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 Campbells
Soups
Spare parts availability - Caterpillar
 Approaches to Differentiation
Continued
More for your money McDonalds,
Wal-Mart
Special features Jenn-airs indoor
cooking tops
Economy GEs 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 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
40%

35%

30%

25%
ROI (%)

20%
34%
15%

10% 20% 20%

5% 11% 11%

0%
0 16 30 45 80
Relative Market Share (%)

High Market Share Increases ROI

ROI INCREASES WITH MARKET
SHARE RANK
35

30

25
ROI (Pretax)

20

15

10

0
#5 #4 #3 #2 #1
Market Share Rank

Higher Market Share Increases ROI

 Profit
(Pre-Tax, pre-interest)
35

30

25

20
Percent

ROS
15
ROI

10

0
20 40 60 80 100
Relative Qualtity (percentile)

Quality Increases Rate of Return

HIGH QUALITY PRODUCTS & SERVICES ARE
MOST PROFITABLE (Less 12% cst of cap.)
30% 29%

25%

21%
20%
18% 18%
ROI(%)

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 -2% +6% 8%

Market
Share Shift
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 customers 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

CAPITAL INTENSITY HURTS
PROFITABILITY
45
40
35
30
PERCENT

25
20 ROS
15
ROI
10
5
0
0 20 60 80 100
Investment/Sales (%)
AS INVESTMENT INTENSITY
RISES ROI DECLINES
0.4
36%
0.35
0.3
26%
0.25
ROI (%)

21%
0.2
0.15 15%
0.1 9%
0.05
0
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, Service
Survey Source All Products Consumer Industrial Service
& Year
Booz, Allen & 37% 35% --
Hamilton (1968)
Advertising Age 80% -- --
(1969)
The Conference 40% 20-40% 10-20%
Board (1971)
Nielson (1971) 53% -- --

Journal of 65% -- --
Marketing (1971)

Grand Average 55% 33% 15%

 Percentage of New Produce Failures For
Three Types of Businesses:
Consumer, Industrial, Service
Survey Source All Products Consumer Industrial Service
& Year

The Conference 40% 42% 38% 10-20%

Board

Booz, Allen & 35% -- -- --

Hamilton

Assn. of Natl. -- 39% -- --

Advertisers

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 riskhigher 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