Strategies For Improving

Profitability (& Cutting Cost)

By
Prof. Iqbal Ahmad Hakim
The Business school,
University of Kashmir,
Srinagar

What is Business?

Business has three dimensions of a meaning

A commerce: Business as a commerce is the process

that people produce, exchange and trade goods and
services
An occupation: Business as an occupation is the
acquired set of specialized skills and abilities that
allows people to create valuable goods and services
An organization: Business as an organization is the
system of task and authority relationship that
coordinates and controls the interactions between
people so that they work toward a common goal

Definitions of Business
Business as a system is a combination of
business commerce, occupations, and
organizations that produces and distributes
the goods and services that create value for
people in a society

Factors of Production
Regardless of meaning there are four crucial
ingredients or productive factors or
resources of land, labor, capital and
enterprise that are needed to profit from
business

Factors of Production
These four productive factors or resources of
land/ machine, labor, capital and material
(enterprise) that are needed to profit from
business and are limited in supply (scarcity)

A company must use them efficiently and

effectively to produce goods and services

Together, the cost of acquiring and using these

four resources to make and sell goods and
services determines a companys operating
costs

Managing Costs and

Maximizing Profitability
Understanding Your Management Style
(The devil is in the details)
Manage What You Measure

Understanding Dashboards and Metrics

Reading vs. Truly Understanding Reports vs.
Taking
Corrective Action

Getting the Right Advice

Professional Advisors
Board of Advisors
Coaches and Mentors
Outsourcing Services Providers

Managing Costs and Maximizing

Profitability (Contd)
Penny-wise

vs. pound foolish

(Act with integrity and dont be short-sighted or cut
corners it will come back to haunt you)

Communication

is critical (most vendors, lenders,

etc. will work with you if you communicate early and
often)

Understanding

your pain points and inefficiencies

Company

capitalization (debt-to-equity ratio and

borrowing costs)

Conducting

expenses

want vs. need analysis on your current

Understanding Types of
Costs
Fixed

vs. Variable Costs

Debt-service costs
Infrastructure and Systems Costs
Human Capital Costs
Salaries
Benefits
Healthcare costs

Advertising

and Promotional Costs

Overhead and Administrative Costs
Research and Development Costs
*** The type of cost you are trying to
manage will dictate the strategy

Cost-Management
Techniques
Types of Strategies
Relationship-Driven
Financial and Management-Driven
Market-Driven
Cost Management
Cost Management
Cost Management
Techniques Techniques
Techniques

Managing Vendor and

Customer Relationships
Outsourcing IT applications
(ex. Network Alliance),
benefits, sales financial
management, etc.
Cooperatives for purchasing,
advertising, etc. (including
trade associations)
Joint Ventures and strategic
alliances
Employee incentives and
rewards for cost-cutting
initiatives

Cash flow management

Managing employee
retention and turnover
costs
Budgeting, planning,
forecasting
Estimates and price
quotes
Corporate restructuring,
recapitalization and
reorganization

Competitive bidding for

vendor needs
Grassroots sales and
marketing techniques
PR vs. Advertising Costs
Customer referral,
retention and loyalty
systems (80/20 rule of
costs of getting new
customers)
Barter networks

Human Capital Costs

Employees

vs. Independent Contractors

Hiring

the right first time and rewarding loyalty

(significantly reduces turnover/replacement costs)

Outsourcing

payroll processing, benefits, taxes,

etc.
part-time/special
Telecommuting
Professional

project/temporary workers

and virtual offices

Employer Organizations (PEOs) (ex.

Administaff, Oasis) can handle everything from
payrolls to account administration to hiring and
firing functions

Best Practices

Walk the talk if you are serious about

controlling costs, then demonstrate it with your
actions and your employees will do the same

Build and embrace a dashboard and reporting

system which will help you monitor and measure
key metrics

Consider third-party cost management services

who work on a contingent basis

Build an expense-control culture which recognizes

and rewards employees (and others) who figure
out ways to control costs and improve profitability

Benchmarking is key know the typical ratios

within your industry and manage accordingly

Best Practices (Contd)

Closely examine each category of your expenses

and ask:
Do we really need to incur this cost?
Is there an alternative and more efficient source or
solution available?
How will a reduction in this particular category of cost (or
change in our approach) affect our other operations or
successes to date?

