Master Thesis: In search of Competitive

Advantage: An opportunity-based view

Conducted by Said Eoon Mussa

Cand.merc. Finance & Strategic Management

Supervised by:
Prof. Henrik Johannsen Duus, PhD – Department of Marketing

Total character count: 139.982

Total page count: 74/97
Acknowledgement
I am grateful for being able to immerse myself in an area of sincere interest, the process of discovering
an idea and embarking on discovering its potential.

Bringing a thesis into being is a significant undertaking. Further, writing the project alone did not make
this a lesser task. However, during this process, I was helped immensely by a few people.

Firstly, my supervisor, Prof. Henrik Johannsen Duus, has provided me with encouragement and
guidance throughout the thesis process. His constructive supervisions made Wednesdays joyful and
gave me renewed energy, thank you, Prof. Duus.

Also, I would like to extend my gratitude to my friends, Lars Olaf Søvndahl Petersen and Bjørn Bo
Sørensen. Your feedback has been invaluable, and I am looking forward to spending more time with
you.

Said Eoon Mussa

Copenhagen Business School – March 8th 2018

Abstract
Increased market dynamism and competitive pressures have made it vital for companies to
continuously search for profitable opportunities. This thesis researches how such opportunities can be
validated. First, six theoretical principles applicable to the opportunity validation process is uncovered.
Second, based on these principles, a framework is created: The Opportunity Validation Approach
(OVA). The OVA framework is applied via two separate case studies. Support is found for the thesis’
main argument: the importance of validating an opportunity before resources are expended on seizing
the perceived market opportunity. Third, the OVA framework is operationalised through customer
conversion metrics and the Economic Value Added concept. Lastly, clear directions for future studies
are provided to evaluate whether the Sense, Seize, and Transform stages in the dynamic capability
theory should be altered to Sense, Validate, Seize, and Transform.
Abbreviations

Abbreviation Meaning

MBV Market-based view

RBV Resource-based view

DCA Dynamic capabilities

CC Core Competence

LSM Lean startup methodology

MVP Minimum viable product

OV Opportunity validation

OVA Opportunity Validation Appraoch

R&C Resources and capabilities

VC Value chain
Table of content

Chapter 1: Introduction

1.1. Background & motivation ................................................................................................ 4

1.2. Problem identification & statement ................................................................................. 5

1.3. Methodology & theoretical application ............................................................................ 7

1.4. Delimitation & thesis structure ........................................................................................ 8

1.4.1. Thesis overview: Researching the opportunity validation process .................................... 10

Chapter 2: Methodology

2.1. Ontological perspective.................................................................................................. 11

2.2. Epistemological philosophy ............................................................................................ 12

2.3. Research design ............................................................................................................. 13

2.3.1. Research strategy .................................................................................................... 13

2.3.2. Research method .................................................................................................... 14

Chapter 3: Literature Review

3.1. The Market-Based View ................................................................................................. 17

3.1.1. The Five Forces, Value Chain, and expected industry profitability ............................... 18

3.2. The Resource-Based View .............................................................................................. 20

3.3. Recent market developments and positioning of thesis .................................................. 22

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 3.3.1. Market developments ............................................................................................. 22

3.3.2. Literature developments ......................................................................................... 23

3.4. Positioning the thesis research ....................................................................................... 24

Chapter 4: Theoretical Analysis

4.1. Financial principles: Ensuring a favourable risk/reward ratio .......................................... 30

4.2. Explication principles: Explicating the opportunity outlook ............................................. 33

4.3. The Lean Venture principles: Embedding the opportunity expectations .......................... 36

4.4. Validation principles: Evaluating the Opportunity Space ................................................. 41

4.5. The Opportunity Validation Approach: Putting the principles together ........................... 45

Chapter 5: Case Studies

5.1. General Electric Inc. ....................................................................................................... 48

5.1.1. GE – Traditional Approach ....................................................................................... 49

5.1.2. GE – OVA Framework .............................................................................................. 50

5.1.3. GE’s successful application of the OVA to verify opportunities .................................... 52

5.2. Intuit Inc. ....................................................................................................................... 52

5.2.1. Intuit – Traditional Approach ................................................................................... 53

5.2.2. Intuit – OVA Framework .......................................................................................... 54

5.3. Applications of the OVA framework ........................................................................ 56

Chapter 6: Discussion

6.1. Operationalising the OVA Framework ............................................................................ 58

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 6.1.1. Operationalising OVA through customer behaviour ................................................. 58

6.1.2. Operationalising OVA via Economic Value Added .................................................... 62

6.2. Discussion, limitations, and further research .................................................................. 65

6.2.1. Discussion ............................................................................................................... 65

6.2.2. Limitations .............................................................................................................. 67

6.2.3. Future research ....................................................................................................... 68

Chapter 7: Conclusion

7.1. Conclusion ..................................................................................................................... 69

Bibliography............................................................................................................................. 71

Appendix ................................................................................................................................. 87

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1. Introduction
1.1. Background & motivation
Before enrolling in my masters at CBS, I had relocated to London where I launched an ecommerce
platform focused on improving employee well-being and productivity. From the platform, firms
could procure a bespoke arrangement of products (e.g. fruit-baskets, mindfulness sessions, healthy
snacks, etc.) to be delivered to the office and enjoyed by the employees. However, several months
after launching the startup, I was confronted with the sheer amount of tasks, risks, and uncertainties
involved in the process. After six months both motivation and cash were running low, and I decided
to abandon the venture and return to Copenhagen.

This experience gave rise to many thoughts and contemplations. Being enrolled in MSc. Finance &
Strategic Management, has answered many questions. However, in the process, new issues emerged
as I became aware of the fact that the majority of startups and product innovations fail (Ries, 2011).
That is, the initial hope and plans of a fruitful outcome did not materialise. In other words,
something went wrong in the process from perceiving an opportunity to the actual outcome. Figure
1 gives a simple illustration of the process of pursuing an opportunity, and encompasses the initial
perception of an opportunity, the actions taken to seize the opportunity, and the actual outcome (i.e.
whether the opportunity was present and profitable).

Examining this process of pursuing an opportunity (e.g. innovation) and finding ways to improve
the odds of realising a successful outcome is very interesting and is immensely helpful on a
personal, organisational, and societal level. The motivation for this research, then, is both
intellectual and practical. I wish to research and develop a useful framework that can aid me in
navigating the next time I decide to pursue an opportunity and, more importantly, help others who
are in the same situation gain clearance in their process towards a successful venture.

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Figure 1: Perception - Process - Outcome

Often, the vast majority of the focus seems to be on the outcome. However, this thesis is interested
in the process that shapes the observed result. I believe much value can be derived from examining
the process itself and the numerous actions that together mould the observed outcome.

1.2. Problem identification & statement

The fundamental issue in strategic management is the examination of competitive advantage, that
is, the achievement of above average profit (Grant, 1991). Given this, strategic management
addresses two main questions: a) why are some firms more profitable than others and b) how may a
firm achieve and sustain competitive advantage (Martin et al., 2014). Two research perspectives
have dominated the strategic management literature since its infancy in the 1960’s. These are the
Market Based View (MBV) and Resource Based View (RBV). The perspectives differ in their
explanation of the two fundamental questions in strategic management highlighted above. The
MBV hypothesises a firm’s competitive advantage is to be derived from its industry, that is, how
industry forces (e.g. barriers to entry) shape the profit potential available to the incumbent firms. In
contrast, the RBV perspective focuses on the internal resources and capabilities possessed by the
firm to derive the determinants of competitive advantage (Hoskisson et al., 1999). Thus, while the
MBV takes an outside-in approach, the RBV adheres to a more inside-out perspective.

However, these theories have recently been challenged by academia (see Govindarajan, 2006;
McGrath, 2013) and practitioners (Ries, 2011). Common to these challenges is the critique of the
inherently static nature of the ‘traditional’ strategic process, where incremental strategic plans are
formed at a biannual meeting, far from the organisation's customers and the product development
activities (Ibid). Such increment driven process may be well-suited for an environment
characterised by a relatively low degree of uncertainty, and hence predictable to some extent, but
much less appropriate for an environment immersed in technological, economic, and sociological

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change (Chen, 2017). Thus, in a dynamic market, both the MBV and RBV perspectives are deemed
risky strategies. This so, as the industry, which MBV holds to be relatively stable, is subject to
threats of disruption. In a similar vein, the special resources and capabilities, seen by the RBV
perspective to endow firms with competitive advantage, are threatened. For example, digitalisation
is making assets fungible and not tied to a physical location. For instance, local distribution
networks are circumvented by digital distribution of content (Friedman, 2005).

How then, should firms deal with an environment characterised by a high level of dynamism and
increased competition? An environment where long-term competitive advantage is, according to
McGrath (2013), ‘transient’ at best and non-existent at worst? Despite the above consensus of
increased dynamism, it is too early to dismiss competitive advantage as being irrelevant. What
seems evident, though, is that firms must be increasingly better at sensing market opportunities and
seizing these quickly and efficiently. Luckily, recent academic developments have addressed the
above concern. One of these developments is called The Lean Startup Methodology (LSM). As
Appendix 1 shows, the number of publications involving LSM has steadily increased since Ries
(2011) synthesised the LSM principles. However, the number of papers, amounting to around 30 in
2017, is still negligent in absolute terms. Accordingly, this presents an exciting opportunity to
explore the theory and methodology advocated by the LSM and its applicability within the strategic
management literature.

LSM, which is rooted in the IT and entrepreneurial field, offers an appropriate framework to deal
with the core issues faced by firms seeking to seize an opportunity: risk and uncertainty (Ries,
2011). The central argument of LSM is that firms go too hurriedly from sensing an opportunity to
orchestrating resources and initiating expensive product launches and market entries. Many failures
can be avoided by focusing on validating the sensed opportunity, before expending resources to
seize it (Ibid). Thus, the thesis seeks to investigate this process of validating a potential business
opportunity. Specifically, I pose the following research question:

“Which principles can firms apply to effectively validate the existence of a business opportunity?”

The objective of the research is twofold; a) to uncover theoretical principles that can help firms
validate the existence of a business opportunity and b) create a framework, based on these
principles, that firms can employ in their pursuit of an opportunity.

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1.3. Methodology & theoretical application
“The fundamental problem is that deeply ingrained structures and systems designed to extract maximum
value from a competitive advantage become a liability when the environment requires instead the capacity to
surf through waves of short-lived opportunities” (McGrath, 2013, 5).

Any research embarking on examining a question has an underlying “system of beliefs and
assumptions” of how the issue at hand is best examined (Saunders et al., 2016, 124). The same is
true for this thesis as it seeks to address the above statement of McGrath (2013), that is, how can
organisations increase their ability to take advantage of market opportunities? This section seeks to
clarify the thesis’ underlying system of beliefs and assumptions.

The objective of this research is to examine the process by which business opportunities are
validated, such that they may be seized afterwards. In doing so, two central elements are focused
upon; a) a small team which has sensed a business opportunity in the market and b) a potential
opportunity embedded in the market as explicit or latent consumer demand. The fundamental
premise is that the process of verifying whether a business opportunity exists can be undertaken by
utilising objective criteria (e.g. market size, number of sales). Thus, the opportunity’s existence is
taken to be real and can be judged independently of the agent’s reality.

Because the research applies theories from finance, decision science, and entrepreneurship the
metrics analysed are categorized as being more objective than constructed (e.g. investment return,
number of consumer purchases). Hence, the epistemological focus is on observable and measurable
facts which can be utilised to gauge the likelihood of successfully exploiting a business opportunity
once it has been validated. In the illustrative case studies conducted, the researcher adopts an
independent position by focusing on uncovering objective metrics that are found to be significant
for the case company.

Saunders et al. (2016) distinguish between strong and weaker forms of methodological positivism,
where the strong version strictly adheres to the scientific concepts of the natural sciences, including
the existence of one true reality and the focus on deriving law-like causal relationships. This thesis
acknowledges the inherently complex nature of examining an open system such as managerial
actions and customer behaviour. Therefore, a weaker form of positivism, with elements of a
pragmatism-based philosophy of science, is adopted. As a consequence, the thesis operates with a

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positivistic framework but also acknowledges that the basis for conducting the research is partly
grounded in its practical value for the people consulting this research.

Seeking to investigate the process of effective opportunity validation, an overall inductive approach
is embraced. In particular, specific academic fields that deal with the market opportunities
(including financial, entrepreneurial, and decision science theories) are surveyed to arrive at core
principles that apply to the validation process. This approach allows for investigating the validation
process from different perspectives, such that a broader understanding is gained and subsequent
operationalisation is made possible. Therefore, both qualitative and quantitative methods are
applied, with emphasis on a qualitative theoretical investigation.

1.4. Delimitation & thesis structure

In seeking to assist firms in improving their opportunity validation process, the research naturally
puts more emphasis on some elements and less on others. The research delimitation can be
categorised into three areas; before, during, and after the opportunity validation process.

First, the thesis does not seek to research how the opportunity the firm has decided to validate is
uncovered. For instance, Kornish & Ulrich (2011) study how firms analyse a vast number of
potential ideas before a few opportunities are selected, and an opportunity validation process is
initiated. Second, during the opportunity validation stage, the thesis takes an all things equal stand
to the other factors besides the validation process. That is, several factors, including project
resources endowment, level of organisational support, and project team member’s motivations and
incentives, are assumed to be constant. However, scholars have found several of these factors to be
influential (Henrikse, 2013; Holmstrom, 1989; Acs et al., 1997). Third, the thesis does not extend
beyond the opportunity validation stage, that is, when a formally structured organisation is put in
place to exploit the validated opportunity. Chen (2017) provides an excellent account of the
architectural differences between organisations designed to explore an opportunity versus an
organisation designed to exploit an opportunity.

The increased dynamism of the business environment means that firms face increased competition
and must be able to adapt quickly (Friedman, 2005). In the strategic literature, the RBV has
addressed this issue and proposes that firms should develop dynamic capabilities to increase their
adaptive abilities (Jiang, 2014). Specifically, the dynamic capability approach puts forth three

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capabilities needed to readjust a firm’s resource base and take advantage of market dynamism:
sensing, seizing, and reconfiguring (Ibid). The thesis agrees with this need but seeks to expand upon
the dynamic capability theory by proposing two additions by a) arguing that an opportunity should
be validated before being seized, and b) construct a framework that can help firms validate a
business opportunity. The below figure shows the focal point of this thesis as being between the
sensing and seizing stages of the dynamic capability framework, that is, the opportunity validation
process.

