...Harvard Business Review May 2010 Beating the Odds When You Launch a New Venture by Clark G. Gilbert and Matthew J. Eyring Smart entrepreneurs aren’t cowboys—they’re methodical managers of risk. For nearly 20 years the case study used to introduce Harvard Business School’s Entrepreneurial Management course has been Howard Stevenson’s “R&R.” It looks at Bob Reiss, an entrepreneur who launches a venture in the board-game industry. Students are encouraged to explore all the production, development, distribution, and marketing costs associated with the new venture. A cursory reading of the case suggests that it’s a lesson in the rewards that come to an entrepreneur who is willing to take on an enormous amount of risk. Reiss capitalizes on what he correctly foresees is an ephemeral opportunity to ride the coattails of the Trivial Pursuit craze before me-too products flood the market. But a more careful analysis reveals something else entirely. At every turn, Reiss seeks to reduce his risks before making any significant financial investments or operational commitments. For example, he presells a sizable number of units to ensure cash flow. As students come to understand, Reiss actually limits his at-risk capital to the cost of the game design and the prototype. Rather than the high-risk, high-reward seeker he initially seems, Reiss proves to be a manager who constantly identifies risks and finds creative ways to remove them. Tackling the Right Risks First (Located at the end of...
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...com) is the president of Innosight, a strategic innovation consulting and investment company outside Boston. Beating the Odds When You Launch a New Venture Smart entrepreneurs aren’t cowboys—they’re methodical managers of risk. by Clark G. Gilbert and Matthew J. Eyring ILLUSTRATION: BRUCIE ROSCH F or nearly 20 years the case study used to introduce Harvard Business School’s Entrepreneurial Management course has been Howard Stevenson’s “R&R.” It looks at Bob Reiss, an entrepreneur who launches a venture in the board-game industry. Students are encouraged to explore all the production, development, distribution, and marketing costs associated with the new venture. A cursory reading of the case suggests that it’s a lesson in the rewards that come to an entrepreneur who is willing to take on an enormous amount of risk. Reiss capitalizes on what he correctly foresees is an ephemeral opportunity to ride the coattails of the Trivial Pursuit craze before me-too products flood the market. But a more careful analysis reveals something else entirely. At every turn, Reiss seeks to reduce his risks before making any significant financial investments or operational commitments. For example, he presells a sizable number of units to ensure cash flow. As students come to understand, Reiss actually limits his at-risk capital to the cost of the game design and the prototype. Rather than the high-risk, high-reward seeker he initially seems, Reiss proves to be a manager who constantly...
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...is considering a number of new projects, including a joint venture with another company. Digital Solutions would provide the software expertise to do the development, while the other company, American Financial Consultants (AFC) would be responsible for the marketing. Nancy Garcia of Digital Solutions would be responsible for assessing the financial viability of the plan. Information about the costs and revenues of the project would come from the accounting, production and marketing groups of the two companies; however, Ms. Garcia would have to put the information together, and provide a preliminary analysis that she would present to the company’s managers. Capital budgeting is the process of making a decision about the financial desirability of a project. The proposed software development project at Digital Solutions is an example of this kind of problem. We will see how Nancy Garcia approaches this problem as a way to learn the techniques of capital budgeting. The Big Picture Businesses are about increasing the wealth of their owners, which means that they should pursue all the profitable projects that they can. Capital budgeting is about deciding which projects are profitable and add to the value of the firm. Sometimes the firm has to choose between two or more projects and can only pick one. For example, you may have a choice between two air-conditioning systems with different installation costs and energy costs. Your decision to install one rules out the installation of...