Understand the direct and indirect impact of

your cost-cutting strategies on your culture and
the fabric and values of your company the key
to this process is to cut fat without cutting into
muscle or bone
Act with integrity and honesty . Cost-cutting
can be creative and aggressive but do not
sacrifice your values and key relationships along
the way communication is critical

Best Practices (Contd)

Lean and Mean does not need to translate into a

compromise of your culture rigor can be instilled
without rigor mortis and discipline can be
instilled without fear

Changing bad habits and empowering and

rewarding the right behaviors with a focus on
profitability is the key there must be an
educational component to the implementation of
the cost-management plan

Profitability-improvement programs do not always

need to be focused on reducing costs there
should also be an effort to develop higher-margin
revenue streams

Improving Your Businesss

Profitability
Learn how to analyse your pricing on
products and services to focus on
profits
Cost

Mark up and Gross Margin Pricing

Methods
Pricing Model
Affect of Discounts

Definitions

Cost of Goods Sold = the sum of the costs

related to the products or services sold
Fixed Costs e.g. equipment, land , building
Variable Costs are volume
related e.g. materials
Classification and Assigning

How are you defining and allocating your costs?

What level of review do you have in place?

Definitions

Gross Profit = Difference

between Sales and Cost
of Good Sold
Sales
Gross Margin

125.00

Generally is stated in
percent
COGS =
Gross Profit divided into75.00
Sales
Gross Profit =
How have your
Gross Margin Rupees is 50.00
the
margins =
been
same as Gross Profit Gross Margin
tracking?
40%
(50/125*100)

Definitions

Expenses
Fixed Expenses e.g. headcount
Variable Expenses e.g. office supplies, travel
Discretionary

What are your biggest expenses?

How much discretionary spend do
you have?
How are you controlling them?

Definitions

Contribution Margin (Rupees)

Sales less variable costs
Excellent to use to compare what products or
services contribute more to your profitability
Analyze for opportunities to reduce costs

What are your Contributions

Margins by Product or Services?

Check Point

Know your total fixed costs and expenses

What is your Number?

What makes it up?

This number is a key baseline number that you
must recover through profits
Look for ways to minimize these
Ideas?

Definitions

Break Even = What volume of units do you

need to sell to recover all your fixed costs
and expenses?
Calculate Total
For each Product or Service

What is your
break even level?

Break Even Working

Example
Selling price = $125.00
Fixed Costs and Expenses total = $250,000 *
Variable Cost = $75.00
Breakeven = Total Fixed Costs and Expenses
divided by (Selling price Variable Cost)
Step 1 $125.00 - $75.00 = $50.00
Step 2
$250,000/$50.00 = 5,000
units

Break Even Working

Example
Therefore Total Sales must be at least
5,000 units X $125.00 = $625,000

What is your total

sales needed?
How are you
tracking?

Cost Mark up and Gross Margin

Pricing Methods

Cost Mark up
Add a dollar value to your Cost to determine
Selling Price
Apply a factor to your costs to Determine your
Selling Price

Gross Margin
Use a predetermined desired Margin to determine
your Selling Price

Cost Mark up and Gross Margin

Pricing Methods Compared
Cost Mark up
Cost = $75.00
Mark up = $30.00 or 40%

Gross Margin
Cost = $75.00
Desired Margin % = 40%

Selling Price = $105.00

Calculated as:
$75.00 +$30.00=$105.00
or
$75.00*1.40= $105.00

Selling Price = $125.00

Calculated as:
$75.00/(1-.40)=$125.00

Profit = $30.00 (28.6%)

Profit = $50.00 (40%)

Basic Pricing Model

Basic Pricing Model

Affect of Discounts

Discounts must be carefully considered to

not erode profits BEFORE fixed expenses
are recovered.

