1 - 6 Barringer

1-1

Chapter 1

Introduction to

Entrepreneurship

Bruce R. Barringer

R. Duane Ireland

©2010 Prentice Hall 2-2

Chapter Objectives 1 of 2

1. Explain entrepreneurship and discuss its importance.

2. Describe corporate entrepreneurship and its use in established firms.

3. Discuss three main reasons people decide to become entrepreneurs.

4. Identify four main characteristics of successful entrepreneurs.

5. Explain five common myths regarding entrepreneurship.



6. Explain how entrepreneurial firms differ from

salary-substitute and lifestyle firms.

7. Discuss the changing demographics of

entrepreneurs.

8. Discuss the impact of entrepreneurial firms on

economies and societies.

9. Identify ways in which large firms benefit from the

presence of smaller entrepreneurial firms.

10. Explain the entrepreneurial process.


Introduction to Entrepreneurship

There is tremendous interest in entrepreneurship

around the world.

Books Amazon.com lists over 33,000 books dealing with entrepreneurship and over 60,000 focused on small business.

College Courses More and more business schools from Romania have courses dealing with entrepreneurship and small business.


Introduction to Entrepreneurship

General Entrepreneurship Monitor

One important indicator: TEA (early-stage entrepreneurial activity)

Romania:

•Low perceived opportunities or capabilities

•Fear of failure quite high

•Quite high perceived status

•Low media attention


What is Entrepreneurship?

• Academic Definitions – Entrepreneurship is the process by which individuals pursue opportunities

without regard to resources they currently control. (Stevenson & Jarillo)

– Entrepreneurship has also been described as a process that involves inputs: an opportunity; one or more proactive individuals; an organizational context; risk; innovation; and resources. It can produce the following outcomes: a new venture or enterprise; value; new products or processes; profit or personal benefit; and growth. (Peggy A. Lambing and Charles R. Kuehl)

• Venture Capitalist (Fred Wilson) – Entrepreneurship is the art of turning an idea into a business.

• Explanation of What Entrepreneurs Do – Entrepreneurs assemble and then integrate all the resources needed –the

money, the people, the business model, the strategy—needed to transform an invention or an idea into a viable business.


Corporate Entrepreneurship 1 of 2

• Corporate Entrepreneurship

– Is the conceptualization of entrepreneurship at the firm

level.

– All firms fall along a conceptual continuum that ranges

from highly conservative to highly entrepreneurial.

– The position of a firm on this continuum is referred to as its

entrepreneurial intensity.


Corporate Entrepreneurship 2 of 2

Entrepreneurial Firms Conservative Firms

• Proactive

• Innovative

• Risk taking

• Take a more “wait and see” posture

• Less innovative

• Risk adverse


Why Become an Entrepreneur?

The three primary reasons that people become

entrepreneurs and start their own firms

Desire to be their own boss

Financial rewards

Desire to pursue their

own ideas


Characteristics of Successful Entrepreneurs 1 of 3

Four Primary Characteristics



• Passion for the Business

– The number one characteristic shared by successful

entrepreneurs is a passion for the business.

– This passion typically stems from the entrepreneur’s belief that the business will positively influence people’s lives.

• Product/Customer Focus

– A second defining characteristic of successful

entrepreneurs is a product/customer focus.

– An entrepreneur’s keen focus on products and customers typically stems from the fact that most entrepreneurs are, at

heart, craftspeople.



• Tenacity Despite Failure

– Because entrepreneurs are typically trying something new,

the failure rate is naturally high.

– A defining characteristic for successful entrepreneurs’ is their ability to persevere through setbacks and failures.

• Execution Intelligence

– The ability to fashion a solid business idea into a viable

business is a key characteristic of successful entrepreneurs.


Common Myths About Entrepreneurs 1 of 5

• Myth 1: Entrepreneurs Are Born Not Made

– This myth is based on the mistaken belief that some people

are genetically predisposed to be entrepreneurs.

– The consensus of many studies is that no one is “born” to be an entrepreneur; everyone has the potential to become

one.

– Whether someone does or doesn’t become an entrepreneur, is a function of the environment, life experiences, and

personal choices.



Although no one is “born” to be an entrepreneur, there are common traits and characteristics of successful entrepreneurs

• Achievement motivated

• Alert to opportunities

• Creative

• Decisive

• Energetic

• Has a strong work ethic

• Is a moderate risk taker

• Is a networker

• Lengthy attention span

• Optimistic disposition

• Persuasive

• Promoter

• Resource assembler/leverager

• Self-confident

• Self-starter

• Tenacious

• Tolerant of ambiguity

• Visionary



• Myth 2: Entrepreneurs Are Gamblers

– Most entrepreneurs are moderate risk takers.

– The idea that entrepreneurs are gamblers originates from

two sources:

• Entrepreneurs typically have jobs that are less structured, and so

they face a more uncertain set of possibilities than people in

traditional jobs.

• Many entrepreneurs have a strong need to achieve and set

challenging goals, a behavior that is often equated with risk taking.



• Myth 3: Entrepreneurs Are Motivated Primarily by

Money.

– While it is naïve to think that entrepreneurs don’t seek financial rewards, money is rarely the reason entrepreneurs

start new firms.

– In fact, some entrepreneurs warn that the pursuit of money

can be distracting.



• Myth 4: Entrepreneurs Should Be Young and

Energetic.

– The most active age for business ownership is 35 to 45

years old.

– While it is important to be energetic, investors often cite

the strength of the entrepreneur as their most important

criteria in making investment decisions.

• What makes an entrepreneur “strong” in the eyes of an investor is experience, maturity, a solid reputation, and a track record of

success.

• These criteria favor older rather than younger entrepreneurs.


Types of Start-Up Firms


Changing Demographics of Entrepreneurs 1 of 3

Women Entrepreneurs

In Romania, recent findings

reveal that such gender

stereotype of women as main

householder is still strong.

Nevertheless the

businesswomen phenomenon is

rising continuously

Source: Mariana Dragusin

National and Regional Women

Entrepreneurs’ Networks



•almost 40% of the total active SMEs were lead by

women entrepreneurs in 2005.

•There are important regional differences as far as

the weight of their enterprises in the total: higher in

the North-West Region (42, 0%)

The South Region has the lowest weight (29%) of

enterprises run by women.



Young Entrepreneurs

• Interest among young people in entrepreneurial careers is

growing.

• college courses

•Associations to support young entrepreneurs

•Governmental initiatives


Economic Impact of Entrepreneurial Firms

• Innovation

– Is the process of creating something new, which is central

to the entrepreneurial process.

– Small firms are twice as innovative per employee as large

firms.

• Job Creation

– In the past two decades, economic activity has moved in

the direction of smaller entrepreneurial firms, which may

be due to their unique ability to innovate and focus on

specialized tasks.


Entrepreneurial Firms’ Impact on Society and Larger Firms

• Impact on Society

– The innovations of entrepreneurial firms have a dramatic

impact on society.

– Think of all the new products and services that make our

lives easier, enhance our productivity at work, improve our

health, and entertain us in new ways.

• Impact on Larger Firms

– Many entrepreneurial firms have built their entire business

models around producing products and services that help

larger firms become more efficient and effective.


