Pikes Peak Coffee

Scenario Pikes Peak Coffee owns 32 coffee shops in three Western states. For the past three quarters, the company has failed to deliver the type of growth that stockholders are accustomed to seeing. One idea to spur growth is to add a healthy, fresh breakfast item to the menu. Thus, the innovation project Operation Feeding Frenzy was begun to determine what type of breakfast offering would outperform the competition. We ll use the company s Project Charter to demonstrate this key technique (Exhibit 10.1). 

Pikes Peak Coffee PPC) has consistently delivered double digit growth since its inception, except for the last three quarters. 

Scenario To demonstrate the basics of innovation financial management, we ll continue the Pikes Peak Coffee example from the Project Charter technique (Technique 10). The company can use this approach to determine the profitability of adding a healthy, portable breakfast offering to its menu. 

For example. Pikes Peak Coffee knows that it currently has 32 locations, and that if the innovative breakfast offering proves to be viable, it would be offered in all locations. What the company doesn t know yet is the details of the offering, the retail price, the demand, or the cost (materials, personnel, and new equipment). However, for each of these assumptions, innovation financial management encourages you to put forth an educated guess. The point is not to show what you know, but to learn as you go (Exhibit 11.2). 

Pikes Peak Coffee, for example, hopes that adding a unique, healthy breakfast offering to its menu will net them an additional 1.8 MM profit annually across their 32 locations. A reverse income statement (Exhibit 11.3) shows that to meet this goal, annual revenue from the new offering (before costs) needs to be 4.6 MM. 

After compiling the estimated operational costs, update the income statement (Exhibit 11.5) to see if your initial profit projections are still on target. For our coffee shop example, total costs will likely be less than predicted on the reverse income statement, which increases the amount of projected profit. Of course, had the pro forma operation specs predicted higher costs than the initial estimate. Pikes Peak Coffee would need to either reduce costs or increase revenue projections. 

Don t wait for the pilot or prototype phase to validate all your assumptions. Although many of Pikes Peak Coffee s assumptions will be tested during a three-month, three-store pilot of their new breakfast offering, many other key assumptions need to be tested both before and after the pilot (Exhibit 11.6). 

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