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 inventionIs fundamental to problem solving Is a critical skill for recognizing or creating

opportunity in a dynamic environment

Creativity ThemesFigure 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 perspectives2. Incubation: letting the problem lie in the

subconscious for a time3. Illumination: the discovery of a solution4. 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 creativityNo 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 ideas3. Put the familiar into a new context4. Take advantage of a personal

network5. Return to childhood

Creativity and Problem SolvingDefine 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 DefinitionUse affirmative judgmentUse a set of predefined criteriaEffective problem statement contains:

◦A “how” question◦Identification of responsible party◦Action verb, representing positive

course of action◦Targeted or desired outcome

Developing SolutionsUse same techniques used to generate

and focus ideasCriteria plays critical role in solution

identification Explicit: time limits, budgets,

constraints Implicit: considerations such as

intuition, team culture, preferences, prejudices, etc.

InnovationJoseph Schumpeter identified five categories

of innovation:1. A new product or substantial change in

an existing product2. A new process3. A new market4. New sources of supply5. Changes in industrial organization

Innovation and Commercialization Process

Figure 3.4

Some Sources of Innovation

Customers Unexpected news events

Newspapers and magazines

Trends and patterns of change

Observation New government regulation

Demographic shifts Emerging industries Small businesses Business operations

Table 3.2

The Business ModelPeter 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 FailFlawed logic Limited strategic choices Imperfect value creation and capture

assumptionsIncorrect 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 definition2. The value proposition3. The product/service4. The distribution channel

The Value PropositionThe 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 DefinitionThe customer is the one who pays for the

solution.◦This may or may not be the end user of the

product or service being offeredThe 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 OfferedA solution to the problem the customer is

facing◦Most businesses produce both products and

services.

The Distribution ChannelHow 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 StoryA 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 Model1. 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 ModelFigure 4.1

Building a Business Model—StagesStage 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 serving3. 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 PlanSplit 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 feasibleEntrepreneur looks at the forecasted outcomes in

four ways: 1. What is the probability a change in the forecast

will occur2. What is the magnitude of the change if it occurs3. What is the impact of the change on the

business4. 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 AnalysisThree 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 TestsAreas to be analyzed:

◦Industry and market/customer◦Product/service◦Founding team◦Financial needs assessment

Quick Screen for Multiple OptionsQuick screen ideas before undertaking a thorough

feasibility study on any one of the concepts:1. Start with a concept statement2. Examine the industry3. Identify the market – customer & competitors4. Identify how the product/service benefits the

customer5. Examine founding/management team

capabilities6. List all resources needed by the business