THE ENTREPRENEUR’S HEADSET:

INNOVATION & DECISION MAKING

Don Peterson January 2011

Two Broad Categories of Opportunities

Example: Google

Lower odds of success

Dramatic when it works

Winners accrue greater and

greater market share

Big capital investment – VCs

Unique technology often key

Speed-to-market

Network effect of product usage

Patents can be critical

Most successful ventures are this type

Higher odds of success

Finding a niche

Differentiation is typically a challenge

Success is possible even in a seemingly crowded market

Often low capital investment

Hustle and quality can make the difference

“Winner Take All” “Many Winners”

Characteristics of “Many Winners” Markets

Resource dependencies and/or geographic constraints

Forces industry fragmentation

Typically rely heavily on key people

Chicago’s “star” real-estate agents are irrelevant in Minneapolis

Often, even the best-known companies can’t get traction in a local market without the right people

Underserved, 2nd or 3rd tier markets can be gold mines

Create Your Company’s Iceberg

Many of the keys to success lie

below the waterline, in the form

of non-obvious, hard-to-replicate

processes, cultural attributes,

intellectual property and other

intangible assets.

Successful companies are like icebergs.

There’s a lot more to them than meets

the eye.

Together, they enable a way of

doing business and, hopefully, a

defensible competitive advantage.

These critical differences are

typically driven by innovation

that matters.

Sorting Out Innovative Ideas

Tons of ideas will be generated by

you, your colleagues, your

customers, your uncle Fred.

Many will suck, a good number will

be worth doing, and a few will be real

difference makers.

You need to be able to sort them out

quickly and reliably. Time and

resources are precious.

Make Sure Innovation Matters

Can you clearly explain how the proposed innovation creates…

More value for your customer?

Don’t forget about risk reduction, which is often very valuable to customers

Increased barriers to entry for competition?

Without detracting from customer value

Enhanced profitability for your company?

Watch out for unintended consequences that reduce customer value

Innovation that fails this test is worse than no innovation at all…

Consumes time and resources for no gain

Might even trigger a major setback

Which Ideas to Implement?

Evaluate how costly, and

how difficult each idea is

to implement.

Look for ways to pilot

ideas at low cost/risk, to

validate the business

impact and refine your

target.

This will enable you to

prioritize your “roadmap”

of product/service

enhancements, as well

as your operational

improvement projects.

Most successful entrepreneurs continually think hard about how to create a differentiated product or service.

But some business model features (e.g. pricing structure, contract terms, etc.) are also part of your customer’s experience with your product or service…so they too can be differentiating factors.

Other business model features (e.g. employee incentives) can also make a huge impact on your customer’s experience.

There are often many ways to create differentiation that matters by having a unique business model…even if your actual product or service is not unique.

Innovate Your Business Model Too!

The Opportunity Filter

Economic Value Tendency to overstate expected revenue, understate costs when starting out

Strategic Value Will this deal improve my position for future opportunities?

Opportunity Cost What will we not be able to do if we pursue this business?

What about if we win it?

Odds-To-Win Do we have a realistic shot?

Long-Term Commitment? Be very careful of these, especially when in unfamiliar territory

Making Tough Decisions

Decision Trees

Be careful not to fool yourself

when assigning probabilities.

It’s easy to make it come out

the way you hope it will.

All-Or-Nothing Bets

Pascal’s Wager

If the consequences of a wrong

decision are unbearable,

especially if you cannot gauge

the probabilities of different

outcomes, then it’s not wise to

make your decision using a

probability-based approach.

Look for Asymmetrical Upside

Heads, I win!…

…Tails, I don’t lose much!*

Look for situations where the penalty for failure is small compared

to the reward for success

Most entrepreneurs have failures, so it’s important that your failures don’t eliminate your ability to try again “Live to fight another day”

Many entrepreneurs don’t spend enough time considering what happens if their venture doesn’t work out It’s not negative thinking to formulate a disaster plan in advance

Set your walk-away threshold

* This saying was coined by a friend of mine, the near-legendary investor and entrepreneur, Mohnish Pabrai

Great Reading

Different: Escaping the Competitive Herd – Moon

How to succeed in a world where conformity reigns…but exceptions rule.

Blue Ocean Strategy – Kim & Mauborgne

Win by playing a new game…that you create

Selling the Invisible – Beckwith

Differentiate your intangible product

Tuned In – Stull, Myers & Scott

How to figure out what will really hit home with your customers

Brand Simple - Adamson

Stake out your unique position in the marketplace

The Dahndo Investor – Pabrai

The “Heads I win…Tails, I don’t lose much!” approach to choosing opportunities

Success – Gladwell

Entertaining stories about what it really takes to become a true expert

The Dip – Goden

How to think about sticking with it vs. moving on

The Checklist Manifesto – Gawande

Ensure consistent execution of critical tasks

THANKS & GOOD LUCK!

Don Peterson January 2011

doncpeterson@gmail.com

LinkedIn: Don C. Peterson