Next Steps To get more control

over your Profits
1.
2.
3.

Know your Breakeven Point

Review your Pricing and Discounts
Understand your costs and expenses
Separate variable versus fixed
Plan in place for regular review and reduction *

4.

Analyze your products and services

Know your Profit generators
Address your Profit eaters

Tools

to help

Pricing matrix model

*

PIC

Profit improver Checklist for Costs and Expenses

Needs Robust Profitability

Strategies

Strategy, Balanced
Scorecard, and
Strategic Profitability
Analysis

What is Strategy?
Strategy describes how an
organization matches its own
capabilities with the
opportunities in the marketplace
to accomplish its overall
objectives.

What is Strategy?
What is the focus of industry analysis?
Competitors
Potential entrants into the market
Equivalent products
Bargaining power of customers
Bargaining power of input suppliers

Basic Strategies
1. Product differentiation
2. Cost leadership

Implementation of Strategy

Management accountants design reports

to help managers track progress in
implementing strategy.

Why measure
performance?
Objectives for for-profit organizations:
Measure changes to stakeholders wealth; put in
simple terms, the value of a firm.
Reward an employee for contributing to increase
in firm value

Issue: How would a firm measure an individuals

contribution to value creation and what purpose
does it serve?

The value concept

(Results control)

The performance measurement concept

indicates that employees can increase the
value of the firm by
Increasing the size of a firms future cash flows,
By accelerating the receipt of those cash flows, or
By making them more certain or less risky.

If you are a CEO or CFO, how would you

increase the cash flows?

Measure the right things

An ideal performance management
system is one that energizes the people in
an organization to focus effort on
Improving things that really matter
One that gives people the information and
freedom that they need to realize
Their potential within their own roles and
that aligns their contribution with the
success of the enterprise.

Then, why do performance

measures fail?
Root cause: complexity - details, details,
details
Staff who collect data get frustrated.
Follow: What has to be done" (WHTBD).

Measure What Matters

Easy to say but difficult to do.
Find out what is valued both by customers and
stakeholders ; Examples:

process: new product development,

measure: time to market

process: customer service,

measure:

customer retention.

process: treasury management,

of service vs. value created.

measure: cost

Keep it simple
Performance Measures must be
simple to operate
simple to understand
simple to action
Ex: If a sales person spends too much time
on call reporting, they have less time for
making calls.

Let us now examine how real world firms

measure performance

Most organization measure

performance using accounting
measures Net profits, gross
margin, ROA, ROE, etc.

Why do organizations choose accounting

data as measures of performance?

Accounting profits and returns can be

measured on a timely basis relatively
precisely and objectively.
Because they are timely, precise, and
objective, employees would react positively.
The short term measures keep employees
on check.

Why accounting measures of performance

are not adequate?

Accounting measures are lagged indicators.

Dependent on the choice of measurement
method.

Accounting can create

management myopia
Accounting is short term earnings or
returns.
Why focusing on the short term is
inappropriate?
Why would this short-term focus affect longterm relationships?

The Changing Business

Environment
Are historical accounting
measures adequate for todays
business environment that
transcend global boundaries?

Performance Measurements
for the new era

In the global, technology-driven,

decentralized environment, measuring
Financial performance, while important, is
not adequate.

Even if less than precise, other measures of

performance are required.

These measures should be capable of

measuring multiple attributes of an
organization.

We need a balanced set of

Performance Measures
We need both lead and lag indicators

Lead indicators as value

drivers
Many non-financial indicators can serve as
lead indicators in certain settings.
Common examples are:

Market share, backlog (book-to-bill ratio), new

product introductions, new product development
lead times, product quality, customer satisfaction,
employee morale, personnel development,
inventory turnover, bad debt ratio, or safety

Lag Indicators
In contrast to lead indicators, lag
indicators are measures that point to
earlier plans and their execution.
Financial performances are lag indicators.
Many times, financial performances are
too late to affect future products and
services.
Therefore, we need multiple measures
that include both financial and nonfinancial measures.

