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Transcript of Keusahawanan
1-1©2006 Prentice Hall
Lecture Outline
Entrepreneurship: Successfully Launching
New Ventures, 1/eBruce R. Barringer
R. Duane Ireland
1-2©2006 Prentice Hall
Chapter 1
Entrepreneurship: Successfully Launching
New Ventures, 1/eBruce R. Barringer
R. Duane Ireland
1-3©2006 Prentice Hall
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 that people become entrepreneurs.
4. Identify four main characteristics of successful entrepreneurs.
5. Explain the five common myths regarding entrepreneurs.
1-4©2006 Prentice Hall
Chapter Objectives(2 of 2)
6. Discuss the economic impact of entrepreneurial firms.
• Discuss the impact of entrepreneurial firms on society.
• Identify ways in which large firms benefit from the presence of smaller entrepreneurial firms.
• Explain the entrepreneurial process.
1-5©2006 Prentice Hall
Introduction to Entrepreneurship
There is tremendous interest in
entrepreneurship around the world.
According to the GEM2003 study, about 300
million people, or 12.5%,of the adults in the 40
countries surveyed, areinvolved in forming
new businesses.
1-6©2006 Prentice Hall
What is Entrepreneurship?(1 of 3)
• Origin of the Word “Entrepreneur”– The word was originally used to describe people who “take
on the risk” between buyers and sellers or “undertake” a task such as starting a new venture.
– The “undertake” interpretation of the word has been central to its usage in English.
• Difference Between an Inventor(pncipta)and an Entrepreneur– An inventor creates something new.– An entrepreneur puts together all the resources needed—the
money, the people, the strategy, and the risk bearing ability to transform the invention into a viable business.
1-7©2006 Prentice Hall
What is Entrepreneurship?(2 of 3)
• Entrepreneurship Defined– Entrepreneurship is the process by which individuals
pursue opportunities without regard to the resources they currently control.
– The essence(intisari) of entrepreneurial behavior is identifying opportunities and putting useful ideas into practice.
– The set of tasks called for by this behavior can be accomplished by either an individual or a group and typically requires creativity, drive, and a willingness to take risks.
1-8©2006 Prentice Hall
What is Entrepreneurship?(3 of 3)
eBay Case
Pierre OmidyarFounder of eBay
All these qualities were exemplified by Pierre Omidyar, the founder of eBay. Omidayar saw an opportunity to create a marketplace where people could find each other online, he risked his career by quitting his job to work on eBay full time, and he worked hard to build a profitable company that delivers a creative and useful service to its customers.
1-9©2006 Prentice Hall
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 intensive.
1-10©2006 Prentice Hall
Corporate Entrepreneurship(2 of 2)
Entrepreneurial Firms Conservative(pdiriankolot) Firms
• Proactive
• Innovative
• Risk taking
• Take a more “wait and see”posture
• Less innovative
• Risk adverse
1-11©2006 Prentice Hall
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 theirown ideas
1-12©2006 Prentice Hall
Characteristics of Successful Entrepreneurs(1 of 2)
• Passion(pnuh semangat) 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.
1-13©2006 Prentice Hall
Characteristics of Successful Entrepreneurs(2 of 2)
• 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.• The ability to translate thought, creativity, and imagination into
action and measurable results is the essence of execution intelligence.
1-14©2006 Prentice Hall
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.
1-15©2006 Prentice Hall
Common Myths About Entrepreneurs(2 of 5)
Although no one is “born” to be an entrepreneur, there are common personality traits and characteristics of successful entrepreneurs.
1-16©2006 Prentice Hall
Common Myths About Entrepreneurs(3 of 5)
• Myth 2: Entrepreneurs Are Gamblers– A second myth about entrepreneurs is that they are
gamblers and take big risks. The truth is, 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.
1-17©2006 Prentice Hall
Common Myths About Entrepreneurs(4 of 5)
• 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.
1-18©2006 Prentice Hall
Common Myths About Entrepreneurs(5 of 5)
• Myth 4: Entrepreneurs Should Be Young And Energetic.– The average entrepreneur is 35 to 45 years old and has 10
or more years of experience in a large firm.– 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 often favor older rather than younger entrepreneurs.