The Entrepreneurial Process

The Entrepreneurial Process Consists of Four Steps

Step 1: Deciding to become an entrepreneur.

Step 2: Developing successful business ideas.

Step 3: Moving from an idea to an entrepreneurial firm.

Step 4: Managing and growing the entrepreneurial firm.


Steps in the Entrepreneurial Process 1 of 2

Step 1 Step 2

Developing Successful Business Ideas


Steps in the Entrepreneurial Process 2 of 2

Step 3 Step 4


Chapter 2

Recognizing

Opportunities and

Generating Ideas

Bruce R. Barringer

R. Duane Ireland



1. Explain why it’s important to start a new firm when its “window of opportunity” is open.

2. Explain the difference between an opportunity and

an idea.

3. Describe the three general approaches entrepreneurs

use to identify opportunities.

4. Identify the four environmental trends that are most

instrumental in creating business opportunities.

5. List the personal characteristics that make some

people better at recognizing business opportunities

than others.



6. Identify the five steps in the creative process.

7. Describe the purpose of brainstorming and its use

as an idea generator.

8. Describe how to use library and Internet research to

generate new business ideas.

9. Explain the purpose of maintaining an idea bank.

10. Describe three steps for protecting ideas from being

lost or stolen.


What is An Opportunity? 1 of 2

Opportunity Defined An opportunity is a favorable

set of circumstances that

creates a need for a new

product, service or business.


What is an Opportunity? 2 of 2

An opportunity has four essential qualities


Three Ways to Identify an Opportunity


First Approach: Observing Trends 1 of 2

• Observing Trends

– Trends create opportunities for entrepreneurs to pursue.

– The most important trends are:

• Economic forces.

• Social forces.

• Technological advances.

• Political action and regulatory change.

– It’s important to be aware of changes in these areas.


First Approach: Observing Trends 2 of 2

Environmental Trends Suggesting Business

or Product Opportunity Gaps


Trend 1: Economic Forces

Economic trends help

determine areas that are

ripe for new startups and

areas that startups should

avoid.

• Individual sectors of the

economy have a direct impact

on consumer buying patterns

(Ex. Banking industry-interests

loans)

•A week economy favors those

business that help people or

businesses save money (Ex.

Nistevo).


Trend 2: Social Forces

Social trends alter how

people and businesses

behave and set their

priorities. These trends

provide opportunities for

new businesses to

accommodate the

changes.

Examples of Social Trends

• Family and work patterns

• The increasing diversity of

the workplace.

• Increasing interest in health,

fitness, and wellness.

• Emphasis on alternative forms

of energy.

• New forms of music and other

types of entertainment.


Trend 3: Technological Advances 1 of 2

Advances in technology

frequently create business

opportunities.

They are usually

correlated with economic

and social changes.

Ex: Walkman, iPod, cell

phones

Examples of Entire Industries

that Have Been Created as the

Results of Technological

Advances

• Computer industry

• Internet

• Biotechnology

• Digital photography


Trend 3: Technological Advances 2 of 2

Once a technology is

created, products often

emerge to advance it

Or help users better use

it.

Example: H20Audio

An example is H20Audio, a

company started by four

former San Diego State

University students, that

makes waterproof housings

for the Apple iPod.


Trend 4: Political Action and Regulatory

Changes 1 of 2

Political action and

regulatory changes also

provide the basis for

opportunities.

General Example

Laws to protect the environment

have created opportunities for

entrepreneurs to start firms that

help other firms comply with

environmental laws and

regulations.


Trend 4: Political Action and Regulatory

Changes 2 of 2

Company created to help

other companies comply

with a specific law.

Specific Example

Consultancy companies

providing help to other

companies in order to

implement specific quality

management regulations (ISO,

HACCP etc.)

Or accessing European funds.


Second Approach: Solving a Problem 1 of 2

• Solving a Problem

– Sometimes identifying opportunities simply involves

noticing a problem and finding a way to solve it.

– These problems can be pinpointed through observing trends

and through more simple means, such as intuition,

serendipity, or chance.


Second Approach: Solving a Problem 2 of 2

• A problem facing the U.S. and

other countries is finding

alternatives to fossil fuels.

• A large number of

entrepreneurial firms, like

this wind farm, are being

launched to solve this problem.

©2010 Prentice Hall

Solving a Problem


Third Approach: Finding Gaps in the

Marketplace 1 of 2

• Gaps in the Marketplace – A third approach to identifying opportunities is to find a

gap in the marketplace

– A gap in the marketplace is often created when a product or service is needed by a specific group of people but doesn’t represent a large enough market to be of interest to mainstream retailers or manufacturers.


Third Approach: Finding Gaps in the

Marketplace 2 of 2

Product gaps in the

marketplace represent

potentially viable

business opportunities.

Specific Example

•Opening case

•Gabriela Man

•Gary Cavin – Curves

International


Personal Characteristics of the Entrepreneur

Characteristics that tend to make some people better at

recognizing opportunities than others

Prior Experience Cognitive Factors

Social Networks Creativity


Prior Experience

• Prior Industry Experience

– Several studies have shown that prior experience in an

industry helps an entrepreneur recognize business

opportunities.

• By working in an industry, an individual may spot a market niche

that is underserved.

• It is also possible that by working in an industry, an individual

builds a network of social contacts who provide insights that lead to

recognizing new opportunities.

• Corridor principle


Cognitive Factors

• Cognitive Factors

– Studies have shown that opportunity recognition may be an

innate skill or cognitive process.

– Some people believe that entrepreneurs have a “sixth sense” that allows them to see opportunities that others miss.

– This “sixth sense” is called entrepreneurial alertness, which is formally defined as the ability to notice things without

engaging in deliberate search.


Social Networks 1 of 3

• Social Networks – The extent and depth of an individual’s social network

affects opportunity recognition.

– People who build a substantial network of social and professional contacts will be exposed to more opportunities and ideas than people with sparse networks.

– In one survey of 65 start-ups, half the founders reported that they got their business idea through social contacts.

• Strong Tie Vs. Weak Tie Relationships – All of us have relationships with other people that are

called “ties.” (See next slide.)



• Nature of Strong-Tie Vs. Weak Tie Relationships

– Strong-tie relationship are characterized by frequent

interaction and form between coworkers, friends, and

spouses.

– Weak-tie relationships are characterized by infrequent

interaction and form between casual acquaintances.

• Result

– It is more likely that an entrepreneur will get new business

ideas through weak-tie rather than strong-tie relationships.

(See next slide.)



Strong-Tie Relationships Weak-Tie Relationships

These relationships, which

typically form between like

minded individuals, tend to

reinforce insights and ideas

that people already have.

These relationships, which

form between casual

acquaintances, are not as

apt to be between like-

minded individuals, so one

person may say something

to another that sparks a

completely new idea.

Why weak-tie relationships lead to more new business ideas

than strong-tie relationships


Creativity 1 of 2

• Creativity

– Creativity is the process of generating a novel or useful

idea.

– Opportunity recognition may be, at least in part, a creative

process.