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...Kirak Kim Before we start Main branches of finance Corporate Finance How do we value projects and (optimally) finance them? Asset Pricing How do we price securities more precisely? What’s the difference? Is it a Corporate Finance question or an Asset Pricing question? □ You are the manager of Intel Corp. You are reviewing the proposal for the new plant to be built in China. The new plant requires a large onetime investment but will provide significant capacity addition as well as cost savings over the next 10 years. Should you approve the proposal for the new plant? □ “HSBC FTSE 100” is a index fund that replicates FTSE 100 index. The fund offers investors a convenient diversification at a low price. Would you be interested in investing in the fund (or somewhere else)? » What if it was TESCO that was considering HSBC FTSE 100 as an investment vehicle? □ In 2004, Sergey Brin and Larry Page, the founders of Google Inc., were talking to investment bankers from Morgan Stanley. They hope to finance a number of potential opportunities through IPO (initial public offering). One of the most important concerns is of course what the offering price should be. Part 1 Project Valuation Dr. Kirak Kim MSc Corporate Finance EFiMM0017 Project Valuation Investment decision Revisit: Valuing unlevered cash flows Revisit: Uncertainty and the notion of risk Weighted average cost of capital Adjusted present value Two Main Decisions in Corporate Finance ...
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...KIT Companies routinely exaggerate the attractiveness of foreign markets, and that can lead to expensive mistakes. Here’s a more rational approach to evaluating global opportunities. Distance Still Matters The Hard Reality of Global Expansion by Pankaj Ghemawat • Included with this full-text Harvard Business Review article: 1 Article Summary The Idea in Brief—the core idea The Idea in Practice—putting the idea to work 2 Distance Still Matters: The Hard Reality of Global Expansion 12 Further Reading A list of related materials, with annotations to guide further exploration of the article’s ideas and applications Reprint R0108K TOOL KIT Distance Still Matters The Hard Reality of Global Expansion The Idea in Brief Why did U.S. media giant Star TV lose $500 million trying to deliver TV programming to Asia? Like many companies, it was so dazzled by the foreign market’s immensity that it ignored the difficulties of pioneering new territories. For example, it assumed—wrongly—that Asian viewers wanted English-language programming. How to avoid this fate—and select the right targets for your firm’s global expansion? Look beyond a country’s sales potential (as expressed by national wealth or propensity to consume)—and analyze the probable impact of distance. But don’t focus only on distance’s geographical dimension. Consider three other dimensions as well: cultural factors (religion, race, social norms, language); administrative factors (colony-colonizer links, currencies...
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...KIT Companies routinely exaggerate the attractiveness of foreign markets, and that can lead to expensive mistakes. Here’s a more rational approach to evaluating global opportunities. Distance Still Matters The Hard Reality of Global Expansion by Pankaj Ghemawat • Included with this full-text Harvard Business Review article: 1 Article Summary The Idea in Brief—the core idea The Idea in Practice—putting the idea to work 2 Distance Still Matters: The Hard Reality of Global Expansion 12 Further Reading A list of related materials, with annotations to guide further exploration of the article’s ideas and applications Reprint R0108K TOOL KIT Distance Still Matters The Hard Reality of Global Expansion The Idea in Brief Why did U.S. media giant Star TV lose $500 million trying to deliver TV programming to Asia? Like many companies, it was so dazzled by the foreign market’s immensity that it ignored the difficulties of pioneering new territories. For example, it assumed—wrongly—that Asian viewers wanted English-language programming. How to avoid this fate—and select the right targets for your firm’s global expansion? Look beyond a country’s sales potential (as expressed by national wealth or propensity to consume)—and analyze the probable impact of distance. But don’t focus only on distance’s geographical dimension. Consider three other dimensions as well: cultural factors (religion, race, social norms, language); administrative factors (colony-colonizer links, currencies...