The Balanced Scorecard

The scorecard measures an organizations
performance from four perspectives:
1. Financial
2. Customer
3. Internal business processes
4. Learning and growth

Identify what comprises

reengineering.

Reengineering

Reengineering is the fundamental rethinking

of business processes delivery to achieve
improvements in critical measures of
performance such as cost, quality, service,
speed, and customer satisfaction.

Reengineering Example
Order delivery system:
Customers needs identifiedQuantities to be shipped
matched against purchase order
Purchase order issued
Production scheduled
Manufacturing completed

Shipping documents sent

to Billing Department
Invoice issued

Finished goods to inventory Customer payment follow up

Reengineering Example
The following was determined:
Frequently, there is a long waiting time before
production begins in the manufacturing department.
Sometimes items are held in inventory until
a truck is available for shipment.

Reengineering Example
If the quantity shipped does not match the
number of items requested by the customer,
a special shipment must be scheduled.
Company discovered that the many transfers
across departments slowed down the
process and created delays.
A multifunctional team reengineered the
order delivery process.

Reengineering Example
A customer relationship manager is responsible
for each customer.
Company will enter into long-term contracts with
customers specifying quantities and prices.
The customer relationship manager will work
with the customer and manufacturing to specify
delivery schedules one month in advance.

Reengineering Example
The schedule of customer orders will be sent
electronically to manufacturing.
Completed items will be shipped directly from
the manufacturing plant to customer sites.
Each shipment will automatically trigger an
invoice to be sent electronically to the customer.

Perspectives of the balanced

scorecard:
Key to Improve Performance & Profitability
1. Financial
2. Customer
3. Internal business process
4. Learning and growth

Financial Perspective
Objective:
Increase shareholder value

Measures:
Increase in operating income

Financial Perspective
Target
Actual
Initiatives:
Performance
Performance
Manage costs and
$2,000,000$2,100,000
unused capacity
Build strong customer
$3,000,000$3,420,000
relationships
Build strong customer
6%
6.48%
relationships

Customer Perspective
Objectives:
Increase market share
Increase customer satisfaction
Measures:
Market share in communication
networks segment
Customer satisfaction survey

Customer Perspective
Target
Actual
Initiatives:
Performance
Performance
Identify future needs
6%
7%
of customer
Identify new target
7
8
customer segments
Increase customer focus
90% give top
of sales organization two ratings

87% give top

two ratings

Internal Business
Process Perspective
Objectives:
Improve manufacturing
quality and productivity
Meet specified delivery dates
Measures:
Yield
On-time delivery

Internal Business
Process Perspective

Initiatives:

Target
Actual
Performance
Performance

Identify problems and

78%
improve quality
Reengineer order
delivery process

92%

79.3%
90%

Learning and Growth

Perspective
Objectives:
Align employee and
organization goals
Improve manufacturing processes
Measures:
Employee satisfaction survey
Improvements in process controls

Learning and Growth

Perspective

Initiatives:

Target
Actual
Performance
Performance

Employee
participation and
suggestion program
to build teamwork

80% of
employees
give top
two ratings

Organize R&D/
manufacturing teams 5
to modify processes

88% of
employees
give top
two ratings

Aligning the Balanced

Scorecard to Strategy
Different strategies call for different scorecards.
What are some of the financial perspective measures?