Full View of the Opportunity Recognition

Process

Depicts the connection between an awareness of emerging trends and the personal characteristics of the entrepreneur


Techniques For Generating Ideas

Brainstorming Focus Groups

Library and

Internet Research


Brainstorming

• Brainstorming

– Is a technique used to generate a large number of ideas and

solutions to problems quickly.

– A brainstorming “session” typically involves a group of people, and should be targeted to a specific topic.

– Rules for a brainstorming session:

• No criticism.

• Freewheeling is encouraged.

• The session should move quickly.

• Leap-frogging is encouraged.


Focus Groups

• Focus Group

– A focus group is a gathering of five to ten people, who

have been selected based on their common characteristics

relative to the issues being discussed.

– These groups are led by a trained moderator, who uses the

internal dynamics of the group environment to gain insight

into why people feel they way they do about a particular

issue.

– Although focus groups are used for a variety of purposes,

they can be used to help generate new business ideas.


Library and Internet Research 1 of 3

• Library Research

– Libraries are an often underutilized source of information

for generating new business ideas.

– The best approach is to talk to a reference librarian, who

can point out useful resources, such as industry-specific

magazines, trade journals, and industry reports.

– Simply browsing through several issues of a trade journal

or an industry report on a topic can spark new ideas.


Libraries and Internet Research 2 of 3

Large public and

university libraries

typically have access to

search engines and

industry reports that would

cost thousands of dollars

to access on your own.

Examples of Useful Search

Engines and Industry Reports

• Lexis-Nexis Academic

• ProQuest

• IBISWorld

• Mintel

• Standard & Poor’s Net Advantage


Library and Internet Research 3 of 3

• Internet Research

– If you are starting from scratch, simply typing “new business ideas” into a search engine will produce links to newspapers and magazine articles about the “hottest” new business ideas.

– If you have a specific topic in mind, setting up Google or

Yahoo! e-mail alerts will provide you to links to a constant

stream of newspaper articles, blog posts, and news releases

about the topic.

– Targeted searches are also useful.


Other Techniques

• Customer Advisory Boards

– Some companies set up customer advisory boards that meet

regularly to discuss needs, wants, and problems that may

lead to new ideas.

• Day-In-The-Life Research

– A type of anthropological research, where the employees of

a company spend a day with a customer.


Chapter 3

Feasibility Analysis

Bruce R. Barringer

R. Duane Ireland



1. Explain what a feasibility analysis is and why it’s important.

2. Discuss the proper time to complete a feasibility

analysis when developing an entrepreneurial venture.

3. Describe the purpose of a product/service feasibility

analysis and the two primary issues that a proposed

business should consider in this area.

4. Explain a concept statement and its components.

5. Describe the purpose of a buying intentions survey

and how it’s administered.



6. Explain the importance of library, Internet, and

gumshoe research.

7. Describe the purpose of industry/market feasibility

analysis and the two primary issues to consider in

this area.

8. Discuss the characteristics of an attractive industry.

9. Describe the purpose of organizational feasibility

analysis and list the two primary issues to consider

in this area.



10. Explain the importance of financial feasibility

analysis and list the most critical issues to consider

in this area.


What Is Feasibility Analysis?


• Feasibility analysis is the

process of determining whether

a business idea is viable.

• It is the preliminary evaluation

of a business idea, conducted

for the purpose of determining

whether the idea is worth

pursuing.


When To Conduct a Feasibility Analysis

• Timing of Feasibility Analysis

– The proper time to conduct a feasibility analysis is early in

thinking through the prospects for a new business.

– The thought is to screen ideas before a lot of resources are

spent on them

– Primary research and secondary research

– Ex: Jim Clark (Silicon Graphics and Netscape).


• The reason so few companies are a success in that most people do not have a lot of common sense about what will sell and what won’t. You need to be very pragmatic about whether people will pay for a product based on your great idea. “This should be great and I am sure the world will beat a path to my door. “ Once you have an idea for a product or service, you need to test the market. Talk to potential customers about what they want. And don’t try to make the product do everything for everyone. Engineers often make mistakes. It’s the Swiss Army knife mentality. They want to put everything in. Don’t. Go out and talk to customers as quickly as you can and put a copy of the product in front of them to get their feedback. When we went out to sell our first product at Silicon Graphics people came back and said. “We don’t want to do this”. We (after making adjustments) sold them what they wanted.

» JIM CLARK

3-67



Role of feasibility analysis in developing business ideas.


Forms of Feasibility Analysis

Product/Service Feasibility

Organizational Feasibility

Industry/Target Market

Feasibility

Financial Feasibility


Outline for a Comprehensive Feasibility

Analysis


Product/Service Feasibility Analysis 1 of 2

Product/Service


Purpose

• Is an assessment of the overall

appeal of the product or service

being proposed.

• Before a prospective firm rushes

a new product or service into

development, it should be sure

that the product or service is what

prospective customers want.


Product/Service Feasibility Analysis 2 of 2

Components of product/service

feasibility analysis

Product/Service

Desirability

Product/Service

Demand


Product/Service Desirability 1 of 3

• Does it make sense? Is it reasonable? Is it something consumers

will get excited about?

• Does it take advantage of an environmental trend, solve a

problem, or take advantage of a gap in the marketplace?

• Is this a good time to introduce the product or service to the

market?

• Are there any fatal flaws in the product or service’s basic design

or concept?

First, ask the following questions to determine the basic

appeal of the product or service.



• Second, Administer a Concept Test

– A concept statement should be developed.

– A concept statement is a one page description of a business,

that is distributed to people who are asked to provide

feedback on the potential of the business idea.

– The feedback will hopefully provide the entrepreneur

• A sense of the viability or the product or service idea.

• Suggestions for how the idea can be strengthened or “tweaked” before proceeding further.



New Venture

Fitness Drink’s Concept Statement


Product/Service Demand 1 of 6

• Product/Service Demand

– Their are two steps to assessing product/service demand.

– Step 1: Administer a Buying Intentions Survey

– Step 2: Conduct library, Internet, and Gumshoe research


• Buying Intentions Survey

– Is an instrument that is used to gauge customer interest in a

product or service.

– It consists of a concept statement or a similar description of

a product or survey with a short survey attached to gauge

customer interest.

– Internet sites like SurveyMonkey make administering a

buying intentions survey easy and affordable.




• Library, Internet, and Gumshoe Research

– The second way to assess the demand for a product or

service is by conducting library, Internet, and gumshoe

research.

– Reference librarians can often point you towards resources

to help you investigate a business idea, such as industry-

specific trade journal and industry reports.

– Internet searches can often yield important information

about the potentially viability of a product or service idea.



Gumshoe Research

Explanation

• A gumshoe is a detective or an

investigator that scrounges around

for information or clues wherever

they can be found.

• Be a gumshoe. Ask people

what they think about your product

or service idea. If your idea is to

sell educational toys, spend a week

volunteering at a day care center

and watch how children interact

with toys.



• One of the most effective

things an entrepreneur

can do to conduct a

thorough product/service

feasibility analysis is to

hit the streets and talk to

potential customers.

• This potential entrepreneur

is administering a survey

about a new product idea.


