the gate review - what the project leader and team deliver to the meeting. These are defined in

advance and are the results of actions from the preceding stage. A standard menu of deliverables is specified for each gate.

– Criteria: What the project is judged against in order to make the go/kill and prioritization decisions. These criteria are usually organized into a scorecard and include both financial and qualitative criteria.

– Outputs: Results of the gate review. Gates must have clearly articulated outputs including: a decision (go/kill/hold/recycle) and a path forward (approved project plan, date and deliverables for the next gate agreed upon).


23


The Results per Robert Cooper

What are the benefits of using Stage-Gate®? The Stage-Gate Product Innovation

system has been referred to as the single most important discovery in product

innovation – empowering almost 85% of all North American companies to achieve

improved returns on their product development dollars and to achieve new growth.

When implemented properly, Stage-Gate delivers tremendous impact:

– Accelerates speed-to-market

– Increases likelihood of product success

– Introduces discipline into an ordinarily chaotic process

– Reduces re-work and other forms of waste

– Improves focus via gates where poor projects are killed

– Achieves efficient and effective allocation of scarce resources

– Ensures a complete process – no critical steps are omitted

The results:

A more effective, efficient, faster process that improves your product innovation results.


24


Disadvantages

Phased development processes, today frequently called stage gate* processes…

have several characteristics that lead to delay when time to market is

paramount

Stages-and-gates processes break work up into sequential phases, thus

thwarting parallel, overlapping activities, especially when they cross the

decision points.

Another shortcoming of stages-and-gates processes is that they inherently

force fundamental project decisions to be made earlier than necessary,

thereby restricting your flexibility to respond to change and raising your cost of

change. If change in markets, customer desires, technology, or management

direction is characteristic of your development projects, consider flexible

development techniques rather than phased approaches.

http://www.newproductdynamics.com/stage_gate.htm 25


SummaryStrengths and Benefits of Stage Gate Methodology:

1. Well-organized innovation can be a source of accelerated product development. Necessary because of shortening product life cycles.

2. Increased success chance of new products. Prevents poor projects early and helps to redirect them.

3. The model breaks down the complex innovation process in large corporations in a number of smaller pieces.

4. Provides overview, which enables prioritization and focus.

5. Integrated market-orientation.

6. Cross-functional. Involves input and participation of employees from various functions in the organization. No separate R&D or Marketing Stage. But see above Discovery.

7. Can be combined with various performance metrics, such as Net Present Value, etc.

Limitations and Disadvantages:

8. The Stage-Gate approach is basically sequential (waterfall). Some innovation experts believe that product development should actually be organized in parallel, using loops.

9. The original Stage-Gate framework did not deal with the Discovery process and the activities to create new ideas.

10. A tension exists between organizing and creativity. Both critical to all innovation.

http://www.12manage.com/methods_cooper_stage-gate.html 26


Lead Users and Prediction Markets


Forecasting Techniques: Methodology Tree

28http://www.forecastingprinciples.com/index.php?option=com_content&task=view&id=16&Itemid=16


Lead UsersLead users are another valuable source of innovative ideas. Lead users are companies and individuals—

customers and noncustomers—whose needs are far ahead of market trends. Lead users are seldom interested

in commercializing their innovations. Instead, they innovate for their own purposes because existing products fail to

meet their needs. Their innovations can often be adapted, however, to the needs of larger markets, which will be

recognized many months or years in the future.

─ An article coauthored by Eric von Hippel, Stefan Thomke, and Mary Sonnack described a four-phase process

used by some 3M units to glean innovative ideas from lead users.

1. Lay the foundation. Identify the targeted markets and the and level of innovations desired by the

organization’s key stakeholders. These stakeholders must be on board early.

2. Determine the trends. Talk to experts in the field about what they see as the important trends. These experts

are people who have a broad view of emerging technologies and leading-edge application in the area being

studied.

3. Identify and learn from the lead users. Use networking to identify users at the leading edge of the target

market related markets. Develop relationships with these lead users and gather information from them that

points to ideas that could contribute to breakthrough products. Use this learning to shape preliminary product

ideas and assess their business potential.

4. Develop the breakthroughs. The goal of this phase is to move preliminary concepts toward completion. Host

two- to three-day workshops with several lead users, a small group of in-house marketing and technical

people, and the lead user investigative team. Work in small groups and then s a whole to design final

concepts. Harvard Business Essentials, Managing Creativity and Innovation, (HBS Press: 2003).


