Checklist for Evaluating New Ideas and Ventures

Key Factors for SuccessBruce Gjovig

Entrepreneur Coach and Director Center for Innovation, Rural Tech Incubator

TECHNICAL EVALUATION

• Innovative product, not “me too”

• Competitive advantages, features, and benefits

• Barriers to competitive entry (hard to imitate)

• High quality

• Third-party test results

• Ability to deliver a consistent, quality product on time

• Spin-off, different market applications

• Environmentally safe

No safety/health risks, regulatory control

MARKET EVALUATION

• Competitive advantage

• “USP”: Unique Selling Proposition Differentiate on quality, service, or innovation

• Market Pull vs. Market Push

Solves customer problems

• Sunrise vs. Sunset market

MARKET EVALUATION CONTINUED

• Significant market niche

• Market plan/strategy

• Distribution channels available

• Repeat sales likely

• Year-round vs. Seasonal demand

Approaches to Differentiation

Prestige – Rolex, Mont BlancQuality – Honda, CadillacTop-of-the-Line image – Ralph Lauren,

Cross PensInnovative, technological leadership – 3M

Corp.Engineering design and performance –

Mercedes

Approaches to Differentiation Continued

A different taste – Dr. Pepper, ListerineProduct reliability – Johnson & Johnson

baby productsSuperior service – Federal ExpressFull range of services – Merrill LynchComplete line of products – Campbell’s

SoupsSpare parts availability - Caterpillar

Approaches to Differentiation Continued

More for your money – McDonald’s,

Wal-MartSpecial features – Jenn-air’s indoor

cooking topsEconomy – GE’s miser light bulbs

ECONOMIC EVALUATION

Premium, price possible for quality

Competing on innovation, quality & service - not price

Low up-front investment intensity Low overhead High value-added Business plan

ECONOMIC EVALUATION CONTINUED

High productivity Minimum product liability Owners have financial commitment Management paid for performance, not title High Return on Investment (ROI) Realistic financial projections Good margins & profitability

Good cash flow

MANAGEMENT EVALUATION(The most important criteria)

• Experienced in industry

• Entrepreneurial aptitude and attitude

Results-oriented, bias for action

• Business experience and education

• Visionary leadership – sees “big” picture

• Business strategy is clear and concise

MANAGEMENT EVALUATION(The most important criteria)

• “Team” has experience and depth

(Production, engineering, finance, marketing, management)

• Experienced consultants, advisors

(Technical, business, legal, accounting)

• Outside accountability

Board of Directors, investors, etc.

Five-Year Profitable Survivalof New Business

Profitable Marginal Failed

Inexperienced, uneducated 8% 62% 30%

Inexperienced, educated 25% 29% 46%

Experienced, uneducated 25% 23% 52%

Experienced, educated 61% 16% 25%

Experienced, educated, planned 81% 12% 7%

RELATIVE MARKET SHARE IS CLOSELY RELATED TO PROFITABILITY

11% 11%

20% 20%

34%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0 16 30 45 80

Relative Market Share (%)

RO

I (%

)

High Market Share Increases ROI

ROI INCREASES WITH MARKET SHARE RANK

0

5

10

15

20

25

30

35

RO

I (P

reta

x)

#5 #4 #3 #2 #1

Market Share Rank

Higher Market Share Increases ROI

Profit(Pre-Tax, pre-interest)

0

5

10

15

20

25

30

35

Pe

rce

nt

20 40 60 80 100

Relative Qualtity (percentile)

ROSROI

Quality Increases Rate of Return

HIGH QUALITY PRODUCTS & SERVICES ARE MOST PROFITABLE (Less 12% cst of cap.)

10%

18% 18%

21%

29%

0%

5%

10%

15%

20%

25%

30%

RO

I(%

)

0 5 25 50

Perceived Quality By Competition

Quality Increases Rate of Return

Quality Customer ServiceBased on 3,000 businesses in all sectors of the economy.

