Lecture Outline

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Lecture Outline
MAN 6721 Strategic Management
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Class 4
The New Business Road TestChapters
1-4 Thursday, February 8, 2007
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Chapter 1 My Opportunity Why Will or Wont This
Work? The New Business Road Test John W. Mullins
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The Seven Domains of Attractive
OpportunitiesSlide 1 of 3
Market Domain
Industry Domain
Market attractiveness
Industry attractiveness
Macro-level
Mission, aspirations, propensity for risk
Ability to execute on CFSs
Team Domain
Connectedness up, down, across value chain
Micro-level
Sustained advantage
Target segment benefits and attractiveness
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The Seven Domains of Attractive
OpportunitiesSlide 2 of 3

• Insights Provided by The Model
• Markets and industries are not the same
• Both macro- and micro-level considerations are
  necessary markets and industries must be
  examined at both levels
• The keys to assessing entrepreneurs and
  entrepreneurial teams arent simply found on
  their resumes or in assessments of their
  entrepreneurial character

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The Seven Domains of Attractive
OpportunitiesSlide 3 of 3

• Addresses The Central Elements in the Assessment
  of Any Market Opportunity
• Are the market and the industry attractive?
• Does the opportunity offer compelling customer
  benefits as well as a sustainable advantage over
  other solutions to the customers needs?
• Can the team deliver the results they seek and
  promise to others?

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Differences Between Markets and IndustriesSlide
1 of 2

• Markets
• Consists of a group of current and/or potential
  customers having the willingness and ability to
  buy productsgoods or servicesto satisfy a
  particular class of wants or needs.
• Thus, markets consist of buyerspeople or
  organizations and their needsnot products.
• One such market, for example, consists of
  businesspeople who get hungry between meals
  during their workday. Well call this the market
  for workplace snacks.

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Differences Between Markets and IndustriesSlide
2 of 2

• Industries
• An industry consists of sellerstypically
  organizationsthat offer products or classes of
  products that are similar and close substitutes
  for one another.
• What industries serve the market for workplace
  snacks?
• At the producer level, there is the salty snack
  industry, the candy industry and the fresh
  produce industry, to name but three.
• There are also industries providing the
  distribution of these products to workplaces,
  including the supermarket industry, the
  restaurant industry, the coin vending machine
  industry, the coffee bar industry and so on.

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Is the Market Attractive? Macro- and Micro-
ConsiderationsSlide 1 of 3

• Macro-level
• Market size
• Number of customers in the market, say for
  workplace snacks
• The aggregate money spent by these customers on
  the relevant class of goods or services, in this
  case workplace snacks
• The number of units of relevant products or usage
  occasions, such as workplace snacks, bought
  annually
• Market growth rate
• Environmental trends
• Do the trends favor the opportunity, or will the
  entrepreneur be swimming against a powerful tide?

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Is the Market Attractive? Macro- and Micro-
ConsiderationsSlide 2 of 3

• Micro-level analysis is based on four key
  questions
• Is there a target market segment where we might
  enter the market in which we offer the customer
  clear and compelling benefits at a price they are
  willing to pay?
• Are these benefits, in the customers minds,
  different from and superior in some way--better,
  faster, cheaper or whateverthat whats currently
  offered by other solutions? Differentiation is
  crucial. The vast majority of me-too products
  fail
• How large is this segment, and how fast is it
  growing?
• Is it likely our entry into this segment will
  provide us entry to other segments we may wish to
  target in the future?

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Is the Market Attractive? Macro- and Micro-
ConsiderationsSlide 3 of 3

• Takeaways from analysis
• Many aspiring entrepreneurs make the mistake of
  examining only the macro-level
• Through failing to identify the first customers
  who will buyalmost by nameand why they would
  benefit, and in ignoring how entry into this
  segment might create one or more options for
  growth into other market segments, they risk
  pursuing a deal-end path on two counts
• Without differentiated benefits, most customers
  wont buy
• Without a pathway to growth, most investors wont
  invest

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Is the Industry Attractive? Macro- and Micro-
ConsiderationsSlide 1 of 4

• Macro-level
• Industry attractivenessPorters five forces
• Threat of entry, buyer power, supplier power,
  threat of substitutes, competitive rivalry
• The more forces that are favorable, the more
  attractive the industry
• Once all the five forces have been assessed, the
  key outcome is to reach a clear conclusion about
  the attractiveness of ones industry

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Is the Industry Attractive? Macro- and Micro-
ConsiderationsSlide 2 of 4

• Micro-level
• A new venture is not likely to grow over the long
  term if the initial advantage it brings to its
  customers cannot be sustained in the face of
  subsequent competitors entry of if its business
  model lacks economic viability
• Thus identifying and assessing the sustainability
  of the proposed new firms competitive advantage
  is necessary to fill in the micro-level industry
  piece of the opportunity assessment puzzle

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Is the Industry Attractive? Macro- and Micro-
ConsiderationsSlide 3 of 4

• Micro-level
• Factors that help a firm sustain its competitive
  advantage
• The presence of proprietary elementspatents,
  trade secrets and s onthat other firms are
  unable to duplicate or imitate
• The likely presence of superior organizational
  processes, capabilities or resources that others
  would have difficulty duplicating or imitating
• The presence of an economically viable business
  modelone that wont quickly run out of cash.
  This factor, in turn, involves a careful look at
  some more detailed issues

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Is the Industry Attractive? Macro- and Micro-
ConsiderationsSlide 4 of 4

• Micro-level
• Factors that help a firm sustain its competitive
  advantage
• The presence of an economically viable business
  modelone that wont quickly run out of cash.
  This factor, in turn, involves a careful look at
  some more detailed issues
• Revenue, in relation to the capital investment
  required and margins obtainable
• Customer acquisition and retention costs, and the
  time it will take to obtain customers
• Gross margins and their adequacy to cover the
  necessary costs structure to operate the business
• Operating cash cycle characteristics, i.e. how
  much cash must be tied up in working capital such
  as inventory, how quickly will customers pay, and
  how slowly may suppliers and employees be paid,
  in relation to the margins the business generates
  

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Can The Team Deliver?