1-19©2006 Prentice Hall
Economic Impact of Entrepreneurial Firms(1 of 2)
• Innovation– Is the process of creating something new, which is central
to the entrepreneurial process.– Small entrepreneurial firms are responsible for over two-
thirds of all innovations in the U.S.
• 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.
1-20©2006 Prentice Hall
Economic Impact of Entrepreneurial Firms(2 of 2)
• Globalization– Today, over 97% of all U.S. exporters are small businesses
with fewer than 500 employees.– Export markets are vital to the U.S. economy and provide
outlets for the sale of U.S. produced products and services.
1-21©2006 Prentice Hall
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.
1-22©2006 Prentice Hall
The Entrepreneurial Process(1 of 1)
The Entrepreneurial Process Consists of Four Steps
Step 1: Deciding(mmutuskan ) 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
2-1©2006 Prentice Hall
Chapter 2
Entrepreneurship: Successfully Launching
New Ventures, 1/eBruce R. Barringer
R. Duane Ireland
2-2©2006 Prentice Hall
Chapter Objectives(1 of 2)
1. Explain the difference between an opportunity and an idea.
2. Describe the two general approaches entrepreneurs use to identify opportunities.
3. Explain why it’s important to start a new firm when its “window of opportunity” is open.
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.
2-3©2006 Prentice Hall
Chapter Objectives(2 of 2)
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 surveys are used 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.
2-4©2006 Prentice Hall
What is an Opportunity?(1 of 2)
• Opportunity Defined– An opportunity is a favorable set of circumstances that
creates the need for a new product, service or business idea.– Most entrepreneurial firms are started in one of two ways:
• Some firms are internally stimulated. An entrepreneur decides to start a firm, searches for and recognizes an opportunity, then starts a business.
• Other firms are externally stimulated. An entrepreneur recognizes a problem or an opportunity gap and creates a business to fill it.
2-5©2006 Prentice Hall
What is an Opportunity?(2 of 2)
An opportunity has four essential qualities.
buyandhold.com – an opportunity
• Attractive
• Durable
• Timely• Anchored in a product, service,or business that adds value forits buyer or end user
2-6©2006 Prentice Hall
Difference Between an Idea and an Opportunity
• Idea– An idea is a thought, impression, or notion. It may or may
not meet the criteria of an opportunity.
• Difference Between an Idea and an Opportunity– Many businesses fail, not because the entrepreneurs that
started the businesses didn’t work hard—they fail because there was no real opportunity to begin with.
– Before getting excited about a business idea, it is crucial to understand whether the idea fills a need and meets the criteria for an opportunity.
2-7©2006 Prentice Hall
Window of Opportunity
• Window of Opportunity– The term “window of opportunity” is a metaphor
describing the time period in which a firm can realistically enter a new market.
• Once the market for a new product is established, its window of opportunity opens, and new entrants flow in.
• At some point, the market matures, and the window of opportunity (for new entrants) closes.
2-8©2006 Prentice Hall
Trend 1: Economic Forces
• Economic Forces– Economic forces affect consumers’ level of disposable
income.– When studying how economic forces affect opportunities,
it is important to evaluate who has money to spend and who is trying to cut costs.
• An increase in the number of women in the workforce and their related increase in disposable income was one of the factors that led the founders of buyandhold.com to target women.
• Many large firms are trying to cut costs. Entrepreneurs have taken advantage of this trend by starting firms that help other firms control costs.
2-9©2006 Prentice Hall
Trend 2: Social Forces(1 of 2)
• Social Forces– Changes in social trends provide openings for new
businesses on an ongoing basis.– The continual proliferation of fast-food, for example, isn’t
happening because people love fast food. It is happening because people are busy, and have disposable income.
– Similarly, the Sony Walkman was developed not because consumers wanted smaller radios but because people wanted to listen to music while on the go.