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...Stata responded with a humble shrug. However, when asked about the Microelectromechanical Systems (MEMS) business, Mr. Stata was willing to show considerable pride. Mr. Stata was Chairman of Analog Devices, Incorporated (ADI), a company which he co-founded in 1965. MEMS was one division. He had invested a tremendous amount of personal attention and energy to the success of MEMS – and risked his reputation. In fact, without his vision and dedicated leadership, this ambitious, entrepreneurial effort would have collapsed under mounting losses several years earlier. During one three-year stretch, from 1997 to 2000, Mr. Stata had decided to simultaneously serve as Chairman of ADI and General Manager of the MEMS division in order to keep the venture alive. In 2002, Mr. Stata regarded the MEMS business as a jewel. With worldwide technical supremacy that had been built over fifteen years, the business was profitable, and the long-term growth prospects appeared tremendous. Still, he readily acknowledged that many of his colleagues disagreed with his assessment that the business was an unqualified success. One such colleague was current CEO Jerry Fishman. MEMS, though in its second profitable year, had only recovered a small fraction of its total accumulated operating losses since it commercialized its first product in 1992. Wasn’t the jury still out? Franklin Weigold, current general manager of the MEMS division, commented: “I can easily make the argument that we have dumped...
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...Stata responded with a humble shrug. However, when asked about the Microelectromechanical Systems (MEMS) business, Mr. Stata was willing to show considerable pride. Mr. Stata was Chairman of Analog Devices, Incorporated (ADI), a company which he co-founded in 1965. MEMS was one division. He had invested a tremendous amount of personal attention and energy to the success of MEMS – and risked his reputation. In fact, without his vision and dedicated leadership, this ambitious, entrepreneurial effort would have collapsed under mounting losses several years earlier. During one three-year stretch, from 1997 to 2000, Mr. Stata had decided to simultaneously serve as Chairman of ADI and General Manager of the MEMS division in order to keep the venture alive. In 2002, Mr. Stata regarded the MEMS business as a jewel. With worldwide technical supremacy that had been built over fifteen years, the business was profitable, and the long-term growth prospects appeared tremendous. Still, he readily acknowledged that many of his colleagues disagreed with his assessment that the business was an unqualified success. One such colleague was current CEO Jerry Fishman. MEMS, though in its second profitable year, had only recovered a small fraction of its total accumulated operating losses since it commercialized its first product in 1992. Wasn’t the jury still out? Franklin Weigold, current general manager of the MEMS division, commented: “I can easily make the argument that we have dumped...
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...Decide & Conquer: Make Winning Decisions and Take Control of Your Life Stephen P. Robbins, Ph.D. PEARSON EDUCATION, INC. Praise for Decide & Conquer: “Do you have trouble making important decisions? If you answered, ‘Well, yes and no,’ you need this book. It's as smart and straightforward as its title. I'm buying my agent five copies. —Joel Siegel Entertainment Editor Good Morning America “I thought making decisions was as natural as breathing— something we just do. Dr. Robbins makes it crystal clear that decision making ability is a skill that can be improved with knowledge from self evaluation and consideration of the right criteria. This book will help not only people who struggle with decisions, but also those who consider themselves effective decision makers.” —Jim Despain, Managing Partner, DESPAINCONVERSE, and co-author of …and Dignity for All “Robbins shows that making good decisions requires more than just knowing the facts. You must know yourself, too! It is the human aspects of the decision-making process that fail. But these problems can be overcome. Start making good decisions now by choosing to read this book.” —John Nofsinger, author of Infectious Greed and Investment Blunders (of the Rich and Famous) “A must read. Robbins translates a vast array of arcane research into a clearly written practical guide that will surely help people make better personal decisions.” —Steven P. Schnaars, author of Marketing Strategy, Second Edition “This is a very personal...