Figure 2: The academic focal point of the thesis

Adapted from Helfat & Peteraf (2009)

To accomplish the above, the thesis is structured as follows. First, a methodology section expands
upon the chosen research approach and design. Second, a literature review is conducted in which
support is found for the first argument, that is, an opportunity should be validated before embarking
on seizing it. Third, theories in finance, decision science, and entrepreneurship are analysed and six
principles are extracted. A framework called the Opportunity Validation Approach (OVA) is
constructed based on these principles. Fourth, applying the OVA to relevant companies via
illustrative case studies, it is found that several companies have successfully applied OVA
principles to validate, and thereafter seize, significant business opportunities. Following, the
discussion puts forth different ways in which the developed OVA framework can be operationalised
such that more generalizable studies can be conducted. Lastly, the thesis is finalised by addressing
limitations, future research, and concluding on the research. Below, a visual structure of the thesis is
presented while the methodology section follows.

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1.4.1. Thesis overview: Researching the opportunity validation process

Ch. 2: Methodology

Ch. 3: Literature Review

Strategic Management & positioning of the thesis

Ch. 4: Theoretical Analysis

Opportunity validation principles

5. Case Studies
Analysing the application of opportunity validation methods

Ch. 6: Discussion, Limitations & Future Research

Operationalising the opportunity validation framwork & discussion

Ch. 7: Conclusion

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2. Methodology
Research entails making specific choices that will affect the process and the final product. This
section is concerned with explicating the methodological decisions made to answer the posed
research question. Hence, the below segments put forth the ontological, epistemological, and
methodological stands applied by the thesis.

2.1. Ontological perspective

Perhaps, the most critical assumption regarding a research process is the ontological perspective
adopted as such assumption guides the research path taken (Kumar, 2005). Because of the nature of
this thesis’ inquiry, that is the process of validating a business opportunity, positivism, albeit in a
weaker form, is adopted.

Ontology is fundamentally about the nature of facts and what constitutes reality (Moses & Knutsen,
2012). As Marsh & Furlong (2002; 18) note, the ontological perspective revolves around that which
is and hence asks “what exists in the world”? In general, there are two scientific ‘ends’ with regards
to what constitutes reality, the objective and subjective ontological perspective.

Objectivism, adhering to the assumptions of the natural sciences, posits the existence of an external
reality. There is one reality which, despite differing opinions among individuals, persists in
objective facts. Thus, the truth is external and exists independently from individual meaning-
making processes (Moses & Knutzen, 2012). Agents are to sense and discover this reality by
scientific and objective measures (Ibid).

In contrast, subjectivism rejects the notion of one external reality independent of each agent.
According to this perspective, differing perspectives lead to differing worldviews and thereby a
possibility of many truths (Saunders et al., 2012). This is particularly prevalent in social interactions
as these are in constant flux and are dependent on the interpretative processing of the individuals
interacting (Remenyi et al., 1998).

The thesis, to an overall extent, adopts the objectivist perspective. Although acknowledging the
scientific merits of subjectivism in providing a ‘richer’ perspective on reality, the objectivist
approach is found to be more appropriate for two reasons; Firstly, it is argued that the opportunity
validation process is inherently an objective phenomenon. Once a market opportunity has been

11
perceived, the company seeks to validate the existence of such an opportunity. Whether it can
successfully carry out such activities is reflected objectively in the form of profit accumulation.
Hence, since market variables (e.g. profit and growth rate) are phenomena external to the agent an
objectivist perspective is better suited to study opportunity validation. Second, the thesis seeks to,
through an exploratory study, contribute to the operationalisation of the opportunity validation
approach. This effort will ideally contribute to generalizable conclusions with regards to
opportunity validation and firm profitability. Thus, due to the above reasons, an objectivist research
perspective is adopted.

2.2. Epistemological philosophy

Epistemology is concerned with knowledge, more specifically “about the necessary and sufficient
conditions of knowledge, its sources, its structure, and its limits”(Steup, 2017). Epistemology is
closely related to the ontological perspective taken as different viewpoints have their
epistemological philosophy (Ibid). As is the case with ontological perspectives, epistemological
philosophies can be arranged on a continuum.

On one extreme is positivism which adheres to the existence of one external reality (i.e.
objectivism). This reality consists of real objects which can be accessed and measured to uncover,
and discover, different phenomena and their inter-relations (Remenyi et al., 1998). The scientist,
then, is to objectively observe, collect data, and produce law-like generalisations to increase
knowledge of how the world works. The emphasis is on statistics and quantitative tools to reach
valid and reliable conclusions (Kumar, 2005).

On the opposite extreme of the epistemological continuum lies interpretivism which holds that the
social realm cannot be studied as the natural realm. Chief, because social interactions govern the
social sphere, these interactions are not subjects to specific generalizable laws. Thus, a different
toolbox, one that allows for qualitative understanding, is needed to access and understand the social
realm (Steup, 2017).

This thesis, seeking to examine the process of opportunity validation, adopts a weak form of
positivism, one that is more aligned with the pragmatist research philosophy. This so due to its
focus on the research question, rather than the specific method, as the focal point (Wilson, 2010).
Because the opportunity validation stage is still being developed, a flexible research stand, both

12
regarding philosophy and methodology, is needed to foster a broader understanding. Thus, in
seeking to explore the opportunity validation process, the focus is on improving the theoretical
understanding, rather than uncovering generalizable conclusions. This is so for two interdependent
reasons: first, the opportunity validation process itself has not yet been clearly defined. Second, this
lack of clear definition, in the current state of research, makes it challenging to identify concepts
and derive generalizable conclusions.

2.3. Research design

The chosen research design of this thesis is heavily shaped by the objective of the thesis; to explore
the concept of effective opportunity validation such that a better understanding is gained and
subsequent conceptual development is feasible. Thus, the focal point of the research is the desire to
examine the construct from different angles rather than following a formal and deductive research
design. Hence, the inductive approach is more aligned with the research of this thesis as it allows
for an inquiry that is more emergent and not bound by strict adherence to a predefined deductive
methodology (Brynman & Bell, 2015). This approach enables the thesis to explore the theoretical
landscape within finance, decision science, and entrepreneurship to gain a broader understanding of
theoretical principles that can fruitfully be applied to the opportunity validation process.

2.3.1. Research strategy

As Babbie (1989) notes, exploratory studies are well-suited for relatively newer constructs and
topics. One the one hand, this approach allows for the flexibility needed to gain an in-depth
examination of the topic. However, the downside is the limited generalizability associated with such
exploratory studies. This limitation is accepted as the benefits of utilising the exploratory research
(i.e. investigation of opportunity validation) are deemed sufficient to compensate for the downside
of being an exploratory rather than conclusive research.

To investigate the opportunity validation stage, the application of secondary data is chosen. This
allows for an extensive search across different domains (Robson, 2002), which is beneficial due to
the relatively new academic formation of the validation stage (York & Danes, 2014). However,
despite the benefits of covering different domains, relying on secondary data also has its pitfalls.
The main issue is that the raw data has previously been processed by other individuals. To minimise
the potential impact of these pitfalls, the thesis has taken several measures. Chief among these is the
principal reliance on academically peer-reviewed journals.

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2.3.2. Research method
To complement the exploratory research strategy, a mixed method is adopted where both qualitative
and quantitative methods are employed. This is in line with recent scholars, including Nirwan &
Dhewanto (2015); Silva et al. (2013); Edison et al. (2018) and Ghezzi et al. (2015) who have, due to
lack of extensive data, adopted case studies in their study of companies applying the LSM to the
opportunity validation process.

The thesis, being in a similar situation, adopts the following mixed method research approach: first,
a qualitative theoretical examination of the opportunity validation process is conducted to uncover
principles pertinent to this process. Based on these principles, the theoretical analysis concludes
with the construction of a framework called the Opportunity Validation Approach (OVA). Second,
two illustrative case studies are carried out in which the constructed OVA framework is applied via
quantitative and qualitative methods. The cases, consisting of two companies, have been chosen as
they a) have applied validation strategies before pursuing business opportunities, b) are categorised
as being either an IT or industrial company, and c) have enough information available to be
analysed via the OVA framework. Lastly, the discussion utilises quantitative theory to
operationalise the OVA and gives directions to how generalizable studies can be conducted in
future research. The below figure visualises the thesis’ research approach.

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Figure 3: Research approach of this thesis

Thus, the thesis is an exploratory research. Literature within three disciplines are analysed, and
principles pertaining to the opportunity validation process is derived. The theoretical analysis is
backed by two case studies. Academically, the contribution of the thesis is threefold. First, the
theoretical foundation of the newly emerged model to opportunity validation (i.e. LSM) is analysed.
Second, opportunity validation principles covering value creation (finance), decision making
(decision science), and market demand (entrepreneurship) are derived. Third, the thesis adds to the
opportunity validation research by including relevant financial principles to the process. Further, by
operationalising the OVA, the thesis enables future research to embed the validation stage between
the sensing and seizing stages of the dynamic capability model.

In combining the different research methods (e.g. theoretical and illustrative cases studies), the
phenomenon of opportunity validation is studied from several angles. Thus, the chosen research
approach and design enables the thesis to answer the research question in the best possible manner
subject to the research constraints (i.e. the lack of quantitative data and academic consensus of
opportunity validation).

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3. An inquiry in to the theory of strategic
management
Merriam-Webster (2017) defines the corporation as “a for-profit corporation whose purpose is to provide a
benefit to society (such as improving the environment or promoting good health) in addition to making a
profit for shareholders”.

Hence, corporations are an integral part of the society and the wealth creation process. This notion
is nothing new and was, for instance, addressed by earlier scholars such as Smith (1776) Marshall
(1890) and Schumpeter (1912). The latter scholar is often accredited for having brought forth the
concept of creative destruction in which economic agents (e.g. entrepreneurs) continually pursue
new ideas and solutions (Herzog, 2017). In the process of creative destruction, many ideas will fail.
However, others will catch a foothold in the market, displacing older products, and jeopardising the
survival of incumbent companies (Schumpeter, 1934; 1942). Given this, along with other market
attributes, a perpetual competition for profit ensures among the ecology of companies in the market.

Some hundred years later, there is a broad academic consensus on the above notion and the inverse
relationship between interfirm competitive intensity and the profit levels a company can expect to
earn (e.g. Stigler, 1968; Hoskisson et al., 1999; Magretta, 2012). For instance, Fama & French
(2000) demonstrated how, using a large sample of 2243 firms, above average profits are very often
a short-lived phenomenon. That is, in competitive environments, profits are subject to a very
powerful economic force, the mean reversion of profits (Ibid).

However, despite this economic predicament, that above average profit is likely to be competed
away, some firms can enjoy high profitability across decades (Collins, 2001). For instance,
Appendix 2 shows how Johnson & Johnson (J&J) has consistently generated a return on invested
capital in excess of 20 %. In comparison to the general market (SP500) returned around 9 % in the
same period (gurufocus, 2017). How can this be and how can other companies limit the competitive
forces lurking to chip away above-average profit potential?

The above questions are covered by the literature on strategic management and competitive
advantage (Jiang, 2014). Generally, the strategic management literature can be divided into two
camps, that is, The Resource-Based View (RBV) and The Market-Based View (MBV) (Knecht,
2014). Both perspectives seek to explain the differences in firm profit levels and provide

16
prescriptive modes of thinking and taking action. In the following, a literature review of the two
perspectives and their developments will be conducted. The MBV perspective is addressed first
followed by the RBV perspective.

3.1. The Market-Based View

To answer the fundamental questions in strategic management, that is, 1) why are some companies
more profitable than others and 2) how may a firm improve its performance? The MBV takes an
outside-in perspective. In particular, early scholars note that companies in different industries tend
to have different levels of profitability and thus infer that external variables must exert significant
influence on firm profitability (Mason, 1939; Bain, 1968, Porter, 1980). To examine which external
factors influence firm performance and tease out generalizable conclusions, the MBV literature
relies heavily on methodology from the industrial organisation literature which examines the
interaction between competing companies in the marketplace (Hoskisson et al., 1999). The
Structure-Conduct-Performance (SCP) paradigm was widely adopted and posits that a firm’s
profitability is mainly a function of the structure of the industry in which it is embedded. Thus,
companies should focus on developing strategies in accordance with their industry’s structure to
gain competitive advantage (Caves, 1980; Porter, 1980).

The below figure illustrates the SCP logic as being a two-step approach, starting with the overall
structure of the industry which in turn shapes the behaviour and strategies available to the firm in
the industry and ultimately its performance. However, in the process of analysing their industry’s
structure, firms became confronted with ambiguity, including which factors should be included in
industry structure and determining how the different factors shape firm performance (Hoskisson et
al., 1999). Porter is often accredited for alleviating the ambiguity of industry structure analysis
through his introduction of two essential concepts; the Five Forces and Value Chain frameworks.

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Figure 4: Structure – Conduct – Performance Paradigm

Reproduced from Knecht (2014, 16).

3.1.1. The Five Forces, Value Chain, and expected industry profitability
Firstly, a firm’s profitability is determined by the difference between its sales and costs. Second,
different industries have different levels of average profitability. Third, an industry’s average profit
is given by a) the number of firms in an industry and b) their profit levels (Porter, 1980; Porter
1985). Given these propositions, Porter identifies five key factors, illustrated in Appendix 3, that
shape an industry’s average level of expected profitability.

These forces are (i) Buyer and Supplier bargaining powers that shape the procurement prices of
input components and selling price concessions with customers. (ii) Substitute products that put an
effective “cap” on pricing levels as these products are the second-best alternative for customers. (iii)
Barriers to entry, defined by Stigler (1968, 67) as a cost that “must be borne by firms seeking to
enter an industry but is not borne by firms already in the industry”. These can take different forms
(e.g. tangible or intangible) and naturally restrict entry of competitors. (iv) Competitive rivalry, or
the extent to which inter-firm competitive dynamics erode price premium or induce additional costs
(e.g. added customer service without a corresponding price increase). Because the intensity of each
force has a negative effect on the firm’s selling price, costs, or both, industry profitability is
positively affected by benign industry forces and vice versa (Porter, 2008; Grant, 1991; Peteraf,
1993).

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Whereas the differences in profitability across industries are explained by the intensity of the five
forces listed above, MBV scholars quickly stumbled upon another issue: that profit differentials are
also significant within industries (Hoskisson et al., 1999). Porter (1985) addressed this issue by
introducing the concept of the Value Chain (VC), which separates a firm’s structure into three
overall categories; the primary functions, the support functions, and the resulting margin of the
activities. Porter (Ibid) notes that the price a product commands and the costs associated with that
product must be a function of the different activities it has ‘consumed’. Competitive advantage can
be achieved when the various activities (i.e. primary and support activities) are configured in line
with the firm’s strategy, that is, which unique value the firms seeks to offer to the market (Magretta,
2012). Because the activities can be categorised as either value adding, value-neutral, or value
destroying the firm must be acutely aware of its value proposition and configure activities (from
upstream to after-sale service) to support this strategic position. For example, as Appendix 4 of
IKEA’s activity system illustrates, a company’s value proposition is embedded in few core
activities and complemented by clusters of support activities.

