OPPORTUNITY ASSESSMENT AND BUSINESS MODELING

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1 The University of Texas Pan American Technology Entrepreneurship Boot Camp OPPORTUNITY ASSESSMENT AND BUSINESS MODELING Opportunity knocks many times but which door do you open? By Jan Smolarski, PhD

2 Opportunities How to spot one: where does it come from? Mature industries, new technologies, unmet needs, identifying trends and niches. How do you assess an opportunity? Hint: ideal opportunity, resource theory, business model analysis, risk. How do you get started? How do you develop sustainability? Is the business plan important? Is the plan of execution important? (Are plans important?)

3 Sources of Entrepreneurial Opportunities The unexpected The incongruous The process need Industry and market structures Demographics Changes in perception New knowledge

4 How Do You Assess Opportunities? How do you assess an opportunity? Hint: ideal investment, resource theory, risk assessment, business model analysis. Map it against the ideal opportunity. Decide if and how you can develop a sustainable competitive advantage. Use all of the above! Note that you now have a model of opportunity assessment.

5 The Ideal Opportunity? Sales growth exceeds 60 percent in the early years. Margins exceed 20 percent. Niche strategy is always the best entry strategy (no matter how large the niche!) The niche should be growing. The opportunity has to have uniqueness (at least in the eyes of the target market/customer).

6 The Ideal Opportunity? The great paradox: uniqueness implies that your goods or service are not easily standardized. This is how you want your target market to think of your business. Inside your company, standardization is the key to growth. The market should be large enough so as not to attract competitors or competitive responses (think Wal-Mart, Southwest Airlines etc). The target audience should be identifiable. Often (but not always) the B2B space offers better opportunities.

7 The Ideal Opportunity? Focus, focus, focus and.. Trema Treasury Management Interbiz Product differentiation should not primarily be based on price. There must be more than one way to differentiate the product from competitors. There should be more than one way of making money.

8 Resource-Based Theory Buy (or acquire) resources and skills cheaply Lesson No 1: If you re successful, you will be short of resources. Lesson No 2: If you re unsuccessful, you will be short of resources. Transform (the resource or skill) into a product or service Deploy and implement (the strategy) Sell dearly (for more than you paid)

9 Sustainable Competitive Advantage Competitive advantage created when firms possess and employ resources that are: Valuable Allowing exploitation of environmental opportunities Rare Not enough for all competitors Hard to copy Competitors cannot easily duplicate them Non-substitutable

10 Resource Attributes and Competitive Advantage Creates Competitive Resource No Competitive Advantage Dimension Advantage Exploits opportunities Neutralizes threats Valuable resources Not suited to the environment - Common

11 Resource Attributes and Competitive Advantage Creates Competitive Resource No Competitive Advantage Dimension Advantage Exploits opportunities Neutralizes threats Valuable resources Not suited to the environment - Common Unique Costly to procure Rare resources Readily available Inexpensive

12 Resource Attributes and Competitive Advantage Creates Competitive Resource No Competitive Advantage Dimension Advantage Exploits opportunities Neutralizes threats Valuable resources Not suited to the environment - Common Unique Costly to procure Rare resources Readily available Inexpensive Unique history Causally ambiguous Socially complex Imitable resources Ordinary history Causality known Socially simple

13 Resource Attributes and Competitive Advantage Creates Competitive Resource No Competitive Advantage Dimension Advantage Exploits opportunities Neutralizes threats Valuable resources Not suited to the environment - Common Unique Costly to procure Rare resources Readily available Inexpensive Unique history Causally ambiguous Socially complex Imitable resources Ordinary history Causality known Socially simple Not possible through: Similar modes Different modes Substitutable resources Possible: Similar modes Different modes

14 Profit Factors - 6 Strategic Resources Resources Valuable Rare Hard-to-Copy Nonsubstitutable Physical yes sometimes not usually sometimes Reputational yes yes yes yes Organizational yes yes yes yes Financial yes sometimes no no Intellectual yes yes usually sometimes Technological yes sometimes sometimes sometimes

