The product spanx is an example of an ordinary innovation

References

Hisrich, R.D., Peters, M.P., & Shepherd, D.A. (2013). Entrepreneurship (Laureate Custom

Education). New York: McGraw-Hill Irwin.

Custom Create Edition LAUREATE EDUCATION I C

1 00 I Entrepreneurship

CREATIVITY AND THE BUSINESS IDEA

1

To identify various sources of ideas for new ventures.

2 To discuss methods available for generating new venture ideas.

3 To discuss creativity and the techniques for creative problem solving.

4 To discuss the importance of innovation.

5 To understand an opportunity analysis plan.

6 To discuss the aspects of the product planning and development process.

7 To discuss aspects of e-commerce and starting an e-commerce business.

I _ ------···- ___________ --·· _______ ___ __________ _ _ _ __ .. _______________ ~~r=~!~-~~~s~~_:_~~~~~E~~~ -+--1_0_ 1 __ _

OPENING PROFILE

FREDERICK W. SMITH

Who would think that an entrepreneur with a $10 million inheritance would need

more capital to get his company off the ground? The business world is filled with sto-

ries of companies, large and small, that started in a garage with an initial investment

of a few hundred dollars. But none of those companies needed a nationwide distribu-

tion system in place, complete with a fleet of airplanes and

trucks, before accepting its first order. And none of those

garage start-ups grew to be Federal Express.

Frederick W. Smith, a Memphis native whose father

made his fortune by founding a bus company, conceived of the idea for his air-cargo

company while studying economics at Yale University in the 1960s. The professor of one

of Smith's classes was a staunch supporter of the current system of air freight han-

dling in which a cargo package literally hitched a ride in any unused space on a passen-

ger flight. Fred Smith saw things differently and, in a paper, described the concept of

a freight-only airline that would fly all packages to one central point, where they

would then be distributed and flown out again to their destinations. This operation

could take place at night when the airports were less crowded, and, with proper logis-

tics control, the packages could be delivered the next day. Whether it was the novelty

of the idea, the fact that it went against the professor's theories, or the fact that it was

written in one night and was turned in late, the first public display of Smith's grand

idea earned him a C.

Smith's idea constituted far more than a concept for a creative term paper, however.

He had seen how the technological base of the country was changing. More compa-

nies were becoming involved in the production and use of small, expensive items such

as computers, and Smith was convinced that businesses could use his air-cargo idea to

control their inventory costs. Overnight delivery from a single distribution center to

anywhere in the country could satisfy customers' needs without a company needing a

duplicate investment in inventory to be stored in regional warehouses. Smith even

thought of the Federal Reserve Bank as a potential customer with the vast quantities

of checks that had to be delivered to all parts of the country every day. But the Vietnam

War and a family history of patriotic service intervened. Smith joined the Marine Corps

and was sent to Vietnam, first as a platoon leader and then as a pilot.

93

1 02 l Entrepreneurship

94 PART 2 FROM IDEA TO THE OPPORTUNITY

After nearly four years of service and 200 ground support missions as a pilot, he left

Vietnam, ready to start building something. He went to work with his stepfather, first

managing and subsequently purchasing a controlling interest in Arkansas Aviation

Sales, a struggling aircraft modification and overhaul shop. Difficulty in getting parts

to the shop in Little Rock, Arkansas, revived his interest in the air-cargo concept. He

commissioned two feasibility studies, both of which returned favorable results based

on a high initial investment. The key to this company would be its ability to serve a

large segment of the business community from the very beginning, and the key to the

required level of service was cash. Full of optimism, Smith went to Chicago and New

York, confident that he would be returning with basket loads of investment checks.

Progress turned out to be slower than Smith had anticipated, but through his bound-

less energy, belief in his idea, and technical knowledge of the air-freight field, he was

finally able to get enthusiastic backing (around $5 million in capital} from New Court

Securities, a Manhattan-based, Rothschild-backed venture-capital investment bank.

This commitment from New Court spurred substantial additional financing. Five other

institutions, including General Dynamics and Citicorp Venture Capital, Ltd., got involved,

and Smith went back to Memphis with $72 million. This was the largest venture-

capital start-up deal in the history of American business.

Federal Express took to the skies on March 12, 1973, to test its service. Servicing an

11-city network (extending from Dallas to Cincinnati}, it initially shipped only six pack-

ages. On the night of April17, the official start-up of Federal Express, the network had

been expanded to include 25 cities (from Rochester, New York, to Miami, Florida}, ship-

ping a total of 186 packages. Volume picked up rapid ly and service was expanded; it

looked as though Federal Express was a true overnight success. Smith's understanding

of a market need had been accurate, but he had not counted on OPEC causing a mas-

sive inflation of fuel costs just as his company was getting started. By mid-1974, the

company was losing more than $1 million a month. His investors were not willing to

keep the company going, and his relatives were suing him for mismanaging the family

fortune (nearly $10 million of Smith money had been invested}. But Smith never lost

faith in his idea and f inally won enough converts in the investment community to keep

the doors open long enough to straighten out the pricing problems caused by OPEC.

