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GIS, Process Innovation, and Small Businesses

GIS, Process Innovation, and Small Businesses. Jerry Platt May 2007. Outline of Talk. SBA Grant 4 Small Businesses 10 Differences Survival Rates GIS Opportunities NON-MARKET Valuations 23 GIS Projects as REAL OPTIONS 32. I. SBA Grant SBA Grant #SBAHQ-06-I-0046

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GIS, Process Innovation, and Small Businesses

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  1. GIS, Process Innovation,and Small Businesses Jerry Platt May 2007

  2. Outline of Talk • SBA Grant 4 • Small Businesses 10 Differences Survival Rates GIS Opportunities • NON-MARKET Valuations 23 • GIS Projects as REAL OPTIONS 32

  3. I. SBA Grant SBA Grant #SBAHQ-06-I-0046 9/1/06 to 8/31/08 $987,228.00 University of Redlands Redlands Institute School of Business SBA Inland Empire SMEs

  4. University of RedlandsSBA Grant 3. Develop/Conduct SB/GIS Training Workshops @ I.E., SoCal, US level 2. ~8Case Studies of GIS Technology Transfer to I.E. Small Businesses 1. Develop Center to provide GIS Assistance to Small Businesses 4. Intern’l Conference on Managing with GIS for SB, SBA, B-Schools 5. Develop Internet-based Knowledge Repository of Case Studies, etc.

  5. What is the “Inland Empire”?

  6. SME Criteria Location Sector Industry Size Maturity Objectives Technology Interest Tomlinson Method Strategic Purpose Plan for a Plan Technology Seminar Information Products Systems Scope Data Design Data Model System Requirements Assessment Metrics Implementation Plan ~8 IE SME Case Studies

  7. Putting It All Together Inland Empire SME Spatial Thinking Business Model 1 GIS App(s) Value- Added 3 Spread 2 Sustain

  8. Where are the GIS Applications? Schuurman, N. GIS: A Short Introduction, 2004, p. 135

  9. Early Impressions with SMEs • The First Law of SMEs  SURVIVAL • One Critical Element of Survival  Process Innovation • “When All You Have is a Hammer, Everything Looks Like a Nail”  Enterprise GIS • “Every Project Competes Against Itself, Delayed in Time” Real Options • A GIS Investment is a Portfolio of Options

  10. II. Small BusinessesWhat IS an SME? http://ec.europa.eu/enterprise/ enterprise_policy/sme_definition/ sme_user_guide.pdf

  11. U.S. has NO single SME Definition http://www.sba.gov/advo/laws/comments/factssba04_0629.pdf

  12. Why Focus on SMEs? • Most private non-farm workers in US are in SMEs (57.4m of 113.4m) • Over past decade, ~80% US net job creation has been through SMEs • SMEs produce 14 times as many patents per employee, and those patents are 2 times as likely to rank among 1% most cited

  13. How SMEs Differ fromPublicly-traded Corporationss: • Market Prices P0 = D1/(k-g) • Corp. Risk Measures ke = rf + β(rm-rf) • Risk Diversification σ2>> β • Agency Issues Owner≈ Management • Slack Resources Lean Operations • Scale and Integration Project ≈Enterprise

  14. Primary Threat to SMEs  SURVIVAL After 4 years http://www.sba.gov/advo/stats/bh_sbe03.pdf http://www.smallbiztrends.com/2005/07/business-failure-rates-highest-in.html

  15. Questions for You • Is the Small Business Survival Rate in CA: • HIGHER than the US Average • EQUAL to the US Average • LOWER than the US Average • What Accounts for Your Answer to 1) ? 3) What Advantage Does CA Have, Compared to most other States?

  16. SME BusinessTurnover Rate

  17. SME_Business_Turnover_RateCA Ranking (50 States + DC) • Fifth worst: U.S. Total 1.15 18% of Business BIRTHS in U.S. 10% of BANKRUPTCIES in U.S. 28% of Business TERMINATIONS in U.S.

  18. Selective Components:SME_Risk to Survival IndexCA Rankings (50 States + DC) • Top Personal Income Tax Rate 51 • Top Capital Gains Tax Rate 51 • Top Corporate Income Tax Rate 40 • State and Local Property Taxes 17 • Number Health Insurance Mandates 44 • Electric Utility Costs 44 • Workers’ Compensation Benefits 49 • State Gasoline Taxes 50 • 5-yr Government Spending Growth Rate 51 • Per Capita Government Expenditures 46

  19. State_Innovation_IndexCA Rankings (50 States + DC) CONCLUSION: Technological Innovation partially offsets the hostile environment to soften its impact on SME failures, BUT … CA SMEs must continue to INNOVATE, and spatial thinking about your business provides a set of opportunities to do so.

  20. Process Innovation IncreasesSME Survival Rates N = 3,275 SMEs Process Innovators > Product Innovators > Non-Innovators http://icc.oxfordjournals.org/cgi/content/abstract/14/6/1167

  21. [For SMEs] “ … innovation acts as a vaccine, allowing firms to increase their resistance to the liability of newness and smallness.” “Overall, innovation increases the survival probability of firms by 11%. This effect is comparable in scale to the effect of firm age, which has traditionally been found to be a key determinant of firm survival.” “ … we are able to detect that there is a significant difference between product and process innovators. Firms that introduce new products do not have higher chances of survival, [whereas] firms that can introduce process innovations do.”