Delphi MethodThe Delphi method is a systematic, interactive forecasting method which relies on a

panel of independent experts. The carefully selected experts answer questionnaires in

two or more rounds. After each round, a facilitator provides an anonymous summary of the

experts’ forecasts from the previous round as well as the reasons they provided for their

judgments.

Thus, experts are encouraged to revise their earlier answers in light of the replies of other

members of their panel. It is believed that during this process the range of the answers will

decrease and the group will converge towards the "correct" answer.

Finally, the process is stopped after a pre-defined stop criterion (e.g. number of rounds,

achievement of consensus, stability of results) and the mean or median scores of the final

rounds determine the results.

Delphi is based on the principle that forecasts from a structured group of experts are

more accurate than those from unstructured groups or individuals. The technique can

be adapted for use in face-to-face meetings. Delphi has been widely used for business

forecasting and has certain advantages over another structured forecasting approach,

prediction markets. http://en.wikipedia.org/wiki/Delphi_method 30


Problems with the Delphi Method

Overall the track record of the Delphi method is mixed. There have been many cases when the

method produced poor results. Still, some authors attribute this to poor application of the method

and not to the weaknesses of the method itself. It must also be realized that in areas such as

science and technology forecasting the degree of uncertainty is so great that exact and always

correct predictions are impossible, so a high degree of error is to be expected.

Another particular weakness of the Delphi method is that future developments are not always

predicted correctly by consensus of experts. Firstly, the issue of ignorance is important. If

panelists are misinformed about a topic, the use of Delphi may add only confidence to their

ignorance. Secondly, sometimes unconventional thinking of amateur outsiders may be superior to

expert thinking.

One of the initial problems of the method was its inability to make complex forecasts with

multiple factors. Potential future outcomes were usually considered as if they had no effect on

each other. Later on, several extensions to the Delphi method were developed to address this

problem, such as cross impact analysis, that takes into consideration the possibility that the

occurrence of one event may change probabilities of other events covered in the survey. Still the

Delphi method can be used most successfully in forecasting single scalar indicators.http://en.wikipedia.org/wiki/Delphi_method 31


The Wisdom of CrowdsThe Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business,

Economies, Societies and Nations, published in 2004, is a book written by James Surowiecki about the aggregation of information in groups, resulting in decisions that, he argues, are often better than could have been made by any single member of the group.

The opening anecdote relates Francis Galton's surprise that the crowd at a county fair accurately guessed the weight of an ox when their individual guesses were averaged (the average was closer to the ox's true butchered weight than the estimates of most crowd members, and also closer than any of the separate estimates made by cattle experts).

Surowiecki breaks down the advantages he sees in disorganized decisions into three main types, which he classifies as:

1. Cognition: Thinking and information Processing Market judgment, which he argues can be much faster, more reliable, and less subject to political forces than the deliberations of experts or expert committees.

2. Coordination: Coordination of behavior includes optimizing the utilization of a popular bar and not colliding in moving traffic flows. The book is replete with examples from experimental economics, but this section relies more on naturally occurring experiments such as pedestrians optimizing the pavement flow or the extent of crowding in popular restaurants. He examines how common understanding within a culture allows remarkably accurate judgments about specific reactions of other members of the culture.

3. Cooperation: How groups of people can form networks of trust without a central system controlling their behavior or directly enforcing their compliance. This section is especially pro free market.

Four elements required to form a wise crowd

Not all crowds (groups) are wise. Consider, for example, mobs or crazed investors in a stock market bubble. According to Surowiecki, these key criteria separate wise crowds from irrational ones:

4. Diversity of opinion: Each person should have private information even if it's just an eccentric interpretation of the known facts.

5. Independence: People's opinions aren't determined by the opinions of those around them.

6. Decentralization: People are able to specialize and draw on local knowledge.

7. Aggregation: Some mechanism exists for turning private judgments into a collective decision. http://en.wikipedia.org/wiki/The_Wisdom_of_Crowds 32


Failures of Crowd IntelligenceSurowiecki studies situations (such as rational bubbles) in which the crowd produces very bad judgment, and argues that in

these types of situations their cognition or cooperation failed because (in one way or another) the members of the crowd were too conscious of the opinions of others and began to emulate each other and conform rather than think differently. Although he gives experimental details of crowds collectively swayed by a persuasive speaker, he says that the main reason that groups of people intellectually conform is that the system for making decisions has a systematic flaw.