2-10©2006 Prentice Hall
Trend 2: Social Forces(2 of 2)
Examples of Social Forces That Allow For New Business Opportunities
• Family and work patterns
• The aging of the population
• The increasing diversity in the workplace
• The globalization of industry
• The increasing focus on health care and fitness
• The proliferation of computers and the Internet
• The increase in the number of cell phone users
• New forms of entertainment
2-11©2006 Prentice Hall
Trend 3: Technological Advances
• Technological Advances– Given the rapid pace of technological change, it is vital that
entrepreneurs keep on top of how new technologies affect current and future business opportunities.
– Entire industries have emerged as the result of technological advances.
• Examples include the computer industry, the Internet, biotechnology, and digital photography.
– Once a technology is created, new firms form to take the technology to a higher level.
• For example, RealNetworks was started to add audio capability to the Internet.
2-12©2006 Prentice Hall
Trend 4: Political Action and Regulatory Changes
• Political Action and Regulatory Changes– Political action and regulatory changes provide the basis
for new business opportunities.– For example, laws that protect the environment have
created opportunities for entrepreneurs to start firms that help other firms comply with environmental laws and regulations.
2-13©2006 Prentice Hall
How Are Opportunities Identified?(1 of 1)
Second Approach: Solving a Problem
Sometimes identifyingopportunities simply
involves noticing a problemand finding a way to
solve it
These problems can bepinpointed through observing
trends and through more simplemeans, such as intuition,
serendipity, or chance
Some business ideas are clearlyinitiated to solve a problem
For example, Symantec Corp. created Norton antivirus
software to guard computersagainst viruses
2-14©2006 Prentice Hall
Personal Characteristics of the Entrepreneur
Characteristics that tend to make some people better at recognizing opportunities than others
Prior Experience Social Networks
Cognitive Factors Creativity
2-15©2006 Prentice Hall
Prior Industry Experience
• Prior Industry Experience– Several studies have shown that prior experience in an
industry helps an entrepreneur recognize business opportunities. There are several explanations for this.
• By working in an industry, an individual may spot a market nichethat 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 new opportunities.
2-16©2006 Prentice Hall
Cognitive Factors
• Cognitive Factors– Studies have shown that opportunity recognition may be an
innate skill or cognitive process.– Some 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.
2-17©2006 Prentice Hall
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.)
2-18©2006 Prentice Hall
Social Networks(2 of 3)
• 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(kenalanbiasa).
• Result– It is more likely that an entrepreneur will get new business
ideas through weak-tie rather than strong-tie relationships. (See next slide.)
2-19©2006 Prentice Hall
Social Networks(3 of 3)
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
The 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
2-20©2006 Prentice Hall
Creativity(1 of 1)
• Creativity– Creativity is the process of generating a novel or useful
idea.– Opportunity recognition may be, at least in part, a creative
process.– For an individual, the creative process can be broken down
into five stages, as shown on the next slide.
2-21©2006 Prentice Hall
Techniques For Generating Ideas
Brainstorming Focus Groups
Surveys Other Techniques
2-22©2006 Prentice Hall
Brainstorming(1 of 2)
• 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
2-23©2006 Prentice Hall
Brainstorming(2 of 2)
• Brainstorming (continued)– There are two reasons brainstorming generates ideas that
might not arise(timbul) otherwise:• Because no criticism is allowed, people are more likely to offer
ideas than they would in a traditional setting.• Brainstorming sessions can generate more ideas than a traditional
meeting because brainstorming focuses on creativity rather than evaluation.
– In most meeting, one person suggests an idea, and immediately the rest of the group begins evaluating it. This happens because most people are better at criticizing ideas than they are at suggesting new ones.
2-24©2006 Prentice Hall
Focus Group
• 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.
2-25©2006 Prentice Hall
Surveys(1 of 2)
• Survey– A survey is a method of gathering information from a
sample of individuals. The sample is usually just a fraction of the population being surveyed.
• The most effective surveys sample a “random” portion of the population, meaning that the sample is not selected haphazardly or only from people who volunteer to participate.
• The quality of survey data is determined largely by the purpose of the survey and how it is conducted.
