workbook - value of failure · 1. business failure in general this chapter provides general...

value

failure

of

Value of Failure Business CourseWorkbook

Did you know that...

www.valueoffailure.com

...in some sectors up to 90 % of new businesses fail

in the first 5 years?

3

Table of Content

I Working with this WorkbookII About the ProjectIII About this CourseIV Learning Achievements

Chapter 1: Business failure in generalChapter 2: Common causes for business failureChapter 3: Facing bankruptcy?Chapter 4: Project managementChapter 5: Risk managementChapter 6: Learning from failuresChapter 7: Re-starting your business

V Disclaimer

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...the value of failure makes re-starters grow faster and stronger than first-timers?

5

I Working with this WorkbookLearning without additional working materials does seldom lead to learning success. The Val-ue of Failure Project therefore designed addi-tional workbooks for tutors as well as for learners to support a fast and productive learning envi-ronment. Those workbooks follow the structure of the Value of Failure Learning Resources and give additional information and content.

The Students Workbooks for each of the mod-ules should be seen as a helping hand for learn-ers. They provide help, tasks and additional information. Free pages give room for your indi-vidual notes.

We also recommend to study the additional liter-ature and online resources provided on the Val-ue of Failure Website and the Value of Failure Pearltrees Account.

Following resources are provided on the project website:

- Tutors Workbooks- Learners Workbooks- Presentations

To enrich the learning experience we are look-ing forward to your feedback:


Legend

Presentation

Workbook

Example

Remember

Digression

Law

Learned

Checklist

Link

Video



...only about 8 % of failed entrepreneurs start

over again?

7

II About the Projectprises an extremely important aspect of US’s activity. The top priorities are joint research and student & staff mobility programs.

www.english.usz.edu.pl

2. Canice Consulting, Northern IrelandCanice Consulting is a small yet established pri-vate company based in Northern Ireland which operates in the fields of local and regional devel-opment, enterprise education and management and technical support to EU networks and pro-grammes.

Canice Consulting provides a broad range of modern learning services to predominantly the EU market place. Services include training solu-tions, e-learning content creation, learning tech-nologies and learning strategy design and con-sulting. Learning technologies include learning portals, learning management systems, content development systems, performance support tools, virtual classroom tools and more.

www.caniceconsulting.com

3. Creo Mind S.C., PolandCREO MIND (CM) is a civil partnership estab-lished from two sole traders: Wojciech Brażuk and Prestige Brand Mariusz Woźniak. The com-pany has wide experience in consulting services in the area of marketing, business development, strategic management and skills development. The owners of CREO MIND have been close-ly collaborating with the Northern Chamber of Commerce, providing their services for the larg-est regional chamber of commerce in Poland. Therefore CREO MIND has a strong potential in networking of entrepreneurs and in building re-lations among various stakeholders of regional market. CREO MIND has elaborated number of analysis and expertise on business and markets. CREO MIND is also recognized on the region-al market from elaborating and realizing crea-tive and innovative marketing campaigns and events.

Value of Failure is a European Union funded grass roots initiative to support a better frame-work for so called failed or second chance en-trepreneurs. The idea is to implement a new positive approach to failure in general and to business failure in specific. The project is fund-ed by the European Union within the Erasmus+ framework.

The approach of the project is to address this important topic from two different sides:

1. Regional alliances involve all important stake-holders to set up more a failing- friendly envi-ronment and funding framework. The project develops a tool-kit for other regions to develop franchises of the alliances on their own.

2. A set of learning resources addressing stu-dents as well as second chance entrepreneurs are set up to implement a seed for a new think-ing about failure and providing in depth knowl-edge about failure and how to cope with it.

All materials produced are open source and can be used by anyone according to the rules provid-ed in the disclaimer at the end of this publication.

More information about the project, the e-learn-ing courses and the regional alliances can be found on the project website


The project is developed, designed and imple-mented by an experienced international con-sortium of universities, business development agencies, consulting companies and SMEs (small and medium sized enterprises) coming from Germany, Northern Ireland and Poland:

1. University of Szczecin, Poland (Project Leader)The University of Szczecin (US) is the most powerful organisation in the West Pomeranian region. Presently over 30.000 students are fol-lowing full-time, evening & part-time studies in 27 subject areas at 13 faculties. One of the most important objectives of the University is educa-tion of students and their preparation for entering labour markets. International cooperation com-



l

...31% of projects fail?

9

4. Enterprise Northern Ireland, Northern IrelandEnterprise Northern Ireland was established in 2000 to represent the network of Local Enter-prise Agencies in Northern Ireland, and is the only membership body in Northern Ireland for or-ganisations providing enterprise support. Enter-prise Northern Ireland holds national contracts with various public sector organisations which it delivers primarily though its member agencies. These contracts include the Regional Start In-itiative; Social Entrepreneurship, Exploring En-terprise, Tradelinks programme and Business Bootcamp. All of these programmes are further supported by access to finance through the ENI Loan Fund and the Northern Ireland Small Busi-ness Loan Fund. As the only membership body in Northern Ire-land for organisations providing enterprise sup-port, Enterprise Northern Ireland is at the heart of a dynamic, high profile network. Enterprise Northern Ireland also represents the interests of the wider small business sector through policy and business development, research and quality assurance, and has a strong lobbying and cam-paigning remit.

www.enterpriseni.com

5. The visionworks, GermanyThe Visionworks is a small company specialized on consulting, coaching, marketing and project management especially for (micro) SMEs and Start-ups. For its clients the visionworks devel-ops investor ready business plans and financing concepts and accompanies founders until the closing of financing. The visionworks has inter-national contacts to public and private investors and has also worked extensively with all relevant regional stakeholders and institutions which are relevant for the regional Second Chance Entre-preneurs Alliance. Despite that the visionworks has great experience in developing learning courses and learning environments for adult ed-ucation as well as for students.

www.thevisionworks.de



...88% of projectsare past the deadline?

11

Course Overview

The Value of Failure Business Course was de-signed for adult learners, including entrepre-neurs and potential entrepreneurs, second chance entrepreneurs as well as undergradu-ates interested in establishing their own compa-ny and the interested public.

For entrepreneurs the course helps to under-stand the risks involved in companies and how to prevent them. For entrepreneurs who failed before, the course provides important resourc-es to prevent failure next time.

The course can be used in a classroom envi-ronment as well as a self-contained distance learning course. Distributed free of charge on the Value of Failure project website.


Course Components

The syllabus of the Value of Failure course is di-vided into seven different chapters each of them focussing on different aspects of business fail-ure.

Chapter 1: Business failure in generalChapter 2: Common causes for business failureChapter 3: Facing bankruptcy?Chapter 4: Project management Chapter 5: Risk managementChapter 6: Learning from failuresChapter 7: Re-starting your business

All chapters include additional resources such as videos and also provides templates and ex-amples where appropriate.

Additional information can be found on our website and our Pearltrees-Account:


www.pearltrees.com/thevalueoffailure/

III About this Course



...Stephen King threw away his entire draft of “Carrie”? His wife found it in

the trash and the book later launched his career with now more than 350

Million books sold.

13

In this course you will learn about:

1. Business failure in generalThis chapter provides general information about business failure, including statistical data, important definitions of failure and the dif-ference between productive failure and unpro-ductive success.

2. Common causes for business failureThis chapter explores the basics of root cause analysis and therefore helps to explore person-al business failures and risks related to your business. It also provides information about typical causes of business failure and reasons why startups are not successful.

3. Facing bankruptcy?This chapter describes how you realize finan-cial distress and it also provides mathematical formulas to predict the risk of insolvency of your company in the near future.

4. Project managementThis chapter describes how you can prevent failing by planing properly. It shows different project management approaches and also pro-vides the basics of risk analysis.

5. Risk managementChapter 5 is about risk management and haz-ard identification. This knowledge is important to keep track on major risks and to prevent your company from failing.

6. Learning from failuresFailing isn’t all bad. Even though business fail-ure is a hard task to take. If you want to restart your business you should try to take as much learning resources from your recent failure.

7. Re-starting your businessThe last chapter of the value of failure business course provides a new and comprehensive ap-proach on business planning and product de-velopment.

