Teena Tech Investment in the U.A.E: An Opportunity Analysis
Introducing a disruptive innovation into a new or existing market requires serious consideration of various factors. Teena Tech will face several challenges, including financial challenges. The company will have to seek funding from various sources, including family and friends and angel investors to initiate its operations in the U.A.E. The business environment in the U.A.E is quite attractive for investment and in case Teena Tech can access start-up funds, the U.A.E would be the recommended as the most viable location for investment.
Task 1: Disruptive Innovation
Disruptive innovation describes a category of innovations that result in changes in both the market and the value given to the customers. Disruptive innovation is characterized by various features, such as creating new markets and new value networks that interfere with the existing markets and value networks. Determining whether an innovation is disruptive requires various considerations. First, the disruption occurs as a process and not a product, and it spreads from the fringe to the mainstream market (Christensen, McDonald, Altman, and Palmer 2018). Secondly, most disruptive innovations begin from low-end or new markets with less-demanding customers. Third, new firms rarely catch up with the mainstream customers in implementing the innovation until after the adoption of new standards. Other characteristics include the potential for success and failure, depending on the level of adoption and management (Christensen et al. 2018). For most disruptive innovations to realize long-term profitability, the business model has to be significantly different from existing ones.
Based on the outlined features of disruptive innovation, Teena Tech’s innovation of a self-test kit for coronavirus is disruptive. The kit will result in the creation of new value networks, given that there is no existing technology for self-testing for coronavirus. It will also result in a new market since the impacts of coronavirus worldwide are increasing, and many stakeholders are pursuing opportunities for faster turnaround in testing and treatment. The self-test kit will result in a disruption process that would spread from the fringe (early adopters) to the mainstream market (global scale of operations). Additionally, the adoption of the innovation will most likely begin from less demanding customers, research organizations with the objective of confirming the effectiveness of the kit. Thereafter, the innovation would spread to clinical application, implying that demand will increase across healthcare organizations, pharmaceutical organizations, and even individual members of the work population. Although the kit promises to come with several benefits to the world because of the potential for demand growth, its success in the relatively new market and value market is not guaranteed.
Task 2: Innovation Life Cycle
The expectation of making as much money as possible from the started venture may only be successful in the long run because the innovation has to go through a predefined life cycle. The potential for high profitability increases as the innovation goes through the growth phase of the lifecycle and reaches an optimum level during the shakeout stage. The self-test kit for coronavirus is current in the start-up phase, and if Teena gets investors to produce the kit, the cash flow is expected to remain negative as heavy capital investments and initial operating costs will be required. As the innovation progresses to the growth phase, the cash flow will be increasing rapidly alongside the profit, and the revenue as the market shares for the product also grows exponentially (CFI no date). At this phase, the innovation is likely to reach break-even and begin being profitable.
The shakeout period will be characterized by a slowdown in the spread of this innovation and a subsequent slowdown in revenue, profits, and general cash flows. The optimum market performance of the kits is expected to occur towards the end of the shakeout stage and at the beginning of the maturity phase (CFI no date). During the maturity phase, the cash flow will be relatively stable. The last phase in the innovation life cycle is the decline phase, characterized by declining revenue, cash flows, and profits.
The innovation life cycle and the expected cash flow patterns are as shown in Figure 1. The innovation is likely to yield the greatest value if the company is sold in its growth phase. The different phases of development are, however, not discreet and will most likely overlap with investment.
Figure 1. Innovation Life Cycle
Source: (CFI no date)
Task 3: Selling the Company
The company is currently in its start-up phase. The customer demand for the self-test kits is most likely to be low at this stage due to unfamiliarity with the kit’s features and performance. Additionally, Teena Tech still has limited networks for product distribution; hence the distribution channels could be another hindrance to market performance. The kit may also require various complimentary products for profitable performance, and the lack of such complementary products may result in low profitability (Schmitz 2012). Moreover, competitive rivalry could also affect product performance in the new market. There are currently proven test-kits for coronavirus, which are being used with high success rates, and the self-test kits will be coming into a market with well-performing products.
With plans to sell the company to another one that embraces disruptive innovations, it is evident that Teena will be selling it as a start-up. The lack of technical equipment and financial capacity for significant investment in the business implies that it will most likely be worth only what the patent for the innovation represents. On the other hand, if the company can be sustained until the growth phase, a higher value can be obtained, although this will also come with significant investment during this start-up phase.
Task 4: Company Financing
Obtaining money from banks in the form of loans will be a challenge for Teena Tech at this stage. Banks typically consider several factors, including the debtor’s capacity to pay the loan, which is indicated by the debt to equity ratio. Since the company is just starting and requires a heavy capital investment, the equity may not be high enough to result in a debt to equity ratio of less than 1, especially since Teena does not have any ready funds for investment. Additionally, the banks would consider whether there is already some investment in the business. Having a heavy investment in the business is considered an indication of the probability of payment as the investor also has some financial risk in case the business sinks (Bellavitis, Filatotchev, Kamuriwo, and Vanacker 2017). Banks consider investors with significant financial risk as more likely to push the business to success compared to those with little to no personal investments in a business (Bellavitis et al. 2017). The availability of collateral is also a consideration by banks. Since the debt to equity ratio is potentially high at the start of a business and the financial risk of the investor low, the banks could opt for collateral as the only rationale for lending. All these considerations disqualify Teena Tech from the possibility of obtaining a bank loan for the company.
