TCC 300: Page 1

Invention and Design

Outline

1. (Engineering) Methodologies for Design
2. Systems Engineering Methodology
3. Decision Methodologies -- Critical Concepts
4. Venture Analysis -- Critical Concepts

Question: How many of you have photographic memories?
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VENTURE ANALYSIS: GO or NO GO?

• Basically, an attempt to predict the future - An Art and a Science
• Organize all relevant information into an structured format.
• Key Concept - uncertainty and managing it:
  • Uncertainty in government policies (eg, tax),
  • Uncertainty in the market activities of competitors,
  • Uncertainty in the structure of the organization, and
  • Uncertainty in technology, R&D.
  • Uncertainty in costs and availability.

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VENTURE ANALYSIS: Economic Concepts

• NPW: Net Present Worth - Discounted Time value of Money: A dollar today is worth more than a dollar tomorrow.
• With a standard discount rate (15% to 20%) only the first ten years mean anything. Good or Bad?

Venture Measures:
• Venture ratio: Discounted Benefits * Prob. Success > T Discounted Cost of Research
• Payback Period: Time required for stream of cash inflows to received by the venture to balance the original cash outlays. (No discounting)
• Other: Benefit Cost Ratios, IRR

VENTURE ANALYSIS: Screening Policy

Some companies have a set of rules: E.G., Gould Corporation
• The product can be introduced within five years (what about computers).
• The product has a market potential of at least 50 million and a 15% growth rate.
• The product will provide at least 30% return on sales and 40% return on investment (ROI).
• The product will achieve technical or market leadership.

VENTURE ANALYSIS: Complexity

Common Omissions:
• Employee strikes or rapid labor turnover.
• Failure of suppliers to deliver raw materials.
• Failure of a device in routine commercial production that worked as a hand-crafted laboratory model.
• Failure of marketing campaign.
• Others?

VENTURE ANALYSIS: Phases

Three Major Phases of a Venture Analysis
1. Information Framework: knowledge of markets, costs, investment requirements, and technical know-how into a consistent framework.
2. Risk Analysis: degree of confidence associated with estimates of various technical and economic factors. Discontinuities: Critical Incident Analysis
3. Decision Analysis: Use all information and decision methodology to make decision.

VENTURE ANALYSIS: Market Opportunity, Market Penetration

• Total Market Potential: Size of the total market for which the product is functionally adequate. Difficult, especially with a product for which no market exists.
• Total Market Opportunity: Total market size over all en-use categories for which the product is functionally and economically adequate.

Technology Push versus Market Pull:

Marketing Pull: existing demand for the product
Technology Push: need or created need, but no current market (functionality!)
Pricing Model: Complex -- Start high or low?

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VENTURE ANALYSIS: Marketing Strategy

Rules of Thumb:

First Stays First: First twice the second, second twice the third (all things roughly equal)

Clear Leadership Market Share: A market share greater than 60% is consistent only with clear leadership in all aspects (service, merchandising, public confidence, product research experience, and patent protection)

Maximize Profit Not Sales: Obsession with market share can be dangerous.

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VENTURE ANALYSIS: Tools and Concepts

• Monte Carlo Simulation of the Venture
  • Develop distributions of probabilistic variables
  • Software -- @ RISK
• Learning Curve: Show the proportional decrease in cost as a function of the number of units produced.

  Eg: 90%, 80%, 70%
  Say the nth unit costs X dollars to produce and the 2nth costs .8X
  => 80% Learning Curve

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VENTURE ANALYSIS: Critical Incident Analysis -- A Managerial Concept

• Risk assessment and decision analysis ideally should be performed by a group separate from the venture analysis team.
• Venture Analyst should be committed to making the venture succeed -- personal conviction!
• Critical Incident Analysis:
  1. List of all possible failures and positive incidents (threshold needs to be established to determine limit) (be creative - use brainstorming, etc.)
  2. Estimate the probability of each incident and the cost or benefit of each incident
  3. Rank the incidents from in order of their expected monetary cost or benefit

VENTURE ANALYSIS: Critical Incident Analysis

• perform sensitivity analysis on all model parameters
  • No surprises!
• looking for major discontinuities - events the can have major impacts on the project.