IV Learning AchievementsAchieved


Chapter 1: Business failure in general

1.1 Success is rareAccording to Bloomberg, eight out of ten startups crash within the first 18 months - in other words: 80% of entrepreneurs fail in less then two years. Failing seems to be way more likely than success.

Here are some more facts:

• Every year, some 150 000 corporate insolvencies wipe out around 1.5 million jobs. Source: Insolvencies in Europe 2006/07, survey by Creditreform

• People who start a new business risk their reputations as well as their money and property. Entrepreneurs worry most about how their families would cope if they went with bankrupt. Source: Attitudes to Bankruptcy. The Insolvency Service, London

• To support high-growth entrepreneurship, we need to be more accepting of firm failure and bankruptcy, and reducing the economic and social costs that go with them (refers to start-ups creating 20 or more jobs within five years). Source: The Global Entrepreneurship Monitor, High Growth Report 2007

• A study on the performance of Europe’s fastest-growing companies shows that companies founded by re-starters have higher turnover and employment growth than companies run by entrepreneurs who have never failed. Source: Setting the Phoenix Free. Boston Consulting Group, 2002

• Business failure does not mean losing the entrepreneurial spirit. Research shows that a large majority of people whose businesses had failed still had plans for new business projects. Source: Starting anew: Entrepreneurial intentions and realizations subsequent to business closure. Stam E., Schutjens V., 2006

• The risk of bankruptcy is what Europeans fear most about setting up a new business. Source: Flash Eurobarometer “Entrepreneurship” No 192, European Commission, 2007

• 48% of Europeans agree with the statement “You should not start a business if it might fail”, compared with just 19% in the United States. Source: Flash Eurobarometer “Entrepreneurship” No 192, European Commission, 2007

Figure 1: Failing and Success rates of companies in Europe

0%!

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Percent of companies failed in year !N after estblishment!

Percent still operating after 4 years!per industry!

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Figure 2: Birth- and death-rates of companies in Europe

Figure 3: Failure rates of projects

As the data proves, there is nothing spectacular about failing in general. It is common and every-where. Even though business failure can lead to catastrophic disaster and personal crisis. But later on we will see that failing isn’t all bad - and it can be prevented (at least most of the time).

Before we go into details, we should start with some definitions first. What is failure? There are many different definitions of failure - depending on the context and the perspective.

• General/common understanding: “Failure is the state or condition of not meeting a desirable or intended objective and may be viewed as the opposite of success.” (Wikipedia)

• Material Science & Mechanics: “In materials science or structural mechanics, failure is generally the loss of load carrying ca-pacity of a material unit or structural element.” (Altenbach, Kolupaev)

• Information & Communication: “A system failure occurs when the delivered service no longer complies with the specifica-tions, the latter being an agreed description of the system’s expected function and/or ser-vice.” (Laprie et al.)

0!

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2010! 2011! 2012!

No. of births of companies No. of deaths of companies

24%

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Failed! Challenged!

2004!

Succeeded!

2006!

2009!


• Business Science: “A situation in which a company or other businesses ceases operations because it is unable to generate sufficient revenue to cover its expenses.” (Financial Dictionary)

We will follow the later definition in the following chapters. As there are different definitions of failure, there are also many different approaches to categorize failure - and the related impacts. Here are some different approaches of categorization:

Categorization by consequences: Not every failure has the same nature

• Minor failures: Failures which cause damage of little or no importance

• Important or catastrophic failures: Failures which cause unacceptable damage

Categorization by level: The levels where failure can occur

• Human failure: Human failure is a failure that occurs at an individual level

• Technical failure: Technical failure is a failure resulting from location or equipment

• Organizational failure: Organizational failure is a failure because of organizational rules, policies, or procedures

Categorization by causes and errors: Errors that can cause failure

• Assumption errors: an essential piece of information cannot be verified and is guessed or presumed

• Selection errors: two or more options exist, and the wrong option is chosen

• Capture errors: focus on a task is diverted elsewhere and an error goes undetected

1.2 Risks, Success and FailureSuccess and failure are closely related to the risks involved with a business, project or task.

• Risks: Risks are potential events that have negative impacts on safety or project technical performance, cost or schedule. Risks are an inevitable fact of life – risks can be reduced but never eliminated.

• Risk Management: Risk Management comprises purposeful thought to the sources, magni-tude, and mitigation of risk, and actions directed toward its balanced reduction.

Note: The same tools and perspectives that are used to discover, manage and reduce risks can be used to discover, manage and increase project opportunities - opportunity management.

A wrong or missing response to risks cause failure - and risks call the so called fear of failure. Fear of failure is one of the greatest fears people can have. It grows due to former criticism or rejection after failures and incapacitates and self-limits us. Fear of failure is one of the main rea-sons why people do not even start working on an idea or project. But fear of failure is also a good balance. It prevents us from running into the wrong direction and being too enthusiastic about an idea. It is about the balance.

17

Figure 4: The fear of failure

Figure 5: The right level of risks

It is important to find the personal risk level you feel comfortable with. People who have to take decisions outside their personal comfort zone and the manageable risk level tend to feel a higher stress level and then tend to take the wrong decisions.

But even if we try. We cannot prevent failing all the time. And as everybody knows, failing feels different each time. Some failures have more influence on your future behaviour than others do. Sometimes we learn from failures and sometimes we don’t. This is why learning theory divides failure into productive and unproductive failure. Interestingly success can be productive and un-productive as well (see figure 6).

The question of failing productively or unproductively is just a question of how much learning we draw from our failure. It is a question of outcome. Failing without learning leaves us with nothing - failure with learning provides us with important knowledge for the future - we might even discuss if we should still call it a failure.

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Too Little Risk! Too Much Risk!

Manageable Risk Zone

Emotional Comfort Zone!(High Fear of Failure)!

Emotional Comfort Zone!(Low Fear of Failure)!

!


Figure 6: Failing productively

Chapter 2: Common causes for business failure

Each task, each project and each business is different and provides numerous risks for failure. To prevent failure we do have to understand and analyse the potential risks and causes. Root cause analysis is an effective tool to both, reactivliy and proactively investigate the situations, events and actions that harmed our performance or has the potential to do so.

One method to find out the reasons for success and failure is the so called Root Cause Analysis (RCA). RCA is a process designed for use in investigating and categorizing the root causes of events with safety, health, environmental, quality, reliability and production impacts. Simply stat-ed, RCA is a tool designed to help identify not only which kind of event occurred, but also why it occurred. Only when we are able to determine why an event or failure occurred we will be able to specify workable corrective measures that prevent future events of the type observed.

Often used in healthcare, RCA can also be very helpful for personal purposes.

Definitions: Important terms around Root Cause Analysis (RCA)

Root Cause: Underlying cause(s) of positive or negative symptoms within any process that, if resolved, would eliminate or substantially reduce the symptom.

Root Cause Analysis: A tool used both reactively, to investigate an adverse event that already has occurred, and proactively, to analyse and improve processes and systems before they break down (Preuss, 2003).

Data Analysis: The process of gathering, reviewing, and evaluating data.

Symptom: A gap between expectations and reality. Generally, mistakes do not just happen but can be traced to some well-defined causes. There are different strategies/approaches to determine root causes. Here are two examples:

UnproductiveFailure

ProductiveFailure

UnproductiveSuccess

ProductiveSuccess

Learning

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(low)! (high)!

(high)!

(low)!

Performance!

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The “5 Whys”: A process to seek root cause by asking “why” five times in succession - this will lead you to the root cause of a problem:

- Write down the specific problem. - Writing the problem makes sure that everybody in the team focuses on the same problem. - Ask why the problem happens and write down the answer. - Repeat 5 times until there is an agreement in the team that the problem is identified.

System Planning Process: Problem solving approach asking 4 major questions like this: - Where are we now? - Where are we going? - How will we get there? - What is holding us back? You can easily adopt those questions to any problem in the past as well.

Task 2.1 Root cause analysis - the “5 Whys”Think about something in your company that is not going well or where you or your team has failed recently. Ask yourself 5 “Why-questions” and answer them (one after the other). Repeat this 5 times, until you feel very clear about the root cause of your failure.