• Questions of Interest Beyond Examining Resumes
• Does the opportunity fit the teams business
  mission, personal aspirations and risk
  propensity?
• Does the team have what it takes, in a human
  sensein experience and industry know-howto
  deliver superior performance for this particular
  opportunity, given its critical success factors,
  i.e.,..
• Those factors that tend to distinguish between
  the better performing and poorer performing firms
  in the industry one proposes to enter
• Is the team well connected up, down and across
  the value chain so it will be quick to notice any
  opportunity or need to change its approach if
  conditions warrant?

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Chapter 2 Will the Fish Bite? The New Business
Road Test John W. Mullins
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Do Customers Matter?
Its not about you. Its not about your
revolutionary products or services. Successful
entrepreneurial ventures are about serving
customers and their needs. Not just any
customers. Target customers. Its about providing
differentiated benefits that are so compelling
that customers abandon their allegiance to former
providers and give their business to you.
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The Seven Domains of Attractive Opportunities
Market Domain
Industry Domain
Market attractiveness
Industry attractiveness
Macro-level
Mission, aspirations, propensity for risk
Ability to execute on CFSs
Team Domain
Examined in Chapter 2
Connectedness up, down, across value chain
Micro-level
Sustained advantage
Target segment benefits and attractiveness
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Four Critical Micro-level Questions About Target
Markets

• Four Crucial Questions (for Micro-level analysis)
• Is there a target market segment where we might
  enter the market in which we offer the customer
  clear and compelling benefits, at a price he or
  she is willing to pay?
• Are these benefits, in the customers minds,
  different from and superior in some waybetter,
  faster, cheaper or whateverto whats currently
  offered by other solutions?
• How large is this segment, and how fast is it
  growing?
• Is it likely that our entry into this segment
  will provide us entry into other segments that we
  may wish to target in the future?
• Talk about lifestyle issues

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The New Business Road Test Stage OneThe
Micro-Market TestSlide 1 of 2

• What customer pain will your offering resolve?
  How strong an incentive do customers have to give
  you their money? Will the fish bite?
• Who, precisely, are the customers that have the
  pain? Do you have detailed, accurate and current
  information about who they are, where they live
  or do business, or what they do?
• What benefits does your offering provide that
  other solutions dont?
• What evidence do you have the customers will buy
  what you propose to offer?

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The New Business Road Test Stage OneThe
Micro-Market TestSlide 2 of 2

• What evidence can you provide to show that your
  target market has the potential to grow?
• What other segments exist that could benefit from
  a related offering?
• Can you develop capabilities that are
  transferable from one segment to another?

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Chapter 3 Is This a Good Market? The New
Business Road Test John W. Mullins
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The Seven Domains of Attractive Opportunities
Market Domain
Industry Domain
Market attractiveness
Industry attractiveness
Macro-level
Examined in Chapter 3
Mission, aspirations, propensity for risk
Ability to execute on CFSs
Team Domain
Connectedness up, down, across value chain
Micro-level
Sustained advantage
Target segment benefits and attractiveness
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Three Crucial Questions About Markets

• Three Crucial Questions
• Is my market large enough today to allow
  different competitors the opportunity to serve
  different segments without getting in others
  way?
• What are the predictions for your markets
  short-term growth rate? (In the absence of other
  information to the contrary, the recent rate of
  growth in your market may be the best available
  predictor of growth in the near future)
• What are the predictions for your markets
  long-term growth rate?
• (This is likely to be influence heavily by
  macro-trends economic, demographic,
  sociocultural, technological, regulatory and/or
  natural)

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The New Business Road Test Stage TwoThe
Macro-Market Test

• What sort of business do you want? One with
  potential to become a huge business, or a small
  lifestyle operation servicing a niche market?
  Without answering this question first, you cannot
  assess for your particular opportunity the means
  of the others below.
• How large is the market you are seeking to serve?
  In how many ways have you measured it?
• How fast has it grown over the last on/three/five
  years?
• What economic, demographic, sociocultural,
  technological, regulatory or natural trends can
  you identify that will affect your market, and
  what effect, favorable or otherwise, will these
  trends have on your business

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Chapter 4 Is This a Good Industry? The New
Business Road Test John W. Mullins
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The Seven Domains of Attractive Opportunities
Market Domain
Industry Domain
Market attractiveness
Industry attractiveness
Examined in Chapter 4
Macro-level
Mission, aspirations, propensity for risk
Ability to execute on CFSs
Team Domain
Connectedness up, down, across value chain
Micro-level
Sustained advantage
Target segment benefits and attractiveness
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Industry Attractiveness
Higher Threat
Lower Average Profits
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The New Business Road Test Stage ThreeThe
Macro-Industry Test

• Based on all five forces, what is your overall
  assessment of this industry? Just how attractive
  or unattractive is it?
• If your industry is a poor performer overall, are
  there persuasive reasons why youll fare
  differently? If not, move on.