Industry/Target Market Feasibility Analysis 1 of 2

Industry/Target Market


Purpose

• Is an assessment of the overall

appeal of the industry and the

target market for the proposed

business.

• An industry is a group of firms

producing a similar product or

service.

• A firm’s target market is the limited portion of the industry it

plans to go after.


Industry/Target Market Feasibility Analysis 2 of 2

Components of industry/target market


Industry Attractiveness Target Market

Attractiveness


Industry Attractiveness 1 of 2

• Industry Attractiveness

– Industries vary in terms of their overall attractiveness.

– In general, the most attractive industries have the

characteristics depicted on the next slide.

– Particularly important—the degree to which environmental

and business trends are moving in favor rather than against

the industry .


Industry Attractiveness 2 of 2


Target Market Attractiveness

• Target Market Attractiveness

– The challenge in identifying an attractive target market is to

find a market that’s large enough for the proposed business but is yet small enough to avoid attracting larger

competitors.

– Assessing the attractiveness of a target market is tougher

than an entire industry.

– Often, considerably ingenuity must be employed to finding

information to assess the attractiveness of a specific target

market.


Organizational Feasibility Analysis 1 of 2

Organizational Feasibility

Analysis

Purpose

• Is conducted to determine

whether a proposed business has

sufficient management expertise,

organizational competence, and

resources to successfully launch

a business.

• Focuses on non-financial resources.


Organizational Feasibility Analysis 2 of 2

Components of organizational


Management Prowess Resource Sufficiency


Management Prowess 1 of 2

• Management Prowess – A firm should candidly evaluate the prowess, or ability, of

its management team to satisfy itself that management has the requisite passion and expertise to launch the venture.

– Two of the most important factors in this area are: • The passion that the solo entrepreneur or the founding team has for

the business idea.

• The extent to which sole entrepreneur or the founding team understands the markets in which the firm will participate.


Management Prowess 2 of 2

• An indication of passion

is the willingness of a

new venture team to

complete a comprehensive

feasibility analysis.


Resource Sufficiency 1 of 2

• Resource Sufficiency

– This topic pertains to an assessment of whether an

entrepreneur has sufficient resources to launch the

proposed venture.

– To test resource sufficiency, a firm should list the 6 to 12

most critical nonfinancial resources that will be needed to

move the business idea forward successfully.

• If critical resources are not available in certain areas, it may be

impractical to proceed with the business idea.


Resource Sufficiency 2 of 2

Examples of nonfinancial resources that may be critical

to the successful launch of a new business

• Availability of affordable office or lab space.

• Likelihood of local and state government support of the business.

• Quality of the labor pool available.

• Proximity to key suppliers and customers.

• Willingness of high quality employees to join the firm.

• Likelihood of establishing favorable strategic partnerships.

• Proximity to similar firms for the purpose of sharing knowledge.

• Possibility of obtaining intellectual property protection in key areas.


Financial Feasibility Analysis 1 of 2

Financial Feasibility

Analysis

Purpose

• Is the final component of a

comprehensive feasibility analysis.

• A preliminary financial assessment

is sufficient.


Financial Feasibility Analysis 2 of 2

Components of financial


Total Start-Up Cash

Needed

Financial Performance of

Similar Businesses

Overall Financial

Attractiveness of the

Proposed Venture


Total Start-Up Cash Needed

• Total Start-Up Cash Needed

– The first issues refers to the the total cash needed to prepare

the business to make its first sale.

– An actual budget should be prepared that lists all the

anticipated capital purchases and operating expenses

needed to generate the first $1 in revenues.

– The point of this exercise is to determine if the proposed

venture is realistic given the total start-up cash needed.


Financial Performance of Similar

Businesses

• Financial Performance of Similar Businesses

– Estimate the proposed start-up’s financial performance by comparing it to similar, already established businesses.

– There are several ways to doing this, all of which involve a

little ethical detective work.

• First, there are many reports available, some for free and some that

require a fee, offering detailed industry trend analysis and reports

on thousands of individual firms.

• Second, simple observational research may be needed. For

example, the owners of New Venture Fitness Drinks could estimate

their sales by tracking the number of people who patronize similar

restaurants and estimating the average amount each customer

spends.


Overall Financial Attractiveness of the

Proposed Venture 1 of 2

• Overall Financial Attractiveness of the Proposed

Investment

– A number of other financial factors are associated with

promising business startups.

– In the feasibility analysis stage, the extent to which a

business opportunity is positive relative to each factor is

based on an estimate rather than actual performance.

– The table on the next slide lists the factors that pertain to

the overall attractiveness of the financial feasibility of the

business idea.


Overall Financial Attractiveness of the

Proposed Venture 2 of 2

Financial Factors Associated With Promising Business

Opportunities

• Steady and rapid growth in sales during the first 5 to 7 years in a clearly

defined market niche.

• High percentage of recurring revenue—meaning that once a firm wins a

client, the client will provide recurring sources of revenue.

• Ability to forecast income and expenses with a reasonable degree of

certainty.

• Internally generated funds to finance and sustain growth.

• Availability of an exit opportunity for investors to convert equity to cash.


First Screen

• First Screen

– Shown in Appendix 3.1, is a template for completing a

feasibility analysis.

– It’s called “First Screen” because it’s a tool that can be used in the initial pass at determining the feasibility of a

business idea.

– If a business idea cuts muster at this stage, the next step is

to complete a business plan.


Chapter 4

Writing a Business

Plan

Bruce R. Barringer

R. Duane Ireland



1. Explain the purpose of a business plan.

2. Discuss the two primary reasons for writing a

business plan.

3. Describe who reads a business plan and what

they’re looking for. 4. Explain the difference between a summary business

plan, a full business plan, and an operational

business plan.

5. Explain why the executive summary may be the

most important section of a business plan.



6. Describe a milestone and how milestones are used

in business plans.

7. Explain why its important to include separate

sections on a firm’s industry and its target market in a business plan.

8. Explain why the “Management Team and Company Structure” section of a business plan is particularly important.

9. Describe the purposes of a “sources and uses of funds” statement and an “assumptions sheet.”



10. Detail the parts of an oral presentation of a business

plan.


What Is a Business Plan?

• Business Plan – A business plan is a written narrative, typically 25 to 35

pages long, that describes what a new business plans to accomplish.

• Dual-Use Document – For most new ventures, the business plan is a dual-purpose

document used both inside and outside the firm.


Why Reads the Business Plan—And What

Are They Looking For?

There are two primary audience for a firm’s business plan

Audience What They are Looking For

A Firm’s Employees

Investors and

other external

stakeholders

A clearly written business plan helps the

employees of a firm operate in sync and move

forward in a consistent and purposeful manner.

A firm’s business plan must make the case that the firm is a good use of an investor’s funds or the

attention of others.


Guidelines for Writing a Business Plan 1 of 5

• Structure of the Business Plan

– To make the best impression a business plan should follow

a conventional structure, such as the outline for the

business plan shown in the chapter.

– Although some entrepreneurs want to demonstrate

creativity, departing from the basic structure of the

conventional business plan is usually a mistake.

– Typically, investors are busy people and want a plan where

they can easily find critical information.