The problem:

Answer 1.1:

Answer 1.2:

Answer 1.3:

Answer 1.4:

Answer 1.5:

Question 1.2:

Question 1.3:

Question 1.4:

Question 1.5:

Question 1.1:


Answer 2.1:Question 2.1:

Answer 2.2:

Answer 2.3:

Answer 2.4:

Answer 25:

Question 2.2:

Question 2.3:

Question 2.4:

Question 2.5:

Question 3.1: Answer 3.1:

Answer 3.2:

Answer 3.3:

Answer 3.4:

Answer 3.5:

Question 3.2:

Question 3.3:

Question 3.4:

Question 3.5:


Answer 4.2:

Answer 4.4:

Answer 4.5:

Question 4.2:

Question 4.5:

Answer 4.3:Question 4.3:

Question 4.4:

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Answer 5.2:

Answer 5.4:

Answer 5.5:

Question 5.2:

Question 5.3:

Question 5.4:

Question 5.5:

Answer 5.3:


Task 2.2 Root cause analysis - System Planning ProcessUse a personal example for a complicated tasks you are facing. Try to find out root causes for this task. Your Problem:

Where are you now?Examples:What are the facts? What worked well? What can be improved?

Where are you going?Examples:What do you want to achieve?What is the expected outcome?

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How will you get there?Examples:What steps must you take to en-sure you reach the outcome?

What is holding you back?Examples:Is there support for improvement planning and implementation?What roadblocks must you over-come in order to reach the ex-pected outcome?


Failure is a topic most of us would rather avoid (even though we already learned that failure isn’t all bad). It is clear that failure is an important part of learning - but there are still some failures that are very common and happen over and over again. Even though we should have learned from our own failures or, even better, from failures others did for us already.

Typical causes of failure: Typically for failure are:

Poor planning: Not starting from the right way• Lack of communication:

No communication procedures developed, lack of communication in team• No breakdowns to milestones:

No project management plan• Not prioritized:

Not setting the right focus on sub-problems and steps• Not involving the right people:

No involvement of the right stakeholders• Lack of time:

Time management inadequate• Unrealistic scheduling:

Too ambitious or too loose

Lack of leadership: Not agreed on or fulfilling duties• No structure:

Ownership, leadership and decision making not clear• Decisions not on time:

Decisions are made too slow or not at all• Lack of management competences:

Project management does not have the needed leading skills• Neglecting roles:

Project team is not fulfilling its individual duties• No strategic vision:

Not clear where to go• Unrealistic expectations:

The vision is too ambitious

Inadequate knowledge: Not the right skills • Lacking skills:

Wrong skills for the task• Inexperience:

No experience in fulfilling the task• Not addressing risks:

No risk management• No tracking:

Actions and milestones are not tracked• Incomplete or vague plan:

The plan does not cover all relevant aspects• Inadequate control systems:

No or inadequate controlling systems

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People problems: Team not sufficient• Lacking communication:

Team members do not communicate adequately • Lacking leadership:

Team is lacking leadership• No efficient team:

Team works not efficient and is not focussed• Unable to resolve conflicts:

Team conflicts are not solved• Inadequate resources:

Team is not big enough or has the wrong resources

Technical problems: Not equipped the right way• Failing definition of technical requirements:

Wrong assumptions for technical requirements in the beginning• Unexpected problems with new technology:

New technology is used but causes unexpected problems• Poor technical design:

The technical equipment is not sufficiently installed and used• Changing requirements during the process:

The technical requirements change during the process• Technology does not fit together:

Tools and technical equipment does not work together• Poor initial testing

Equipment was not tested before starting

Seth Godin’s list of failure causes

• Design failure If your product or service is misdesigned, then people don’t understand it, don’t purchase it, or may even harm themselves when they use it, and you have failed

• Failure of opportunity If your assets are poorly deployed, ignored, or decaying, it’s as if you are destroying them, and you have failed

• Failure of trust If you waste stakeholders’ goodwill and respect by taking shortcuts in exchange for short-term profits, you have failed

• Failure of will If your organization prematurely abandons important work because of internal resistance or a temporary delay in market adoption, you have failed

• Failure of priorities If your management team chooses to focus on work that doesn’t create value, that’s like send-ing cash directly to your competitors, and you have failed

• Failure to quit If your organization sticks with a mediocre idea, facility, or team too long because it lacks the guts to create something better, you have failed

• Failure of respect If you succeed without treating your people, your customers, and your resources with respect and honesty, you have failed

• Failure to see And, of course, the most self-referential form of failure is the failure to see when you’re failing


Why startups fail:

• Single Founder No feedback

• Bad location Market somewhere else

• Marginal niche Market too small

• Derivative idea Me-too does seldom lead to success for startups

• Obstinacy Most successful startups end up with something different than originally planned

• Bad / wrong staff Bad programmers, bad marketers, bad sales

• The wrong plattform Putting resources on the wrong technology

• Slowness in launching Never finishing something – being too perfect

• Launching too early Product not useful yet

• No specific customer in mind Not empiric enough

• Not enough money raised Not enough to make it to the next raise

• Spend to much Spending too much too early on the wrong things

• Raising too much money Too much time spend on searching for money

• Poor investor management Not the right communication strategy

• Sacrificing customer to profit Not enough thinking into business model

• Not wanting to get your hands dirty Selling, selling, selling

• Fights between founders Surprisingly common

• Half-hearted effort Most common start failure!

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Chapter 3: Facing bankruptcy?

Knowing about your financial situation is most important to run a business. But in fact many entre-preneurs do not know how to read financial information and they do not understand the warning signals. Many companies do not use controlling instruments or even a proper accounting In this chapter we are going to present the key indicators you should check regularly and also provide you with the knowledge you need to stress-test your company in order to see how high the risk of bankruptcy is.

Financial distress• A situation where a firm’s operating cash flows are not sufficient to satisfy current obligations

and the firm is forced to take corrective action.• Financial distress may lead a firm to default on a contract, and it may involve financial restruc-

turing between the firm, its creditors, and its equity investors.• Usually the firm is forced to take actions that it would not have taken if it had sufficient cash

flow.

To prevent financial distress, you need to understand the early warning signals. And this is only possible if your accounting or controlling provides you with some important data. This data of course needs to be correct - but this should be clear anyway.

Those are the indicators and ratios every company should know at any time. Not only with regard to financial distress - you also need to know those numbers to take the right strategic decisions when your company is growing.

Figure 7: Important indicators and ratios

To predict financial distress, you actually have to analyse different financial risk levels. Financial distress (and the likelihood of bankruptcy) can have many different causes. Therefore you should regularly check for potential financial hazards coming from the following financial risks levels:

Category! Financial ratios! Definition!

Profitability! Profit Margin ! Net Profit or Loss / Turnover *100!

Return on Assets ! Net Profit or Loss / Total Assets *100!

Return on Equity ! Net Profit or Loss / Equity *100!

Profit per employee ! Net Profit or Loss / number of employees!

Operating Revenue per employee ! Operating revenue / number of employees!

Solvency! Current ratio ! Current assets / Current liabilities!

Debts on Equity ! Total Debts / Equity *100!

Debts on Total Assets ! Total Debts / Total Assets *100!

Asset utilization! Working capital per employee ! Working capital / number of employees!

Total Assets per employee ! Total Assets / number employees!

Growth ability! Growth rate on net profit ! (Net P/ L1 - Net P/L0) / Net P/L0 !

Growth rate on total assets ! (Total Assets1 – Total Assets0) / Total Assets0 !

Turnover growth ! (Turnover1- Turnover0) / Turnover0 !

Size! Company size ! ln (Total Assets)!


• Financial flexibility• Short-term liquidity risk• Long-term solvency risk• Credit risk• Bankruptcy risk• Market equity risk

You should also be aware that your (financial) business partners (esp. banks) do the same checks on your company. And in fact they should not know more about your company than you do.