Surowiecki asserts that what happens when the decision-making environment is not set up to accept the crowd, is that the benefits of individual judgments and private information are lost and that the crowd can only do as well as its smartest member, rather than perform better (as he shows is otherwise possible). Detailed case histories of such failures include:

1. Too homogeneous: Surowiecki stresses the need for diversity within a crowd to ensure enough variance in approach, thought process, and private information.

2. Too centralized: The Columbia shuttle disaster, which he blames on a hierarchical NASA management bureaucracy that was totally closed to the wisdom of low-level engineers.

3. Too divided: The US Intelligence community, the 9/11 Commission Report claims, failed to prevent the 11 September 2001 attacks partly because information held by one subdivision was not accessible by another. Surowiecki's argument is that crowds (of intelligence analysts in this case) work best when they choose for themselves what to work on and what information they need. (He cites the SARS-virus isolation as an example in which the free flow of data enabled laboratories around the world to coordinate research without a central point of control.) The Office of the Director of National Intelligence and the CIA have created a Wikipedia style information sharing network called Intellipedia that will help the free flow of information to prevent such failures again.

4. Too imitative: Where choices are visible and made in sequence, an "information cascade" can form in which only the first few decision makers gain anything by contemplating the choices available: once past decisions have become sufficiently informative, it pays for later decision makers to simply copy those around them. This can lead to fragile social outcomes.

5. Too emotional: Emotional factors, such as a feeling of belonging, can lead to peer pressure, herd instinct, and in extreme cases collective hysteria.

The most common application is the prediction market, a speculative or betting market created to make verifiable predictions. Surowiecki discusses the success of prediction markets. Similar to Delphi methods but unlike opinion polls, prediction (information) markets ask questions like, “Who do you think will win the election?” and predict outcomes rather well. Answers to the question, "Who will you vote for?" are not as predictive.http://en.wikipedia.org/wiki/The_Wisdom_of_Crowds 33


Prediction MarketsPrediction markets (also known as predictive markets, information markets, decision markets, idea

futures, event derivatives, or virtual markets) are speculative markets created for the purpose of

making predictions. Assets are created whose final cash value is tied to a particular event (e.g., will the

next US president be a Republican) or parameter (e.g., total sales next quarter). The current market prices

can then be interpreted as predictions of the probability of the event or the expected value of the

parameter. Prediction markets are thus structured as betting exchanges, without any risk for the

bookmaker.

Many prediction markets are open to the public. Betfair is the world's biggest prediction exchange, with

around $28 billion traded in 2007. Intrade is a for-profit company with a large variety of contracts not

including sports. The Iowa Electronic Markets is an academic market examining elections where positions

are limited to $500. TradeSports are prediction markets for sporting events. The simExchange, Hollywood

Stock Exchange, NewsFutures, the Popular Science Predictions Exchange, Hubdub, The Industry

Standard's technology industry prediction market, the Foresight Exchange Prediction Market and the

Brazilian Mercado de Previsões are virtual prediction markets where purchases are made with virtual

money. Bet2Give is a charity prediction market where real money is traded but ultimately all winnings are

donated to the charity of the winner's choice.

A common belief among economists and the financial community in general is that prediction markets

based on play money cannot possibly generate credible predictions. However, the data collected so

far disagrees. Analyzed data from the Hollywood Stock Exchange and the Foresight Exchange concluded

that market prices predicted actual outcomes and/or outcome frequencies in the real world. Comparing an

entire season's worth of NFL predictions from NewsFutures' play-money exchange to those of Tradesports,

an equivalent real-money exchange based in Ireland, both exchanges performed equally well. In this case,

using real money did not lead to better predictions. http://en.wikipedia.org/wiki/Prediction_market 34


The Six Thinking HatsEdward de Bono

(Back Bay Books: 1999)


Thinking

The main difficulty of thinking is confusion. We try to do too much at once.

Emotions, information, logic, hope and creativity all crowd in on us. It is like

juggling with too many balls.

What I am putting forward in this book is a very simple concept which allows a

thinker to do one thing at a time. He or she becomes able to separate emotion

from logic, creativity from information, and so on. The concept is that of the

six thinking hats. Putting on any one of these hats defines a certain type of

thinking.

The six thinking hats allow us to conduct our thinking as a conductor might lead

an orchestra. We can call forth what we will.