• Structure of the Business Plan (continued)

– Software Packages

• There are many software packages available that employ an

interactive, menu-driven approach to assist in the writing of a

business plan.

• Some of these programs are very helpful. However, entrepreneurs

should avoid a boilerplate plan that looks as though it came from a

“canned” source.

– Sense of Excitement

• Along with facts and figures, a business plan needs to project a

sense of anticipation and excitement about the possibilities that

surround a new venture.



• Content of the Business Plan

– The business plan should give clear and concise

information on all the important aspects of the proposed

venture.

– It must be long enough to provide sufficient information

yet short enough to maintain reader interest.

– For most plans, 25 to 35 pages is sufficient.

• Types of Business Plans

– There are three types of business plans, which are shown

on the next slide.



Types of Business Plans



• Recognizing the Elements of the Plan May Change

– It’s important to recognize that the plan will usually change while written.

– New insights invariably emerge when an entrepreneur or a

team of entrepreneurs immerse themselves in writing the

plan and start getting feedback from others.


Outline of Business Plan

• Outline of Business Plan

– A suggested outline of a business plan is shown on the next

several slides.

– Most business plans do not include all the elements

introduced in the sample plan; we include them here for the

purpose of completeness.

– Each entrepreneur must decided which elements to include

in his or her plan.


Section 1: Executive Summary 1 of 2

• Executive Summary – The executive summary is a short overview of the entire

business plan

– It provides a busy reader with everything that needs to be known about the new venture’s distinctive nature.

– An executive summary shouldn’t exceed two single-space pages.


Executive Summary

Key Insights

• In many instances an investor will

ask for a copy of a firm’s executive

summary and will ask for a copy of

the entire plan only if the executive

summary is sufficiently convincing.

• The executive summary, then, is

arguably the most important

section of a business plan.

Section 1: Executive Summary 2 of 2


Section 2: Company Description 1 of 2

• Company Description – The main body of the business plan beings with a general

description of the company.

– Items to include in this section: • Company description.

• Company history.

• Mission statement.

• Products and services.

• Current status.

• Legal status and ownership.

• Key partnerships (if any).


Company Description

Key Insights

• While at first glance this section

may seem less important than the

others, it is extremely important.

• It demonstrates to your reader that

you know how to translate an idea

into a business.

Section 2: Company Description 2 of 2


Section 3: Industry Analysis 1 of 2

• Industry Analysis – This section should being by describing the industry the

business will enter in terms of its size, growth rate, and sales projections.

– Items to include in this section: • Industry size, growth rate, and sales projections.

• Industry structure.

• Nature of participants.

• Key success factors.

• Industry trends.

• Long-term prospects.


Industry Analysis

Key Insights

• Before a business selects a target

market it should have a good grasp

of its industry—including where its

promising areas are and where its

points of vulnerability are.

• The industry that a company

participates in largely defines the

playing field that a firm will

participate in.

Section 3: Industry Analysis 2 of 2


Section 4: Market Analysis 1 of 2

• Market Analysis – The market analysis breaks the industry into segments and

zeros in on the specific segment (or target market) to which the firm will try to appeal.

– Items to include in this section: • Market segmentation and target market selection.

• Buyer behavior.

• Competitor analysis.


Market Analysis

Key Insights

• Most startups do not service their

entire industry. Instead, they focus

on servicing a specific (target)

market within the industry.

• It’s important to include a section in

the market analysis that deals with

the behavior of the consumers in the

market. The more a startup knows

about the consumers in its target

market, the more it can tailor its

products or service appropriately.

Section 3: Market Analysis 2 of 2


Section 4: Marketing Plan 1 of 2

• Marketing Plan – The marketing plan focuses on how the business will

market and sell its product or service.

– Items to include in this section: • Overall marketing strategy.

• Product, price, promotions, and distribution.


Marketing Plan

Key Insights

• The best way to describe a startup’s

marketing plan is to start by

articulating its marketing strategy,

positioning, and points of

differentiation, and then talk about

how these overall aspects of the

plan will be supported by price,

promotional mix, and distribution

strategy.

Section 4: Marketing Plan 2 of 2


Section 5: Management Team and Company

Structure 1 of 2

• Management Team and Company Structure – The management team of a new venture typically consists

of the founder or founders and a handful of key management personnel.

– Items to include in this section: • Management team.

• Board of directors.

• Board of advisers.

• Company structure.


Section 5: Management Team and Company

Structure 2 of 2

Management Team and

Company Structure

Key Insights

• This is a critical section of a

business plan.

• Many investors and others who

read the business plan look first at

the executive summary and then go

directly to the management team

section to assess the strength of the

people starting the firm.


Section 6: Operations Plan 1 of 2

• Operations Plan – Outlines how your business will be run and how your

product or service will be produced.

– A useful way to illustrate how your business will be run is to describe it in terms of “back stage” (unseen to the customer) and “front stage” (seen by the customer) activities.

– Items to include in this section: • General approach to operations.

• Business location.

• Facilities and equipment.


Section 6: Operations Plan 2 of 2

Operations Plan

Key Insights

• Your have to strike a careful balance

between adequately describing this

topic and providing too much

detail.

• As a result, it is best to keep this

section short and crisp.


Section 7: Product (or Service) Design and

Development Plan 1 of 2

• Product (or Service) Design and Development Plan – If you’re developing a completely new product or service,

you need to include a section that focuses on the status of your development efforts.

– Items to include in this section: • Development status and tasks.

• Challenges and risks.

• Intellectual property.


Product (or Service)

Design and Development

Plan

Key Insights

• Many seemingly promising startups

never get off the ground because

their product development efforts

stall or turn out to be more difficult

than expected.

• Its important to convince the reader

of your plan that this won’t happen

to you.

Section 7: Product (or Service) Design and

Development Plan 2 of 2


Section 8: Financial Projections 1 of 2

• Financial Projections – The final section of a business plan presents a firm’s pro

forma (or projected) financial projections.

– Items to include in this section: • Sources and uses of funds statement.

• Assumptions sheet.

• Pro forma income statements.

• Pro forma balance sheets.

• Pro forma cash flows.

• Ratio analysis.


Section 8: Financial Projections 2 of 2

Financial Projections

Key Insights

• Having completed the earlier

sections of the plan, its easy to see

why the financial projections come

last.

• They take the plans you’ve developed and express them in

financial terms.


Presenting the Business Plan to Investors 1 of 3

• The Oral Presentation

– The first rule in making an oral presentation is to follow

directions. If you’re told you have 15 minutes, don’t talk for more than the allotted time.

– The presentation should be smooth and well-rehearsed.

– The slides should be sharp and not cluttered.

• Questions and Feedback to Expect from Investors

– The smart entrepreneur has a good idea of the questions

that will be asked, and will be prepared for those queries.



Twelve PowerPoint Slides to Include in an Investor Presentation

1. Title Slide

2. Problem

3. Solution

4. Opportunity and target market

5. Technology

6. Competition

7. Marketing and sales

8. Management team

9. Financial projections

10. Current status

11. Financing sought

12. Summary



• It’s also important to look sharp when

presenting a business

plan.

• This new venture team

is going over its

PowerPoint slides one

last time before an

investor presentation.