Operating income
Revenue growth
Cost reduction is some areas
Return on investment

Aligning the Balanced

Scorecard to Strategy
What are some of the customer
perspective measures?
Market share
Customer satisfaction
Customer retention percentage
Time taken to fulfill customers requests

Aligning the Balanced

Scorecard to Strategy
What are some of the internal business
perspective measures?
Innovation Process:
Manufacturing capabilities
Number of new products or services
New product development time
Number of new patents

Aligning the Balanced

Scorecard to Strategy
Operations Process:
Yield
Defect rates
Time taken to deliver product to customers
Percentage of on-time delivery
Setup time
Manufacturing downtime

Aligning the Balanced

Scorecard to Strategy
Post-sales service:
Time taken to replace or repair
defective products
Hours of customer training for
using the product

Aligning the Balanced

Scorecard to Strategy
What are some of the learning and growth
perspective measures?
Employee education and skill level
Employee satisfaction scores
Employee turnover rates
Information system availability
Percentage of processes with advanced controls

Pitfalls When Implementing

a Balanced Scorecard
What pitfalls should be avoided when
implementing a balanced scorecard?
1. Dont assume the cause-and-effect
linkages to be precise.
2. Dont seek improvements across
all measures all the time.
3. Dont use only objective measures
on the scorecard.

Pitfalls When Implementing

a Balanced Scorecard
4. Dont fail to consider both costs and benefits
of initiatives such as spending on information
technology and research and development.

5. Dont ignore nonfinancial measures when

evaluating managers and employees.
6. Dont use too many measures.

nalyze changes in operating

ncome to evaluate strategy.

Evaluating the Success

of a Strategy
Assume the following operating incomes:

Year 2013
Revenues:
(1,000,000 $26)
(1,100,000 $24)
Expenses:
Materials
Other
Operating income

Year 2014

$26,000,000
$26,400,000
4,050,000
16,000,000
$ 5,950,000

3,631,320
16,000,000
$ 6,768,680

Evaluating the Success

of a Strategy
How can the increase in operating
income of $818,680 be evaluated?
Growth
Price recovery
Productivity

Growth Component
Assume that for 2013, Company produced
and sold 1,000,000 units at $26 per unit.
During the year 2014, the company produced
and sold 1,100,000 units at $24 per unit.
What is the revenue effect of growth?

Growth Component
Revenue effect of growth component

(Actual units of output sold in 2014

Actual units of output sold in 2013)
Output price in 2013
(1,100,000 1,000,000) $26 = $2,600,000 Favorable
This component is favorable because
it increases operating income.

Growth Component
Cost effect of growth component

Actual units of input or capacity that would

have been used in 2013 to produce year 2014
output assuming the same input-output
relationship that existed in 2013

Actual units or capacity to produce 2013 output

Input prices in 2013

Growth Component
To produce 1,100,000 units in 2014 compared
with the 1,000,000 units produced in 2013
(a 10% increase), the company would require a
proportional increase in direct materials.

Assume that 3,000,000 square centimeters of

materials were used to produce the 1,000,000
units in 2013 at a cost of $1.35
per square centimeter.

Growth Component
Assume that manufacturing conversion costs,
selling and customer service costs and research
and development costs were $16,000,000
and remained stable during 2014.

What is the cost effect of the growth component?

3,000,000 110% = 3,300,000 centimeters
(3,300,000 3,000,000) $1.35 = $405,000 Unfavourable

Operating Income and

Growth
What is the net increase in operating income
as a result of growth?
Revenue effect of growth component
Cost effect of growth component
Increase in operating income
due to growth component

$2,600,000 F
405,000 U
$2,195,000 F

Price-Recovery Component
Revenue effect of price-recovery component
= (Output price in 2014 Output price in 2013)
Actual units of output sold in 2014

What is the revenue effect of the

price-recovery component?
($24 $26) 1,100,000 = $2,200,000 Unfavorable

Price-Recovery Component
Cost effect of price-recovery component

(Input prices in 2014 Input prices in 2013)

Actual units of inputs or capacity that would
have been used to produce year 2014 output
assuming the same input-output relationship
that existed in 2013

Assume that in the year 2014, direct materials

costs were $1.31 per square centimeter.