Analysing Financial flexibilityFinancial flexibility is the ability of a company to use debt financing to strategically take advan-tage of investment opportunities that arise or to respond to unforeseen expenditures that surface in the normal course of business. In simple words, financial flexibility is the ability to access debt capital in short terms. The higher the levels of debt and the borrowing rates are. and the lower the profitability, cash flows and credit lines are, the lower is the financial flexibility. In addition to the access to capital, the concept of “spread” is important to understand. Spread reflects the difference between the rate of return on the operating assets and the borrowing rate on financial obligations. Larger spread means that a company can obtain capital at a borrowing rate and deploy that capital into operating assets that generate a rate of return that covers the borrowing costs. A large spread indicates that a company enjoys a high level of financial flexibili-ty.

• Financial leverage can enhance the return to common shareholders• provides insight about the degree of benefit derived from using leverage• Higher leverage generally suggests greater financial risk• Risk is primarily attributable to the costs of borrowings

Figure 8: Analysing financial flexibility

Analysing short-term liquidity risksShort-term liquidity represents the ability to satisfy payment obligations to suppliers. employees, and creditors for short-term borrowings. To analyse short-term liquidity risks you need to know the cash flow and operating systems of a company. In simple words: If you are able to delay all cash outflows to suppliers and employees, and others and at the same time receive more cash than you must pay to those by your customers it is unlikely that you encounter short-term liquidity problems.

ROCE (Return on Capital Employed) = Operating Return on Assets (ROA) + (Leverage x Spread)

Where:

Operating ROA = Net Operating Profit After TaxesAverage Net Operating Assets

Leverage =1+ Total LiabilitiesCommon Equity

Spread = Operating ROA-Net Borrowing RateAverage Financing Obligations

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• Measures a firm’s ability to generate sufficient cash to supply operating working capital needs and to service debts

• Short-term liquidity problems can arise from the following:• Untimed cash inflows and outflows• High Degree of long-term leverage

• Financial ratios: • Current ratio: It indicates the amount of cash available and other current assets of the firm,

relative to obligations coming due.• Quick ratio:

• Also called Acid Test Ratio• Includes only those assets the firm could convert quickly into the cash (Cash, Marketa-

ble securities & Receivables)• Operating cash flow to current liabilities: Indicates the amount of cash from operations

after funding working capital needs.• Working capital activity ratios: Rate of activity measures used to study cash-generating

ability of operations and short-term liquidity risk of a firm are:• Accounts Receivable Turnover• Inventory Turnover• Accounts Payable Turnover

• Revenues to cash ratio: • Reflects the net effect of operating, investing, and financing activities on cash and

management’s judgments about the desired level of cash• Lenders prefer a smaller revenue to cash ratio and large number of days revenue

available as cash on hand• Days revenue held in cash:

• It measures the number of days sales the firm has on hand as available cash• It will be useful for forecasting financial statements

Figure 9: Analysing short-term liquidity risks

Analysing long-term liquidity risksExamines a firm’s ability to make interest and principal payments on long-term debt and similar obligations. Three measures used to examining long-term solvency risk are:• Debt ratios• Interest coverage ratio• Operating cash flow to total liabilities ratio

Debt Ratios are used to measure the amount of liabilities, particularly long-term debt in a firm’s capital structure. The higher this proportion, the greater the long-term solvency riskIt is the alternative computation of leveraged used in ROCE.

Quick Ratio = Cash and Cash Equivalents + Short-Term Investments + Accountrs ReceivableCurrent Liabilities


Figure 10: Commonly used measures for debt ratios

Analysing credit risksLenders need to analyse the likelihood that the firm will pay periodic interest and repay the princi-pal amount. Has a firm borrowed in past and has it successfully repaid it? Poor credit history can doom a firm to failure. Lenders prefer that the firm generates sufficient cash flows to pay interest and repay principal on a loan rather than selling the collateral.

Lenders may use following checklist as factors:• Circumstances leading to need for loan• Credit History• Cash flows• Cash flows• Collateral• Capacity for debt• Contingencies• Character of Management• Communication• Conditions or covenants

InsolvencyInsolvency is the state of being unable to pay the money owed. There are two different forms of insolvency:

• Cash-flow insolvency: A company has enough assets to pay what is owed - but the assets are in the wrong form to pay debts.

• Balance-sheet insolvency: Assets are not high enough to pay debts. The company might en-ter bankruptcy.

Equity rs’Shareholde TotalDebt Term-Long RatioEquity rs’Shareholde to Debt Term-Long

Equity rs’Shareholde Total Debt Term-LongDebt Term-Long

Ratio Capital Term-Long to Debt Term-Long

Equity rs’Shareholde TotalsLiabilitie Total RatioEquity rs’Shareholde to sLiabilitie

AssetsTotalsLiabilitie Total Ratio Assetsto sLiabilitie

=

=

=

=

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Figure 11: Insolvency

Figure 12: Cash flow shortfall causing insolvency

Financial distress does not automatically have to result in the firm’s death. You may deal deal with distress by...• Selling assets• Merging with another firm• Reducing capital spending• Issuing new securities• Negotiating with banks and other creditors• Exchanging debt for equity• Filing for bankruptcy

Firms that cannot meet their obligations have two choices: liquidation or reorganization. Liquida-tion means termination of the firm as a going concern• selling assets of the firm for salvage value• net of transactions costs are distributed to creditors in order of priority

Reorganization is the option of keeping the firm a going concern• Reorganization sometimes involves issuing new securities to replace old ones

!Assets!

!

Debt!!Equity!!

Solvent firm!

Debt!!

!Assets!

!

Equity!!

Insolvent firm!

!!

Debt!!

Contractual obligations!

Insolvency!

€!

Firm cash flow!

Cash flow

shortfall!

time!


Figure 13: Managing financial distress

Predicting financial distress and bankruptcy

Edward Altman’s Z-Score:

The Z-Score formula for predicting bankruptcy was published in 1968 by Edward Altman. The formula can be used to predict the probability that a firm will go into bankruptcy within two years. Z-Score uses multiple corporate income and balance sheet values to measure the financial health of a company.

In Tests, Altman Z-Score was found to be 72% accurate in predicting bankruptcy two years prior to the event. In a series of subsequent tests covering three different time periods over the next 31 years (up until 1999), the model was found to be approximately 80-90% accurate in predicting bankruptcy one year prior to the event.

Z-Score Bankruptcy Model for private firmsZ = 0,717T1 + 0,847T2 + 3,107T3 + 0,420T4 + 0,998T5

Component definitionsT1 = Working Capital / Total AssetsT2 = Retained Earnings / Total AssetsT3 = EBIT / Total AssetsT4 = Market Value of Equity / Total LiabilitiesT5 = Sales/ Total Assets

Zones of Discrimination for private firmsZ’ > 2.9 “Safe” Zone1.23 < Z’ < 2.9 “Grey” ZoneZ’ < 1.23 “Distress” Zone

Financial!distress!

Financial!restructuring!

No financial!restructuring!

Legal !bankruptcy!

Private!workout!

Financial!distress!

Reorganize and emerge!

Reorganize and emerge!

Merge with another firm!

Liquidation!

Financial!distress!

33

Z-Score Bankruptcy Model for non-manufacturing firmsZ = 6,56T1 + 3,26T2 + 6,72T3 + 1,05T4

Component definitionsT1 = Working Capital / Total AssetsT2 = Retained Earnings / Total AssetsT3 = EBIT / Total AssetsT4 = Market Value of Equity / Total Liabilities

Zones of Discrimination for private firmsZ > 2.6 “Safe” Zone1.1 < Z < 2.6 “Grey” ZoneZ < 1.1 “Distress” Zone


Chapter 4: Project management

Definition Project management:• The application of knowledge, skills, tools and techniques to project activities in order to

meet or exceed stakeholder needs and expectations from a project.• Project Management is the process of defining, planning,organizing, leading and

controlling the development of a project.

Basic elements of project management:• Project scope• Deliverables• Roadmaps• Roles and responsibilities• Communication procedures

Use of project management:• To focus and clarify so that it can be proceeded in a systematic, effective, and efficient way.• Identification of everything that needs to be considered and done to reach a goal (includes

what should be communicated and to whom).• To identify who will do what when.• Reduction of confusion, frustration, backtracking, and errors that can be associated with de-

veloping or introducing something new.