Chapter 5

Industry and

Competitor Analysis

Bruce R. Barringer

R. Duane Ireland



1. Explain the purpose of an industry analysis.

2. Identify the five competitive forces that determine

industry profitability.

3. Explain the role of “barriers to entry” in creating disincentives for firms to enter an industry.

4. Identify the nontraditional barriers to entry that are

especially associated with entrepreneurial firms.

5. List the four industry-related questions to ask

before pursuing the idea for a firm.



6. Identify the five primary industry types and the

opportunities they offer.

7. Explain the purpose of a competitor analysis.

8. Identify the three groups of competitors a new firm

will face.

9. Describe ways a firm can ethically obtain

information about its competitors.

10. Describe the reasons for completing a competitive

analysis grid.


What is Industry Analysis?

• Industry

– An industry is a group of firms producing a similar product

or service, such as airlines, fitness drinks, furniture, or

electronic games.

• Industry Analysis

– Is business research that focuses on the potential of an

industry.


What is Industry Analysis Important?

Industry Analysis

Importance

• Once it is determined that a new

venture is feasible in regard to the

industry and market in which it

will compete, a more in-depth

analysis is needed to learn the ins

and outs of the industry.

• The analysis helps a firm determine

if the niche market it identified

during feasibility analysis is

favorable for a new firm.


Three Key Questions

When studying an industry, an entrepreneur must answer

three questions before pursuing the idea of starting a firm.

Is the industry

accessible—in other

words, is it is realistic

place for a new

venture to enter?

Are there positions in

the industry that avoid

some of the negative

attributes of the

industry as a whole?

Does the industry

contain markets that

are ripe for innovation

or are underserved?

Question 1 Question 3 Question 2


How Industry and Firm-Level Factors

Affect Performance

• Firm Level Factors

– Include a firm’s assets, products, culture, teamwork among its employees, reputation, and other resources.

• Industry Level Factors

– Include threat of new entrants, rivalry among existing

firms, bargaining power of buyers, and related factors.

• Conclusion

– In various studies, researchers have found that from 8% to

30% of the variation in firm profitability is directly

attributable to the industry in which a firm competes.


Techniques Available to Assess Industry

Attractiveness

Study Environmental

and Business Trends

The Five Competitive

Forces Model

Assessing Industry Attractiveness


Studying Industry Trends

• Environmental Trends

– Include economic trends, social trends, technological

advances, and political and regulatory changes.

– For example, industries that sell products to seniors are

benefiting by the aging of the population.

• Business Trends

– Other trends that impact an industry.

– For example, are profit margins in the industry increasing

or falling? Is innovation accelerating or waning? Are input

costs going up or down?


The Five Competitive Forces Model 1 of 3

• Explanation of the Five Forces Model

– The five competitive forces model is a framework for

understanding the structure of an industry.

– The model is composed of the forces that determine


– They help determine the average rate of return for the firms

in an industry.



• Explanation of the Five Forces Model (continued)

– Each of the five-forces impacts the average rate of return

for the firms in an industry by applying pressure on


– Well managed firms try to position their firms in a way that

avoids or diminishes these forces—in an attempt to beat the

average rate of return of the industry.


Threat of Substitutes 1 of 3

• Threat of Substitutes

– The price that consumers are willing to pay for a product

depends in part on the availability of substitute products.

– For example, there are few if any substitutes for

prescription medicines, which is one of the reasons the

pharmaceutical industry is so profitable.

– In contrast, when close substitutes for a product exist,

industry profitability is suppressed, because consumers will

opt out if the price gets too high.



• Threat of Substitutes (continued)

– The extent to which substitutes suppress the profitability of

an industry depends on the propensity for buyers to

substitute between alternatives.

– This is why firms in an industry often offer their customers

amenities to reduce the likelihood that they will switch to a

substitute product, even in light of a price increase.



• A customer could easily get

a cup of coffee cheaper at

one of Starbuck’s competitors. • To decrease the likelihood of

this, Starbucks offers high-

quality fresh coffee, good

service, and a pleasant

atmosphere.

• Starbucks has therefore

reduced the threat of

substitutes.


Threat of New Entrants 1 of 6

• Threat of New Entrants

– If the firms in an industry are highly profitable, the industry

becomes a magnet to new entrants.

– Unless something is done to stop this, the competition in

the industry will increase, and average industry profitability

will decline.

– Firms in an industry try to keep the number of new entrants

low by erecting barriers to entry.

• A barrier to entry is a condition that creates a disincentive for a new

firm to enter an industry.



Barrier to Entry Explanation

Economies of Scale

Product

differentiation

Capital

requirements

Barriers to Entry

Industries that are characterized by large economies

of scale are difficult for new firms to enter, unless they

are willing to accept a cost disadvantage.

Industries such as the soft drink industry that are

characterized by firms with strong brands are difficult

to break into without spending heavily on advertising.

The need to invest large amounts of money to gain

entrance to an industry is another barrier to entry.




Cost advantages

independent of size

Access to distribution

channels

Government and

legal barriers

Barriers to Entry (continued)

Existing firm may have cost advantages not related to

size. For example, the existing firms in an industry

may have purchased land when it was less expensive

than it is today.

Distribution channels are often hard to crack. This is

particularly true in crowded markets, such as the

convenience store market.

Some industries, such as broadcasting, require the

granting of a license by a public authority to compete.



• Non Traditional Barriers to Entry

– It is difficult for start-ups to execute barriers to entry that

are expensive, such as economies of scale, because money

is usually tight.

– Start-ups have to rely on nontraditional barriers to entry to

discourage new entrants, such as assembling a world-class

management team that would be difficult for another

company to replicate.




Nontraditional Barriers to Entry

Strength of

management team

If a start-up puts together a world-class management

team, it may give potential rivals pause in taking on

the start-up in its chosen industry.

First-mover

advantage

If a start-up pioneers an industry or a new concept

within an industry, the name recognition the start-up

establishes may create a barrier to entry.

Passion of the

management team

and employees

If the employees of a start-up are motivated by the

unique culture of a start-up, and anticipate large

financial reward, this is a combination that cannot be

replicated by larger firms.




Nontraditional Barriers to Entry (continued)

Unique Business

Model

Inventing a new

approach to an

industry

If a start-up is able to construct a unique business

model and establish a network of relationships that

makes the business model work, this set of advantages

creates a barrier to entry.

If a start-up invents a new approach to an industry

and executes it in an exemplary fashion, these factors

create a barrier to entry for potential imitators.

Internet Domain

Name

Some Internet domain names are so “spot-on” that they give a start-up a meaningful leg up in terms of e-

commerce opportunities.


Rivalry Among Existing Firms 1 of 3

• Rivalry Among Existing Firms

– In most industries, the major determinant of industry

profitability is the level of competition among existing

firms.

– Some industries are fiercely competitive, to the point where

prices are pushed below the level of costs, and industry-

wide losses occur.

– In other industries, competition is much less intense and

price competition is subdued.



Factors that determine the intensity of the rivalry among

existing firms in an industry.

Number and

balance of

competitors

Degree of

difference

between products

The more competitors there are, the more likely it

is that one or more will try to gain customers by

cutting its price.