  22. GIS: An IT Process Innovation “In most organizations the introduction of a GIS brings with it a period of change. This is in common with other IT applications, and other innovations that change working practices.” An Introduction to GIS Heywood et al, 3rd Ed., p. 351

  23. III. Non-Market ValuationsFirst, Market-Derived Event StudiesRandomize Away Confounding Variables Same Event, Multiple Firms, Multiple Real-time Event Dates

  24. Passive NPV Calculations NPV = Sum of EXPECTED Cash Flows, Discounted at RADR Expected Net Cash Flows at t: RADR = (1 + Rf + Risk Premium) Rf = Riskfree Rate CEQ = Sum of CEQ Cash Flows, Discounted at Riskfree Rate CEQ Net Cash Flows at t: α * Expected Net Cash Flows at t 0 ≤α≤ 1

  25. Accounting-DrivenGIS Project Cashflows • Benefits:DCosts: Improved Productivity Purchases & Training Improved Efficiency Data Collection Expansion of Revenues Database Design Value of Assets Communications Customer Satisfaction Customer Expectations Other Other

  26. Estimating SME Discount Rates Annualized Survival Rate = p; 1 + k = (1 + R f) / p if d = 0

  27. Example: NPV v. CEQ Equivalent iff: α = 1+Rf / 1+RADR Ben. = 26.42 Cost = 23.68 Rate = 0.00 NPV = +2.74 RADR NPV at “Corresponding RADR”

  28. Injecting Uncertainty

  29. Simulation Results

  30. Passive NPV Analysis of GIS • INSTRUCTIONS: Slide, stretch and shrink bar until your best guess is equally likely inside as outside bar • Considering all GIS net benefits and costs, estimate net value as a percent of sales: First Year: 0% 100% Later Years: 0% 100% • Estimate the firm’s survival probability for one year: Current Year: 0% 100% Best Estimate Value- Added = $447,382 Likelihood Value-Added Positive = 82%

  31. http://www.ibm.com/developerworks/rational/ library/nov05/mckenna/index.html

  32. IV. GIS Projects as REAL OPTIONS “ … a well-planned implementation can start out as a project and grow, or scale, into a full-blown enterprise system.” “ … GIS tend to evolve over time.” Introduction Thinking About GIS Roger Tomlinson Expires Single GIS Project SCALE Option ? Enterprise GIS Exercised

  33. The Case for ROA of IT (GIS) http://web.gsm.uci.edu/kzhu/PDFfiles/ Papers_Abstract/ICIS01_RealOptions_panel.pdf

  34. GIS creates REAL OPTIONS “Managing risk within significant GIS projects requires at least two appraisals: • a sound investment appraisal before commitment is made to proceed • a risk appraisal to identify the significant factors which may go wrong in implementation of the project.” Geographical Information Systems and Science Longley, Goodchild, Maguire and Rhind Second Edition page 444

  35. The REAL OPTIONS Approach Traditional, Passive NPV ( ≈ B / C Ratio ) + Active NPV = Managerial Flexibility to React as Uncertainties Are Resolved OR right

  36. Basic Logic of an OPTION

  37. Basic Logic of a REAL OPTION

  38. GIS Examples of REAL OPTIONS • DELAY OPTION, to implement a full GIS later • SCALE OPTION, to expand toward enterprise GIS after cultural acceptance and in-house expertise established • FLEXIBILITY OPTION, to switch platforms, or to accelerate/decelerate GIS • EXIT OPTION, to abandon GIS as a “sunk cost” • LEARNING OPTION, to attain otherwise unattainable information

  39. OPTION Valuation Models • Black-Scholes OPM • Binomial OPM, … REAL OPTIONS Done Right

  40. From Financial to REAL OPTIONS Financial Option Embedded GIS Option

  41. http://www.numa.com/cgi-bin/numa/calc_op.pl

  42. Projects as REAL OPTIONS

  43. A Stylized Example

  44. Uncertain Outcomes μσ ~ 1 Die3.50 1.71 ~ 1 Flip of 1 Coin ~ Double * (1 Die)7.00 3.42 ~ Sum (2 Dice)7.00 2.42 {1:6} w Pr = 1/6 {0:1 ~ 1:3 v. 4:6} w Pr = 1/2 {2,4,6,8,10,12} w Pr = 1/6 {2:12} w Pr 1/36, 2/36, …, 6/36, … , 2/36, 1/36

  45. What Happened? • A Business Services Firm • RADR = 27% • RiskFree = 4% • OPTION = 3 Years Out; Let Expire Unless Initial Projects Payoff = {$4, $5, $6}

  46. What’s Next Identify SME Case Studies In I.E. with: GIS Enterprise Aspirations + Embedded GIS Options Passive NPV of Initial Investment Formulate Stages of GIS Implementation Active Management and Valuation Of Options Wide Dissemination of Results

  47. Basic Premise • SME Objective Function • = SURVIVAL • =f(PROCESS INNOVATION) • GIS = • A Process Innovation • An Enterprise Strategy • A Portfolio of Options

  48. Thank You

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