Figure 14: Project Framework

35

The process of project management can be separated in 5 different phases:

Phase 1: Initiation• Process in which activities are performed to asses the size, scope, and complexity of the pro-

ject and to establish procedures to support later project activities.• Depending on the project some of the following activities might be unnecessary.

Activities:• Establishment of a project initiation team• Establishment of relationships with the important stakeholders• Establishment of a project initiation plan• Establishment of management procedures• Establishment of project management environment and project workbook

Phase 2: Preparation and Planning• The Project Planning provides an overall framework for managing project costs and sched-

ules. • Project planning takes place at the beginning and at the end of each project phase (con-

trolling).• Project planning involves defining clear “activities” or “tasks” and the work needed to com-

plete each activity.

Activities:• Description of project scope, alternatives and feasibility• Dividing the project into manageable tasks• Estimating and creating a resources plan• Developing a preliminary project schedule• Developing a project communication plan• Determining project standards and procedures• Identifying and assessing project risks• Developing a statement of work• Setting a baseline project plan

Phase 3: Execution and Controlling• The plans created in the prior project phases are put to action.• If you develop a high quality project plan, it is much more likely that the project will be suc-

cessfully executed.

Activities:• Execution of baseline project plan• Monitoring of project progress against baseline plan • Monitoring of changes to baseline plan• Maintaining the project workbook• Communication of project status


Phase 4: Closure• Final phase of project management focussing on bringing the project to an successful end.• Closure is very important since a project is not complete until it is closed

and it is at closedown that projects are deemed a success or failure.• Projects can conclude with a natural or unnatural termination.• Natural termination occurs when the requirements of the project have been met and thus

the project completed and is a success.• An unnatural termination occurs when the project is stopped before natural completion.

Activities:• Closing down the project• Conducting post-project review

You can find different structures for project management procedures. Another example is the following:

1.Start-up• As you engage potential team members and stakeholders, project initiation activities

establish the scope, goals and preliminary plan.

Activities: • Document and/or confirm scope and assumptions• Confirm financing• Draft high level plan• Identify who needs to provide input into plan and resources

Possible checklists that might be helpful• Project start-up and financing

Templates that might be helpful• Project scope, GANTT Chart and resource planning• Project role descriptions

2. Define and confirm scope/requirements• Engage your financiers and business stakeholders to confirm the project scope and clarify

business requirements. It is also the time to identify the technical requirements with the appro-priate providers (if applicable).

Activities: • Confirm baseline project scope with stakeholders• Define, document and confirm business and technical requirements• Identify impact on business processes• Identify what’s not in scope

Possible checklistst hat might be helpful• Financing

Templates that might be helpful• Project scope

37

3. Develop plan and secure resources • The initial detailed project plan provides a project roadmap and is the working baseline for all

team members and stakeholders. As the project evolves, the plan may need to refined.

Activities: • Identify who needs to provide input into plan• Develop preliminary detailed plan based on scope, requirements, etc.• Identify skills needed to accomplish tasks (and plan how skills can be acquired from

external resources if needed) • Develop communication plan• Identify and secure resources• Conduct pre-kick-off meeting with important stakeholders• Conduct kick-off meeting • Conduct risk assessment with team members• Identify the criteria for stopping the project in emergency (upcoming failure)• Update detailed plan and get buy-in from team and stakeholders

Possible checklists that might be helpful - Project planning - Deliverable and quality assurance - Transition

Templates that might be helpful - Activity list - Detailed project plan - Project resource plan - Project risk assessment

4. Track, Control, Report and Review• Once you kick off the project controlling (esp. tracking, reporting, reviewing) is most important

Activities: • Implement communication plan• Hold regular team meetings to:

- share progress/status - identify/resolve issues

• Hold formal stakeholder updates• Monitor progress and report status• Monitor risks and take action as necessary• Identify and manage issues• Manage scope and track changes• Update plan as needed

Possible checklists that might be helpful• Project planning• Transition

Templates that might be helpful• Project scope change• Communication matrix• Detailed project plan• Risk assessment


• Issue log

5. Completion and Assessment• Import to ensure a smooth transition and leverage lessons learned for future projects.

Activities: • Develop a cutover plan or checklist, if applicable• Complete documentation, training, and knowledge transfer• Conduct final project review• Conduct sponsor sign-off• Transition to support/service organization or next project team• Close-out final tasks and issues• Conduct lessons learned• Celebrate success

Possible checklists that might be helpful• Transition• Project closeout

Templates that might be helpful• Issue log• Detailed project plan• Communications matrix

Successful project management is actually easy to learn and there are many different helpful tools available. Some of the most common are:

1. Work Breakdown Structure (WBS)2. GANTT Charts3. Network Diagrams

1. Work Breakdown Structure (WBS)• To successfully plan workload and available resources, work must be divided into managea-

ble tasks and then logically order them to ensure a smooth evolution between tasks.• The definition of tasks and their sequences is referred to as the WBS.• WBS is essential in planning and executing a project because it is the foundation for

developing the project schedules (e.g. GANTT chart) for identifying milestones in the schedul-ing and for managing costs.

39

Figure 15: Work Breakdown Structure - Example

3. GANTT Charts• A graphical visualization of a project that shows each task as a horizontal bar whose length is

proportional to its time for completion.• A GANTT chart is a horizontal bar chart that illustrates a project schedule.• In the GANTT chart time is displayed on the horizontal axis and the tasks activities are

arranged vertically from top to bottom, in order of their start dates.• A detailed GANTT chart for a large project might be quite complex and hard to understand.• To simplify the chart you can combine related activities into one task.

Figure 16: GANTT Chart - Example

Phase! Duration in days! Number of Resources!

1.0 Project Planning Phase!

1.1 Define the problem!

1.1.1 Meet with users! 2! 2!

1.1.2 Determine scope! 2! 2!

1.1.3 Write statement of business benefits! 1! -!

1.1.4 Define statement of system capabilities! 1! -!

1.1.5 Develop context diagram! 1! -!

1.2 Produce the project schedule!

1.2.1 Develop work breakdown schedule! 3! 2!

1.2.2 Estimate resources, durations, and predecessors! 2! 2!

1.2.3 Develop PERT chart and Gantt chart! 2! 2!

Objectives 2015 2016

A! R&D/Testing Specific Aims Jul Aug Sep Oct Nov Dec Jan Feb Mar April May June1! AIM 1: Prototype Development (e.g.) 1,1! Sub Task 1,2! Sub Task 2! AIM 2: Proof of Principle studies (e.g.) 2,1! - initial experiment A 2,2! - initial experiment B 3! AIM 3 3,1! Sub Task 3,2! Sub Task 4! AIM 4 4,1! Sub Task 4,2! Sub Task

B! IP/Commercialization Strategy 1! Goal 1: IP/Commercialization Meeting (e.g.) 2! Goal 2: Provisional patent filing (e.g.) 3! Goal 3: etc

C! Regulatory Strategy 1! Goal 1: Initial Regulatory Planning w Consultant 2! Goal 2: Pre-IDE/Kickoff Meeting w FDA 3! Goal 3: Regulatory Submission

D! Follow on Funding Plan 1! Business Plan Development 2! Apply for additional grant(s) (A, B, C) (e.g.) 3! Engage Commercial partner 4! Sub Task

Completed!

Projected!


4. Network Diagram• A graphical depiction of tasks and their inter-relationships.• The distinguishing feature of a network diagram is that the ordering of tasks is shown by

connecting with its predecessor and successor tasks.• Network Diagramming is a critical path scheduling technique used for controlling resources.

• Critical path scheduling is a scheduling technique whose order and duration of a se-quence of task activities directly affect the completion date of a project.