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...handle success 3 Overcoming the mental blocks 3 Fighting back 6 Checking your readiness 12 Case studies 13 Action points 15 2 Finding Ideas 16 Looking right in front of you 16 Cashing in on change 17 Carving a niche 18 Acquiring commercial skills 20 Working on your self-esteem 20 Choosing a trading name 21 Checking your readiness 24 Case studies 24 Action points 26 3 Creating a Winning Business Plan 27 Planning ahead 27 Making sure the plan is yours 30 Your blueprint for success 30 Getting help from the public sector 36 Getting help from the banks 36 Checklist 37 Constructing your 'blueprint for success' 38 Case studies 43 Exercises 45 4 Funding Your Enterprise 46 Getting your hands on some seed money 46 Start-up costs 46 Getting outside finance 49 Approaching the public sector 50 Approaching potential funders 54 The plan that will fix your funding 58 Presenting your case 61 Checklist 62 Case studies 63 Action points 65 5 Planning Ahead 66 Choosing a partner 66 Case studies: going into partnership 69 Measuring the competition 71 Competitive analysis 75 Finding the right premises 77 The systems you will need 79 Deciding your business status 80 Understanding the basics of taxation 81 Preparing to survive - and succeed 84 Case studies 85 Action points 87 6 Marketing Your Enterprise 89 Debunking the marketing myth 89 Creating the right personal image 90 Marketing research 95 Above the line promotion 97 Avoiding mistakes in small business...
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...Stengel” Attributed to Donald N. Stengal Saylor URL: http://www.saylor.org/books/ Saylor.org 1 Chapter 1 Introduction to Managerial Economics What Is Managerial Economics? One standard definition for economics is the study of the production, distribution, and consumption of goods and services. A second definition is the study of choice related to the allocation of scarce resources. The first definition indicates that economics includes any business, nonprofit organization, or administrative unit. The second definition establishes that economics is at the core of what managers of these organizations do. This book presents economic concepts and principles from the perspective of “managerial economics,” which is a subfield of economics that places special emphasis on the choice aspect in the second definition. The purpose of managerial economics is to provide economic terminology and reasoning for the improvement of managerial decisions. Most readers will be familiar with two different conceptual approaches to the study of economics: microeconomics and macroeconomics. Microeconomics studies phenomena related to goods and services from the perspective of individual decisionmaking entities—that is, households and businesses. Macroeconomics approaches the same phenomena at an aggregate level, for example, the total consumption and production...
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...S O N SOUTH-W ES TE THO M RN MBA series in ’s Eco n o mi cs Managerial Economics A Problem Solving Approach Luke M. Froeb Vanderbilt University Brian T. McCann Purdue University Australia Brazil Canada Mexico Singapore Spain United Kingdom United States Managerial Economics: A Problem-Solving Approach Luke M. Froeb VP/Editorial Director: Jack W. Calhoun Editor-in-Chief: Alex von Rosenberg Sr. Acquisitions Editor: Mike Worls Sr. Content Project Manager: Cliff Kallemeyn Brian T. McCann Art Director: Michelle Kunkler Sr. First Print Buyer: Sandee Milewski Printer: West Group Eagan, MN Marketing Manager: Jennifer Garamy Marketing Coordinator: Courtney Wolstoncroft Technology Project Manager: Dana Cowden COPYRIGHT ª 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and SouthWestern are trademarks used herein under license. Printed in the United States of America 1 2 3 4 5 09 08 07 06 ISBN-13: 978-0-324-35981-7 ISBN-10: 0-324-35981-0 ALL RIGHTS RESERVED. No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, Web distribution or information storage and retrieval systems, or in any other manner—without the written permission of the publisher. For permission to use material from this text or product, submit a request online at http://www.thomsonrights...