In sum, Porter (1996) notes that a firm’s long-term success is given by its profitability, hence
achieving a competitive advantage is not a competition about being the best but about delivering
unique value. In doing so, the firm must take account of the industry structure in which it is
embedded, determine which unique value it wants to offer to which segment, and carve out a
position in its industry by focusing on the activities that support the firm’s value proposition.

Michael Porter has been instrumental in the MBV literature. For instance, his book “Competitive
Advantage: Creating and sustaining superior performance” (Porter, 1985) has been cited almost
100,000 times! Despite this success, there has not been a lack of criticism of the MBV. The most
critical challenge being the lack of empirical support for MBV (Hoskisson et al., 1999). Numerous
scholars, including Rumelt (1991), Schmalensee (1985), McGahan & Porter (1997) and Misangyi et
al. (2006), have concluded that industry structure lacks, or has minor, explanatory power in relation
to firm performance. Also, the MBV’s assumption of a relatively static market structure is seen as a
major issue and at odds with the dynamic nature of ‘modern markets’ (Wang, 2014). Recently,
Furrer et al. (2008) surveyed the strategic research literature and found the MBV accounted for a
relatively smaller number of research publications. In contrast, the resource-based view (RBV) has
gained ground in the strategic management research. Thus, research has embraced the RBV and its

19
focus on internal firm-specific factors in explaining firm performance (Martin et al., 2014). The
next section unfolds the RBV research area.

3.2. The Resource-Based View

In the earlier economic analyses, the firm, despite being an integral part of economics, was often
taken to be a ‘black box’ (Hoskisson et al., 1999). Penrose, in her seminal book “The Theory of
Growth of The Firm” (1959), was among the first scholars looking to open the perceived ‘black
box’ of firm operations and provide a comprehensive theory of the firm (Kor & Mahoney, 2004).
Besides Penrose, early scholars, such as Chandler (1962) and Ansoff (1965), made significant
strides in developing the RBV perspectives. From early 1980’s the RBV perspective gained a
central position in the strategic management literature and was the dominant contributor to the
academic discipline (Ramos-Rodríguez & Ruíz-Navarro, 2004). But what are the core tenants of the
RBV perspective and how do they contribute to the understanding of firm performance?

The vital underpinning of the RBV perspective is the focus on the firm’s internal elements, that is,
its resources, capabilities, and processes (Furrer et al., 2008; Grant, 2013; Kraaijenbrink, Spender &
Groen, 2010). This reasoning is quickly supported by observing the large heterogenic performance
among companies in the same industry. For instance, Rumelt (1991), Roquebert et al. (1996), and
Misangyi et al. (2006) all find that a significant part of a firm’s return on assets can be explained by
firm-specific variables.

Before exploring the theoretical landscape of RBV, it is important to bear in mind the context in
which the RBV literature is discussed. Chiefly, there are three assumptions to be observed, which is
a) RBV literature is embedded in the strategic management literature, hence the fundamental issue
of concern is on firms and their attainment of superior performance (Grant, 1991; Porter 1985), b)
this superior performance must be sustainable, that is, it must endure for long stretches of time
(Peteraf & Barney, 2003), and c) superior performance is inherently relative to a firm’s competitors
(Barney, 1991).

As stated above, Penrose (1959) was the first scholar to turn the attention towards the internal
components of a firm in explaining firm growth and value creation. Subsequently, other scholar
made epistemological strides in the RBV literature. Among these Rumelt (1984) and Wernerfelt
(1984) who conceptualised the firm as a bundle of resources used to produce products. Hence,

20
products and resources can be seen as two sides of the same coin (ibid). Prahalad & Hamel (1990)
added to the RBV literature by noting that a firm’s resources and capabilities (R&C) allow it to
develop a core competence (CC) which can be embedded in different product and services. The
concept of CC consists of three essential parts, namely that (i) a CC should give potential access to
a range of markets (ii) a CC should contribute significantly to customer value and (iii) a CC should
not able to be imitated by competitors (Prahalad & Hamel, 1990).

Barney (1991) managed to construct a formalised theoretical framework of the RBV perspective.
The scholar understood that specific conditions must apply before a firm can profit from its R&C
since all firms possess R&C but very few exhibit consistent performance (Devan et al., 2005). For
R&C to be categorised as being strategic (i.e. being able to endow the firm with a competitive
advantage), they must exhibit four attributes. They must be (i) valuable, such that a firm can
“improve its efficiency and effectiveness” (Barney 1991; 106), (ii) rare, such that only one/few
firms possess the R&C, that is, it is not a resource or capability broadly possessed by the market
competitors, (iii) inimitable, such that the R&C owned by the firm are imperfectly imitable, and (iv)
have a lack of substitutability, such that competitors cannot easily deploy other R&C to gain the
same result (Barney 1991). Contrasting the below figure, with the above structure-conduct-
performance figure, illustrates the difference between MBV and RBV. Namely, whether it is the
industry structure or a company’s resource and capability base that shape its conduct and
performance.

Figure 5: Resource – Conduct – Performance Paradigm

Reproduced from Knecht (2014, 20).

21
Despite the RBV quickly gaining a central position in the strategic management literature, the
theory nevertheless has been subject to critique. Chiefly, three overall critique points of the
traditional RBV perspective can be identified; the inherent static nature of the theory (Lockett et al.,
2009), its highly focused attention to variables internal to the firm and hence ignorance of the
external dimension (Teece et al., 1997; Mahoney, 1995), and its lack of explicating the linkage
between internal R&C and superior performance derived from the external product market (Ketchen
et al., 2007; Williamson, 1999).

3.3. Recent market developments and positioning of thesis

3.3.1. Market developments

While MBV assumes a relative static industry level structure, the RBV assumes, albeit indirectly, a
static resource and capability endowment across firms (Wang, 2014; Teece et al., 1997). However,
these underlying static assumptions have been severely challenged by recent market level
developments that have embedded companies in a highly dynamic market environment. For
instance, Friedman (2005) identifies ten factors, or so-called levellers, that are making the world
ever smaller, interconnected, and converging to a level playing field. In particular, technologies and
new ways of working enable organisations and individuals to access, create, coordinate, and take
advantage of opportunities throughout the physical and digital world. Friedman is not alone, other
scholars such as McGrath (2013) and Chong (2004), support the notion of increased dynamism.
McGrath (2013) even questions whether sustainable competitive advantage is possible in today’s
dynamic environment.

Appendix 5 (global tariff rates) and 6 (average lifespan of SP500 members) support the two notions,
that is, the world is increasingly getting ‘flatter’ and that increased market dynamism is affecting
the survival of firms. Firstly, the average tariff level among the WTO’s 164 members has decreased
by 20% in the past 20 years (WTO, 2015), fuelling the global trade among countries and opening up
markets for overseas creative destruction. Secondly, Mauboussin et al. (2017) compiled statistics on
the longevity of the average SP500 member firm and found firm turnover in the index to have
increased from circa 10 pr. year to 30 pr. year in 2016. Further, Innosight (2012) finds that the
average company lifespan on the SP500 decreased from 61 years in 1958 to 18 years in 2011/12. In
other words, the expected lifespan of firms on the SP500 index has been cut down to 1/3 in half a
century!

22
The question is then, how has the strategic management literature adapted to the increased market
dynamism and which tools are available for firms to deal with these changes? The below sections
trace the relevant development in the strategic management literature and positions the thesis in the
literature. In particular, the focus is put on the RBV literature as scholars within this research field
have specifically sought to address how firms can deal with dynamism (Jiang, 2014).

3.3.2. Literature developments

The epistemological landscape of the RBV has addressed the increased market dynamism
highlighted above. The most prominent additions to the RBV literature are The Knowledge-Based
View (KBV), the Relational Capabilities, and The Dynamic Capability Approach (DCA) (Jiang
2014). KBV posits that knowledge is the most important resource, which can facilitate ‘higher-
order’ capabilities including innovation, coordination and integration (Kraaijenbrink et al., 2010;
Grant 1996). The KBV is especially focused on the tacit nature of knowledge, which may endow a
firm with the ability to survive, compete and perform, thus making knowledge a basis for
competitive advantage (Hamel & Prahalad, 1994; Zack, 1999).

The second addition, the Relational Capabilities perspective, recognises the importance of the
external environment in the acquisition and exploitation of valuable R&C (Wang, 2014).
Specifically, Dyer & Singh (1998) note that a firm rarely owns all the resources necessary to ensure
competitive advantage. Thus some vital R&C (e.g. distribution network) must be sourced through
inter-firm linkages making these inter-organisational relationships sources of value (Rumelt, 2003).

The DCA, with major contributions from Eisenhardt & Martin (2000), Helfat & Peteraf (2003), and
Teece et al. (1997), seeks to address the underlying static nature of RBV by endowing the theory
with a dynamic dimension, that is, the ability to “integrate, build, and reconfigure internal and
external competencies to address rapidly changing environments” (Teece et al., 1997). Specifically,
DCA takes the fundamental view that the market in which the firm operates is inherently dynamic.
Thus, the value of the VRIN R&C and the firm’s position in the market is in flux. This dynamism
must, therefore, be addressed by the firm as it otherwise risks turning its ‘core capabilities into core
rigidities’ (Ambrosini & Bowman 2009). Three broad concepts are seen as vital for firms to develop
dynamic capabilities. Namely, the sensing, seizing, and reconfiguring (Teece et al., 2007; Helfat et
al., 2007). Sensing deals with the firm’s ability to be attuned to its environment such that new
opportunities are identified quickly and efficiently. Seizing is the ability to act upon opportunities
once these are sensed by the firm. Lastly, firms must continuously recombine and reconfigure their

23
R&C to take advantage of new opportunities and be aligned with the market and technological
developments (Lockett et al., 2009; Teece et al., 2007).

Other scholars within the RBV literature also address market dynamism and how firms can adapt
accordingly, including O’Reilly & Tushman (2007) who focuses on the firm’s ability to
simultaneously deploy exploration and exploitation strategies and thus adjust to external
developments by developing ambidextrous capabilities. Lately, the DCA has been integrated with
the concept of ambidexterity (see Birkinshaw et al. (2016) among others). Due to this integration,
the thesis uses terminology from both the DCA and ambidexterity literature to refer to adaptive
processes.

Common to the above conceptual understandings of dynamic capability and its constitutes is the
imperative for firms to develop the capabilities necessary to adapt to market developments and
innovate accordingly if a competitive advantage is to be developed and sustained (Grant, 1996;
Jiang, 2014).

Due to increased market dynamism, McGrath (2001; 2013) dismisses the incremental strategy
planning process that spans several years into the future. No, competitive advantage is inherently
transient. Thus firms must accept environmental uncertainty and continuously make ‘small bets’ to
ensure future growth potential.

In sum, the strategic management literature, and the RBV in particular, has addressed the increased
market dynamism along with the imperative of innovating and adapting. Thus, there seems to be a
consensus among scholars about the impact of market dynamism and the importance of adapting to
it. However, this theoretical consensus stands in stark contrast to the lack of practical agreement,
that is, how firms should address the market dynamism in practice (Sirmon et al., 2007). This
practical deficiency is what the thesis seeks to address. The below section positions the paper before
a useful conceptual model of opportunity validation is developed.

3.4. Positioning the thesis research

Firstly, the thesis does not seek to discuss to what extent market opportunities are found or enacted
by the relevant agents. Rather, it is observed that a) a firm will always be better off exploiting a
profit opportunity and b) in line with Priem et al., (2012, 354) that “entrepreneurial opportunities

24
must be discovered or created by someone”. Hence the focus is on the opportunity rather than how
it came into existence.

As elaborated upon in the above sections, the strategic management literature has seen a wide
acceptance of increased market dynamism and corresponding theoretical developments of
integrating dynamism in firm strategy. In particular, it is argued that firms should continuously
sense market opportunities, seize these, and frequently reconfigure their R&C to be well-positioned
for new opportunities (Helfat et al., 2007). For a company to successfully seize an opportunity,
three overall elements are involved a) the identification of an opportunity in the market b) the
presence of internal capabilities to be able to seize the opportunities identified and c) the actual
process of seizing the opportunity.

The identification of external opportunities is a well-developed field in strategic management

(Martin et al., 2014; Priem et al., 2012). For instance, Kirzner (1997) put forth the notion that firm
performance is not as constrained by external factors as they are by the lack of knowledge regarding
market opportunities. Consequently, firms must engage in direct market participation which is
“aimed at the discovery of profit opportunities which are unknown a priori” (Martin et al., 2014,
72). Opportunities, then, are embedded in the market and the firm must actively engage in
discovering or shaping these opportunities (Alvarez & Barney, 2007). The second element,
possessing the right internal capabilities to be able to seize the identified market opportunities, is
also well-researched. For instance, much of the DCA literature is concerned with endowing firms,
through managerial actions, with the ability to adapt and take advantage of profit opportunities
(Sirmon et al., 2007). The third element, however, that is the process of seizing a (potential) market
opportunity, has received less attention especially concerning practical tools and methodologies that
firms can adopt before the seizing stage is feasible (Blank & Dorf, 2012).

Empirical data suggests such research will be valued by firms as the majority of product
developments (i.e. attempts at seizing a perceived opportunity) fail. For instance, Schneider & Hall
(2011) find that around 75% of newly launched consumer packaged goods and retail products fail to
achieve their benchmark. This highlights that pursuing market opportunities does not come without
risk. Further, the presence of such risks can make managers risk-averse, hinder innovation and
negatively affect firm performance (Hoskisson et al., 1999).

25
Because seizing a new (potential) opportunity consumes resources while the “returns are uncertain,
distant, and delayed” (Chen, 2017, 387), the process is associated with high level of uncertainty.
Further, it is impossible to distinguish between productive failures (e.g. the ones that bring your
closer to an opportunity) and unproductive failures (where the potential opportunity is absent)
(Chen, 2017). The thesis seeks to assist managers in improving the process of validating market
opportunities such that risk of failure can be decreased while the chances of success are improved.
The below figure illustrates the focal area of the thesis.

Figure 6: Area of focus of thesis research

According to several scholars, Hoskisson et al. (1999), Martin et al. (2014), the development in the
strategic management literature can be characterised by two swinging pendulums. As the below
figure displays, Pendulum 1 highlights whether research has focused on the internal or external
factors in explaining firm performance. Pendulum 2 tracks whether the level of analysis has been on
macro factors on the micro level (e.g. teams).