– Surveys generate new product, service, and business ideas because they ask specific questions and get specific answers.
2-26©2006 Prentice Hall
Surveys(2 of 2)
Example of a suspect survey technique
Self-Selected Opinion Poll Result
Most call-in television surveys or magazine write-in
polls are highly suspect because the participants
represent what’s called a self-selected opinion poll
Most people who take the time to participate in a self-selected
opinion poll do so because their have either strong
positive or strong negative feels about the a particular
product or topic
2-27©2006 Prentice Hall
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.
2-28©2006 Prentice Hall
Encouraging(mggalakan) New Ideas(1 of 1)
• Establishing(tubuhkan) a Focal Point for Ideas– Some firms meet the challenge of encouraging, collecting,
and evaluating ideas by designating a specific person to screen and track them—for if its everybody’s job, it may be no one’s responsibility.
– Another approach is to establish an idea bank (or vault), which is a physical or digital repository for storing ideas.
• Encouraging Creativity at the Firm Level– Creativity is the raw material that goes into innovation.
2-29©2006 Prentice Hall
Protecting Ideas From Being Lost or Stolen
• Step 1– The idea should be put in a tangible form such as entered
into a physical idea logbook or saved on a computer disk, and the date the idea was first thought of should be entered.
• Step 2– The idea should be secured. This may seem like an
obvious step, but is one that is often overlooked.• Step 2
– Avoid making an inadvertent or voluntary disclosure of an idea, in a manner that forfeits the right to claim exclusive rights to it.
3-1©2006 Prentice Hall
Chapter 3
Entrepreneurship: Successfully Launching
New Ventures, 1/eBruce R. Barringer
R. Duane Ireland
3-2©2006 Prentice Hall
Chapter Objectives(1 of 2)
1. Explain what a feasibility analysis is and why it’s important.
2. Discuss the proper time to complete a feasibility analysis when developing a business venture.
3. Explain a concept statement and its contents.4. Describe the purpose of a product/service feasibility
analysis and the two primary issues that a proposed business should consider in this area.
5. Identify three primary purposes for concept testing.
3-3©2006 Prentice Hall
Chapter Objectives(2 of 2)
6. Define the term usability testing and explain why it’s important.
7. Describe the purpose of industry/market feasibility analysis and the three primary issues to consider in this area.
8. Explain the difference between primary research and secondary research.
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 important issues to consider in this area.
3-4©2006 Prentice Hall
What Is Feasibility Analysis?
• Feasibility(kebolehlaksanaan) Analysis– Feasibility analysis is the process of determining
whether(samada) 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.
– Feasibility analysis takes the guesswork (to a certain degree) out of a business launch, and provides an entrepreneur a more secure notion that a business idea is feasible or viable.
3-5©2006 Prentice Hall
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.
• Components of a Properly(dgn btl) Conducted(dipandu) Feasibility Analysis– A properly conducted feasibility analysis includes four
separate components, as shown in Figure 3.1 on the next slide.
3-6©2006 Prentice Hall
Preparing a Concept Statement(1 of 2)
• Concept Statement– Before a company undertakes a feasibility analysis, a
concept statement should be developed.– A concept statement is a one page description of a business,
that is distributed by a startup entrepreneur to people who are asked to provide feedback on the potential of the business idea.
– The feedback will hopefully provide the entrepreneur (1) a sense of the viability of the business idea; and (2) suggestions for how the idea can be strengthened or “tweaked” before proceeding further.
3-7©2006 Prentice Hall
Preparing a Concept Statement(2 of 2)
• Information to Include– A description of the product or service being offered– The intended target market– The benefits of the product or service– A description of how the product will be positioned relative
to similar ones in the market– A description of how the product or service will be sold
and distributed– Information about the founder or founders of the firm
3-8©2006 Prentice Hall
Four Forms of Feasibility Analysis
Product/Service FeasibilityAnalysis
Organizational FeasibilityAnalysis
Industry/Market FeasibilityAnalysis
Financial FeasibilityAnalysis
3-9©2006 Prentice Hall
Product/Service Feasibility(1 of 5)
• Product/Service Feasibility Analysis– Is an assessment of the overall appeal of the product or
service being proposed.– The idea is that before a prospective firm rushes a product
or service into development, it should be confident that the product or service is what its prospective customers want.