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... IT IS STILL FOOLISH: Social Proof 5 WHY YOU SHOULD FORGET THE PAST: Sunk Cost Fallacy 6 DON’T ACCEPT FREE DRINKS: Reciprocity 7 BEWARE THE ‘SPECIAL CASE’: Confirmation Bias (Part 1) 8 MURDER YOUR DARLINGS: Confirmation Bias (Part 2) 9 DON’T BOW TO AUTHORITY: Authority Bias 10 LEAVE YOUR SUPERMODEL FRIENDS AT HOME: Contrast Effect 11 WHY WE PREFER A WRONG MAP TO NO MAP AT ALL: Availability Bias 12 WHY ‘NO PAIN, NO GAIN’ SHOULD SET ALARM BELLS RINGING: The It’llGet-Worse-Before-It-Gets-Better Fallacy 13 EVEN TRUE STORIES ARE FAIRYTALES: Story Bias 14 WHY YOU SHOULD KEEP A DIARY: Hindsight Bias 15 WHY YOU SYSTEMATICALLY OVERESTIMATE YOUR KNOWLEDGE AND ABILITIES: Overconfidence Effect 16 DON’T TAKE NEWS ANCHORS SERIOUSLY: Chauffeur Knowledge 17 YOU CONTROL LESS THAN YOU THINK: Illusion of Control 18 NEVER PAY YOUR LAWYER BY THE HOUR: Incentive Super-Response Tendency 19 THE DUBIOUS EFFICACY OF DOCTORS, CONSULTANTS AND PSYCHOTHERAPISTS: Regression to Mean 20 NEVER JUDGE A DECISION BY ITS OUTCOME: Outcome Bias 21 LESS IS MORE: The Paradox of Choice 22 YOU LIKE ME, YOU REALLY REALLY LIKE ME: Liking Bias 23 DON’T CLING TO THINGS: Endowment Effect 24 THE INEVITABILITY OF UNLIKELY Events: Coincidence 25 THE CALAMITY OF CONFORMITY: Groupthink 26 WHY YOU’LL SOON BE PLAYING MEGATRILLIONS: Neglect of Probability 27 WHY THE LAST COOKIE IN THE JAR MAKES YOUR MOUTH WATER: Scarcity Error 28 WHEN YOU HEAR HOOFBEATS, DON’T EXPECT A ZEBRA: Base-Rate Neglect 29 WHY THE ‘BALANCING FORCE OF THE...
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...* Diversification does not reduce “systematic risk” * Porter has 3 essential tests to decide if you should diversify 1. “Attractiveness Test” – the industry you enter must be attractive or capable of making attractive 2. “Cost-Of-Entry” – it must not capitalize all future profits 3. “BETTER OFF TEST” – the new unit must gain an advantage from being linked to the company (P&G & Gillete) * The attractiveness test and cost-of-entry usually cancel each other out. * An argument for diversification is “economies of scope” – This could be tangible resources such as sharing distribution networks, therefore eliminating duplication * You can also explore a brand to achieve “economies of scope” * Also management and organization capabilities = “economies of scope” * You don’t need to diversify to achieve “economies of scope”, you can license 1. ex: - Pepsi selling Starbucks Frappachino * Deciding which way to achieve “economies of scope” is a debate about market contracts (legal documents and watching partner not exploit) vs. internalization (running a diversified company) * If a resource can be licensed out close to real value, do it. * “Parenting Advantage” can help explain most successful diversification strategies * Diversified Firms can avoid external capital and have better financial information but allocating money can become...
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...A UTH-WE ST MBA series N's CEN G SO ER GE in E conomics Managerial Economics A Problem Solving Approach SECOND EDITION LUKE M. FROEB Vanderbilt University BRIAN T. MC CANN Vanderbilt University Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States Managerial Economics: A Problem Solving Approach, Second Edition Luke M. Froeb, Brian T. McCann Vice President of Editorial, Business: Jack W. Calhoun Vice President/Editor-in-Chief: Joe Sabatino Acquisitions Editor: Michael Worls Developmental Editor: Jean Buttrom Associate Marketing Manager: Betty Jung Content Project Manager: Lindsay Bethoney Media Editor: Deepak Kumar © 2010, 2008 South-Western, Cengage Learning ALL RIGHTS RESERVED. No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, Web distribution, information storage and retrieval systems, or in any other manner—except as may be permitted by the license terms herein. For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706 For permission to use material from this text or product, submit all requests online at www.cengage.com/permissions Further permissions questions can be emailed to permissionrequest@cengage.com Print Buyer: Sandee Milewski Production Service:...
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