Checklist for Evaluating New Ideas
and Ventures
Key Factors for Success
Bruce 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 Blanc
Quality – Honda, Cadillac
Top-of-the-Line image – Ralph Lauren,
Cross Pens
Innovative, technological leadership – 3M
Corp.
Engineering design and performance –
Mercedes
Approaches to Differentiation
Continued
A different taste – Dr. Pepper, Listerine
Product reliability – Johnson & Johnson
baby products
Superior service – Federal Express
Full range of services – Merrill Lynch
Complete line of products – Campbell’s
Soups
Spare parts availability - Caterpillar
Approaches to Differentiation
Continued
More for your money – McDonald’s,
Wal-Mart
Special features – Jenn-air’s indoor
cooking tops
Economy – 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 Survival
of New Business
Profitable
Inexperienced, uneducated
8%
62%
30%
Inexperienced, educated
25%
Experienced, uneducated
25%
Experienced, educated
Experienced, educated, planned
29%
23%
61%
81%
46%
52%
16%
12%
Marginal
25%
7%
Failed
RELATIVE MARKET SHARE IS CLOSELY
RELATED TO PROFITABILITY
40%
35%
30%
ROI (%)
25%
20%
34%
15%
10%
5%
11%
11%
0
16
20%
20%
30
45
0%
80
Relative Market Share (%)
High Market Share Increases ROI
ROI INCREASES WITH MARKET
SHARE RANK
35
30
ROI (Pretax)
25
20
15
10
5
0
#5
#4
#3
#2
Market Share Rank
#1
Higher Market Share Increases ROI
Profit
(Pre-Tax, pre-interest)
35
30
Percent
25
20
ROS
ROI
15
10
5
0
20
40
60
80
Relative Qualtity (percentile)
100
Quality Increases Rate of Return
HIGH QUALITY PRODUCTS & SERVICES ARE
MOST PROFITABLE (Less 12% cst of cap.)
30%
29%
25%
21%
20%
ROI(%)
18%
18%
15%
10%
10%
5%
0%
0
5
25
50
Perceived Quality By Competition
Quality Increases Rate of Return
Quality Customer Service
Based 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
Profitability
-2%
+6%
8%
+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 superior
minus
Percent of sales from inferior
products
GOOD PRODUCTIVITY IS
CLOSELY TIED TO HIGH ROI
35
30
25
20
ROI (%)
15
10
5
0
25K
30K
35K
50K
Value Added Per Employee
High Productivity Increases Profitability
PERCENT
CAPITAL INTENSITY HURTS
PROFITABILITY
45
40
35
30
25
20
15
10
5
0
ROS
ROI
0
20
60
80
100
Investment/Sales (%)
ROI (%)
AS INVESTMENT INTENSITY
RISES ROI DECLINES
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
36%
26%
21%
15%
9%
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
• Fixed Capital
Investment/Sales < 33%
•
Working Capital
or
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, Service
Survey 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, Service
Survey 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 Low
Real Wages – all time high
Record Profits
Export Growing 3x growth of economy
BUT…
12% college graduates lost job since 1993
Corporate downsizing
Job insecurity
Economic 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