Price-Recovery Component
What is the cost effect of the
price-recovery component?
($1.31 $1.35) 3,300,000 = $132,000 Favorable
What is the total effect on operating
income of the price-recovery component?

Operating Income and

Price-Recovery Component
Revenue effect
of price-recovery component
$2,200,000 U
Cost effect
of price-recovery component
132,000 F
Decrease in operating income
due to price-recovery component $2,068,000 U

Productivity Component
Productivity component

Actual units of inputs or capacity to

produce year 2014 output
Actual units of inputs or capacity
that would have been used to produce
year 2014 output assuming the same
input-output relationship that existed in 2013

Input prices in 2014

Productivity Component
Assume that 2,772,000 actual square
centimeters of direct materials were
used in the year 2014.

Actual price was $1.31/square centimeter.

Productivity Component
What is the productivity component of cost changes?
(2,772,000 3,300,000) $1.31 = $691,680 Favorable
There is a $691,680 increase in operating
income due to the productivity component.

Change in Operating
Income
Increase in operating income
$818,680

Growth
component
$2,195,000 F

Price-recovery
component
$2,068,000 U

Productivity
component
$691,680 F

Distinguish between
engineered
and discretionary costs.

Engineered Costs
Engineered costs result specifically from a clear
cause-and-effect relationship between output
and the resources needed to produce that output.

They can be variable or fixed in the short run.

Discretionary Costs
Discretionary costs have two important features.
They arise from periodic (usually yearly)
decisions regarding the maximum
amount to be incurred.

They have no measurable cause-and-effect

relationship between output and resources used.

Relationships Between
Inputs and Outputs
Engineered costs differ from discretionary
costs along two key dimensions:
Type of process
Level of uncertainty

Relationships Between
Inputs and Outputs
Engineered costs pertain to processes that are
detailed, physically observable, and repetitive.
Discretionary costs are associated with processes
that are sometimes called black boxes, because
they are less precise and not well understood.

Identify unused capacity

and how to manage it.

Managing Unused Capacity

What actions can management take
when it identifies unused capacity?
Attempt to eliminate the unused capacity
Attempt to use the unused capacity to grow revenue

From Invention to
Innovation

From
From Invention
Invention to
to
Innovation
Innovation
While invention depends upon
creativity,
successful technological
innovation requires integrating
new knowledge with multiple
business functions.

Innovation What is it?

The creation of new
ideas/processes which will lead
to change in an enterprises
economic or social potential

What is Innovative
Thinking?
A means of generating innovation to achieve two
objectives that are implicit in any good business
strategy:
make best use of and/or improve what we have
today
determine what we will need tomorrow and how we
can best achieve it, to avoid the "Dinasaur
syndrome
Innovative thinking has, as a prime goal, the object of
improving competitiveness through a perceived
positive differentiation from others in:
Design/Performance
Quality
Price
The Small and MediumSized Enterprises (SMEs)
Uniqueness/Novelty
Division of WIPO

Obstacles to Successful
Innovation

Competitive position

Market judgement

Technical performance

Manufacturing
expertise

Financial resources

The Small and MediumSized Enterprises (SMEs)

Division of WIPO

Innovati
on
How to classify newness
and
degree of innovation and what
to focus on:
New to the firm?
First in the market?
First in the world?
Incremental or radical
innovation?

There are several types of new products. Some are new to the
market, some are new to the firm, and some are new to both.
Some are minor modifications of existing products while some
are completely innovative

The Small and MediumSized Enterprises (SMEs)

Division of WIPO

Product Development
Strategies

Old
Market
New
Market

New Product
Old Product
Market
Penetration

Product
Development

Market
Development

Product
Diversification

Marketing
principles.

Identify opportunities and threats

Identify customer needs

React to a competitive environment

Careful planning to make a New or improved

product

Use the 4 Ps.

