Key point: Being the key determinant of an incubator’s effectiveness in option creation, the selection process should be properly managed.
A properly executed screening process ensures that resources are channeled only to those potential incubatees that truly need it. Hacket and Dilts state that “ideally, only those firms that are ‘weak-but-promising’ (weak due to lack of resources, but promising in the sense that they have built a compelling business case) should be considered” (2004a). Merrifield (1987) proposes to ask three basic questions during the selection process: Is this a good business to be in? Does the applicant have the competence to engage in it? And is incubation the most appropriate way to pursue it? Hamdani (2006) and Merrifield (1987) elaborate on the three questions below.
Attractiveness of business is evaluated on six factors, which cover:
- Sales and profit potential;
- Regulatory and social constraints (e.g. antitrust, environmental);
- Growth potential of the business;
- Competitive environment, including proprietary technologies and patents, rate of product and technological obsolescence, monopolies, etc.;
- Risk distribution by ensuring sufficient differentiation among selected candidates to pre-empt cannibalization among them; and finally
- The scope of opportunities offered by industry to segment the market or create new markets.
If the applicant receives a satisfactory score on business attractiveness, it is then tested for the fit, which covers the following:
- Sufficient capital to fully exploit the opportunity;
- Competence to meet the growth potential of the market;
- Sufficient marketing and distribution competence to provide market penetration within the expected product life cycle;
- Sufficient technology base to provide customer service, product improvement and diversification;
- Material availability; and
- Supportive top management.
The final question then would be: Is incubation the best route to take or would other methods of entry such as a joint venture be more appropriate?
For a backgrounder on the incubator-incubation concept and for a complete set of references, see my earlier post.