The product and its need - This is the first focus that results in a list of facts and assumptions about the opportunity. They are in answer to questions such as: What is the product? What need does it fill? How is the need being fulfilled now? How is this different from the products now filling the need? In assessing the product or process opportunity ask what are its features, competitive advantages and user benefits? There are three reasons why people buy things... they're newer, better or cheaper than what is out there now. This runs the gambit from crutches to central venous catheters. As consumers or users become accustomed to a product it becomes the way of fulfilling that particular need. That is why so much hangs on being first to market as the winner typically commands the greatest market share over the long haul. But the design features have to be right to become the dominant design. In the early stage of a market's formation a new design that offers marginal advantages or benefits over the product that crystallized the market can capture the leadership position. Once that design has ensconced itself in the minds of the users, a paradigm takes hold and what was once "one possible solution" now becomes the "only solution." Opportunities to unseat the dominant design do occasionally and wonderfully show themselves. So much for newer and better. Look at the proliferation of "me-too" products in the world. They're working the "cheaper" side of the equation as competition blunts the idea of one product being "better" than the other. Breakthroughs in production, however, where there are clear cost advantages over the competition, can be significant. Here "better" is not sacrificed for "cheaper." In summary, are you dealing with a new solution to an old problem or a solution to a new problem? These answers are important as we'll see later for figuring out rates of market penetration. Figure 3, Innovation Imperatives, was distilled primarily from an article by George R. White, then with Xerox and Margaret B. W. Graham a professor at Harvard University.

Market Penetration - The idea of market diffusion is an extension of work with product life cycles by the Boston Consulting Group and others. It flows from the classic product S-curve tracing a product from its launch through growth on to maturity and then into decline. Here the market segments by customer buying behavior. While this is a gross simplification of many studies, the similarities are significant enough for our purposes to give us a rule-of-thumb. Figure 4, the Market Diffusion Model, gives the contribution of each type of buyer makes to the market. The innovators are those types that are game to try anything new. These are the discoverers, who will often modify products to fit their own fancy. God bless 'em; these are our inventors. The next group, the early adopters will respond to conceptually good ideas. They are the word of mouth types responding to individual endorsements. A few technical articles in the trade or industry press and they are ready to try a product. Typically these people are authors and those that present at trade conferences. Gaining the support of this segment is imperative for introducing any new product. The early majority are those that need endorsements from several sources before they will buy. They respond to articles and testimonials from their peers. They are the focus of most advertising. Then there is the late majority. These are the individuals that have to read about it in Time or Newsweek. If it is a technical item they need to be able to read about it in the textbooks. They are the "no risk" types, responsive to guarantees and things that are proven. Finally there is the laggard. While an individual may have a proclivity to a particular type of behavior, it doesn't necessarily mean it is applicable to all markets.

The next step is to approximate how long it is going to take to surmount each segment as defined by the Market Diffusion Model. This is essentially the time it takes to reach each segment in the manner in which they are responsive. Mostly the transitions are sequential. Where one enters the progression, however, depends on the nature of the product. Does it create a new market or is it a substitute for product with an established market? The many different models that have been developed to explain both consumer and industrial buying behaviors are but variations on the theme of stimulation,

Development Strategy as Indicated by Market and Technology Factors

Levels of knowledge or expertise within a corporation and the consequential strategy for entering a business

organic response and reaction. As one study puts it "awareness, trial, reinforcement." Knowing that each segment has to be approached in its own particular manner and then needs time to digest the information, begins to put the time it takes to penetrate a market into perspective. Knowing the size of a market, having an idea of what people will pay and what share of a market can be sold, boil down to an order-of-magnitude estimate of revenues.

Reducing the revenue stream to net cash flow is the next step toward calculating the net present value of an opportunity. The use of industrial comparables is sufficient for our purposes. What profit margins and cash flows do other businesses in a similar market experience? Annual reports and indexes of financial ratios published by various services are sources for this information. Applying the appropriate ratios and making adjustments for up-front capital requirements result in a cash flow stream ready for discount.

The Risks of the Venture: The interest we earn on our money reflects the risks we take in putting it to work. The Treasury Bill rate established at auction, historically around 7.2%, is the return for the most safe investment. Companies typically look for 20-25% returns on capital invested in their on-going businesses. Venture capitalists on the other hand have historically looked for returns of between 40% and 60%. So in selecting a discount rate for the Business Opportunity Model, we need to factor in the risks of achieving the cash flow that has been predicted. The Development Matrix, Figure 5, deals with development strategy as a function of a business' core competence. The discount factor assigned to each box within the matrix reflects the level of risk associated with an undertaking of that nature. Clearly familiarity with the technology and the market of a given opportunity reduces the risks of the undertaking.

Figure 6: The Montgomery Model

One last adjustment is warranted before applying the appropriate discount rate to the Model. Robert T. Davis and F. Gordon Smith in their book "Marketing in Emerging Companies" described work by David Montgomery of the Stanford Business School. His aim was to predict the outcomes of the buying decisions of a large client organization. His predictions are reported to be 90% accurate. The Montgomery Buying Model, Figure 6, predicts buyers' responsiveness as functions of their knowledge of the seller and the uniqueness of the product. Handicap the discount rate from the Development Matrix with the results from the Montgomery Buying Model by adding the two numbers together. Applying this adjusted rate to the cash flow projections, then, yields the NPV of the Business Opportunity. Figure 7 is an example of a Business Opportunity Model.

An estimated 25 out of 500 consumer product ideas ever it to market testing. Of these, one-third are launched nationally. Only one, however, will remain profitable after 10 years on the market. For commercial products the hit ratio is better, but mostly they represent incremental improvement over what is already in the market. In the pharmaceutical industry, only one in 5,000 drug compounds make to market, and that journey takes 12 years and costs an average of $359 million. The message is quite clear. Define and stay within your stated fields of interest and waste little time culling through the opportunities. The Business Opportunity Model is one method to sharpen and prioritize your focus. And focus is the prerequisite for closure.