After losing $27 million in the first two years, Federal Express turned a profit of

$3.6 million in 1976. The development and growth of Federal Express were tightly regu-

lated. Because of old laws designed to protect the early pioneers of the passenger air-

line industry, Smith was required to obtain approval for operating any aircraft with a

payload in excess of 7,500 pounds. Since the major airlines-at the time, the giants of

the industry-were not ready to share the cargo market, he was not able to obtain this

needed approval and had to operate a fleet of small Falcon jets instead. While this sit-

uation worked well at start-up, by 1977 his operation had reached the capacity of

these smaller planes. Since the company was already flying several jets on the most ac-

tive routes, it did not make sense to buy more Falcons. Smith took his salesmanship to

Washington and, with the help of a grassroots Federal Express employee effort, was

able to obtain legislation creating a new class of all-cargo carriers. This gave Smith the

operating latitude he needed.

Entrepreneursh ip, Eighth Edition 1 03 --·--·· ·-···---- ·------------------ -----··· -------. ·--·-·--------·--·--·--··--·------ ---- ------·-·------- t---- -------

CHAPTER 4 CREATIVITY AND THE BUSINESS IDEA 95

Although Smith had the approval to operate large jets, he needed to find a way to

purchase them. The corporate balance sheet of the company was still a mess from early

losses, and the long-suffering early investors needed some reward . Thus, Smith took his

company public on April12, 1978, raising enough money to purchase used Boeing 727s

from ail ing passenger airlines. The investors were indeed richly rewarded, with General

Dynamics watching its $5 million investment grow to more than $40 million by the time

Federal Express was first traded on the New York Stock Exchange in December 1978.

The company continued to perform well since its public offering, combining technica l

innovation and an obsession w ith customer orientation (Federal Express was the first

company to win the Malcolm Baldrige National Qual ity Award in the service category,

and in 1994 it became the first global express transportation company to receive simul-

taneous worldwide ISO 9001 certif ication) to ensure exceptional growth.

Since 2002, with sales revenue of $20.6 bi llion and the company's first-in-its-h istory

cash dividend, FedEx has continued to grow. In the fiscal year ending in 2008, the com-

pany had grown to $38 bi llion in revenues, offering just the right mix of transporta-

tion, e-commerce, and business solutions. Fed Ex is composed of Federal Express, Fed Ex

Ground, Fed Ex Freight, Fed Ex Kinko's Office and Print Services, Fed Ex International Pri-

ority, FedEx International Priority Freight, FedEx SmartPost, FedEx Home Delivery,

FedEx Customer Critical, FedEx Trade Networks, FedEx National LTL, FedEx Supply

Chain Services, and FedEx Services. In 2008, FedEx averaged: (1) more than 7.5 million

shipments a day for express, ground, freight, and expedited delivery services; (2) more

than 290,000 employees and contractors worldwide; and (3) more than 220 countries

and territories, including every address in the United States.

The company has over 18 million Web site vis itors monthly and processes more than

5 million tracking requests daily. There are more than 20 million packages shipped via

FedEx Sh ip Manager monthly and 670 aircrafts serving more than 375 airports world-

wide. FedEx has more than 80,000 motorized vehicles for express, ground, freight, and

expedited delivery service; 725 Fed Ex World Service Centers; 1,281 Fed Ex Kinko's Office

and Print Centers; 6,505 FedEx Authorized ShipCenters; and 44,008 FedEx Drop Boxes

(including 4,979 U.S. Posta l Service locations). The firm's stock price saw a high of $109

in July 2007, up from $62 in Ju ly 2003 (though it saw a steep decl ine during the

2008/2009 recession, seeing a low of $34 in March 2009).

At the heart of Frederick Smith's success story is the creativity and uniqueness of the ini-

tial business concept. This part of the new venture creation process is perhaps the most

difficult to actualize. What specific features does the new product or service need? A wide

variety of techniques can be used to obtain the new product idea. Smith expressed his

original idea in a paper he wrote to complete a college course. For others-such as Bob

Reis of Final Technology, Inc., and Frank Perdue of Perdue Chickens-the idea came from

work experience. No matter how it occurs, a sound, unique idea for a new product (or

service), properly evaluated, is essential to successfully launching a new venture. Through-

out this evaluation, or opportunity analysis, the entrepreneur must remember that most

ideas do not provide the basis for a new venture; rather, it is important to sift through and identify those ideas that can provide such a basis so that they can be the entrepreneur's focus. A good method for doing th is is to look at trends that will occur in the next decade.