The thesis research is concerned with the process in which agents within the firms can exploit
external profit opportunities to ensure firm performance. Hence, the focus is on manager’s pursuit
of exploiting market opportunities. Besides being embedded in the micro level of strategic
management, the thesis is also positioned within the external perspective. Following this, managers
are engaged in a process of discovering and exploiting profit opportunities to develop and maintain
the company’s competitive advantage (Martin et al., 2014).

26
Figure 7: Thesis research position in the strategic management literature

Reproduced from (Martin et al. (2014, 71).

Despite the promising benefits of seizing market opportunities, the process is nevertheless filled
with uncertainty and risks. Therefore, theories within finance (value creation), decision science
(decision management), and entrepreneurship (demand realisation) are examined to uncover
principles about the opportunity validation process. Particularly, the focus is on the LSM approach.
LSM is a set of principles successfully deployed by startups in dealing with an environment
characterised by high risk and uncertainty (Ries, 2011). LSM core principles are dealing with
product and market uncertainties right from the start by quickly validating hypotheses about the
market (Ibid). Thus, LSM is well positioned in bridging the above-addressed elements of external
opportunities and internal capability of exploiting the opportunity, which is why the focus is on this
concept.

27
It should be clear, though, that LSM is not the only frameworks or theories dealing entrepreneurship
and opportunity uncertainty, see Brown (2009) for Design Thinking, Chesbrough (2003) for Open
Innovation, or Shore & Warden (2008) for Agile. However, the thesis focuses on LSM since it deals
with situations in which both the problem (i.e. potential need) and solution (i.e. offering) is
unknown.

The thesis applies financial, decision science, and entrepreneurship based theories to improve the
process of validating market opportunities. By doing so, this research seeks to explicitly address the
risks and uncertainties involved in this process and put forth practical methods to manage these
issues. The next chapter develops the conceptual model based on these fields and uncovers
fundamental principles that firms can apply in their validation efforts.

28
4. Theoretical analysis – Principles of
opportunity validation
This chapter puts forth underlying principles that apply to the process of validating a market
opportunity. Firstly, it is important to note that the thesis uses the term opportunity to refer to non-
incremental opportunities. That is opportunities which, if realised, have a significant economic
potential for the company (e.g. creating a new business unit, product, market, etc.). In contrast,
incremental opportunities, which are comparable to incremental innovations, smaller upgrades are
made to the existing business. Thus, non-incremental opportunities (e.g. breakthrough,
discontinuous, radical, disruptive) have the potential to create significant cash flow but also come
with a higher level of uncertainty and risk (Cooper & Vlaskovits, 2016). As Davila (2014) notes
“incremental innovation calls for managing knowledge on many fronts, whereas breakthrough
innovation is more about managing ignorance.” Hence, how the decision process is structured is
vital in dealing with non-incremental opportunities. The beneath table illustrates some key
differences between incremental and non-incremental opportunities.

Table 1: Incremental vs. Non-incremental Opportunities

Incremental Non-incremental
 Existing market  Unknown/new market
 Problem well-understood  Problem not well understood
 Incremental change  Radical change
 Known goal and path  Desired goal and unknown path
Re-produced from Cooper & Vlaskovits (2016)

To uncover core principles related to the validation of a market opportunity, this chapter is divided
into four sections. First, the financial characteristics that should be possessed by a business
opportunity are examined. Second, the need to explicate prior assumptions about the expected
opportunity is addressed. Third, methods for embedding and testing the explicated assumptions in
the market, cheaply and efficiently, are brought forth. The fourth section includes the time
dimension and examines the principles applying to the dynamic process of validating the economic
potential of an opportunity as more information is gathered from the market. As stated above, the
thesis does not seek to examine how an opportunity is discovered or whether it can be created

29
without prior existence. Rather, the focus is on how firms can validate a perceived (explicit or
latent) market opportunity.

A framework for opportunity validation is developed in the last section. This framework is based on
the theoretical principles analysed in this chapter. These principles are utilised as the foundational
building blocks in the conceptual model developed at the end of this chapter. By application of this
logic, it is the aim to ensure a robust model built on few, but central, principles and thereby aid
firms in improving their ability to validate opportunities successfully.

4.1. Financial principles: Ensuring a favourable risk/reward ratio

Essentially, companies create value by investing in projects that can generate excess return relative
to the cost of capital (Brealey et al., 2017). In seeking to maximise long-term value companies
continuously scout for new projects with favourable reward characteristics, that is, with relatively
high cash flow and little risk associated with these cash flows (Koller et al., 2010). Several key
factors influence a project’s cash flow level and hence its value. For instance, a project with a cash
flow level of, CFa, spanning 5 years is less valuable than a similar project spanning 5+t years, which
again is less valuable than a project spanning 5+t years with growing cash flows (Ibid)1. The below
inequality illustrates this logic

𝐶𝐹𝑡 ∗ (1 + 𝑔)𝑡 > 𝐶𝐹5+𝑡 > 𝐶𝐹5

And the value of a project’s future cash flows can be stated as2

𝑛
𝐶𝐹1 𝐶𝐹2 𝐶𝐹𝑡
V0 = ∑ 1
+ 2
. . .
(1 + 𝑟) (1 + 𝑟) (1 + 𝑟)𝑡
𝑡=1

However, resources and effort must be assembled and deployed if the cash flows are to materialise.
This is captured by the investment necessary to generate the project’s expected cash flows, that is,
the initial and subsequent investments (Damodaran, 2012). Formalized in the Net present value
(NPV) formula as

𝑛
𝐶𝐹1 𝐶𝐹2 𝐶𝐹𝑡
𝑁𝑃𝑉 = − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 + ∑ 1
+ 2
. . .
(1 + 𝑟) (1 + 𝑟) (1 + 𝑟)𝑡
𝑡=1

1
Assuming equivalent risk
2
It is assumed that projects are fully financed by equity

30
Thus, the NPV is the metric upon which a project’s value addition is to be measured. Essentially
then, the more favourable a project’s cash flows are (e.g. magnitude, length and growth) and the
lower the investment level needed relatively to potential cash flow, the higher a project’s NPV and
attractiveness.

It is important to be aware, though, that an estimated NPV of a project is only that, an estimated
value. Thus, a project’s NPV is one of N different possibilities as is illustrated by Appendix 7.
Hence, a reported NPV follows from the logic that “given assumptions XYZ, the expected NPV of
the project is A”. Two characteristics can be derived from the above logic in relation to analysing
the attractiveness of a non-incremental opportunity: a) the actual cash flow level is an expected
value, and in extension, highly uncertain and b) if a project with favourable cash flow
characteristics succeeds, it is highly valuable. This project scenario is analogous to the payoff
characteristic of options and, in particular, similar to the properties of a call option as illustrated
below.

A call gives the holder the right,

conditional on paying a small
premium, to purchase an underlying
asset under pre-specified conditions.
If holder’s future expectations are
met, the contract has a high potential
payoff.
Profit/loss formula for a call:
Max (0, Price – Premium paid), or
Min (Premium paid, 0)

31
 Similarly, a small initial investment
gives a company the possibility of
potentially large future profit, and
limited loss, given as: Max (0, Future
project value – total investment), or
Min (total investment, 0)

Adapted from Benninga (2014) &

McGrath (2010)

Notice the differing profit potential of non-incremental and incremental opportunities. Incremental
projects have limited cash flow potential as the uncertainty and risk levels are relatively well-known
as they present smaller improvements to an existing offering (McGrath, 2013). Further, as Porter
(1996) notes, such incremental improvements, if they are operational improvements, cannot be the
basis for competitive advantage as other firms quickly implement similar initiatives. Such
incremental improvements then, are associated with relatively smaller economic potential and
diminish hastily as competitors adopt similar advances and erode a firm’s competitive advantage
(McGrath, 2013). Non-incremental opportunities differ in their potential payoff pattern. As Taleb
(2013) notes, such opportunities have a convex payoff path and are embedded in “an environment
where the errors are small and of small costs and the gains are large and unlimited”. However,
such small investments in projects carrying significant economic potential are fraught with risk
uncertainty. Below, the risk aspect is addressed while the next sections deal with managing the
uncertainty of the opportunity’s potential.

In seeking to capture potential rewards, one must also analyse the risks associated with these. As
formulated above, the rewards should be virtually ‘unlimited’ relative to the small investment
required by the project. The notion of risk in financial literature is often associated with the concept
of volatility, that is, how an asset’s rate of return fluctuates relative to the overall market (Brealey et
al., 2017; Bodie et al., 2013). However, this definition of risk has been criticized for being too
simplistic and potentially misleading (Szramiak, 2016). This thesis defines risk in accordance with
Merriam-Webster (2017) as “the chance that an investment will lose value”. As analysed above, a

32
firm can (and should) tolerate relatively small investment losses in so far these investments carry
the potential to deliver highly asymmetric rewards.

Given the above analysis, the following principles of financial theory are posed:

1a: Non-incremental opportunities should be pursued by relatively small and incremental

investments

1b: In pursuing non-incremental opportunities, minor losses should be accepted

In addition to the small risk (i.e. loss of investment) that must be tolerated, the thesis emphasises
another form of risk with regards to the validation process. This risk, termed behavioural risk, deals
with the risk of sub-optimal behaviour. For instance, commitment risk entails manager’s tendency
to commit investments to projects despite the lack potential being evident. As Kahneman &
Tversky (1979), Boulding et al. (1997), and Teger (2013) find, individuals often continue to commit
resources to ‘lost causes’, even in the face of factual evidence. It is vitally important to deal with
such commitment risk as no value is added, but plenty can be destroyed (McGrath, 2013). The next
sections analyse theories within decision science and put forth ways to improve the decision-
making process. Afterwards, it is analysed how relatively cheap pilot projects can be constructed to
validate the existence of an opportunity.

4.2. Explication principles: Explicating the opportunity outlook

While the financial section uncovered the characteristics that should be possessed by an attractive
business opportunity (i.e. dealing with the goal), the next sections are concerned with the process
towards that goal. Hence, the first section asks; “where to go?” while the rest of the chapter
analyses the question; “how to get there in the best possible manner?”

Because the perception of a business opportunity is initially just that, a perception, a process of
validation is needed to bridge the gap between the perception of an opportunity and whether it
actually exists and is profitable (Ries, 2011). The next section confronts this detachment, of prior
perception and the posterior reality of an opportunity by putting forth the need for explicating prior
assumptions, hypotheses, and features of the opportunity. Doing so facilitates the process of testing
the validity of prior views and accepting or rejecting projects systematically.

33
According to several scholars (Warren et al., 2011; Buksar, 1999), the decision-making process has
a significant effect on the development and maintenance of competitive advantage. As this section
addresses the opportunity validation process, which is comprised of a multitude of decisions, it is
crucial to recognise the impact of decisions and their features. Hendrikse (2013) categorises
decision making by rationality which is comprised of two factors: the agents cognitive capacity over
the complexity of the problem. The ratio of the two factors forms a continuum between 1 and 0 and
measures the extent to which an agent can grasp and solve a given problem. The typical agent in the
economic literature, the 'homo-economicus’ if you will, has a rationality score of 1 since she is
assumed to possess complete rationality. Thus, confronted with a problem the homo-economicus
can construct a complete and coherent systematic evaluation of all possible alternatives, their
characteristics, his preferences for different alternatives, and choose the optimal solution for the
problem (Simon, 1951, Mahoney, 2001). Such an agent would be able to quickly determine which
opportunities to pursue to maximise a firm’s long-term value, that is, choose the highest NPV
projects across all scenarios.

However, the concept of homo-economicus has been criticised for being far too simplistic and
unrealistic (Britannia, 2017). Instead, other models of decision making that deal with the limited
rationality of agents are proposed. The Garbage Model, presents agents to operate under an
organized anarchy where they, in extreme cases, “are unclear and inconsistent about what they
want to do, how they are supposed to do it, and who should make which decisions” (Britannia,
2017). Alternatively, The Political Model posits that the decision process is a function of
organisational coalitions and their relative power positions (Das & Teng, 1999). In such non-
rational environments, Hendrikse’s (2003) rationality ratio (i.e. cognitive ability/problem
complexity) deviates from 1 as many factors, such as environmental complexity or self-interested
behaviour, distort the value-adding purpose of the company.

Most situations, though, are a mixture of the two extremes put forth above where the level of
rationality is less than 1 but larger than 0. Thus, in seeking to validate an opportunity, companies
plan and strive for some rationality but often choose the alternative that is ‘good enough’ rather than
the optimal Simon (1951, 1979). This satisficing behaviour is driven by two factors. Firstly, perfect
information is not possible (especially given the time constraint). Second, all alternatives cannot be
evaluated due to the costs associated with such an exhaustive evaluation (Britannia, 2017). Given
these, and the limited cognitive ability of agents, the process of opportunity validation is

34
characterised by bounded rationality, in which the best possible actions are taken subject to the
information available.

Given a specific purpose, or objective, (e.g. validating a business opportunity), agents must
therefore develop an information gathering and processing strategy that will ensure the
accomplishment of the objective at a reasonable cost. Among the most important elements, is the
explication of prior hypotheses, assumptions, and features of the opportunity one seeks to exploit,
such that these can be tested (McGrath, 2010). As Fox (2014) notes “you can’t tell by the outcome
whether you made a good decision.” Thus, good decision making is determined by the process
rather than the observed outcome, which managers shy away from or claim credit for depending on
its nature. Several scholars, including Goodwin & Wright (2014) and Hastie & Dawes (2006) have
dismissed the outcome based view and concluded that people, even expert managers, do better
when the decision process is explicated The next sections are concerned with principles that, when
appropriately applied, enhance the decision process of opportunity validation.

Different scenarios can play out in the pursuit of a perceived opportunity. First, the opportunity can
exist in the perceived form, in which case prior assumption and hypotheses are in line with market
reality. Second, the opportunity can exist but take a different form. For instance, a solution may be
rejected by a customer segment but embraced by another. Third, an opportunity may not exist at all
in which case the best approach for the company would be to re-direct resources to other activities.
As addressed above, given the bounded rationality of agents, the right decision processes are needed
to increase a firm’s chances of quickly and effectively judging which opportunity scenario is
prevalent (York & Danes, 2014). Besides facilitating better evaluation, explication is found to
decrease factors detrimental to the decision-making process, including pre-judgment and attachment
to specific decisions (Goodwin & Wright, 2014).

Ultimately, an opportunity’s value level is determined by the customer (Blank, 2013; Osterwalder
& Pigneur, 2010). Therefore, it makes logical sense to start from a customer-centric perspective in
determining the feasibility of a venture in an effective manner. Blank & Dorf (2012) developed a
model termed the Customer Discovery Model, to tease out hypotheses about customer demand and
value characteristics and thus manage the disconnect between prior perception and market reality.
To do so, individuals are to be immersed and engaged with prospective customers to bridge the gap
between prior demand hypotheses and actual customer needs. Doing so at the beginning of a

35
venture increases their chances of getting a better understanding of customers and construct relevant
initial hypotheses.