The degree to which products differ from one

product to another affects industry rivalry.



Factors that determine the intensity of the rivalry among existing

firms in an industry (continued)

Growth rate of an

industry

Level of fixed

costs

The competition among firms in a slow-growth

industry is stronger than among those in fast-

growth industries.

Firms that have high fixed costs must sell a higher

volume of their product to reach the break-even

point than firms with low fixed costs.


Bargaining Power of Suppliers 1 of 3

• Bargaining Power of Suppliers

– Suppliers can suppress the profitability of the industries to

which they sell by raising prices or reducing the quality of

the components they provide.

– If a supplier reduces the quality of the components it

supplies, the quality of the finished product will suffer, and

the manufacturer will eventually have to lower its price.

– If the suppliers are powerful relative to the firms in the

industry to which they sell, industry profitability can suffer.



Factors that have an impact on the ability of suppliers to

exert pressure on buyers

Supplier

concentration

Switching costs

Switching costs are the fixed costs that buyers

encounter when switching or changing from one

supplier to another. If switching costs are high, a

buyer will be less likely to switch suppliers.

When they are only a few suppliers that supply a

critical product to a large number of buyers, the

supplier has an advantage.



Factors that have an impact on the ability of suppliers to exert

pressure on buyers (continued)

Attractiveness of

substitutes

Threat of

forward

integration

The power of a supplier is enhanced if there is a

credible possibility that the supplier might enter

the buyer’s industry.

Supplier power is enhanced if there are no

attractive substitutes for the product or services

the supplier offers.


Bargaining Power of Buyers 1 of 3

• Bargaining Power of Buyers

– Buyers can suppress the profitability of the industries from

which they purchase by demanding price concessions or

increases in quality.

– For example, the automobile industry is dominated by a

handful of large companies that buy products from

thousands of suppliers in different industries. This allows

the automakers to suppress the profitability of the

industries from which they buy by demanding price

reductions.



Factors that have an impact on the ability of suppliers to exert

pressure on buyers

Buyer group

concentration

Buyer’s costs The greater the importance of an item is to a

buyer, the more sensitive the buyer will be to the

price it pays.

If there are only a few large buyers, and they buy

from a large number of suppliers, they can

pressure the suppliers to lower costs and thus

affect the profitability of the industries from which

they buy.



Factors that have an impact on the ability of buyers to exert

pressure on suppliers (continued)

Degree of

standardization

of supplier’s products

Threat of

backward

integration

The power of buyers is enhanced if there is a

credible threat that the buyer might enter the

supplier’s industry.

The degree to which a supplier’s product differs from its competitors affect the buyer’s

bargaining power.


First Application of the Five Forces Model 1 of 2

• First Application of the Model

– The five forces model can be used to assess the

attractiveness of an industry by determining the level of

threat to industry profitability for each of the forces.

– If a firm fills out the form shown on the next slide and

several of the threats to industry profitability are high, the

firm may want to reconsider entering the industry or think

carefully about the position it would occupy.


First Application of the Five Forced Model 2 of 2

Assessing Industry Attractiveness Using the Five Forces Model


Second Application of the Five Forces Model 1 of 2

• Second Application of the Model

– The second way a new firm can apply the five forces model

to help determine whether it should enter an industry is by

using the model to answer several key questions.

– The questions are shown in the figure on the next slide, and

help a firm project the potential success of a new venture in

a particular industry.


Second Application of the Five Forced Model 2 of 2

Using the Five Forces Model to Pose Questions to Determine the Potential Success of a New Venture in an Industry


• Emerging Industries

– Industries in which standard operating procedures have yet

to be developed.

• Opportunity: First-mover advantage.

• Fragmented Industries

– Industries that are characterized by a large number of firms

of approximately equal size.

• Opportunity: Consolidation.

Industry Types and the Opportunities

They Offer 1 of 3


• Mature Industries

– Industries that are experiencing slow or no increase in

demand.

• Opportunities: Process innovation and after-sale service innovation.

• Declining Industries

– Industries that are experiencing a reduction in demand.

• Opportunities: Leadership, establishing a niche market, and

pursuing a cost reduction strategy.


They Offer 2 of 3


• Global Industries

– Industries that are experiencing significant international

sales.

• Opportunities: Multidomestic and global strategies.


They Offer 3 of 3


Competitor Analysis

• What is a Competitor Analysis?

– A competitor analysis is a detailed analysis of a firm’s competition.

– It helps a firm understand the positions of its major

competitors and the opportunities that are available.

– A competitive analysis grid is a tool for organizing the

information a firm collects about its competitors.


Identifying Competitors

Types of Competitors New Ventures Face


Sources of Competitive Intelligence 1 of 3

• Collecting Competitive Intelligence

– To complete a competitive analysis grid, a firm must first

understand the strategies and behaviors of its competitors.

– The information that is gathered by a firm to learn about its

competitors is referred to as competitive intelligence.

– A new venture should take care that it collects competitive

intelligence in a professional and ethical manner.



Ethical ways to obtain information about competitors

• Attend conferences and trade shows.

• Purchase competitor’s products. • Study competitors’ Web sites. • Set up Google and Yahoo! e-mail alerts.

• Read industry-related books, magazines, and Web sites.

• Talk to customers about what motivated them to buy your

product as opposed to your competitor’s product.



• Many companies attend

trade shows to not only

display their products,

but to see what their

competitors are up to.

• This is a photo of the

the 2008 Consumer

Electronics Trade Show

in Las Vegas.


Completing a Competitive Analysis Grid

• Competitive Analysis Grid

– A tool for organizing the information a firm collects about

its competitors

– A competitive analysis grid can help a firm see how it

stakes up against its competitors, provide ideas for markets

to pursue, and identify its primary sources of competitive

advantage.


Competitive a Analysis Grid for Expresso

Fitness


Chapter 6

Developing an

Effective Business

Model

Bruce R. Barringer

R. Duane Ireland



1. Describe a business model.

2. Explain business model innovation.

3. Discuss the importance of having a clearly

articulated business model.

4. Discuss the concept of the value chain.

5. Identify a business model’s two potential fatal flaws.



6. Identify a business model’s four major components. 7. Explain the meaning of the term business concept

blind spot.

8. Define the term core competency and describe its

importance.

9. Explain the concept of supply chain management.

10. Explain the concept of fulfillment and support.


What is a Business Model?

• Model

– A model is a plan or diagram that’s used to make or describe something.

• Business Model

– A firm’s business model is its plan or diagram for how it competes, uses its resources, structures its relationships,

interfaces with customers, and creates value to sustain itself

on the basis of the profits it generates.

– The term “business model” is used to include all the activities that define how a firm competes in the

marketplace.


Dell’s Business Model 1 of 2

• It’s important to understand that a firm’s business model takes it beyond its own boundaries.

• Almost all firms partner with

others to make their business

models work.

• In Dell’s case, it needs the

cooperation of its suppliers,

customers, and many others to

make its business model

possible.


Dell’s Business Model 2 of 2

Dell’s Approach to Selling PCs versus Traditional Manufacturers


The Importance of Business Models

Having a clearly articulated business model is important

because it does the following:

• Serves as an ongoing extension of feasibility analysis. A business

model continually asks the question, “Does this business make

sense?”