– The two components of a product/service feasibility analysis are:
• Concept testing• Usability(yg blh dign) testing
3-10©2006 Prentice Hall
Product/Service Feasibility(2 of 5)
• Concept Testing– A concept test involves showing a representation of the
product or service to prospective users to gauge customer interest, desirability, and purchase intent.
– A concept test is different from a concept statement (discussed earlier). A concept test is limited to testing the feasibility of a specific product or service idea. A concept statement is a preliminary(pndahuluan) evaluation of an entire business idea.
3-11©2006 Prentice Hall
Product/Service Feasibility(3 of 5)
Three purposes of conducting a concept test
Purpose How it is accomplished
Validate the underlying premises of a product or
service idea
This can be accomplished via phone interviews, personal interviews, and focus groups and simply by watching
people perform relevant tasks.
Help develop an idea
A firm may show a product idea to a prospective customer, get feedback, and tweak the idea. Then, in an iterative
manner, they’ll show the idea to more potential customers, get feedback and tweak the idea some more, and so on.
Estimate the potential market share the product or service might command
Some type of buying intention question appears in almost every concept test, usually in the form of a survey
questionnaire.
3-12©2006 Prentice Hall
Product/Service Feasibility(4 of 5)
• Usability Testing– Is the method by which users of a product are asked to
perform certain tasks in order to measure the product’s ease-of-use and the user’s perception of the experience.
– Usability tests are sometimes called user tests, beta tests, or field trials, depending on the circumstances involved.
• While it is temping to rush a new product or service to market, conducting a usability test is a good investment of an entrepreneur’s or firm’s resources.
• Many products that consumers find frustrating to work with have been brought to market too quickly.
3-13©2006 Prentice Hall
Product/Service Feasibility(5 of 5)
Forms of usability testing (this is not an exhaustive list)
Form of usability test Explanation
Basic prototypeSome entrepreneurs, with limited budgets, develop a fairly basic prototype and ask friends and colleagues to use the
product, then complete an evaluation form or give feedback.
Elaborate usability test
Better funded companies have more elaborate usability tests. For example, in Intuit’s usability-testing lab participants are
asked to work with software programs that are being developed, while “loggers” record usability problems.
Hybrid testsThere are a number of “hybrid” tests, that provide a
entrepreneur a sense of a potential usability problem with a product or service. An example is Intuit’s follow-me-home
testing methodology.
3-14©2006 Prentice Hall
Industry/Market Feasibility Analysis(1 of 6)
• Industry/Market Feasibility Analysis– Is an assessment of the overall appeal of the market for the
product or service being proposed.– For industry/market feasibility analysis, there are three
primary issues that a proposed business should consider:• Industry attractiveness, market timeliness, and the identification of
a niche market.
• Industry Attractiveness– A primary determinant of a new venture’s feasibility is the
attractiveness of the industry it chooses.
3-15©2006 Prentice Hall
Industry/Market Feasibility Analysis(2 of 6)
Characteristics of attractive industries for new ventures
• Are large and growing (with growth being more important than size)
• Are important to the customer
• Are fairly young rather than older and more mature
• Have high rather than low operating margins
• Are not crowded
3-16©2006 Prentice Hall
Industry/Market Feasibility Analysis(3 of 6)
• Industry Attractiveness– Although the criteria shown on the proceeding slide is an
ideal list, the extent to which a new business’s proposed industry’s growth possibilities satisfy these criteria should be taken seriously.
– In addition to evaluating an industry’s growth potential, a new venture will want to know more about the industry it plans to enter.
– This can be accomplished through both primary and secondary research, as explained in the next slide.
3-17©2006 Prentice Hall
Industry/Market Feasibility Analysis(4 of 6)
Role of Primary and Secondary Research in Investigating Industry Attractiveness
Type of Research How it is conducted
Primary research
Secondary research
This is research that is original and is collected by the entrepreneur. In assessing the attractiveness of a new
market, this typically involves an entrepreneur talking to potential customers and key industry participants.