Product service

Price

Promotion

Place (distribution)

Retain flexibility to react to changes

The Small and MediumSized Enterprises (SMEs)
Division of WIPO

The
TheDevelopment
Developmentof
ofTechnology:
Technology: From
From
Knowledge
KnowledgeGeneration
Generationto
to Diffusion
Diffusion

IM ITATION
Supply side

Basic
Knowledge

Invention

Innovation

Diffusion

Demand side
ADOPTION

Innovation Process
Invention

The adoption of an
innovation by similar firms
Usually leads to product
or process standardization
Products based on
imitation often are offered
at lower prices but with
fewer features

Innovation

Imitation

The Innovation Process

An innovation starts as an idea/concept that

is refined and developed before application.
Innovations may be inspired by reality
(known problem). The innovation (new
product development) process, which leads
to useful technology, requires:
Research
Development (up-scaling, testing)
Production
Marketing
Use
Experience with a product results in feedback
and leads to incrementally or radically
improved innovations.
The Small and MediumSized Enterprises (SMEs)
Division of WIPO

The Innovation Process

Translation of a Creative Idea into Useful
Application
Analytical
Planning

To Identify:
Product Design
Market
Strategy
Financial Need

Organizing
Resources
To Obtain:
Materials
Technology
Human Resources
Capital

Implementation

Commercial
Application

To Accomplish:To Provide:
Organization
Value to Customers
Product Design Rewards to Employee
Manufacturing Revenue to Investors
Services
Satisfaction of Founders

The
The Profitability
Profitability of
of Innovation
Innovation

Profits
from
Innovation

Value of an
innovation

Legal protection

Innovators
ability to
appropriate
value from an
innovation

Ease of imitation
of technology

Complementary
resources

Lead time

Appropriating Value from

Innovation

arriers to
tegration
Different Time
Orientation
Interperson
Orientation
al
Different
Goal
Orientatio
n of
Formality
Structur
e
Facilitators of
Integration
Shared Values

Leaders Vision
Budget
Allocation
Effective

Time to
Market
CrossFunctional
Integration/
Design Teams

Value
Appropriati
on from
Innovation

Product
Quality
Creation
of
Customer
Value

The Small and MediumSized Enterprises (SMEs)

Division of WIPO

Product Life
Cycle
Maturity
Decline

Sales

Growth

Introducti
on

Time

The Small and MediumSized Enterprises (SMEs)

Division of WIPO

New Product Development

Stages in a New Product Development

process:
Idea Generation
Idea Screening
Concept Development and Testing
Business Analysis
Beta Testing and Market Testing
Technical Implementation
Commercialization
The Small and MediumSized Enterprises (SMEs)
Division of WIPO

The Right Innovative

Product?

The right product is one that becomes

available at the right time (i.e., when the
market needs it), and is better and/or less
expensive that its competition.
To have the right product, therefore, one
must:
Predict a market need
Envisage a product whose performance
and capability will meet that need
Develop the product to the appropriate
time scale and produce it.
Sell the product at the right price
The Small and MediumSized Enterprises (SMEs)
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Innovation and Competitive

Advantage
Difficult
Difficult for
for
competitors
competitors to
to imitate
imitate

Commercially
Commercially exploitable
exploitable
with
with present
present capabilities
capabilities
Provides
Provides significant
significant
value
value to
to customers
customers
Timely
Timely

Competitive
Advantage

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Strategic Entrepreneurship and

Innovation
Entrepreneurship is concerned with:
The discovery of profitable opportunities
The exploitation of profitable opportunities
Firms that encourage entrepreneurship are:
Risk takers
Committed to innovation
Proactive in creating opportunities rather
than waiting to respond to opportunities
created by others

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Entrepreneurship
Creativity is at the heart of entrepreneurship, enabling
entirely new ways of thinking and working.
Entrepreneurs identify opportunities, large or small, that
no one else has noticed.
Good entrepreneurs also have the ability to apply that
creativitythey can effectively marshal resources to a single
end.
They have drivea fervent belief in their ability to change
the way things are done, and the force of will and the passion
to achieve success.
They have a focus on creating valuethey want to do
things better, faster, cheaper.
And they take risksbreaking rules, cutting across accepted
boundaries, and going against the status quo.