• Focuses attention on how all the elements of a business fit

together and constitute a working whole.

• Describes why the network of participants needed to make a

business idea viable are willing to work together.

• Articulates a company’s core logic to all stakeholders, including

all employees.


Diversity of Business Models

Diversity or Variety in

Business Models

• There is no standard business

model for an industry or for

a target market within an

industry.

• However, over time, the most

successful business models

in an industry predominate.

• There are always opportunities

for business model innovation.


Business Model Innovation

Netflix is an example of

a business model

innovator.


Business model Innovators Solar Energy seems like an ideal alternative to fossil fuels. However,

the reality is that purchasing and installing a solar energy system is simply too expensive given the potential cost savings in most instances. Installing a solar energy system also requires a consumer or business to make a substantial capital outlay for future cost savings. Although there are obvious environmental benefits to consider, how would you like to pay your next five years of electric bills in advance? There’s also the issue of maintenance. Once you buy a solar energy system you own it and are responsible for upkeep and repairs. So how can solar energy be affordable alternative business model, pioneered by Sun Edison, is to make solar energy a service rather than a product. The company, which was started by Jigar Shah, a former British Petroleum executive, purchases, installs, and maintains the solar panels placed on its customers’s roofs in exchange for service contracts that provide SunEdison a steady stream of revenue to fund its operators.

6-186


Business Model Innovators In 1991, a student at the University of Helsinki named Linus Torvarlds

posted his Linux operating system on the Internet to compete with the Microsoft Windows operating system. Torvalds, a believer in free software, invited other programmers to try to improve it-for free. The only caveat is that if an individual or company downloads the source code and improved upon it, they must then make the upgraded version freely available to everyone else.

Linux quickly developed a global following among programmers and business. Many companies, like Google or Amazon.com use Linux rather than a system from Microsoft to cut their technology costs.

The problem with Linux is that even though is free, it takes some expertise to download and properly implement it. To solve this problem, Red Hat introduced an innovative business model to complement Linux software. RedHat didn’t sell Linux, that is not allowed. But it started supporting and customizing Linux for clients and developed applications to make Linux run smoother.

6-187


How Business Models Emerge 1 of 3

• The Value Chain

– The value chain is the string of activities that moves a

product from the raw material stage, through

manufacturing and distribution, and ultimately to the end

user.

– By studying a product’s or service’s value chain, an organization can identify ways to create additional value

and assess whether it has the means to do so.

– Value chain analysis is also helpful in identifying

opportunities for new businesses and in understanding how

business models emerge.



The Value Chain



• The Value Chain (continued)

– Entrepreneurs look at the value chain of a product or a

service to pinpoint where the value chain can be made more

effective or to spot where additional “value” can be added. – This type of analysis may focus on:

• A single primary activity such as marketing and sales.

• The interface between one stage of the value chain and another,

such as the interface between operations and outgoing logistics.

• One of the support activities, such as human resource management.


Potential Fatal Flaws in Business Models

• Fatal Flaws

– Two fatal flaws can render a business model untenable

from the beginning:

• A complete misread of the customer.

• Utterly unsound economics.

Pets.com sported an unsound

business model, and failed.


Components of a Business Model

Four Components of a Business Model


Core Strategy 1 of 3

• Core Strategy

– The first component of a business model is the core

strategy, which describes how a firm competes relative to

its competitors.

• Primary Elements of Core Strategy

– Mission statement.

– Product/market scope.

– Basis for differentiation.



Primary Elements of Core Strategy

Mission

Statement

Product/Market

Scope

A company’s product/market scope defines the products and markets on which it will

concentrate.

A firm’s mission, or mission statement, describes why it exists and what its business

model is suppose to accomplish.



Primary Elements of Core Strategy

Basis of

Differentiation

It is important that a new venture

differentiate itself from its competitors in

some way that is important to its customers.

If a new firm’s products or services aren’t different from those of its competitors, why

should anyone try them?


Strategic Resources 1 of 3

• Strategic Resources

– A firm is not able to implement a strategy without

resources, so the resources a firm has affects its business

model substantially.

• For a new venture, its strategic resources may initially be limited to

the competencies of its founders, the opportunity they have

identified, and the unique way they plan to serve their market.

– The two most important strategic resources are:

• A firm’s core competencies. • Strategic assets.



Primary Elements of Strategic Resources

Core

Competencies

Strategic

Assets

A core competency is a resource or capability that

serves as a source of a firm’s competitive advantage. Examples include Sony’s competence in

miniaturization and Dell’s competence in supply chain management.

Strategic assets are anything rare and valuable that a

firm owns. They include plant and equipment,

location, brands, patents, customer data, a highly

qualified staff, and distinctive partnerships.



• Importance of Strategic Resources

– New ventures ultimately try to combine their core

competencies and strategic assets to create a sustainable

competitive advantage.

– This factor is one that investors pay close attention when

evaluating a business.

– A sustainable competitive advantage is achieved by

implementing a value-creating strategy that is unique and

not easy to imitate.

– This type of advantage is achievable when a firm has

strategic resources and the ability to use them.


Partnership Network 1 of 2

• Partnership Network

– A firm’s partnership network is the third component of a business model. New ventures, in particular, typically do

not have the resources to perform key roles.

– In most cases, a business does not want to do everything

itself because the majority of tasks needed to build a

product or deliver a service are not core to a company’s competitive advantage.

– A firm’s partnership network includes: • Suppliers.

• Other key relationships.


Partnership Network 2 of 2

Primary Elements of Partnership Network

Suppliers

Other Key

Relationships

A supplier is a company that provides parts or

services to another company. Intel is Dell’s primary suppler for computer chips, for example.

Firms partner with other companies to make their

business models work. An entrepreneur’s ability to launch a firm that achieves a competitive

advantage may hinge as much on the skills of the

partners as on the skills within the firm itself.


Customer Interface 1 of 3

• Customer Interface

– The way a firm interacts with its customer hinges on how it

chooses to compete.

• For example, Amazon.com sells books over the Internet while

Barnes & Noble sells through its traditional bookstores and online.

– The three elements of a company’s customer interface are: • Target customer.

• Fulfillment and support.

• Pricing model.



Primary Elements of Customer Interface

Target

Market

Fulfillment

and Support

A firm’s target market is the limited group of individuals or businesses that it goes after or tries to

appeal to.

Fulfillment and support describes the way a firm’s product or service reaches it customers. It also refers

to the channels a company uses and what level of

customer support it provides.



Primary Elements of Customer Interface

Pricing

Structure

The third element of a company’s customer interface is its pricing structure. Pricing models

vary, depending on a firm’s target market and its pricing philosophy.


Recap: The Importance of Business Models

• Business Models

– It is very useful for a new venture to look at itself in a

holistic manner and understand that it must construct an

effective “business model” to be successful. – Everyone that does business with a firm, from its customers

to its partners, does so on a voluntary basis. As a result, a

firm must motivate its customers and its partners to play

along.

– Close attention to each of the primary elements of a firm’s business model is essential for a new venture’s success.

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