This is research that probes data that are already collected. Examples of where this data might come from are:
industry-related publications, government statistics, competitor’s Web sites, and industry reports from research
firms like Forrester Research.
3-18©2006 Prentice Hall
Industry/Market Feasibility Analysis(5 of 6)
Market Timeliness Considerations
Nature of product or service introduction
Improvement on something already
available in the marketplace
Breakthrough new product or service,
which should establish a new market segment
Major Considerations
• Is the window of opportunity open or closed?• Is now a good time for a new market entrant (i.e.,
are customers buying, are industry incumbentsmaking money?)
• Should we try to capture a first-mover advantage?
3-19©2006 Prentice Hall
Industry/Market Feasibility Analysis(6 of 6)
• Identification of a Niche Market– A niche market is a place within a larger market segment
that represents a narrower group of customers with similar interests.
– For a new firm, selling to a niche market makes sense for at least two reasons.
• It allows a firm to establish itself within an industry without competing against major competitors head on.
• A niche strategy allows a firm to focus on serving a specializedmarket very well instead of trying to be everything to everybody in a broad market, which is nearly impossible for a new entrant.
3-20©2006 Prentice Hall
Organizational Feasibility Analysis(1 of 4)
• Organizational Feasibility– Is concerned with determining whether the business itself
has sufficient skills and resources to bring a particular product or service idea to market successfully.
– There are two primary issues to consider in this area:• Management prowess• Resource sufficiency
3-21©2006 Prentice Hall
Organizational Feasibility Analysis(2 of 4)
• 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. – Sole entrepreneurs or founding teams with established
social and professional networks also have an advantage.
3-22©2006 Prentice Hall
Organizational Feasibility Analysis(3 of 4)
• Resource Sufficiency– This topic pertains to an assessment of whether an
entrepreneur has sufficient resources to launch the proposed venture.
– The focus here should be on nonfinancial resources in that financial feasibility is considered separately.
– 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.
3-23©2006 Prentice Hall
Organizational Feasibility Analysis(4 of 4)
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
3-24©2006 Prentice Hall
Financial Feasibility Analysis(1 of 4)
• Financial Feasibility– For feasibility analysis, a quick financial assessment is
usually sufficient. – The most important issues to consider at this stage are:
• Capital requirements• Financial rate of return• Overall attractiveness of the investment
3-25©2006 Prentice Hall
Financial Feasibility Analysis(2 of 4)
• Capital Requirements– In the feasibility analysis stage, it is important that an
entrepreneur have a sense of what the business’s initial capital requirements will be.
– The figure that is determined provides important information about the rate of return that can be anticipated from the business and about the type of financing or funding that will be needed.
3-26©2006 Prentice Hall
Financial Feasibility Analysis(3 of 4)
• Financial Rate of Return– Although the estimate may be rough, an entrepreneur
should have a sense of the rate of return that the proposed business will produce.
– This figure can be determined in part by looking at the rate of return of similar businesses, and then adjusting upward or downward depending on the unique characteristics of the proposed business.
3-27©2006 Prentice Hall
Financial Feasibility Analysis(4 of 4)
• Overall Attractiveness of the 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.
– Table 3.5 on the next slide lists the factors that pertain to the overall attractiveness of the financial feasibility of the business idea.
4-1©2006 Prentice Hall
Chapter 4
Entrepreneurship: Successfully Launching
New Ventures, 1/eBruce R. Barringer
R. Duane Ireland
4-2©2006 Prentice Hall
Chapter Objectives(1 of 2)
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.
4-3©2006 Prentice Hall
Chapter Objectives(2 of 2)
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.
4-4©2006 Prentice Hall
What is Industry Analysis?
• Industry– An industry is a group of firms producing a similar product
or service, such as airlines, fitness drinks, or electronic games.
• Industry Analysis– Is business research that focuses on the potential of an
industry.
4-5©2006 Prentice Hall
Why is Industry Analysis Important?