It is very important to note that the hats are directions and not descriptions

of what has happened. It is not a matter of everyone saying what they like

and then the hats being used to describe what has been said. It is a matter of

setting out to think in that direction. 36


The Hat Description

White Hat White is neutral and objective. The white hat is concerned with objective facts and figures.

Red Hat Red suggests anger (seeing red), rage and emotions. The red hat gives the emotional view.

Black Hat Black is somber and serious. The black hat is cautious and careful. It points out the weaknesses in an idea

Yellow Hat Yellow is sunny and positive. The yellow hat is optimistic and covers hope and positive thinking.

Green Hat Green is grass, vegetation, and abundant, fertile growth. The green hat indicates creativity and new ideas.

Blue Hat Blue is cool, and it is also the color of the sky, which is above everything else. The blue hat is concerned with control, the organization of the thinking process, and the use of the other hats


Johns Hopkins Tech TransferTechnology Readiness Model

Relevant PatentsGeneral Market Information

Commercialization // Analysis

Technology Components

Academic Prior Art

Research Structure

Industry Structure Technology Landscape

Value Proposition Discussion

Competing products matrix

Analyst Recommendations

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• Initial analysis is hierarchical in nature. At the bottom of the analysis are mostly information gathering tasks (blue).

• Deductions must be made from the bottom layer to create a new layer of understanding (purple).

Analysis is hierarchical:

• A value proposition is then generated from evidence found in the research and industry landscapes (red).

• This process iterates until it reaches the tenth and most synthetic step, which is the tenth step (green).


John Mullins’Seven Dimensions Model


The Mullins Model:The Seven Domains of Attractive Opportunities

Macro Level

Micro Level

Market Domains Industry Domains

Mission, Ability toAspirations, Execute Propensity on CSFsfor Risk

Connectedness up and down Value Chain

Team Domains

Market Attractiveness

Target Segment Benefits and Attractiveness

Industry Attractiveness

Sustainable Advantage

Per John Mullins (London School of Business):

John Mullins, The New Business Road Test (FT Press: 2008).

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Target Segment

Can you identify any customers?– what customer pain will your business idea resolve– evidence that your idea is superior (better, faster, cheaper) enough to

get customers to change what they are doing now– evidence that customers will buy– list of initial customers

Defining a targeted market segment– who, in terms of demographics or psycho-graphics– where, in terms of geography– benefit expected

Will this segment lead to others?


Market Attractiveness

What sort of business do you want?– niche or promising

How large is the market?– number of customers– how much do they spend– how fast has the market grown, and will it continue to grow– large markets offer the chance for multiple players and for

segmentation

What economic, demographic, socio-cultural, technological, regulatory, or fashion trends will affect your market positively or negatively?

In short, the key variables are market size and market growth


Industry Attractiveness

What industry are you competing in? Can you define it clearly?

– How attractive is this industry?

– Can you do a SWOT analysis?

According to Michael Porter these five competitive forces determine industry attractiveness (i.e. margins):

1. Threat of new entrants: How difficult is it for others to enter this industry?

2. Threat of substitute products or services: What are the substitute products and services to yours? How difficult is it for them to steal your customers?

3. Bargaining power of suppliers: Do suppliers have the power to set terms and conditions?

4. Bargaining power of buyers: Do customers have the power to set terms and conditions?

5. Rivalry among competitors: How intense is the competitive rivalry in the industry?

The interdependence among these factors prevents one competitor from earning above-average returns

– It is only through competitive advantage that a firm can earn above-average profits for a time

– These above-average profits are a function of strategically erected entry barriers


Sustainable Competitive Advantage

Per Michael Porter (Harvard) the strength of an opportunity is a function of the strength of its competitive advantage:

A sustainable competitive advantage is a difference that can be preserved - a proprietary asset, a core competence, which– delivers greater value to customers– and/or comparable value at lower cost– or enters a niche market where there is no competition

Competitive strategy is about being different– deliberately choosing a different set of activities to deliver a unique set of values

Do you possess proprietary advantages that other firms cannot duplicate?– What is the evidence?

Can your business develop and deploy superior organizational resources, assets, processes, or values that other companies will have difficulty in matching?– What is the evidence?

Is your business model viable?– Can it be expanded to new markets? Is it scalable?– How much time do you have till you run out of cash?


Team Domains

Are you clear about your mission, aspirations, and risk propensity?– How much do you care about this business?– How focused are you?

Can you identify the few critical success factors, the ones that really make a difference?

