The Saga of the Solar Teapot - Go or No Go?

By Don Creswell, Co-Founder SmartOrg Inc.

This is the story of a radical new product idea: a solar teapot. Given limited resources and uncertainty, is this a product the company should fund? The “Saga of the Solar Teapot” is a simplified example of how companies use Value-based Management to address this challenge.
The teapot’s internal champions claim it heats water twice as fast as any product on the market, saves energy, can be used when camping and appeals to the green movement: “It is going to be a real winner for our company. We predict the market is at least $500 million and, as first to the market, we can grab 60 to 70% share within a year following launch.”

“Not so fast,” says the CFO, “you have to show me. Given your track record, if the market is as big as $200 million and if you can take 30%, I’d be truly surprised. Plus, I’m not sure you can pull this off technically. What I want to know is, is this a good investment for our company.”

Sound familiar? There are proponents for a new product where there is little experience, little hard data and a lot of uncertainty. Champions make projections based on optimistic assumptions about technology, markets, price and so on; hey, they believe in their product and want to see it funded! On the other hand, others like the CFO are appropriately skeptical.

The challenge: how to assess business value as objectively as possible, obtaining buy-in from finance, marketing, R&D and others who must make it happen?

The teapot needs to be evaluated on two levels. Is it a potentially profitable product in itself? Does the teapot represent a good use of resources given other opportunities in the portfolio?


Assessing Value
Two basic questions need to be answered: Can we do it? What is it worth IF we can do it?
These questions are usually addressed via spreadsheet business models driven by assumptions about the inputs. Our clients have found this approach to be unsatisfactory for a number of reasons:

• Decision makers distrust spreadsheet models, which they do not understand.

• Spreadsheet models take a huge amount of time, create version control problems, and are full of errors after a number of iterations.

• Spreadsheet models require the skills of a trained analyst; models are not directly accessible by stakeholders.

• Most models fail to deal explicitly with uncertainty and how it can affect value.

• Assumptions are subject to politics, endless argumentation, rework and gamesmanship.


Value Maps to the Rescue
Value Maps have proven to be a most effective way to address the above issues.
A Value Map is a graphic representation of a business model transparent to all stakeholders. Uniquely, value maps define the math needed to derive Expected Net Present Value (ENPV) — NPV weighted for the impact of risk and uncertainty.

Users access a library of Value Maps, e.g., New Product, Product Extension, Cost Reduction, and other business models. The maps assure a consistent approach to economic evaluation while clearly revealing the business model structure to users and decision makers.
Input templates representing each of the factors in the Value Map, enable users to interact with the business model and instantly see results on project and portfolio value. Web-based software encourages collaboration and understanding among various functions enabling, in the words of a Fortune 100 portfolio manager, “insightful conversations about value.”

Let’s return to the teapot. The Value Map and a sample input template look like this:

In our example, the team gathers to discuss input parameters, developing their initial assessment of the probability of technical or development success and the ranges of uncertainties around each of the cost, market and sales variables.

While there is general agreement on the ability to move through each of development phase, the sales/marketing team and the CFO have quite different opinions about the size of the market, penetration, etc. Who is right? At this stage, no one is right. Therefore, it is important to capture a range of values that represent their viewpoints. This range will be used by the computer to identify critical downside risk as well as upside opportunities and to rank these in order of their impact on ENPV.

The example below shows a portion of the input template for Market. In the example, the team agrees on a range for New Product (NP) Margin from 15% low to 50% high; on Market Size, from $200 million low to $500 million high, the CFO and Team estimates respectively. They will provide like inputs for each factor in the Value Map model.


The computer analyzes the team’s data and provides a first cut evaluation (graphic).






The initial numbers are, frankly, not that exciting: an expected value of $15.4 million and a 25% chance of technical success.

Management asks the team identify the major factors that influence final value and downside risk. A “tornado chart” reveals there are three factors that dominate value: New Product (NP) Peak Share, NP margin and NP market size. It further reveals a considerable range of uncertainty around each of these factors. The tornado indicates there is a lot of value to be gained IF the company can find a way to drive toward the upside potential (right edge of each of the three bars). The value of knowing this is that the team now has a clear picture of where to apply its resources, avoiding wasting time and money.

For information about Portfolio Navigator, please visit www.smartorg.com or contact info@smartorg.com

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Free Briefing and Software Demonstration
If your company is challenged to improve the return on investment in projects and product development, let us show you how you can raise your chances for success through value-based management process and software. To schedule a free, private web briefing contact mgurman@smartorg.com.