Entrepreneurship
Defining entrepreneurship is difficult because there is no
universal, clear-cut definition of the term. In its most basic
sense, entrepreneurship is manifest in a business venture
when an individual is able to turn a novel idea into a
profitable reality. In practice, however, entrepreneurship is
more multifaceted, ranging from operating a small
business in ones own home, to bringing a national
franchise to a small town, to turning a new and unique idea
into a high-growth company. Entrepreneurship can involve
starting a business that brings a new store to main street,
offering a product or service previously unavailable to a
community, or acquiring an existing business that has had
a long-standing presence in a community and helping it
evolve to reflect ones own vision and personality.
The Small and MediumSized Enterprises (SMEs)
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Entrepreneurship
The word entrepreneurship literally means, "to take or
carry between" in the sense of an economic transaction;
to be a market-maker. It does not literally convey the
notion of innovation that we commonly associate with
the term.
Joseph Schumpeter (1883-1950), one of the more well
known theorists on entrepreneurship, defined an
entrepreneur as one who reorganizes economic activity
in an innovative and valuable way. That is, an
entrepreneur is one who engages in a new economic
activity that was previously unknown. An entrepreneur is
a risk taker because being innovative means there are
few rules or history for guidance.
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Entrepreneurship
Entrepreneurship is the process of
creating or seizing an opportunity, and
pursuing it regardless of the resources
currently controlled.
The Websters Third New International
Dictionary defines an entrepreneur to
be one who organizes, owns,
manages, and assumes the risks of a
business
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Entrepreneurship
The entrepreneur shifts resources out of an area of lower and
into an area of higher productivity and greater yield.
[J. B. Say, French economist, circa 1800]
The entrepreneur searches for change, responds to it, and exploits
it as an opportunity. Innovation is the specific tool of
entrepreneurs, the means by which they exploit change as an
opportunity for a different business or a different service
[Peter Drucker, 1985]

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Entrepreneurship
Entrepreneurship drives innovation,
competitiveness, job creation and
economic growth.
It allows new/innovative ideas to turn into
successful ventures in high-tech sectors
and/or can unlock the personal potential of
disadvantaged people to create jobs for
themselves and find a better place in
society.
The Small and MediumSized Enterprises (SMEs)
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Entrepreneurship
Entrepreneurship, in small business
or large, focuses on "what may be" or
"what can be".
One is practicing entrepreneurship by
looking for what is needed, what is
missing, what is changing, and what
consumers will buy during the coming
years.

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Division of WIPO

Entrepreneurship
Entrepreneurs have:

A passion for what they do

The creativity and ability to innovate
A sense of independence and self- reliance
(Usually) a high level of self confidence
A willingness and capability (though not
necessarily capacity or preference) for taking risks

The Small and MediumSized Enterprises (SMEs)

Division of WIPO

Entrepreneurship
Entrepreneurs do not (usually) have:

A tolerance for organizational bureaucracies

A penchant for following rules
A structured approach to developing and
implementing ideas
The foresight to plan a course of action once the
idea is implemented and established

The Small and MediumSized Enterprises (SMEs)

Division of WIPO

Entrepreneurial Success
1. People
(Entrepreneur/Entrepreneurial
Team)
2. Opportunity (Marriage of
Market and Product/Service)
3. Access to Resources (Land.
Labor, Capital, Knowledge)
And the fit amongst these three
elements

Major factors determining

success of a new product in the
market
The product provides functional
advantages
Lower price for comparable product
More attractive design (look)
Reputation of brand
Easy access: Available in the main retail
shops
Consistent product quality
Excellent after-sales services

The Small and MediumSized Enterprises (SMEs)

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Competitive Advantage

Criteria
Low cost producer
Product differentiation
Niche market
The Small and MediumSized Enterprises (SMEs)
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Thank You