– Can you and your team really do this?– Where is the evidence?– Do you have the experience and drive?– Can you sell this product/service?

Who do you know up, down and across the value chain?– How well do you know this business, the customers, the key suppliers,

other key players from whom you will need support?


Scoring the Seven Domains Model

Which domains are critical?

Which are necessary but not sufficient?

Which increase an opportunity’s attractiveness, but are

not critical?

Which do you know and which do you still need to

figure out?

In the end, it always comes down to market demand,

market size and structure, and margin analysis


Creating a Monopoly

The business version of our contrarian question is: what valuable company is nobody building? This question is

harder than it looks, because your company could create a lot of value without becoming very valuable

itself. Creating value is not enough—you also need to capture some of the value you create.

The airlines compete with each other, but Google stands alone. Economists use two simplified models to explain

the difference: perfect competition and monopoly.

Under perfect competition, in the long run no company makes an economic profit. The opposite of perfect

competition is monopoly. Whereas a competitive firm must sell at the market price, a monopoly owns its

market, so it can set its own prices. Since it has no competition, it produces at the quantity and price

combination that maximizes its profits.

…by “monopoly,” we mean the kind of company that’s so good at what it does that no other firm can offer a

close substitute. Google is a good example of a company that went from 0 to 1: it hasn’t competed in search

since the early 2000s, when it definitively distanced itself from Microsoft and Yahoo!

Tolstoy opens Anna Karenina by observing: “All happy families are alike; each unhappy family is unhappy in

its own way.” Business is the opposite. All happy companies are different: each one earns a monopoly

by solving a unique problem. All failed companies are the same: they failed to escape competition.

Peter Thiel, From Zero to On (Crown Business : 2014)


Four Characteristics of Monopoly…a great business is defined by its ability to generate cash flows in the future. Investors expect Twitter will be

able to capture monopoly profits over the next decade, while newspapers’ monopoly days are over.

Simply stated, the value of a business today is the sum of all the money it will make in the future. (To properly value a

business, you also have to discount those future cash flows to their present worth, since a given amount of money

today is worth more than the same amount in the future.) Comparing discounted cash flows shows the difference

between low-growth businesses and high-growth startups at its starkest. Most of the value of low-growth

businesses is in the near term. An Old Economy business (like a newspaper) might hold its value if it can maintain

its current cash flows for five or six years. However, any firm with close substitutes will see its profits competed

away.

Technology companies follow the opposite trajectory. They often lose money for the first few years: it takes time

to build valuable things, and that means delayed revenue. Most of a tech company’s value will come at least

10 to 15 years in the future.

If you focus on near-term growth above all else, you miss the most important question you should be asking: will

this business still be around a decade from now? Numbers alone won’t tell you the answer; instead you

must think critically about the qualitative characteristics of your business.

What does a company with large cash flows far into the future look like? Every monopoly is unique, but they

usually share some combination of the following characteristics: proprietary technology, network effects,

economies of scale, and branding.Peter Thiel, From Zero to On (Crown Business : 2014)


Start SmallAs a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute

in some important dimension to lead to a real monopolistic advantage. Anything less than an order of

magnitude better will probably be perceived as a marginal improvement and will be hard to sell, especially in

an already crowded market. The clearest way to make a 10x improvement is to invent something completely

new.

Brand, scale, network effects, and technology in some combination define a monopoly; but to get them to work,

you need to choose your market carefully and expand deliberately

Every startup is small at the start. Every monopoly dominates a large share of its market. Therefore, every

startup should start with a very small market. Always err on the side of starting too small. The reason

is simple: it’s easier to dominate a small market than a large one. If you think your initial market might be

too big, it almost certainly is.

Once you create and dominate a niche market, then you should gradually expand into related and slightly

broader markets. Amazon shows how it can be done.

Sequencing markets correctly is underrated, and it takes discipline to expand gradually. The most successful

companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a

part of their founding narrative.Peter Thiel, From Zero to On (Crown Business : 2014)


When is Doing a Full Business Plan Warranted?

Per Jeffrey Timmons,

– A business plan is a selling document that conveys the

excitement and promise of your business to any potential

backers or stakeholders

When the opportunity assessment warrants a more

thorough operational analysis

– i.e. how are you really going to do this

Confidential – For Classroom Use Only Screening Opportunities.

Documents

need statement word

defined need statement

scope of need

accuracy of need statement

organizing concepts

classroom use

numerous ideas

crosspollination of