Figure 17: Network Diagram - Example

Chapter 5: Risk management

Definitions: Important terms terms around risk management

Risks: - Risks are potential events that have negative impacts on a certain tasks or project (e.g. safety, technical performance, cost or schedule) - Complex function of probability, consequences and vulnerability - Risks can be reduced but never eliminated

Risk Assessment: - Risk assessment and risk analysis can be defined as a set of systematic methods to: - Identify hazards - Quantify risks - Determine components, safety measures and/or human interventions important for the task - Risk analysis is teamwork - Ideally risk analysis should be done by bringing together experts with different backgrounds

41

Risk Management: - Risk Management comprises purposeful thought to the sources, magnitude, and mitigation of risk, and actions directed toward its balanced reduction - The same tools and perspectives that are used to discover, manage and reduce risks can be used to discover, manage and increase project opportunities - Risk management is a continuous and iterative decision making technique designed to improve the probability of success. It is a proactive approach that:

- Seeks or identifies risks - Assesses the likelihood of these risks - Assesses the impact of these risks - Identifies the most significant risks - Develops and chooses mitigation options to implement - Tracks progress to confirm that cumulative project risk is indeed declining - Communicates and documents the project risk status - Repeats this process throughout the project life

Not all risks are equal. Some are more likely to happen than others, or have the potential for hazardous consequences. Therefore it is important to individually analyse risks and to track their development over time.• Risks are assessed by characterizing the probability that a project will experience an unde-

sired event and the consequences, impact or severity of the undesired event, if it to occurs.• Risks can be compared on iso-curves consisting of a likelihood measure and a consequence

measure.• Since the assessment of the likelihood and consequence of a risk is both subjective and

has significant uncertainty the characterization of risk IS qualitative (low medium or high) or semi-quantitative (risk are captured on a matrix)

Figure 18: Categorization of risks by likelihood and severity of consequence

Not all risks require the same attention. It is important to analyse them in a risk assessment pro-cess, to decode whether actions need to be prepared or not.

Process of risk assessment:1. System definition2. Hazard identification3. Analysis of accident scenarios4. Estimation of accident frequencies5. Consequence analysis and modelling6. Risk estimation

Low!Risk!

Medium!Risk!

High!Risk!

Severity of Consequence!

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0,0!

1,0!


Summarizing the different risks in a matrix provides a quick visual comparison of all important risks. Figures 4.2 and 4.3 show an example of NASA how you can execute risk assessment and visualize it in a matrix.

Figure 19: Risk assessment example (NASA)

Figure 20: Risk assessment example II (NASA)

Task 5.1 Risk assessmentThink about a difficult task you are facing at the moment and summarize the related risks in the following table and visualize them in the matrix.

Probability of Occurrence!

Scale! Measure!

5! Near certain to occur (80-100%).!

4! Highly likely to occur (60-80%).!

3! Likely to occur (40-60%).!

2! Unlikely to occur (20-40%).!

1! Not likely; Improbable (0-20%).!

Impact of Consequences!Class! Technical! Schedule! Cost!

Class I!Catastrophic!

(Scale 5)!

A condition that may cause death or permanently disabling injury, facility destruction on the ground, or loss of crew, major systems, or vehicle during the mission!

launch window to be missed!

cost overrun > 50 % of planned cost!

Class II!Critical!

(Scale 4)!

A condition that may cause severe injury or occupational illness, or major property damage to facilities, systems, equipment, or flight hardware!

schedule slippage causing launch date to be missed!

cost overrun 15 % to 50 % of planned cost!

Class III!Moderate!(Scale 3)!

A condition that may cause minor injury or occupational illness, or minor property damage to facilities, systems, equipment, or flight hardware!

internal schedule slip that does not impact launch date!

cost overrun 2 % to 15 % of planned cost!

Class IV!Negligible!(Scale 2)!

A condition that could cause the need for minor first aid treatment but would not adversely affect personal safety or health; damage to facilities, equipment, or flight hardware more than normal wear and tear level!

internal schedule slip that does not impact internal development milestones!

cost overrun < 2 % of planned cost!

5!

4!

3!

2!

1!

1! 2! 3! 4! 5!

Risk Level! Risk Trend! Risk Approach!

High risk! Decreasing (Improving)! M! Mitigate!

Medium risk! Increasing (Worsening)! W! Watch!

Low risk! Unchanged! A! Accept!

New since last period! R! Research!Severity of Consequence!

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Rank & Trend!

Risk ID!

Approach! Risk Title!

1! DFRC-34! R! Landing gear door system failure!

2! DFRC-12! M! Cost growth for engine components!

3! DFRC-07! W! Quality control resources insufficient!

4! DFRC-24! A! Avionics software behind schedule!

5! DFRC-01! W! Limited flight envelope, due to technical issues!

1 1!

1 2!

1 3!

1 4!1 5!

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Rank & Trend!

Risk ID!

Approach! Risk Title!

1!

2!

3!

4!

5!

6!

7!

8!

9!

10!

11!

5!

4!

3!

2!

1!

1! 2! 3! 4! 5!Severity of Consequence!

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5.1 Methods of hazard identification

Definition hazard identification:Hazard identification is a collective term that encompasses all activities involved in identifying haz-ards and evaluating risk for projects. The evaluation takes place throughout the whole life cycle of a project or task and involves risks for the project itself but also for related stakeholders (employees, the public, or the environment). The risks are consistently controlled within a defined risk tolerance.

Hazard identification address three main risk questions to a level of detail commensurate with anal-ysis objectives, life cycle stage, available information, and resources.

The three main risk questions are:

1. Hazard – What can go wrong?2. Consequences – How bad could it be?3. Likelihood – How often might it happen?

When answering these questions, the objective is to perform only the level of analysis necessary to reach a decision, because insufficient analysis may lead to poor decisions and excessive analysis wastes resources. The following chapters show different methods to analyse potential hazards.

5.1.1 HAZOP analysisA hazard and operability study (HAZOP) is a structured and systematic examination of a planned or existing process or operation in order to identify and evaluate problems that may represent risks. HAZOP is often used in construction but can also be adopted to other purposes. HAZOP is exe-cuted in 6 main steps:

1. Project exploration Identification of inherent hazards of the project (process, facility, suitability and probable envi-ronmental impact).

2. Project definition To identify and reduce significant hazards associated with items and areas, check conformity with relevant standards and codes of practices.

3. Design and procurement To examine the design in detail for identification of deviations capable of causing operability problems or hazards.

4. Check for steps 1-3 During final stages of project completion: check if all recommended and accepted actions recorded in steps 1-3 are implemented.

5. Check for safety During finishing the project: check that all relevant safety requirements have been acknowl-edged and all installed safety systems are reliably working.

6. Check for changes in operation During normal operation, some time after finishing the project (especially if any modifications have been made): check if changes in operation has not invalidated the HAZOP report of step 1-3 by introducing new hazards.

45

The analysis itself is executed by using so called guide words. To prompt discussion, or to ensure completeness, it may also be helpful to explicitly consider appropriate parameters which apply to the design intent. Guide words are general words such as flow, temperature, pressure, compo-sition. The current standard notes that guide words should be chosen which are appropriate to the study and neither too specific (limiting ideas and discussion) nor too general (allowing loss of focus). All possible variables of a process are then “challenged” with the guide words (see figure 4.3):

Figure 21: Examples of guide words (HAZOP of a pipe and pump system)

Potential hazards are then simulated in a flow chart to develop and agree on potential strategies.

Figure 22: Example of a flow chart

Guide words!

No! Low! High! Part of! Also! Other than!

Reverse!

Proc

ess

varia

ble! Flow! No flow! Low flow! High flow! Missing

ingredience!Impurties! Wrong

material!Reverse flow!

Level! Empty! Low level! High level! Low interface!

High interface!

-! -!

Pressure! Open to atmosphere!

Low pressure!

High pressure!

.-! -! -! Vacuum!

Temperature! Freezing! Low temp.! High temp.! -! -! -! -!

Select Line!Select deviation e. g more flow !

Is more flow possible!Move on to next deviation !Is it hazardous or does it prevent efficient operation ?!

Will the operator know that there is more flow ?!What changes in plant or method will prevent the deviation or make it less likely or protect against the consequences ?!

Is the cost of the change justified ?!

Agree change (s)!Agree who is responsible for action!

Consider other causes of more flow!

What change in plant will tell him ?!Consider other change(s) or agreed to accept hazard!

Follow up to see action has been taken !


In order to quantify the effects of failures, so that priorities to reduce the probability or to mitigate the severity can be taken, an additional criticality analysis needs to be carried out.