The company could pursue various other sources of funding instead of the banks. Some of these channels include debts from friends and family, personal savings, and angel investors (Bellavitis et al. 2017). Personal savings are the most accessible source of funding for such an investment and are also the greatest attraction of the interests of other sources of funding. Similarly, friends and family can offer debt funding at minimum costs, depending on the availability of funds and the projected potential for growth. Angel investors, on the other hand, can contribute funds in exchange for equity in the business. Such investors can be organizations or individuals who believe in the potential of the company.
Task 5: The U.A.E as a Potential Host
The U.A.E provides a supportive environment and, thus, a good location for consideration for this start-up. The government of the U.A.E has developed various initiatives to promote innovation and support innovative companies. Innovation is reported as one of the elements that constitute the nation’s pillar ‘United in Knowledge’, which is part of the drivers for Vision 2021 (UAE 2020). The pillar focuses on the use of innovation by Emiratis to build a competitive economy in the U.A.E. Various specific initiatives have been undertaken by the U.A.E government to support innovation. Currently, the government of the U.A.E has been keen on supporting both traditional manufacturing and 3-D printing (UAE 2020). As part of this initiative, the U.A.E is currently working towards ensuring that Dubai is a leading hub for 3-D printing by 2030. These attributes indicate the U.A.E’s support for innovation and its probability of embracing disruptive innovations, such as the self-test kits for coronavirus.
From the probable response to disruption in the U.A.E., the decision to set-up the company in the U.A.E is viable. Setting up in the U.A.E will enable the company to get quick recognition in the U.A.E and in the international markets. The U.A.E is an international business hub and will expose the company to international dealings. The U.A.E government’s support for innovation also implies that the company is most likely to obtain subsidies from the U.A.E government. The decision to invest in the U.A.E should be based on the business’s potential to grow in the U.A.E relative to other countries.
Task 6: Comparison of Indicators
Table 1 below shows the relative performances of the U.A.E and China in terms of different investment performance indicators, as reported by Schwab (2019). The table shows that the U.A.E reported relatively higher performances across all the indicators compared to China. This means that the U.A.E is a better target market for Teena Tech than China.
Table 1. Items to be taken into account and relative weights
| Indicators in order of importance | Relative Weights (ai) | U.A.E | China |
| 1. Intellectual property right protection | 30% (a1) | 75.8% | 58.3% |
| 2. Financing SMEs | 25% (a2) | 66.2% | 57.2% |
| 3. Number of days to start a business | 25% (a3) | 4.0 | 8.6 |
| 4. Venture capital availability | 10% (a4) | 63.9% | 57.0% |
| 5. Companies embracing disruptive ideas | 5% (a5) | 61.6% | 53.8% |
| 6. Soundness of banks | 5% (a6) | 74.3% | 58.1% |
Task 7: Index of Performance
Based on the country index of performance of China and the U.A.E., the U.A.E appears to be a better market option compared to China for the company. The overall country index of performance indicates the attractiveness of a country for doing business based on several key indicators. A comparison between the U.A.E and China shows that the U.A.E had a score of 75% while China had a score of 73.9% (Schwab 2019). This score is a function of several factors, including ICT development, macroeconomic stability, infrastructural development, financial systems, and the labor market (Schwab 2019). Thus, a higher index of performance indicates that the country is better developed in terms of all or most of the indicators, making it a suitable business environment. Table 2 below shows the performances of the two countries.
Table 2. Index of Performance: U.A.E and China
| U.A.E | China | |
| Index of performance | 75.0% | 73.9% |
Conclusion
Disruptive innovation, such as that by Teena Tech, can be a source of significant changes in the markets in which they occur. However, not all disruptive innovations succeed over the long-term, and there must be deliberate efforts to push for success through strategic decision making. For Teena Tech, the lack of funds will be the main challenge that needs to be overcome for the business to succeed. However, the company cannot obtain funds from banks; hence will have to seek alternative sources of funding, such as angel investors, friends and family, and personal savings. The business environment in the U.A.E is also potentially supportive, and the company is more likely to grow in it than in any other country.
Reference List
Bellavitis, C, Filatotchev, I, Kamuriwo, DS and Vanacker, T 2017. Entrepreneurial finance: New frontiers of research and practice. Venture Capital, vol. 19, no. 1-2, pp. 1-16. Available from: <https://www.tandfonline.com/doi/full/10.1080/13691066.2016.1259733>. [Accessed on 12 July 2020].
Christensen, CM, McDonald, R, Altman, EJ and Palmer, JE 2018. Disruptive innovation: An intellectual history and directions for future research. Journal of Management Studies, vol. 55, no. 7, pp. 1043-1078. Available from: <https://onlinelibrary.wiley.com/doi/full/10.1111/joms.12349>. [Accessed on 12 July 2020].
Corporate Finance Institute (CFI) no date. Industry life cycle: Identify the different stages of the industry life cycle. Available from: <https://corporatefinanceinstitute.com/resources/knowledge/strategy/industry-life-cycle/>. [Accessed on 12 July 2020].
Schmitz, A 2012. Creative services and products. Creative Commons. Available from: <https://2012books.lardbucket.org/books/creating-services-and-products/s06-05-independent-complement-and-sub.html>. [Accessed on 12 July 2020].
Schwab, K 2019. The global competitiveness report 2019. World Economic Forum. Available from: <http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf>. [Accessed on 12 July 2020].
UAE 2020. “9. Industry, innovation and infrastructure.” Available from: <https://u.ae/en/about-the-uae/leaving-no-one-behind/9industryinnovationandinfrastructure>. [Accessed 12 July 2020].
Pg. 3 ECON802 Case Study #2 Guidelines Summer 2020