All entries for Thursday 11 March 2010

ENVC Exercise 3

Having completed the lesson and having read Day (1997) on shakeouts, this exercise is about dynamic markets. Discuss an idea for a new product that will create a new industry niche. To convince others of your idea you need to set out the likely scenario for how the new niche will develop in terms of competition, numbers of firms and how firms compete over time.

Any new venture creation is dependent on how it will perform and survive over time in today's highly globalized and dynamic markets. Putting the great business idea into life will only get you far if you manage to navigate and survive over time in constantly changing business and market conditions.

Although the idea is not new the use and application of Hydrogen Generator kits is still largely unexploited and presents a big market opprotunity for the future. Hydrogen Generator technology is making new progress all the time, it is "green" ie environmentaly friendly since it is based on transformation of water into power. The application of hydrogen technology especially in motor vehicles will give better engine performance, no CO2 emissions, cost effective fuel and other environmentaly friendly features. 

In teh future, the development of this technology will probably make us completely independent of fossil fuel. This is the opportunity that is worth investigating and investing in further. Thousands of people around the globe have tried and succeeded in running their vehicles through the combination of water with oxygen to form hydrogen gas. These kits are sold to regular internal combustion engines in order to improve their performance and increase their mileage. We can read below how it works:

Below, I will review potential threats and barriers for entering this market applied through Porter's Five Forces:

Threat of entry 

Establishing a hydrogen generator venture would require substantial capital and no small players may enter this venture without major financial backing. There a few players in this market today and in most areas like the automotive it may be consideres as a "Blue Ocean" opportunity. There has been some substantial achievements in development of hydrogen technology but there is still not a clear cut business case that this technology is economically viable today.

Threat from substitutes

Concerning that hydrogen generators as a product and technology are fairly new and still need to prove themselves on the market will keep substitute product away. Eventually, when the technology becomes more common and cheaper to produce such a threat would be accountable, but most probably not in a long while. 

Buyers bargaining power

Buyers of hydrogen technology will for instance in case of motor vehicles have to compare price and performance to gas, hybrid or electric vehicles. If the technology is able to produce a vehicle that is comparable in price to standard vehicles that may be a breakthrough point for this technology

Suppliers bargaining power

The financial side of the business model will have to consider suppliers of parts that will drive this technology. Many parts of this equipment are high-tech product such as high pressure hydrogen tank that needs to be fitted in a vehicle and that provides same security (for example in case of collision) as gas tanks in regular fossil fueled vehicles.

Intensity of rivalry

The intensity is low at the moment but the increasing number of big players are looking into this technology. Governments urge for more “green” technology may however create favorable conditions for application of this technology and intensification of rivalry.

Barriers to entry

There are some important obstacles that may stop other companies to enter this market today. Besides big players there are some small niche players that are investing in this technology. Economies of scale play an important role since the technology is new and R&D cost is still substantial. Government grants and tax policy may however help smaller players to enter this financially and know-how demanding market.

Threat of SHAKEOUTS

Browsing the internet one may encounter some companies that already offer hydrogen car converter kits. There are a few of them and the big players such as GM who invested heavily in this technology are now cutting back on R&D dollars due to financial difficulties. If hydrogen generator business initiative is successful it will attract more companies to the niche. There is a need to create barriers to entry in order to sustain the competitive advantage of being the first on the market. Consumers will consequently concentrate on market leaders that will take the increasingly higher market shares. This will in turn cause business shakeouts (Day 1997) of laggards not very unlike that we have seen in the 1920-ies and 1930-ies in the automobile business. Some smaller niche players will remain while the majority of the market will be divided between a few large companies.

Prevention of one's own firm ending in shakeout will according to Day (1997) be in the awareness of the economics of the industry, knowing the market and the market trends. Since in this case the best cost-efficient  technology give most business advantage it will be wise to closely monitor competitors and their achievements in advancement of this technology. One should therefore strain not to overshoot and cash starve itself out of business. As in all other ventures timing is crucial. One may even wait until the competitors are making progress and utilize this of own purposes in order not to overshoot. If the threat of a shakeout gets too serious for one's own company one should try some of the harvest or exit strategies to either make profit by selling the company or try to merge it with one of the major players and avoiding shakeout in this sense.

Running cars and other engines on water is and will remain a fantastic business opportunity. 

: 11 Mar 2010 13:57 |  Comments (1) |  Close comments |  Report a problem

ENVC Exercise 2

ENVC Exercise 2 Blog

There is a committee that considers strategic developments on the basis of business plans. It is concerned that it may be too risk averse and requires some new guidance on evaluating business plans. Having worked through the PORES how would you advise the committee?

This question is about risk and uncertainty and its relationship to planning i.e. where it is 'irreducible' then risk/ uncertainty can only be found out by experience. How does this affect decision making (see e.g. Mintzberg) and who is doing the planning?

In the 18th century, swiss scholar Daniel Bernouilli studied the occurence of random events and human interaction behind it. His aim was to create a mathematical tool that will help estimate success prospects for any risky undertakings in financial terms.  Bernouilli also introduced the term "human capital". Neuman&Morgenstern developed in the 1940-ties "Game Theory" that deals with situations where people's decisions are influenced by other people that they interact with "live variables".

Today corporations use several modern techniques to estimate potential for profit opportunities and minimization of risk that financial undertakings bring.

Our texbooks recommend warmly the establishment of business plans before starting up new ventures. It is an important tool and a valuable help to assess the business environment and the conditions for our intended venture. It is also there to help us address risks and uncertainty regarding many aspects of business environment and market conditions and competition that we may face under way.  Bygrave & Zacharakis (2004) see business plans as beneficial for entrepreneurs when assessing the strategy, preparations for start-up and management of the new venture.

PORES analysis (Profit Opportunity Recognition and Exploitation Strategy) will be helpful tool for assessment of our current position in the present market situation. It will allow us to explore possibilities for potential profit opportunities. PORES analysis is built under assumption that a market gap exists and that it should be exploited.  However, one should differ between uncertainty and risk as in Helmer (2005) because even the best business plan cannot predict the future completely just give us some indication of possible outcomes.

The first recommendation to a business plan is to find out if the opportunity exists and if it can be profitably exploited. We must also find out if we have Unique Selling Points (USP's) that will differentiate us from possible competitors. We should try to find out about the market dynamics and choose the right strategy for presenting our product. Key personnel, technology, production site, correct pricing of our product are some of the points that will need closer examination. A thorough analysis of present and future competitors is also improtant for proper business planning.

Mintzberg (2001) suggests that different decision making models are used to different situations. Mintzberg describes 3 different decison making models described below:

(Mintzberg 2001)

In giving a recommendation to the management team regarding planning and managing the risk I would say that PORES does not give us a clear picture of our potential market situation in the future and how the potential growth of the venture is going to be handled. PORES is mainly static in nature and some more dynamic models should be used when appropriate such as "sensitivity analysis". The ultimate decision will be for the strategic committee to make based on the background and findings of the PORES analysis and other relevant frameworks such as business plan.

: 11 Mar 2010 09:31 |  Comments (1) |  Close comments |  Report a problem