Besides the customers, other elements to be explicated concern the suitable product offering,
distribution channels, pricing, etc. (York & Danes, 2014). Even though all these characteristics are
explicated, such that they may be tested and validated, there is no guarantee that the project will
succeed. A product may attract customers and sell well, but if it is not profitable, it cannot be
categorised as being a successful venture for the company (Duus, 2012). Therefore, how the firm
plans to serve customer needs in a profitable manner (i.e. revenue and costs) must be explicated
such that the business model can be verified.

The next section addresses how the explicated assumptions and hypotheses can be embedded in
simple products before principles of decision theory and entrepreneurship are put forth.

4.3. The Lean Venture principles: Embedding the opportunity

expectations
The above section addressed the first element concerning the process of validating an opportunity,
that is, explicating one’s prior hypotheses about the opportunity and its features (e.g. who the
relevant customer segment is). This section deals with the process of embedding these prior
hypotheses in relatively cheap pilot projects (i.e. an MVP) enabling a company to decrease the level
of uncertainty by gathering information at a relatively low cost. For non-incremental ventures, this
approach is critical as prior assumptions about an opportunity, due to the high level of uncertainty,
are most likely wrong (Blank, 2012). Thus, what is needed is a framework that enables the
collection of market information and refinement of prior hypotheses about the opportunity at low
cost. The below Figure illustrates the rational for such an approach.

36
Figure 8: The Opportunity Space, Spots, and Paths

This opportunity space consists of: 1 prior value/problem, 2 segments, 2 offerings, 2 delivery systems, and 2
business models = 8 relevant opportunity paths. The opportunity space illustrates that a firm’s prior
perception of a business opportunity is just one of numerous opportunity paths in which an opportunity
might be present.

By constructing multiple MVPs in an iterative manner, the firm can more accurately examine the
opportunity space of the potential opportunity and where it may be located. Drucker (1985) puts
forth multiple instances in which a product is embraced by a new segment, often more profitable
than the segment the product was originally ‘intended’. Thus, it is important to incorporate
flexibility to effectively examine the opportunity space in which the opportunity may be present.

The traditional literature on management practices, however, has not dealt with this need for
flexibility when launching a new venture (York & Danes, 2014). Instead, the best practice for
pursuing an opportunity has been the Stage Gate Model which lays out sequential steps, from
ideation to scaling, when launching a new venture. As McGrath (2010) notes, this sequential
approach provides a good roadmap to follow but has some critical weaknesses. Most importantly,

37
the Stage Gate model is unsuitable for uncertain environments where both the problem (i.e. need)
and the solution (i.e. offering) are unknown. In such environments, the Stage Gate model’s lack of
early market feedback mechanisms makes it prone to commit too many resources to products with
low success rates. This is so as the Stage Gate model, from the onset, assumes a specific
opportunity path is the correct one and commits resources to that path. For non-incremental
ventures, where the level of uncertainty is high, the focus should be on creating small experiments
that enable the firm to “learn as much as possible at the lowest possible cost” (McGrath, 2010;
258).

The LSM combines a multitude of principles to address the high level of uncertainty present in
pursuing a non-incremental opportunity (Frederiksen & Brem, 2017). Whereas the Stage Gate
model focuses on efficiently satisfying a need, the LSM focuses on effectively validating whether
such a need exists. Appendix 8 (Blank, 2013; 8) contrasts the two frameworks. The rest of the
section analyses the components of the LSM and how the explicated hypotheses in section 4.2 can
be embedded in multiple MVPs to test the opportunity spaces illustrated by the figure above.

The LSM is a collection of principles in dealing with the uncertainty and risk of pursuing a
perceived opportunity. The individual principles, though, are not new (Frederiksen & Brem, 2017).
However, the syntheses of the principles is a relatively new phenomenon, with important scholars
encompassing Blank (2013), Osterwalder & Pigneur (2010), Ries (2011), Maurya (2012) and Blank
& Dorf (2012). As noted above, the LSM addresses the uncertainty and risk characteristics of non-
incremental opportunities and put forth a methodology to validate the existence of an opportunity in
a fast and efficient manner. The LSM framework is fundamentally hypothesis-driven and relies on
an iterative process to explicate, analyse, and re-evaluate the validity of the prior assumptions. This
is illustrated by the below figure.

38
Figure 9: The Lean Startup Methodology

The LSM focuses on dealing directly with

uncertainty about the perceived value,
customer demand, and the suitable
offering. This so, by building simple
products, measuring customer reactions,
and adapting the product based on data.

Firstly, following the explication of core assumptions about the opportunity, combined with initial
customer feedback, an MVP is built. An MVP is different from traditional prototyping as the focus
is, not on features and functions, but on fundamental hypotheses about the potential need, relevant
customer segments, and suitable offerings (Frederiksen & Brem, 2017). An MVP is defined as “A
product with the fewest number of features needed to achieve a specific objective, and users are
willing to “pay” for in some form of a scarce resource” (Cooper and Vlaskovits, 2010; 26).
Specifically, the aim is to establish a reliable connection between (i) the problem, (ii) the customer,
and (iii) the offering, quickly and cheaply such that the presence of an opportunity can be gauged.

As the core emphasis of the LSM is on validating if and where an opportunity may be present in the
opportunity space, the beneath table illustrates that the efforts should be directed towards activities
that test the explicated assumptions about the value-customer-offering characteristics. The
following example highlights how to embed prior assumptions in a cheap MVP to analyse the value
proposition, customer demand, and the provided offering when validating a possible opportunity.

39
Table 2: Prioritisation of resources and activities

Low value information High information value

1) Low value information 2) High value information

Low resource cost & &
Low resource cost Low resource cost
4) Low value information 3) High value information
High resource cost & &
High resource cost High resource cost

Zappos Inc. (an American online shoe and apparel company) started in 1999 by hypothesising that
online shoe sale was possible and in demand. To start with, an MVP consisting of a single webpage
with pictures and ‘fake’ buttons, including a buy button, was created to gauge consumer reaction.
This was the first MVP, enabling the founder to test the value proposition of selling shoes online
cheaply.

After some initial positive responses, the founder further developed the website (the second MVP)
by allowing customers to buy a pair of shoes online. But, instead of investing in an inventory, the
founder bought the ordered shoes from a nearby physical store. As the customer base grew, the
value-customer-offering hypotheses seemed to be supported. That is, people are willing to buy
shoes online, which essentially opened up a new market with huge potential. Rather than
undertaking activities located in quadrant 4 (e.g. creating the website and building expensive
inventory), Zappos focused on validating the fundamental value-customer-offering hypotheses as
resource efficiently as possible before expanding the scope of the MVP.

As seen above, the MVP allows for sequential testing of different opportunity spots and their
potential. However, since the opportunity space encompasses numerous opportunity spots (20 in the
figure above), it is not possible to put forth specific variables that should be measured for all spots.
Rather, specific variables to gauge the value-customer-offering characteristics must be explicated
for each opportunity spot. Take the Zappos Inc. example, of which an alternative customer
opportunity spot could be to sell footwear to corporate staff. In such case, other variables, such as
whether companies provide footwear to their employees, constitute a more relevant and valuable
hypothesis to test.

40
Given the above analysis, the following principles of decision theory and entrepreneurship are
posed:

2a: Prior assumptions and hypotheses about the potential opportunity spots and paths should be
explicated

3a: For non-incremental opportunities, the relevant area of analysis is the opportunity space

Having analysed the importance of explicating prior hypotheses in the previous section, this section
analysed how these hypotheses could be embedded in relatively cheap MVPs. The next section
deals with the final element of the opportunity validation process, the process of continually
evaluating whether an opportunity exists in the different opportunity spots.

4.4. Validation principles: Evaluating the Opportunity Space

This section addresses the dynamic evaluation of whether an opportunity is present in the chosen
opportunity spots, the corresponding opportunity path, and overall opportunity space. Specifically,
this section analyses how the company can answer the questions of whether to persevere (continue
along the current opportunity path), pivot (change to a different opportunity spot), or perish
(abandon the opportunity space).

As addressed above, there are three important stages to validating an opportunity, these are depicted
in the beneath table.

Table 3: Stages of the opportunity validation process

1. Value validation Is the perceived problem/demand valued by customers?
Focus on validating value proposition
2. Customer-offering Is there a sizable customer segment willing to pay for the offering?
validation Focus on validating the customer-offering
3. Business model validation Does the chosen opportunity path result in a profitable business model?
Focus on validating the business model

This table formulates different stages. However, the stages are not as clear-cut in practice. For
instance, assumptions about product pricing and customer acquisition costs will be addressed, albeit
in a different scope, in all stages (York & Danes, 2014).

41
In the process of investigating the different opportunity spots and which opportunity path may be
feasible, the critical emphasis is on learning which of the prior hypotheses hold and which must be
altered in the light of discovered information. Thus, before scaling can be undertaken, the venture
must ensure, with a relatively high degree of certainty, that it is a) offering something of value b) to
a sizable market and c) with attractive economics (Maurya, 2012).

To decrease uncertainty, the venture must address the most critical hypotheses. Having examined
the venture’s value proposition, the most demanding stage is testing hypotheses concerning the
customer base and the suitable offering. This constellation of achieving an attractive customer base
that is demanding the venture’s offering is termed product/market fit (Niculescu & Jinaru, 2014).
Eisenmann et al. (2013, 11) state that product/market fit has been achieved when “the venture has
the right product for the market: one with demonstrated demand from early adopters and with solid
profit potential”. This state is the tipping point for the company as it has, with relatively high
confidence, uncovered the presence of a business opportunity. But how may a project get to the
point of product/market fit and start the scaling process? The critical aspect is that this state is
achieved by systematically testing the underlying opportunity hypotheses (Ries, 2011; Maurya,
2012). Otherwise, a venture might commence scaling based, not on verified hypotheses, but on
hope and intuition which can hardly be categorised as being solid business foundations.

Once an MVP is built and the newly formed venture starts interacting with the opportunity space, it
must have metrics upon which to measure the actual progress (or lack thereof). Thus, a baseline of
the important business metrics (e.g. customer segment and offering characteristics) is established.
When the MVP is launched, information about these metrics are gathered which is utilised to ‘steer’
towards the right customer segment and a suitable offering, increasing the chances of successfully
achieving product/market fit (Ibid). In particular, information is to be judged on two important
dimensions; direction and magnitude. The direction of the uncovered information indicates whether
market-based variables are in accordance with prior hypotheses, while the magnitude dimension
indicates the extent to which the information verifies/rejects the hypothesised business metrics
(Maurya, 2012). Because non-incremental opportunities are embedded in much uncertainty, the
most important metrics (i.e. metrics that exhibit high information value and have low resource
costs) should be tested first, as illustrated by Table 3.

Since the MVP is an offering to a specific customer segment, the customer segment and offering
hypotheses are tested simultaneously. Even though this customer-product interaction is dynamic

42
and non-linear, several stages can be identified. Maurya (2010; 2012) put forth different customer-
offering interaction stages. First, customers become aware of the offering and are exposed to its
value proposition. Second, customers choose to engage with the product (e.g. visiting the store) or
leave. Third, the remaining customers either buy3 or abandon the product. Fourth, is the retention
which addresses to which extent customers become repeat clients. Lastly, customers can choose to
recommend or refer new customers to the offering. Ideally then, a venture would see many people
becoming aware of the offering, find it attractive, buy, continue buying when in need, and
recommend the offering to other customers. However, achieving such ideal situation from the start
is very rare, hence the need to measure the extent to which the venture is moving towards that ideal
(Ibid).

The three first stages (awareness, engagement, and purchase) are the most crucial stages in
achieving product/market fit (Maurya, 2012). The MVP and its interaction with different customer
segments provide cues (direction and magnitude of uncovered information) of whether a venture is
closer to product/market fit. If, for example, the customer flow is exhibiting positive metrics, that is,
of the customers that become aware of the offering, many are engaged, and a relatively large
percentage buy, an opportunity is likely to exist. The MVP can then be developed to a more
extensive product along with the operational activities needed (i.e. production and delivery system).

If the customer flows are exhibiting a negative trend, however, either the MVP should be iterated or
a different customer segment targeted. Altering the MVP should, according to the LSM, be
grounded in explicit prior hypotheses which can be tested after the change has been made. Hence,
an iteration of the MVP that does not improve the metrics of the customer stages (i.e. level of
awareness, engagement and purchase), does not constitute a viable change towards product/market
fit.

In seeking to validate the various opportunity spots, different analytical tools can be utilised to
measure the direction and magnitude of progress towards product/market fit, including descriptive
statistics, hypothesis testing, cohort analysis, and qualitative measures. This approach
fundamentally takes the form of an experiment and applies the reasoning of If A  Then B. Thus,
the following process is followed a) prior hypotheses are explicated b) information is gathered and

3
Note: The term ‘buying’ may refer to different behaviours depending on the product. For instance, exchanging your
time, which is of value, to be entertained (e.g. on YouTube) is also considered ‘buying’ a product (Davidovici-Nora,
2014)

43
c) a posterior understanding is formed (Schrage, 2014). This reasoning is illustrated in the figure
below.

Figure 10: Validating the opportunity spots

The left-hand side consists of the opportunity space, spots, and the different opportunity paths
possible, while the right-hand side measures the outcome of the specific opportunity path. In
evaluating the product/market fit, the outcome observed is the extent to which customers are
exhibiting positive behaviour from awareness to purchase. In the hypothetical example above, the
opportunity path of 1.1. (segment 1 + offering 1) did not result in the hypothesised customer-
offering outcome (e.g. awareness to purchase conversion). Following the lack of validation in that
opportunity path, the company decides to validate the opportunity path of 1.2, that is, targeting the
same customer but with a changed offering (i.e. a different opportunity spots).

Given the above analysis, the following principles of decision theory and entrepreneurship are
posed:

3b: New offerings should be iterated from simple MVPs to full-featured, as hypotheses are
validated via market feedback

3c: Before scaling, the venture should exhibit significant product/market fit

44
4.5. The Opportunity Validation Approach: Putting the principles
together
The above theoretical analysis examined the opportunity validation process. The analysis shows
that theories within finance, decision science, and entrepreneurship are directly applicable to the
validation process of non-incremental opportunities. Further, there is a sound theoretical backing to,
if not to include, then at least address the need of a validation stage in the Sense, Seize, and
Transform stages of the DCA framework.