15 Reputational Resources The quality of management The use of corporate assets The firm s financial soundness The firm s value as a financial investment The quality of products and services Media coverage Innovativeness The ability to attract, develop, and retain top people The extent of community and environmental responsibility

16 Business Model Analysis Business model analysis Revenue sources Definitions: single stream, multiple stream, interdependent, loss leader Revenue models: subscription, volume or unit based, advertising based, licensing, transaction fee. Cost drivers Fixed, semi-variable, variable, non-recurring. Investment size Critical success factors

17 Business Model Analysis Recording artist revenue model. Revenue sources Concerts Depends on # of concerts and revenue/concert. Merchandise Probably the same as concerts Recording Albums recorded Revenue per album

18 Business Model Analysis Software developer complex product (not plug and play). Revenue sources License fees. Selling ad-on third party products. Selling interfaces. Installation. Customization. Maintenance. Sale of own products to existing customers.

19 Issues to Consider!

20 Lets Look at Pricing Price, Price and Price

21 How to Manage an Aggressive Competitor How can firms develop a competitive defense strategy that minimizes both self- and competitor-inflicted damages resulting from price competition? Principles: Anticipate long-term strategic consequences Weigh them against short-term goals Defining what winning means! Firm s ability to operate profitably in the long-term

22 Traditional Responses Competitor Actions For many firms and managers, competitor actions trigger actions like: attempting to match price Premise: keeping an old customer is less costly than acquiring a new one Some profit is preferable to losing the entire sale The danger in this reasoning are: Customers learn quickly how to get a lower price Competitors may push the price even lower Customers learn from each other

23 Customer s Learn Quickly Lessons from the trenches: Continental Airlines

24 First, When Should You Compete on Price? When your business has a substantial and sustainable cost advantage Remember, there is always somebody cheaper When managers have good reason to believe that competitors will not or cannot respond When the firm s strategic objective is to grow without regard for profitability Warning sign: a firm that has received venture capital financing.

25 Think before you act! Lessons from the Trenches Price competition is usually costlier for larger firms They have higher fixed cost to support They rely on volume Although many firms exit, their physical assets do not Think boat industry With each price war, incumbents become weaker because they have fewer resources

26 Strategies Focus reactive price cuts on only those customers likely to be attracted by a competitive offer Focus reactive price cuts on a particular geography, distribution channel, or product line where the competitor has the most to lose compared to you from cutting the price Focus reactive price cuts only on the incremental volume at risk

27 Strategies Raise the cost to the competitor of its discounting If discounts are given only to new customers, try to inform the competitors old customers Leverage any competitive advantages to increase the value of your offer as alternative to matching the price Common in the software industry Try to figure out when price cuts are likely High fixed costs Excess capacity Low growth or shrinking markets Lack of dominant industry leaders

28 Strategies If you respond, is the competitor willing and able to cut the price again to re-establish the price difference? Think generic pharma In a price sensitive business, will the multiple responses required cost more or less? Its better to get stuck with a high price, on which to base the price difference. Again, the pharmaceutical industry is a good example. Figure out a way to let the competitor have something to loose Let the competitor win some profitable business and let them know that if they continue to cut prices, you will turn their profitable business into an unprofitable business

29 Strategies Direct the competitor to more price sensitive low margin customer segments Create switching barriers in more profitable segments Don t do anything Never participate in competitive engagements that you cannot win. Don t fight loosing battles. Always participate in competitive engagements from a position of advantage

30 Factors Affecting Retaliatory Pricing Encouraging Factors Elastic demand Cost advantages Excess capacity High fixed cost Small competitors New competitors Single-product markets Discouraging Factors Inelastic demand No cost advantages Tight capacity Low fixed cost Large competitors Long-time rivalries Mkt. interdependence

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