An example formula for criticality might be: Cr = P x B x S

Cr: criticality numberP: probability of occurrence in an yearB: conditional probability that the severest consequence will occurS: severity of the severest consequence

The criticality number...• is used to rank the identified deviations in a HAZOP study• cannot be used as a risk measure • is a product of three rough estimates

Before a criticality analysis can be performed guidelines have to be developed on how to deter-mine P, B and S. There are no generally accepted criteria for criticality applicable to a system. An example for interpretation of values of P, B and S might be:

Probability (P)• very rare - less than once in 100 years• rare - between once in 10 y. and once in 100 y.• likely - between once a year and once in 10 years• frequent - more frequent than once a year

Conditional probability (B)• very low - less than once every 1000 occurrences of the cause• low - less than once every 100 occurrences of the cause• significant - less than once every 10 occurrences of the cause• high - more than once every 10 occurrences of the cause

Severity (S)• low - no or minor economical loss/small, transient environmental damage• significant - considerable economic losses/considerable transient environmental damage/

slight non-permanent injury• high - major economic loss/considerable release of hazardous material/serious temporary

injury• very high - major release of hazardous material/permanent injury or fatality

Figure 23: Criticality Numbers - values for P, B and S

Categories!

Probability!P!

Conditional Probability!B!

Severity!S!

Very rare! 1! Very low! 1! Low! 1!

Rare! 2! Low! 2! Significant! 2!

Likely! 3! Significant! 3! High! 3!

Frequent! 4! High! 4! Very high! 4!

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After defining the criticality numbers, a decision strategy needs to be developed. This helps to fasten and to objectify decision making processes. It might be necessary to formulate some addi-tional criteria (for instance: every deviation for which the severity is classified as “very high severi-ty” shall be evaluated to investigate the possibilities of reducing the undesired consequences).

Figure 24: Example for decision rules in HAZOP-Analysis

5.1.2 Index based methods

In risk management, indexes are used to quantify and rank risks and to draw decisions from those rankings.

Usage of an index for risk assessment: • Indexes can be used for risk ranking• Process units can be assigned a score or index based on

- type of substance (flammable, explosive and/or toxic properties) - type of process (pressure, temperature, chemical reactions) - quantity

• Ranking of the hazards• Focus attention on hazard analysis for the most hazardous units

Professional risk indexes are available for many topics already (e.g. for material risks) - but you might also develop your own index.

Examples of substance indexes: • Substance Hazard Index (SHI): Proposed by the Organization of Resources Counsellors

(ORC) to OSHA. Based on a ratio of the equilibrium vapour pressure (EVP) at 20 oC divided by the toxicity concentration.

• Material Hazard Index (MHI): Used by the state of California to determine threshold quantities of acutely hazardous materials for which risk management and prevention programs must be developed.

• Dow Fire and Explosion Index (F&EI): Evaluates fire and explosion hazards associated with discrete process units.

• Mond Fire and Explosion Index: Developed by ICI’s Mond Division, an extension of the Dow F&EI.

The last two indexes focus on fire and explosion hazards, e.g. Butane has a Dow Material Index of 21, and Ammonia 4.

Criticality! Judgment! Meaning!Cr < X! Acceptable! No action required!X < Cr < Y! Consider

modification!Should be mitigated within a reasonable time period unless costs demonstrably outweigh benefits!

Cr > Y! Not acceptable!

Should be mitigated as soon as possible!


5.1.3 Fault tree analysis

Definition fault tree:Graphical representation of the logical structure displaying the relationship between an undesired potential event (called “top event”) and all its probable causes.

Fault tree analysis is...• a top-down approach to failure analysis• starting with a potential undesirable event (top event)• determining all the ways in which the top event can occur• used so mitigation measures can be developed to minimize the probability of the undesired

event

Fault tree can help to...• quantify probability of top event occurrence • evaluate the architecture of a plan, strategy or system• Assess design modifications and identify areas requiring attention • Comply with qualitative and quantitative safety/reliability objectives • qualitatively illustrate failure condition classification of a top-level event• establish maintenance tasks and intervals from safety/reliability assessments

The fault tree follows a defined structure with defined symbols visualizing the different ways a top event can occur. You might add or develop own symbols according to your needs.

Figure 25: Symbols in fault tree analysis

Using this structure, you can already draw a fault tree. To make it as usable as possible, you should follow some additional guidelines:

Name! Look! Description!AND gate! To show that the output event occurs only if all the

input events occur!

OR gate! To show that the output event occurs only if one or more of the input events occurs!

Basic event! A basic event requires no further development because the appropriate limit of resolution has been reached!

Intermediate event! An intermediate event occurs because of one or more antecedent causes acting through logic gates !

Transfer! A triangle indicates that the tree is developed further at the occurrence of the corresponding transfer symbol!

Underdeveloped event! A diamond is used to define an event which is not further developed either because it is of insufficient consequence or because of insufficient information!

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Guidelines for fault trees:• be as specific as possible

- Replace abstract events by less abstract events• use classifications

- Classify an event into more elementary events• identify distinct causes for an event• couple trigger events with “no protective action”• find co-operative causes for an event• pinpoint a component failure event

Figure 26: Example of a fault tree

Task 5.2 Fault tree

Think about an upcoming, complicated task you are facing.

1. Think about 3 possible top events and write them down below. - Top event Nr. 1: - Top event Nr. 2: - Top event Nr. 3:

2. Develop a fault tree for all 3 top events on the following free pages.

and!

or!

No flow from !pipe B!

No flow from !pipe C!

or!

Pipe B not fed!

Pipe c not fed!

Pipe C blocked!

Pipe B blocked!

or!

Pump A broken!

Barrel D empty! or!

Pump A broken!

Barrel D empty!

No flow into barrel E!Top event:!


Fault tree Nr. 1:

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Fault tree Nr. 2:


Fault tree Nr. 3:

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Chapter 6: Learning from failures

Research shows that entrepreneurs have, in average and compared to regular employees, have a different mindset.

They do have to face different tasks and often have to face a different decision environment. En-trepreneurs need to effectuate, be cognitively adaptable, and they do need to learn from failure very fast. The Entrepreneurial mind-set involves the ability to rapidly sense, act, and mobilize, even under uncertain conditions.

Cognitive adaptability describes the extent to which entrepreneurs are:

• Dynamic, flexible, self-regulating and engaged in the process of generating multiple decision frameworks focused on sensing and processing changes in their environments and then act-ing on them.

It reflects an entrepreneur’s metacognitive awareness.

Achieving cognitive adaptability:

• Comprehension questions – Aids understanding of the nature of the environment before ad-dressing an entrepreneurial challenge.

• Connection tasks – Stimulates thinking about the current situation in terms of similarities and differences with situations previously faced and solved.

• Strategic tasks – Stimulates thoughts about which strategies are appropriate for solving the problem (and why) or pursuing the opportunity (and how).

• Reflection tasks – Stimulates thinking about their understanding and feelings as they progress through the entrepreneurial process.

Entrepreneurs who are able to increase cognitive adaptability have an improved ability to:• adapt to new situations• be creative• communicate one’s reasoning behind a particular response

Learning from Business Failure:Uncertainty, changing conditions, and insufficient experience can contribute to failure among entrepreneurial firms.

An entrepreneur’s motivation is not simply from personal profit but from:• Loyalty to a product• Loyalty to a market and customers• Personal growth• The need to prove oneself

Loss of a business can result in a negative emotional response from the entrepreneur. It can interfere with:

• Entrepreneur’s ability to learn from the failure• Motivation to try again


Recovery and Learning Process:Emotional recovery from failure happens when thoughts about the events surrounding, and lead-ing up to the loss of the business, no longer generate a negative emotional response. Primary descriptions of the process of recovering are:• Loss-orientation.• Restoration-orientation

• Loss-orientation:Involves working through, and processing, some aspect of the loss experience and, as a result of this process, breaking emotional bonds to the object lost. This process gradually provides the loss with meaning and eventually produces a changed point of view. Loss-orien-tation involves confrontation, which is often physically and mentally exhausting. This process is usually characterized by feelings of relief and pain that wax and wane over time.