First, financial theory highlighted the payout differences between incremental and non-incremental
opportunity. Specifically, in dealing with the latter, smaller losses should be accepted as an inherent
element of the process. Second, decision theories stressed the need to focus on the decision process
along with explicating prior assumptions and hypotheses about the perceived opportunity. Lastly,
entrepreneurial theory (i.e. LSM) laid out how the opportunity space is best examined by applying
an experimental, rather than a Stage Gate approach, to pursue an opportunity. Based on the above
analysis, the following principles about opportunity validation process are proposed.

Theory Principle derived

1a: Non-incremental opportunities should be pursued by relatively small and

incremental investments

Financial Theory
1b: In pursuing non-incremental opportunities, minor losses should be
accepted

2a: Prior assumptions and hypotheses about the potential opportunity spots
Decision Theory and paths should be clearly explicated

3a: For non-incremental opportunities, the relevant area of analysis is the

opportunity space

Entrepreneurial Theory 3b: New offerings should be iterated from simple MVPs to full-featured, as
hypotheses are validated via market feedback

3c: Before scaling, the venture should exhibit significant product/market fit

45
The Opportunity Validation Approach (OVA) transforms the above principles into a framework.
The OVA is divided into three stages. First is the stage before an opportunity is sought validated.
Second is the actual validation process which ends with the achievement of product/market fit.
Lastly, is the transition from validation to confirmation when a significant level of product/market
fit is experienced. The OVA is presented below.

Figure 11: The Opportunity Validation Approach (OVA)

Two elements should be noted concerning the OVA framework. First, the framework builds on the
LSM. This so, as LSM is a recent theory in the strategic management literature that explicitly
addresses the need to validate an opportunity (York & Danes, 2014). Second, the OVA framework
extends the LSM by including financial and decision principles pertaining to the validation process
and emphasising opportunity space as being the relevant areas of analysis.

This chapter analysed the opportunity validation process, found principles applicable to this
process, and constructed an opportunity validation framework. The next chapter applies the OVA
framework and analyses how companies are applying OV methods in their strategy. The focus is on
the LSM as it deals with the validation process, is adopted by the case companies, and is a very
good indicator for the applicability and usefulness of the OVA framework developed in this thesis.

46
5. Case Studies
This section is comprised of two investigative case studies to highlight the different approaches
taken to OV. Further, the case studies allow for the illustrative application of the theoretical
principles underpinning the OVA which were uncovered in the previous chapter. This allows for a
tentative evaluation of whether OVA principles have improved the analysed companies’ abilities to
take advantage of market opportunities. As addressed in the methodology section, numerous
scholars (for example, see Ghezzi et al., 2015) have adopted the case study format to investigate the
relatively new phenomenon of applying LSM to corporate strategy and opportunity validation.

Careful consideration is needed in selecting the companies and devising a suitable method of case-
study. Three specific criteria for inclusion were applied in selecting these cases. First, a relevant
sample company had to have adopted, or at least tried, implementing the LSM approach to
opportunity validation. Second, to examine the application of OVA across industries, both an IT
and an industrial company were selected. Often LSM is argued to be more suitable for IT
companies. However central contributors to LSM, including Blank & Dorf (2012), and Ries (2017),
claim the principles underlying LSM apply to ‘analogue’ companies as well. As Ries (2014) notes
“these ideas apply to any size company, in any industry, in any sector”. Thus, including industrial
companies allows for a brief examination of this proposition. The last criteria set is that enough
information about the companies’ application of OV principles must be available, such that past and
present approaches to OV can be contrasted. Five companies (three IT and two non-IT) were found
to fulfil the criteria. One company from each category were chosen randomly.

The below table highlights the two companies chosen (General Electric and Intuit) as well as the
different approach to opportunity validation they have employed (i.e. Traditional and OVA). In this
regard, the traditional approach is similar to that of Stage Gate model methodology which was
elaborated upon in the theory section.

The next sections apply and contrast the Traditional and OVA approach to the opportunity
validation process across General Electric (GE) and Intuit. The analysis is conducted in sequential
order, that is, from quadrant 1A to quadrant 2B.

47
Table 4: The case companies and their approaches
Opportunity validation
approach Traditional OVA
Company

1A. 1B.
General Electric (GE) Traditional GE LSM GE
2A. 2B.
Intuit Inc.
Traditional Intuit LSM Intuit

5.1. General Electric Inc.

GE is a US-based industrial conglomerate with global operations and a diversified product range.
Founded by Thomas Edison in 1892, the company has grown to generate $ 123 Billion in sales and
employs approximately 295,000 people (MarketLine, 2017). The company is diversified into
several product categories, including; Power Generation | Aviation | Healthcare | Energy & Lighting
| Oil & Gas | Capital | Renewable Energy | and Transportation. GE is heavily reliant on continually
identifying, validating, and seizing market opportunities which are reflected in its large R&D
investments totalling $ 4.78 Billion in FY16 (Ibid).

The below table highlights the chief differences between the Sig Sigma (i.e. traditional) and OVA
approaches to the opportunity validation process. The subsequent sections contrast GE’s application
of the Traditional (i.e. Six Sigma) and OVA principles. Lastly, based on the case study, a table
summarises the extent to which GE’s new approach to OV adheres to the six OVA principles.

Table 5: Underlying principles of GE's previous and new OV approach

Six Sigma Approach OVA Approach

Financial measurement Traditional (e.g. payback period) Validation progress (e.g. critical
hypotheses)
Customer involvement Limited, focused on the end Continuous, focused on the
initial stage
Development process Linear Iterative
Development cycles Long cycles Short cycles

48
5.1.1. GE – Traditional Approach
Before experimenting with and implementing OVA principles, via an internally developed program
called FastWorks, GE’s innovation and approach to opportunity validation was characterised by
traditional management principles (Power, 2014). For instance, much of its processes were based on
the Six Sigma methodology which is a quality assurance method that focuses on a) defining specific
objectives, b) analysing the causes of deviations, and c) controlling the process to minimise
variations (Pyzdek & Keller, 2009). Thus, the overarching goal is to minimise variability and defect
rates.

The focus on extremely low defection rates (3.4 defects per million possibilities according to the
Six Sigma methodology) and necessary streamlined processes contributed to operational practices
characterised as being traditional and bureaucratic as depicted in table 5. These practices directly
affected GE’s approach to opportunities. Among these being long development cycles, linear
development path, and limited customer involvement in evaluating market opportunities (Clough,
2014). Thus, in pursuing an opportunity, GE focused on effectively developing, launching, and
minimising product variance instead of applying a validation based approach (Power, 2014).

First, long development cycles meant that products and their market suitability would be revised
once every five years. This approach, while it can be fitting for a process based on scale and low
defect rates, also ended up constituting a possible threat for GE (Power, 2014). Second, once
opportunities were identified, GE would apply a closed system to develop the product from ideation
to a complete product. Thus, the development would follow a pre-determined opportunity path, a
traditional Stage Gate model approach (GE, 2017). Third, the linear development path meant little
customer involvement was orchestrated. Instead, the traditional customer survey and desk research
served as the inputs to the offering being developed. Lastly, a team seeking to validate an
opportunity was measured based on GE’s traditional investment criteria, including a payback period
of 1-2 years (Power, 2014), giving little room to experiment and examine other opportunity spots if
necessary (i.e. pivot).

Hence, before introducing and implementing OVA principles to validate opportunities and
developing new offerings, GE’s applied the traditional Stage Gate model approach. That is, a
process to OV that was based on long and linear development cycles, little customer involvement,
and the commitment to a predefined opportunity path.

49
5.1.2. GE – OVA Framework
“What has changed since the 1990s is that in a protectionist, slow-growth world, you can’t succeed
just by excelling in a process like Six Sigma (Jeffrey Immelt, Former CEO of GE; 2017)

Having been exposed to LSM in early 2012, GE’s former CEO, Jeffrey Immelt, consulted the
author of “The Lean Startup”, and a proponent of LSM, Eric Ries. GE created an internal program
dubbed FastWorks (please see Appendix 9) which builds on the philosophy of validating
opportunities before committing extensive resources to seizing activities (GE, 2017). These include
the emphasis on pursuing non-incremental opportunities, sketching out prior hypotheses and
assumptions about the customer problem and possible solutions, constructing MVPs to test the most
critical hypotheses, incorporating customer feedback throughout the process, and iterating (or
stopping) the project if the previous hypotheses were unsupported. Below, these principles are
elaborated upon and how GE applied them is highlighted.

First, GE focused on altering the previously linear approach to opportunity validation (i.e. Stage
Gate approach) to a more iterative one. This started with clarifying the hypotheses about the
customer problem and underlying assumptions about the suitable solution such that these could be
embedded in an MVP and tested effectively. Second, the hypotheses about the different
opportunity spots (e. g. customer segments) were to undergo tests. For instance, while developing a
new engine, engineers at GE tested different customer-offering hypotheses by reconfiguring
existing engine models to gauge customer demand for different features (e.g. better fuel economy).
This MVP was built in 6 months. A stark contrast to the previous approach of spending 60 months
building a product based on basic marketing research and with little customer interaction until
product launch (GE, 2017). The received customer feedback facilitated the next principle, iteration
based on market feedback. The iterations allowed FastWorks to alter offerings and/or discover new
markets with significant financial potential. For example, GE applied FastWorks to verify the
possibility of applying Aviation engine technology to gas compression and power generation (GE,
2016). The example below covers GE’s development and launch of Durathon battery technology
and is illustrative of how GE applied the OVA principles to validate and pursue market
opportunities.

In 2010/11 GE’s Energy Storage Division devised a strategy to deploy battery technology, initially
developed for locomotives, in other industries in need of stable electric power in emergency
situations. Based on extensive traditional market research, several B2B segments were found to

50
comprise an attractive market opportunity, including data warehouses and telecommunication (Dias,
2017). Grounded on these prior assumptions and research, $100 million was granted for full
commercialisation, including plant constructing and building a distribution system (Ibid). So far,
GE’s approach followed the traditional and linear Stage Gate model, transitioning from sensing to
seizing without much validation. However, the division’s general manager, Prescott, sought to
verify the underlying hypotheses about the different opportunity spots (e.g. customer segments) and
the opportunity path settled upon. Travelling to prospective customers, he inquired about the
characteristics of their problem and how they might benefit from the Durathon solution. Prescott
found several initial hypotheses to be unsupported, the most critical issue being that the
standardised nature of the Durathon battery technology could not meet the different industries’ need
for varying specifications (Blank, 2013). Subsequently, GE iterated the initial hypotheses and
matched Durathon’s value proposition (supply of stable electric backup power) to two new
customer segments; utility companies and cell phone service providers in countries with an unstable
electric grid-system (Dias, 2017).

According to GE (2017), the application of OV principles in later years has resulted in successful
opportunity validation and exploitation of market opportunity. Drawing on the above analysis of
GE’s deployment of OVA, the below table specifies the extent of support (weak, moderate, or
strong) found for the different principles.

Table 6: Evaluation of GE's adherence to the OVA

Theory Principle derived Degree of adherence to
principle
1a: Non-incremental opportunities should be Moderate
pursued by relatively small and incremental
Financial Theory investments
1b: In pursuing non-incremental opportunities, Moderate
minor losses should be accepted
2a: Prior assumptions and hypotheses about Strong
Decision Theory the potential opportunity spots and paths
should be explicated
3a: For non-incremental opportunities, the Strong
Entrepreneurial
relevant area of analysis is the opportunity
Theory
space

51
 3b: New offerings should be iterated from Strong
simple MVPs to full-featured, as hypotheses
are validated via market feedback
3c: Before scaling, the venture should exhibit
significant product/market fit Weak

5.1.3. GE’s successful application of the OVA to verify opportunities

Since the introduction of FastWorks, GE has undertaken significant changes to their approach to
validating and exploiting market opportunities. Specifically, the changes pertain to adopting core
principles advocated by OVA, including constructing small financial ‘bets’, explicating and testing
assumptions, constructing iterative MVPs, and embracing an approach based on customer and
market feedback. It seems FastWorks, and the underlying OVA principles, has benefited GE. For
instance, according to GE (2016), the company was able to pursue a $40 billion market opportunity
by utilising 3D printing technology to construct MVPs. Further, GE’s commitment to these
principles, evidenced by training 40,000 employees in FastWorks methodology, underscores GE’s
confidence in this way of operating. The efforts are supported by Hindo (2007) who found that
GE’s previous strategy, the Six Sigma approach, had a negative effect on company creativity and
innovation. However, despite these encouraging findings and academic support for the applicability
of OVA principles to industrial companies (see Silva et al., 2013), it is nevertheless too early to
draw generalizable conclusions on this matter.

5.2. Intuit Inc.

Intuit is a US-based provider of financial management software for consumers, accounting
professionals, and small businesses. Founded by Scott Cook and Tom Proulx in 1983, Intuit has
grown to generate USD 5.1 Billion in 2016/17 and employs approximately 8,000 people
(MarketLine, 2017). Intuit’s three segments (small business, consumer tax, and ProConnect for
accounting professional) are subject to different trends and changes. Among these are technological
changes (e.g. cloud services displacing desktop programs), regulatory compliance across
jurisdictions, and demographic changes (e.g. freelancers substituting full-time workers) (Intuit,
2017). Thus, Intuit’s business environment is affected by several trends, prompting the company to
identify, validate, and seize market opportunities on a continuous basis.

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The below table highlights the key differences between the Waterfall (i.e. Traditional approach in
IT) and OVA approaches to the opportunity validation process. The next sections contrast Intuit’s
application of the Traditional and OVA principles. Lastly, based on the case study, a table
summarises the extent (weak, moderate, strong) to which Intuit’s new approach to OV adheres to
the six OVA principles.

Table 7: Underlying principles of Intuit’s previous and new OV approach

Waterfall Approach OVA Approach

Customer involvement Limited, focused on the end Continuous, focused on the

initial stages
Development process Linear and planned Iterative and validation-based
Investment and risk Upfront commitment and Limited investment and
management minimising failure testing the riskiest
assumptions
Reproduced from Gay (2013) and Blank (2013)

5.2.1. Intuit – Traditional Approach

In the 1990’s, when Intuit was growing rapidly, the prevalent system of fostering new business
opportunities in software development was a methodology called Waterfall. The Waterfall
methodology, being highly linear and sequential, provides a good structural process in which
development can proceed from design to implementation to maintenance (Eisenmann et al., 2013).
Thus, much like the Stage Gate model addressed above, the Waterfall methodology is made up of
specific principles that govern the process of pursuing a market opportunity (Fitzgerald & Stol,
2017).

