INSEAD MBA 2006 How Entrepreneurs Transfer a Business Concept Venture Replication Workbook This document walks you through a systematic process of analyzing and implementing a business concept that you have seen working in another geography or industry context. New Business Ventures Prof Bala Vissa
The replication process is organized in 3 parts: A: Clarify Core Business Concept B: Assess Replication Context C: Select Replication Strategy A: Clarify Core Business Concept 1- Validate attractiveness of business concept through business metrics (profitability, cash generation, revenue growth, momentum) in comparison with industry benchmarks. If the concept is not an outlier in performance it may not be worth your time and effort. 2- What is the offering and why it creates value in a novel way? (Identify the value proposition from the point of view of end-users what problem is it solving for the users?): 3- What templates or models were used to design and communicate the offering? (Are they culturally specific? People tend to adopt what they can understand well some templates may not work well in different cultures) 1
4- Draw the value system including the core design choices and their enabling elements that allow the business to solve the end user s problems. (Force yourself to identify the main service/product features and delivery procedures that are key to create value. Creating value is all about making the right trade-offs for a certain audience (customers and partners) Core Design Choices circle Enabling Elements - square Full Line reinforcing elements Dashed line inconsistent elements 5- What are the procurement methods, partnership relations, time dependence effects, or proprietary elements that facilitate the creation of value and may be hard to replicate? (look for economies of scale, IP, learning curve effects, or sharing of resources) 2
B- Assess Replication Context 1- CSF: Context Success factors: List the factors that were critical in making this concept successful in the initial geographies/industry. (Consider cultural, demographic, competitive, regulatory, technical, structural, and economic factors). 2- CFF: Context Failure Factors: List the factors and conditions that would invalidate this business concept in a new geography 3- What is the context(s) (geography/industry) where you have deep expertise and contacts and would like to replicate the business concept? (it is extremely hard to replicate a concept in a context that you don t know well you need to understand better the new context than they ever will!). 4- Assess if your chose context has most of the CSF and none of the CFF. 3
5- Re-draw the minimal system of core and enabling elements that make sense for the new context and preserve the value-creation potential of the business concept. Are there any that you need to add to adapt to the new context? 6- Break-even analysis: What is the required investment to set-up the venture, how big can the market become, and what is your break-even point? (Get benchmark for costs and revenue calculation to identify the financial break-even point.) 7- Exit Strategy: What are the exit opportunities and the value of the business? 4
C Select Replication Strategy (more applicable to geographic replication) - Four main replication mechanisms: Re-invent: adapt the business concept to the new context (focus on the elements that transfer well and add other necessary ones). You have no source brand, no proprietary processes, no support. However you keep all upside License: legal right to use some proprietary elements of the source business. Terms are negotiable but usually involves less monitoring that a franchising relation. Usually there is no up-front fee and payment is in the form of royalties. There may be different types of licenses such as trademark license, product distributorship, and technology transfer agreement Franchise (business format license): adopt brand and business format and full support for transfer of proprietary processes. Payment is fixed entry fee plus revenue share. Widely used in retail/service concepts. Joint-Venture: marriage with joint ownership (the franchise or license agreement is assigned to a new entity which is jointly owned). It is good since you leverage licensor s assets and capital. Also it requires more commitment of the other party than a franchising or licensing relation and may have higher value at exit due to the creation of IP. However, it is less flexible / requires more coordination and you split the upside. 1- Two initial questions to ask: Will re-inventing likely lead to legal problems regarding the use of intellectual property? If yes, then some form of licensing is needed (established firms will often sue just to give an example to others). Do I trust the potential franchisor s ability to support my efforts and be committed to my success (is there a cultural fit involving an entrepreneurial leader with common missions/passions and attitudes)? If no, then franchising is not a viable or useful option (the existence of intermediaries master or region franchisees may be particularly problematic). Note: - to make a deal, researching and understanding the other side is key: What stage are they in? What is their financial situation? Is the entrepreneur founder still at the top? (this last criterion is probably the most important since it usually means that they understand the issues you are facing and have autonomy to make a decision You don't want to deal with the hired guns). Usually there is a narrow window of opportunity in which a deal is possible. 5
2- Evaluate four characteristics of the replication process (low, medium, high): 1- To the extent that the business format is applicable in its entirety to the new context, then franchising is preferred to re-inventing because of learning advantages and faster time to market. 2- To the extent the business process is very complex, with many reinforcing core and enabling elements (some not apparently obvious), then franchising is preferred to reinventing given the danger of weak replication process (people tend to underestimate the value of proprietary processes). 3- The higher the brand value and recognition the more franchising is preferred given the faster user adoption (however, a very large and well known brand/franchisor does not make a good partner for a growth oriented entrepreneur since most value has already been created). 4- The higher the dependence on the source of the business format due to economies of scale, proprietary designs, economies of learning, technological change, control of supply sources, the more franchising or joint-venture is preferred to benefit from those advantages. 3- Based on the analysis of the four characteristics, find the best compromise among the different replication mechanisms. Characteristics Rating 1- Applicability of business format 2- Complexity of business process 3- Brand Value /Recognition 4- Dependence on Source (key resources) Low Re-invent Re-invent Re-invent Re-invent Average High Re-invent (or License) Franchise or Joint-Venture License (or Franchise) Joint-Venture Franchise (or license brand) Franchise (or Joint-Venture) Franchise (or license) Joint-Venture Preferred Solution = 6