• Restoration-orientation:Based on both avoidance and a proactiveness toward secondary sources of stress arising from a major loss. Restoration-orientation involves suppression, which requires mental effort and presents potentially adverse consequences for health. It provides an opportunity to ad-dress secondary causes of stress and may reduce emotional significance of the loss.

The dual process of oscillating between the loss-orientation and restoration-orientation enables a person to:• Obtain the benefits of each• Minimize the costs of maintaining one for too long• This dual process speeds the recovery process• Knowledge that feelings and reactions being experienced are normal• Realizing that psychological and physiological outcomes caused by the feelings of loss are

“symptoms” can reduce secondary sources of stress• There is a process of recovery to learn from failure, which offers some comfort that current

feelings of loss will eventually diminish• Recovery and learning process can be enhanced by some degree of oscillation• Recovery from loss offers an opportunity to increase one’s knowledge of entrepreneurship

As mentioned before, bad experiences and wrong learnings from recent failures can result in a fear of failure that prevents us from taking the right decisions next time.

Overcoming the fear of failure:

• Take Action• Perist• Don’t take failure personally• Do things differently• Don’t be so hard on yourself• Treat the experience as opportunity to learn• Look for possible opportunities that result from the experience• Fail forward, fast

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Chapter 7: Re-starting your business

As explored before, failing with you business is actually a common situation. To prevent failure next time, you need to analyse the causes for your recent failure. Many businesses fail because they used an one-dimansional decision process when they entered the market. Many entrepre-neurs check the market situation or even test the product with the customers - but most of them do not have a fall-back strategy or plan B if the expected success does not occur.

Figure 27: How businesses usually fail

No matter if you re-start your business with a new business idea, or want to try again with the for-mer business model, you should implement new decision making processes. The most important difference of the “failing fast” model is a fall-back strategy. It is important to test and verify many different ideas, prototypes of business models of which you choose the one that seems to have the best chances for success. At the same time you generate a plan B if the chosen strategy does not work. The plan B needs to be developed to a certain level so it can be implemented fast if your chosen strategy does not work out as expected.

Figure 28: The failing fast process

The more strategy options you have, the better are your chances for success. If your strategy works out, your fallback strategy can still be implemented as a side product e.g.

Idea Inception!

Create/evaluate alternative approaches!

Choose Alternative!

Build full product and!go to market!

Success!Failure!

Wait for potential outcomes!

Feedback too late!No resources left!

No fallback position!No useful learning!

Idea Inception!

Idea generation!rapid prototyping!

Fallback strategy!

Success!Failure!

Wait for potential outcomes!

Test and !choose!

Choose/ Re-Design/!Re-test!

Customer !Feedback!

Customer !Feedback!

Customer !Feedback!

Customer !Feedback!

Customer !Feedback!

Customer !Feedback!

Customer !Feedback!


When planning your new business, you should also try to use a different approach for business planning. The business model canvas is an innovative and comprehensive approach to business planning.

What the video about the business model canvas: http://bit.ly/1gX9WHE

The business model canvas, is a strategic management and lean startup tool which allows you to describe, design, challenge, invent, and pivot your business idea. The idea behind the canvas is that most of the businesses can be described using a template consisting of nine important fields to consider:

• Customer segmentsIt is important to realize that your chosen customer segments is under no obligation to buy your product or service. To ensure that your products are designed according to your cus-tomers needs, you first need to understand your customer and the buying environment where the buying decision takes place.

Customer segments are the community of customers (Business to customer or B2C) or busi-nesses (business to business or B2B) that you want to sell your products to. Customers can be segmented into distinct groups based on different segmentation measures such as• Psychological measures

• needs• buying behaviours• spending behaviours

• social demographic measures• age• gender• ethnicity• profession

An organization can categorize consumers into distinct groups if they have the following char-acteristics:

1. the customer groups have a particular need which justifies the creation of a product to match this need

2. the group needs a separate distribution channel to be reached3. the groups require relationships of different kinds4. there is a very clear difference in the level of profitability each group represents for the

organization5. each consumer group feels strongly enough to pay for a different version of the product or

service, tailored to their preferences

• Value propositionsTo be successful on the market it is most important to solve a customers problem in a unique way. Otherwise your customers do not have any reason to buy your product. You can solve customers problems in many different ways:

• Newness• Performance• Customization• Getting the job done just right• Design

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• Brand or status• Price• Cost reduction• Accessibility• Usability / Convenience

• ChannelsThe channels represent the medium through which you provide your products or services to your customers. There are various options for channels available, and the selection is based on either cost and / or convenience reasons.

There are two different main categories of channels available: • Company owned channels• Partner channels / distributors

You might choose one of those or provide a combination of both. The decision for the right channel should be taken from a customers point of view. Each channel has different strengths and weaknesses and you should analyse them carefully.

• Key activitiesYour key activities are the processes how you create the value propositions. To save resourc-es (time, money, personnel) you should try to limit yourself designing the processes to those activities that are really important and create value for the customers.

• Key resourcesKey resources are those resources and assets needed to handle the key processes and to produce value for your customers.

Starting your business it is important to list the resources you already have and those, that are definitely needed to start the business and run it sustainable. Find out the resources that are dispensable in order to save costs for your company.

• Key partnersIn order to create a lean business and to reduce risks you should carefully decide which processes should be handled inside your company and which processes should be done by external partners which are either cheaper or better than you are (make or buy decision)

Key partnerships are the network of suppliers and partners who complement each other in order to create the value proposition for your customers.

Partnerships can have different categories: • Strategic alliances• Joint ventures• Business relationships

You should not just look for the right partners but also make future plans how the ideal rela-tionship looks like in the future. It is important to have a good and working relationship with your partners, especially if they have direct contact to your customers.

• Customer relationshipsIn order to create sustainable relationships with your customers you need to select the kind of contact and relationship you want to have with your customers.


After deciding about the type of relationship it is important to estimate the value of a customer for your company. This is depending on the estimated revenue streams created by the indi-vidual customer. Based on the customer value you can decide about the frequency of con-tacts you have with your customers.

Types of customer relationships:1. Personal Assistance (personal interaction through the whole buying decision)2. Dedicated Personal Assistance (personal interaction through a dedicated representative)3. Self-Service (tools need to be provided that the customer can serve him or herself)4. Automated Services (customized self-service where the historical preference of the cus-

tomer is taken into account)5. Communities (customer communities where they can share experiences and come up with

common challenges and solutions)6. Co-creation (the customer can directly work on the product or service)

• Cost structureThe cost structure is depending on the chosen business model. Your business model can be either cost driven (minimizing costs to provide the best price) or value driven (maximizing cus-tomer experiences).

It is important to consider all relevant costs:

1. Fixed Costs: costs that remain the same over a period of time2. Variable Costs: as the name suggests, these costs vary according to a variance in produc-

tion3. Economies of Scale: costs decrease as production increases4. Economies of Scope: costs are decreased by investing in businesses related to the core

product.

• Revenue streamsThe revenue stream is the way how you get your customers to buy your products or services and how you actually earn money with your customer segments. Revenue can be created in many different ways:

1. Asset Sale: the company sells the right of ownership over the good to the customer2. Usage Fee: the company charges the customer for the use of its product or service3. Subscription Fee: the company charges the customer for the regular and consistent use of

its product or service4. Lending/ Leasing/ Renting: the customer pays to get exclusive access to the product for a

time-bound period5. Licensing: the company charges for the use of its intellectual property6. Brokerage Fees: companies or individuals that act as an intermediary between two parties

charge a brokerage fee for their services7. Advertising: a company charges for others to advertise their products using their mediums

When setting up revenue streams, it is important to recognize that an effective price for the product and/or service will be arrived at through the process of elimination. Different iterations of prices should be listed and evaluated.

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You can use the business canvas template developed by Business Model Generation (free down-load: http://bit.ly/1Tknvwu)

Figure 29: Business model canvas template

Additional information, literature and resources can be found on our website and our Pearltrees-Account:

www.valueoffailue.com

www.pearltrees.com/thevalueoffailure/


Notes

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Notes


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