First, once an opportunity is identified, traditional market research ensues in which the relevant
customer segment is identified along with market sizing and marketing strategy. Intuit very much
followed this approach where traditional marketing research and planning were performed before
launching new offerings (Innovation Leader, 2016). Second, once an opportunity is settled upon,
resources are committed to pursuing the opportunity. Thus, based on marketing research, a specific
opportunity path is chosen. Third, the prospective customer is not, or to a very small degree,
involved in the development process. Rather, full customer involvement commences once the
product is launched in which extensive customer feedback is received.

53
Intuit managed to generate substantial growth by utilising the Waterfall approach and expand the
market penetration of its core offering, QuickBooks. However, in the mid-2000’s, sales started to
slow down as the traditional product portfolio matured and revenue growth started to plateau (Scott,
2016). Despite many ideas, few turned out to be successful. For example, it took an average of 5.5
years for a newly introduced product to generate revenue of $50 mill. This level of outcome
concerned top managers, including the CEO, as other companies were much better at identifying
and commercialising new offerings, constituting a threat to the survival of Inuit (Yuvnesh, 2015).

5.2.2. Intuit – OVA Framework

“We were spending lots of time on planning and thinking, rather than testing ideas with our
customers” (Bennett Blank, Innovation Leader at Intuit; 2016).

As mentioned above, ideas at Intuit were not scarce. However, there was a disconnection between
the number of ideas pursued and the corresponding financial results observed by Intuit. The
prevalent mode of pursuing an opportunity was characterised by utilising the Waterfall
methodology. However, while such method may apply to incremental opportunities, it is less
suitable for effectively matching new offerings with market opportunities (Eisenmann et al., 2013).
Because of its linear process, from conception to implementation, the waterfall methodology is
heavily reliant on the initial inputs being correct (Fitzgerald, & Stol, 2017). Such an approach,
albeit implicitly, assumes the managers deciding on which opportunity path to commit to are able to
correctly make such decisions. But, as addressed in the decision theory section, pursuing a non-
incremental market opportunity is highly dynamic and pre-committing to a specific opportunity
path is often not optimal (Maurya, 2012).

Having been introduced to the LSM, and thus some OVA principles, former Intuit CEO, Scott
Cook, sought to apply the principles at Intuit to pursue potential opportunities (Yuvnesh, 2015). The
resulting method was the creation of a program called Design for Delight (please see Appendix 10)
which consists of three interrelated elements.

The first element, deep customer empathy, is focused on ‘knowing the customer better than they
know themselves’ by interacting closely with the customers. Utilising such an approach, Intuit
sought to replace the traditional desk-based marketing research, with actual customer involvement
(Gay, 2013). Second, rather than committing to a pre-determined opportunity path, Intuit explicated
the underlying assumptions and hypotheses about the opportunity perceived. Lastly, Intuit

54
introduced a methodology of rapid experimentation by constructing simple MVPs and testing these
on a limited set of customers to gauge customer demand (Ibid). Besides these, other organisational
changes were introduced. For instance, because of the linear and ‘predictable’ development process
of the Waterfall method, employee capacity was previously fully allocated. This changed with the
introduction of the Design for Delight program which enabled employees to spend some of their
time working on projects of their choosing (Intuit, 2018).

According to Ries (2011), an example of the results of this changed approach to opportunity
validation was a product called SnapTax. In 2009, Intuit perceived the potential demand for a
program that could replace the traditional process of completing, scanning, and mailing personal tax
filing in the US. With this opportunity hypothesis, Intuit employees engaged in a process of
discovering the characteristics of tax filling, potential pain points, and whether customers would
adopt a solution based on taking a picture of one’s tax form instead of scanning it. In the process,
Intuit uncovered that customers desired an even more extensive offering, one in which the whole
tax filing could be completed via the phone. To verify the opportunity, the company built a simple
mobile-based tax filling app and limited the customer segment to individuals based in California
with a simple tax form (e.g. students and young people). Following an initially positive reception,
Intuit built a more extensive program and launched it nationwide by 2011. After the full launch,
SnapTax was downloaded 350,000 times in its first three weeks and is now part of the business unit
Consumer Tax which generated 42 % of Intuit’s revenues, or USD 2.1 Billion (FY2016/17) (Intuit,
2018).

According to Intuit (2018), the application of OVA principles has been successful as the approach
has enabled the company to successfully pursue market opportunities with significant financial
potential. Drawing on the above analysis of Intuit’s application of OVA, the below table specifies
the extent (weak, moderate, strong) of support found for the different principles.

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Table 8: Evaluation of Intuit's adherence to the OVA
Theory Principle derived Degree of adherence to
principle
1a: Non-incremental opportunities should be Strong
pursued by relatively small and incremental
Financial Theory investments
1b: In pursuing non-incremental opportunities, Weak
minor losses should be accepted
2a: Prior assumptions and hypotheses about Strong
Decision Theory the potential opportunity spots and paths
should be explicated
3a: For non-incremental opportunities, the Strong
relevant area of analysis is the opportunity
space Strong
Entrepreneurial 3b: New offerings should be iterated from
Theory simple MVPs to full-featured, as hypotheses
are validated via market feedback Strong
3c: Before scaling, the venture should exhibit
significant product/market fit

Intuit has continued the implementation of the OVA principles and has trained over 300 ‘Innovation
Catalysts, that is, specific employees who are versed in OVA principles and work across functions
and business units (Intuit, 2013). The changed approach seems to have paid off. For instance, Intuits
has steadily increased its ranking in Forbes yearly ranking of the “100 Most Innovative
Companies”. From not being featured in the 2010 ranking, Intuit was listed as the 66th most
innovative company in 2017 (Forbes, 2017).

5.3. Applications of the OVA framework

These short and illustrative case studies indicate that the principles underlying the OVA apply to the
validation of perceived opportunities. Further, that both GE (an industrial company) and Intuit (an
IT company) have successfully utilised the OVA framework, indicates support for Ries’ (2014)
notion that the principles apply to companies in different industries. However, since the above case
studies are illustrative and highly specific to the firms addressed, generalizable conclusions cannot
be extracted. More research is needed before such conclusions are merited. However, increased

56
focus on OV principles is starting to take shape in the in strategic management literature. For
instance, Teece et al. (2016), one of the founders of dynamic capability theory, acknowledges the
importance of applying LSM, and thus the majority of OVA principles, in a firm’s efforts to
fostering dynamic capabilities.

The above sections addressed how GE and Intuit have applied different approaches to validating
and pursuing business opportunities and support were found for the OVA framework. The rest of
the thesis consists of two parts; the discussion and conclusion. The discussion is further divided into
two sections; operationalisation and general discussion. First, the operationalisation section
examines how the OVA can be operationalised such that generalizable studies can be performed
once enough data is available. Second, the general discussion synthesises the thesis, states
limitations, and suggests fruitful areas of future studies. The last section concludes the thesis and
puts forth the author’s closing remarks.

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6. Discussion
The two chapters above derived six principles applicable to the OV process, constructed the OVA
framework, and applied the framework to two case companies. This chapter first operationalises the
OVA before a general discussion commences.

6.1. Operationalizing the OVA Framework

The OVA is operationalised in two ways. First, OVA is operationalised through its effectiveness in
converting customers in different stages (e.g. from exposure to referral) vis-à-vis other approaches.
Second, the OVA is operationalised through Economic Value Added by relating the level of value
its application creates compared to other approaches.

6.1.1. Operationalising OVA through customer behaviour

The OVA is very concerned with the customers and the type of behaviour they exhibit. Specifically,
the focus is on analysing the customer behaviour to examine the value delivered and thereby help
validate the existence of an opportunity (Maurya, 2012; Blank, 2012). The least optimal situation in
seeking to pursue a market opportunity is to commit extensive resources and time to build an
expensive and elaborate product, just to acknowledge that there is no demand for the product!
Hence, because of the high costs associated with such an experience, the chief focus of the OVA is
to minimise waste of valuable resources until the presence of an opportunity is validated.

In contrast to the customer-driven approach of the OVA, the Stage Gate approach is arguably more
product-driven (Kirsch et al., 2009; Frederiksen & Brem, 2017). The Stage Gate model relies on a
linear sequence of steps in bridging the perceived market opportunity and the firm’s pursuit of this
opportunity. Thus, the primary focus is on the processes that the chosen offering undergoes, from
ideation to market launch. Hence, in contrast to the OVA’s focus on validation efforts, the Stage
Gate is designed to effectively produce and launch a new offering (Eisenmann et al., 2013).

Because the OVA seeks to validate the existence of an opportunity, while minimising the resource
consumption in the process, it relies on analysing the customer behaviour. Customers behave in
different ways as they are exposed to a firm’s value proposition. Some of these behaviours are more
valuable than others from a firm perspective. This so, as the different forms of behaviours indicate
the value customers derive from the firm’s offering (Ries, 2011). Also, research (Heskett et al.,

58
2008) indicates that repeat buyers are significantly more profitable than new and non-repeat buyers.
Thus, as firms are developing their new offering, they are critically interested in which type of
customer behaviour their offering induces.

Much like the product development process, the customer behaviour also undergoes specific stages.
Thus, parallel changes in the offering and customer behaviour are observed. The offering evolves
from being an idea to an MVP which is iterated and finally, if the opportunity is validated,
commences into a fully developed product. Conversely, the customer behaviour develops from
exposure (i.e. becoming aware of the offering and its value proposition), to interest, and finally, if
demand is present, in repeating customers (Cooper & Vlaskovits, 2010). These two interrelated
process of developing an offering and analysing customer behaviour is illustrated by the below
table.

Table 9: Product development and customer behaviour stages

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The venture development process, illustrated above, undergoes four specific stages according to the
OVA. In the first stage, the preliminary assumptions about the problem to be solved and the
hypothesised solution are examined by interviewing and analysing customer behaviour. The goal of
this process is to establish a thorough understanding of the problem, that is, whether it actually
exists and, if so, whether it is ‘worth’ solving. The second stage, going from the first MVP to
regular purchase behaviour, is concerned with establishing a product/market fit. That is, the stage in
which the critical assumptions about the business model have been validated and the existence of an
opportunity path has been established in which a) customers are willing to pay for the offering, b)
cost of customer acquisition is less than the price charged, and c) evidence indicate the existence of
a sizable market (Cooper & Vlaskovits, 2010). Arguably, this stage is the most difficult and
involves much effort and numerous iterations as the different opportunity spots are investigated.
Stage three and four encompasses when the offering is fully developed, the customer demand is
verified, and the focus shifts from validating to exploiting and expanding (Blank & Dorf, 2012).

It should be noted that the validation process only deals with the first two stages, which is until the
offering reaches a significant level of product/market fit. Further, even though the above table
presents the pursuit of a market opportunity as being highly sequential, the process is in fact highly
iterative as illustrated by the Build-Measure-Learn model showcased earlier.

But how may one measure the different customer ‘stages’ and gauge, albeit imperfectly, whether
the developed offering is valued by customers? As previously mentioned, different customer
behaviours have different market values and the more valuable the customer behaviour generated
by the offering, the more likely it is that an opportunity is present (Maurya, 2012). Measuring
customer stages and the drivers is very industry specific, hence the need for adapting these to the
relevant industry in which the firm operates. However, three important variables that can be
measured may be identified: customer stages, the relation between the different customer stages,
and the driver of customer stages. The beneath table gives an example of how the variables could be
measured.

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Table 10: Operationalising the OVA via customer behaviour

Customer stages Progress evaluation metrics Potential behaviour drivers

1. Exposure: Purchase a) Marketing channel

The exposure to offering 𝐸𝑥𝑝𝑜𝑠𝑢𝑟𝑒 b) Consumer trends

2. Engagement: 𝐸𝑥𝑝𝑜𝑠𝑢𝑟𝑒 a) Familiarity with offering

The interaction with offering Engagement b) Customer channel

3. Purchase: Engagement a) Perceived value

The purchase of offering Purchase b) Assortment

4. Retention: Purchase a) Experienced value

The re-purchase of offering Retention b) Alternatives

5. Referral: Retention a) Referral incentives

The endorsement of customers Referral b) Net Promoter Score

While the drivers of customer behaviour are highly context dependent, the customer stages metrics
are more stable as virtually all customers undergo some, if not all, of the stages. Specifically, the
level and changes in different customer stages can be measured and analysed. For instance, a core
tenant in the OVA is to measures the impact product iterations have on customer behaviour. Thus,
the magnitude and direction of the changes in the customer stages is a good benchmark for
evaluating the extent of product/market fit, and thereby whether an opportunity is present
(Eisenmann et al., 2013; York & Danes, 2014). Naturally, the key emphasis is on improving the
conversion rates between the different customer stages such that a minimum number of customers
are lost in the process from level one (exposure) to level 5 (referral). The middle row extends the
analysis of the customer stages by making the conversions relative to each other. For instance, the
metric purchase/exposure shows how many customers buy for each customer exposure.

The customer behaviour stages could be operationalised by analysing customer conversion relations
(second row in the table) with the methodology applied, that is, OVA or another approach. Thus,
one might gauge how successful different projects, or firms, are at establishing and seizing
customer demand. However, operationalising the OVA construct in this regard requires two critical
considerations; a) examining companies that have relatively similar customer stages, and b)
controlling for other variables that may affect customer conversion (e.g. product differences).

61
Because of these relatively stringent requirements, this form of operationalisation is more suitable
for case studies in which a small sample of relatively similar firms/projects can be chosen. Thus,
this operationalisation method, though being able to generate valuable insights, may be limited in its
generalisability. Next, the Economic Value Added (EVA) concept, a more generalizable construct,
is operationalised in relation to the OVA.

6.1.2. Operationalising OVA via Economic Value Added

As put forth in section 4.1 (i.e. financial principles), a firm’s principal goal is to create value by
identifying and investing in projects that can generate an excess return, relative to the cost of
deploying that capital (Brealey et al., 2017). Therefore, companies continually strategize about
which projects have the highest NPV, IRR, and other metrics utilised to evaluate the attractiveness
of projects. However, these metrics are often the result of base case scenarios, which means that
much can change once a project has been given the ‘green light’. As Appendix 7 illustrates, the
NPV can take different values depending on the scenario that prevails. Hence the likelihood that the
actual project value realised is different from the planned. Given this discrepancy, an evaluation
tool is needed to assess the actual value created by a project. One of the most acknowledged
evaluation tools is the EVA, which is beneficial when measuring a project’s level of value creation
(Bausch et al., 2009). Thus, whereas the NPV is forward-looking, by estimating the potential value
creation of projects, the EVA analyses the realised value by current projects.

EVA is a good measure because it highlights the value created relative to a project’s expected value
creation. EVA consists of two essential components; a) a project's level of value creation given the
capital it deploys, and b) the benchmark return for the capital deployed (Harris, 1997). The EVA
can be measured as an absolute and relative value. The below table4 decomposes the EVA in the
absolute and relative form.