--Strategic Planning Institute, Cambridge, MA

Low Service High Service Difference

Price Index 98% 107% 9%

Annual Market Share Shift

-2% +6% 8%

Profitability +1% 12% 11%

Pay for Quality

Customers will pay:

33% more for a higher quality car

50% more for a higher quality dishwasher

65% more for a better TV

70% more for a better sofa

100% more for better shoes Gallup Surveys for American Society for Quality Control

Definition of “Quality”

• The customer’s judgment, not yours• Both the product and the associated services• Not absolute, but relative to competitors• Does not include price

Quality Index = Percent of sales from superiorminus

Percent of sales from inferior products

GOOD PRODUCTIVITY IS CLOSELY TIED TO HIGH ROI

0

5

10

15

20

25

30

35

ROI (%)

25K 30K 35K 50K

Value Added Per Employee

High Productivity Increases Profitability

CAPITAL INTENSITY HURTS PROFITABILITY

05

1015202530354045

PE

RC

EN

T

0 20 60 80 100

Investment/Sales (%)

ROS

ROI

AS INVESTMENT INTENSITY RISES ROI DECLINES

36%

26%

21%

15%

9%

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

RO

I (%

)

0 36 46 58 72

Investment/Sales (%)

Capital Intensity Decreases Profitability

Major Factors Causing High Profits

1. Strong Market Position Relative Market Share > 80%

2. Low Investment Intensity Investment/Sales < 33%

3. High Productivity Value Added/Employee > $60 K

4. High Perceived Quality Quality > 50%

5. Low R&D Marketing Expense Marketing + R&D/Sales < 10%

Major Factors Causing Profit Trouble

1. Weak Market Position Relative Market Share < 25%

2. High Investment Intensity Investment/Sales < 33%

• Fixed Capital

or

• Working Capital Investment/Sales > 70%

3. Low Productivity Value Added/Employee < $45K

4. Poor or Standard Quality Quality < 0

5. High R&D & Marketing Expense Marketing + R&D/Sales > 15%

Percentage of New Produce Failures For Three Types of Businesses:

Consumer, Industrial, ServiceSurvey Source & Year

All Products Consumer Industrial Service

Booz, Allen & Hamilton (1968)

37% 35% --

Advertising Age (1969)

80% -- --

The Conference Board (1971)

40% 20-40% 10-20%

Nielson (1971) 53% -- --

Journal of Marketing (1971)

65% -- --

Grand Average 55% 33% 15%

Percentage of New Produce Failures For Three Types of Businesses:

Consumer, Industrial, ServiceSurvey Source & Year

All Products Consumer Industrial Service

The Conference Board

40% 42% 38% 10-20%

Booz, Allen & Hamilton

35% -- -- --

Assn. of Natl. Advertisers

-- 39% -- --

Gallagher -- 36% -- --

Cooper -- -- 24% --

Grand Average 38% 39% 31% 15%

Product Lifecycle

• 17-20 years – 1970• 10-20 years – 1980• 5-6 years – 1990• 2-3 years – 2000• Less than 1 year for some products• Need for constant innovation,

improvement, new product development

3M

• 30% of sales from products introduces within last 5 years

• 10% real growth annually

• 10% profitability after taxes

• 27% return on capital investment

• 15% rule of time

New Products

• Need a champion• Market test• Get to market swiftly (market plan)• First to market gains share,

higher margins, etc.• Sell benefits, not features• Unique benefits – innovative, better, faster,

etc.

• Some 37% of U.S. households include someone who has founded, tried to start or helped fund a small business.

- Entrepreneurial Research Consortium

Small Business Success…

70% going after 8 years

-Dun& Bradstreet survey of 800,000 small businesses started in 1985

80% fail in 5 years is myth!

“Every Community will lose about 10% of its jobs each year – from acquisition, downsizing, death, retirements or other causes.

About 55% of all new jobs are from expansions of existing local companies and nearly 45% of new jobs are created by startup companies.

Less then 1% of net new jobs occur as the result of relocations.”

-David Birch, Ph.D.

Cognetics

“Fast growth companies that utilize university resources boast productivity rates 59% higher than peers without a university relationship, as well as 21% higher annual revenues and 23% more capital investments.

Private/public collaboration provides a strategic advantage for a significant number of high growth companies.”

-1995 Coopers & Lybrand Study

Net new jobs come form…

• 66% employers of less than 20

• 80% employers of less than 100

• 50% less than 4 years old

• 1/3 generate 2/3 new jobs

80% of new sales

High risk Economy

Unemployment LowReal Wages – all time highRecord ProfitsExport Growing 3x growth of economy

BUT…12% college graduates lost job since 1993Corporate downsizingJob insecurityEconomic uncertainty

Growth

Has been traded for

Security

Higher risk…higher reward

Strategies for Workers…

• High tech career

-most growth, most turmoil

• Exporting company

-pays 12% more on average

• Self-employed

Strategies for companies…

• Reengineer, restructure

-boost productivity, profits

-cut costs

• Technological innovation

• Export in growth countries

• Invest in deregulated markets