4
Decomposition of the Economic Value Added (EVA) construct

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Table 11: Decomposition of the Economic Value Added (EVA) construct
EVA – Absolute level EVA – Relative level (%)

EVA = NOPAT – (WAAC*CE), where EVA = ROCE – WAAC, where

1. NOPAT = EBIT * (1 – Tc) 1. ROCE = NOPAT / CE

2. CE5 = NWC6 + NFA7 2. CE = NWC + NFA

3. WAAC = WE * re + WD * rd,a.t. 3. WAAC = WE * re + WD * rd,a.t.

a. re = rf + B (rm – rf) a. re = rf + B (rm – rf)

b. rd,a.t. = rd * (1-Tc) b. rd,a.t. = rd * (1-Tc)

Thus, if NOPAT – (WAAC*CE) > 0, then Thus, if ROCE > WAAC, then value created >
value created > 0 0

Hence, the higher the level of EVA, the more value a project creates, and the more market value a
firm adds (Ferguson, 2014). Based on the above deconstruction of the EVA, at least four possible
relationships between OVA and EVA can be derived.

First, due to the focus on examining the potential opportunity space, rather than settling on a pre-
determined opportunity path, firms that apply the OVA have the advantage of covering a larger
number of opportunity paths. Hence, projects that have the most profitable opportunity path, and
thereby a higher NOPAT, can be identified. Operationalising this possibility entails comparing
NOPAT levels across projects that utilise OVA to projects that do not on.

Second, OVA is concerned with matching the developed offering to a relevant customer segment
and validating the value derived by analysing customer behaviour. The emphasis is on minimising
waste until valuable customer behaviour (e.g. purchase) is realised. Therefore, it can be
hypothesised that once capital is committed in an OVA approach, a significant customer demand

5
CE: Capital employed
6
NWC: Net working capital
7
NFA: Net fixed assets

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has been identified. Operationalising this possibility entails comparing ROCE levels across projects
that utilise OVA to projects that do not on. With the emphasis on analysing whether projects
utilising the OVA have higher ROCE levels.

Third, OVA is concerned with maximising the amount of learning pr. experiment. Thus, OVA seeks
to explicate the most critical assumptions and hypotheses about the perceived opportunity, test these
via experiments, and adjust the offering according to the gathered information (Frederiksen &
Brem, 2017). In this regard, the focus is on verifying whether an opportunity exists in the chosen
opportunity space and move on relatively quickly if the perceived opportunity is disconfirmed.
Operationalising this possibility entails comparing when EVA >=0 across projects that utilise OVA
to projects that do not on. With the emphasis on analysing whether OVA projects are quicker at
adding value, that is, achieving non-negative EVA levels.

Fourth, because the OVA is focused on mitigating uncertainty and enabling firms to pursue non-
incremental opportunities, the potential, if realised, is significant relative to incremental projects. It
may be possible that the OVA is better at identifying and validating these kinds of opportunities
compared to Stage Gate based approaches. Operationalising this possibility entails comparing the
level of EVA across projects that utilise OVA to projects that do not on. With the emphasis on
analysing whether OVA projects exhibit higher levels of EVA.

Figure 12: Operationalisation of possible relationship between OVA and EVA

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Thus, operationalisation can be used to measure how effective OVA is at converting customers and
in creating value in relation to other approaches, chiefly the Stage Gate model. The next sections
put forth relevant discussion points in relation to the thesis’ research, highlight limitations, and
argue for how OVA can be incorporated in the strategic management literature.

6.2. Discussion, limitations, and further research

6.2.1. Discussion
In researching how companies can effectively validate the existence of a business opportunity, the
thesis gained several important findings. First, it is found that research covering how companies can
benefit from dynamic environments is plentiful (i.e. via sensing, seizing, and transforming
capabilities). However, an important element, the need to validate an opportunity after it is sensed
and before it is seized, is under underemphasised in the literature. Second, analysing theories from
finance, decision science, and entrepreneurship, six principles were found to be applicable to the
process of validating an opportunity. Based on these principles, a framework, the Opportunity
Validation Approach, was constructed. Third, applying the OVA framework via investigative case
studies, confirmed the application and value of validating an opportunity before resources to seize it
are orchestrated. Concretely, in dealing with non-incremental opportunities, in which the problem
and solution are unknown, taking an experimental approach for validating prior assumptions about
the perceived opportunity is found to be highly effective. This is in contrast to the Stage Gate
model, which relies on traditional market research with little customer involvement to ‘get it right
first time’ as the cost of failure is very high (Blank, 2013). Lastly, the operationalisation of the
OVA framework laid out a clear path as to how the effectiveness of the OVA could be measured.

One of the objectives of the thesis has been to examine the process of validating an opportunity.
The thesis has made theoretical and practical contributions in this regard. Analysing, uncovering,
and applying principles relevant to the opportunity validation process highlights the value of the
validation stage and supports the LSM. Interestingly, the importance of the validation process is
supported by one of the founders of DCA theory who notes that

“Identifying the customer segment(s) to focus on first in order to learn and achieve proof of concept
and business model viability is a critical capability… These relationships, and their implications for
performance, will need to be teased out for years to come." (Teece, 2018: 48).

65
Thus, the criticality of the validation process is beginning to be noticed in the strategic management
research. The thesis’ research into the process of validating along with the operationalisation of the
OVA framework is part of this academic stride.

Besides the theoretical contributions of uncovering principles about opportunity validation and
operationalising the OVA framework, the thesis is also adding practical value. As economies are
deriving an increasingly greater percentage of their GDP from the service sectors, value creation
shifts from physical goods to intangible services. For instance, around 75 % of the economy in the
OCED countries is service-based (Factbook, 2018). For example, in 2006, of the top five most
valuable public companies, one was categorised as a technology company. This changed to 5/5 in
2017 (Statista, 2017; Visualcapitalist, 2016). The rise of technology companies is fueled by cheap
and powerful IT infrastructure, including free open-source software, scalable cloud technology, and
global distribution through smartphones (Maurya, 2012). As McRae writes (2015) “The world’s
largest taxi firm, Uber, owns no cars… the world’s largest accommodation provider, Airbnb, owns
no property.” Instead, these companies provide a platform, connecting millions of users every day.
However, both of these companies changed their initial business model, that is, they settled on an
opportunity path that was different from their initial hypotheses (Jimenez-Eliaeson, 2017). Given
the global possibilities enabled by the new IT infrastructure tools, an effective process for testing,
iterating, and validating new opportunities will become vital. The thesis’ exposition of the
validation process along with putting forth principles applicable to this process constitutes a
practical contribution and helps companies in their validation process.

Lastly, it should be noted that the thesis has dealt with a certain kind of opportunity, that is, non-
incremental opportunities. The aim has been on researching how companies can systematically
validate the existence of a perceived opportunity by applying an experimental approach to the
opportunity space. This experimental approach share many similarities with the notion of
explorative strategies where companies seek to explore new business opportunities (Frederiksen &
Brem, 2017). However, as is acknowledged by the strategic management literature, a company’s
profits are mostly generated by existing offerings that undergo gradual improvements, that is,
incremental opportunities (Gardner, 2009; Grant, 2013). Further, as the product life cycle in
Appendix 11 shows, new offerings often become profitable after a significant customer base has
been achieved. This usually takes time to accomplish. Due to the cash flow generated by current
offerings, and the corresponding risk of new ones, some argue for a relatively low level of resource

66
commitment to the pursuit of new opportunities (Kalbach, 2012). The thesis acknowledges the
importance of balancing the act of pursuing new opportunities while emphasizing the exploitation
of current offerings as put forth by scholars arguing for the ambidextrous company (O’Reilly &
Tushman, 2007; Chen, 2017).

6.2.2. Limitations
As with any research project this thesis has its limitations. First, the focus has been to research the
OV process and uncover applicable theoretical principles. This approach, while quite suitable for
unfolding a new academic topic, naturally comes with its limitations. For example, the extent to
which one may generalize the thesis’ findings is limited, as these are theoretical rather than
empirical. However, the thesis has nevertheless been able to anticipate and contribute to future
research taking a more generalizable approach. For instance, the illustrative case studies and the
exposition of ways in which the OVA could be operationalised, help future scholars in their quest to
establish generalizable conclusions about OV efforts.

Second, the thesis has focused on opportunity validation from a process and customer perspective.
In doing so, other factors that are vital to successfully pursue an opportunity were deprioritised.
Some of these important factors are Technological uncertainty (Narvekar & Jain, 2006); Market
uncertainty, including the actions of competitors (i.e. the benefits of being a strong second mover)
and the impact of substitute products (Markides & Geroski, 2005; Jalonen, 2012);
Regulatory/institutional uncertainty (York & Venkatraman, 2010); Social and Political uncertainty
(Hanft & Korper, 1981); Timing uncertainty, opportunities can be pursued ‘too early or slow’
(Macdonald & Jinliang, 1994).

Third, there are the limitations embedded in the core concepts utilised; the LSM. For instance, Ladd
(2016) found that a firm strategy correlates better with the success of new ventures more than the
number of experiments run. This being, since the number of assumptions tested does not have a
linear relationship with validating an opportunity. Rather, validation based experiments seem to
exhibit a curvilinear relationship with the success of seizing a new opportunity. Further, the
application of validation principles does not eliminate false positive (or negatives), which may
occur if all decisions are taken on the basis of customer feedback (Ibid). Many products (e.g. the
iPhone) did not rely on customer feedback but on serving a latent demand perceived by one/few
persons (Chen, 2017). Thus, as with many other concepts, the OVA is a useful concept but must be
applied in moderation to be valuable.

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6.2.3. Future research
The above analysis identified two areas of future research, one is empirically based while the other
is theoretically grounded. First, future studies should empirically examine the OVA framework.
Since the framework has been operationalised via the EVA construct, measuring the effect of
applying the OVA framework is rather straightforward. However, for a generalizable study to be
conducted, a relatively large sample size is needed, which is unavailable at the moment. Therefore,
an alternative approach is to investigate the effect of the OVA by evaluating its impact on firm's
customer conversion. In this regard, the dependent variable is how successful companies are at
converting customers (e.g. from awareness to purchase) while the independent variable is the
absence/presence of OVA. Either investigation (i.e. via EVA or customer conversion) adds
significant value to the strategic management literature and the dynamic capability model in
particular.

Secondly, the OVA should be examined theoretically. Specifically, a synthesis of DCA, LSM, and
OVA is called for. As noted earlier, Teece (2016, 2018) acknowledged the LSM along with the
importance of the validation process. However, while some scholar within DCA (Narver et al.,
2004) argue that some opportunity validation principles are located in the sensing capability, others
posit these principles pertain to the transformation capabilities in the DCA model (Teece et. al.,
2016). Interestingly, the same scholar (Teece, 2013) claim the LSM principles should be considered
as part of the seizing capabilities. Thus, theoretical examination and synthesis of DCA and the
opportunity validation process are needed. It would be interesting to see if support for the thesis’
position, that opportunity validation is a separate stage in the DCA model, is supported.

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7. Conclusion
7.1. Conclusion
In the last two decades, we have seen an unprecedented increase in market dynamism. The average
company lifespan has decreased by 2/3. This trend of competitive pressures will continue as IT
developments, such as cloud technology, makes the world ever connected and enable few persons in
a garage to launch an app that out-competes the global taxi industry (i.e. Uber). Companies can no
rely on applying traditional strategy thinking such as erecting entry barriers, for example by
controlling the physical distribution channels. In a world where distribution occurs through the
internet, such strategies are flawed. However, these uncertainties also entail enormous opportunities
for companies. What is needed, in this environment where opportunities are intertwined with
uncertainty, is the ability to effectively validate opportunities before committing resources to seize
them. Less the perceived opportunity, upon seizing, becomes a serious misfortune.

This thesis has addressed this market dynamism by researching the opportunity validation process.
That is, how companies can judge the potential of perceived market opportunities. First, six
principles within finance, decision theory, and entrepreneurship were found to be applicable to the
opportunity validation process. Second, utilising these principles, The OVA framework for
opportunity validation was constructed. The key emphasis of these principles is the utilisation of an
experimental approach to explore the opportunity space. In contrast to the OVA and LSM, the Stage
Gate model pre-commits to a specific opportunity path and focuses on executing upon this path.
Third, two investigative case studies were carried out by applying the OVA to two relevant
companies. These companies were found to have reaped significant benefits and, perhaps more
importantly, avoided costly mistakes by applying OVA principles. Lastly, the operationalisation of
OVA showed that it might influence two important business concepts: the economic value added
and a firm's ability to convert its customers. Thus, support, both theoretically and empirically, is
found for the importance of formally validating the financial potential of an opportunity before
expending resources in seizing the perceived opportunity.

69
Companies continuously strive to take advantage of new market opportunities. As technological
developments accelerate both online and offline competitive pressures intensify. In this
environment, the companies that end up thriving will be those who embrace uncertainty. Benefiting
from uncertainty means being able to pursue opportunities without being beaten by potential
failures. The OVA framework, and its underlying principles, enables companies to effectively
validate potential opportunities. Accepting uncertainty and applying a creative, but rigorous,
experimental approach to validate opportunities may become the distinguishing factor between
tomorrow's laggards and winners.

70
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Appendix
Appendix

Appendix 1: Research on the Lean Startup Methodology (LSM)

Number of publications (search term: "lean startup"

35

30

25

20

15 Publications

10

0
2012 2013 2014 2015 2016 2017

Retrieved from ScienceDirect (2018)

Appendix 2: Johnson & Johnson – Historical Revenue & Net Margin Performance

Gurufocus.com (2017)

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Appendix 3: Porters Five Forces and expected average industry profitability

Reproduced from Porter in HBR (2011, 27)

Appendix 4: Porter Value Chain Activity Systems – IKEA

Reproduced from Porter (2000, 71)

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Appendix 5: Tariffs8 applied by WTO members and global trades in goods

World Trade Organization (2015, 2)

Appendix 6: Turnover in the S&P 500 Index, 1958-2016

Reproduced from Mauboussin et al. (2017, 1)

8
MFN: Most Favored Nation (MFN) means a country cannot discriminate between WTO members (unless free trade-
agreements exist between the two countries in question).

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Appendix 7: Depending on the prevalent scenarios in the future, NPV takes different values

90
Appendix 8: Contrasting the LSM and traditional approach

Reproduced from Blank (2012, 8)

91
Appendix 9: GE’s FastWorks Principles (GE, 2017)

Appendix 10: Intuit’s Innovation Program

Reproduced from Blank (2014)

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Appendix 11: The Product Life Cycle and profit levels

Re-produced from Open Textbook Library (2015)

93