• Why is This Topic Important?– 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 firm plans to enter.
– This analysis helps a firm determine if the niche markets it identified during feasibility analysis are accessible and which ones represent the best point of entry for a new firm.
4-6©2006 Prentice Hall
Three Key Questions
When studying an industry, an entrepreneur must answer three questions before pursuing the idea of starting a firm.
Is the industryaccessible—in otherwords, is it a realistic
place for a new venture to enter?
Are there positions in theindustry that will avoidsome of the negative
attributes of the industry as a whole?
Does the industrycontain markets that
are ripe for innovationor are underserved?
Question 1 Question 3Question 2
4-7©2006 Prentice Hall
Industry—vs Firm—Specific Factors
• 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 profitability is directly attributable to the industry in which a firm competes.
4-8©2006 Prentice Hall
The Five Competitive Forces That Determine Industry Profitability
(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
industry profitability.– The forces—the threat of substitutes, the threat of new
entrants, rivalry among existing firms, the bargaining power of suppliers, and the bargaining power of buyers,determine the average rate of return for the firms in an industry.
4-9©2006 Prentice Hall
The Five Competitive Forces That Determine Industry Profitability
(2 of 3)
• 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 industry profitability.
– 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.
4-10©2006 Prentice Hall
The Five Competitive Forces That Determine Industry Profitability
(3 of 3)
• 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 industry profitability.
– 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.
4-11©2006 Prentice Hall
Threat of Substitutes(1 of 2)
• 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.
4-12©2006 Prentice Hall
Threat of Substitutes(2 of 2)
• 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.
4-13©2006 Prentice Hall
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.
4-14©2006 Prentice Hall
Threat of New Entrants(2 of 6)
Barrier to Entry Explanation
Economies of Scale
Product differentiation
Capital requirements
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. For example, it
now takes about two years and $4 million to develop an electronic game. Many new firms do not have the capital to
compete at this level.
Barriers to Entry
4-15©2006 Prentice Hall
Threat of New Entrants(3 of 6)
Barrier to Entry Explanation
Cost advantages independent of size
Access to distribution channels
Government and legal barriers
Entrenched competitors may have cost advantages not related to size. For example, the existing competitors in an industry may have purchased property when it was much
cheaper than a new entrant would have to pay.
Distribution channels are often hard to crack. This is particularly true in crowded markets, such as the convenience store market. For a new sports drink to be placed on the shelf,
it has to displace a product that is already there.
In knowledge intensive industries, such as biotechnology and software, patents, trademarks, and copyrights form major barriers to entry. Other industries, such as broadcasting,
require the granting of a license by a public authority.
Barriers to Entry (continued)
4-16©2006 Prentice Hall
Threat of New Entrants(4 of 6)
• Nontraditional 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.
4-17©2006 Prentice Hall
Threat of New Entrants(5 of 6)
Barrier to Entry Explanation
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 advantageIf a start-up pioneers an industry or a new concept within an
existing industry, the name recognition the start-up establishes may create a formable barrier to entry.
Passion of the management team and
employees
If the employees of a start-up are highly motivated by the unique culture of a start-up, and anticipate large financial rewards through stock options, this is a combination that
cannot be replicated by larger firms. Think of the employees of a biotech firms trying to find a cure for a disease.
Nontraditional Barriers to Entry
4-18©2006 Prentice Hall
Threat of New Entrants(6 of 6)
Barrier to Entry Explanation
Unique Business Model
Inventing a new approach to an industry and executing the idea in
an exemplary fashion
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 create 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.
Nontraditional Barriers to Entry (continued)
4-19©2006 Prentice Hall
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.
4-20©2006 Prentice Hall
Rivalry Among Existing Firms(2 of 3)
Factors that determine the nature and 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. Price-cutting occurs more often when all the competitors in an industry are about the same size and
when there is no clear market leader.
The degree to which products differ from one product to another affects industry rivalry. For example,
commodity industries such as paper products producers tend to compete on price because there is
little difference between the manufacturer’s products.
4-21©2006 Prentice Hall
Rivalry Among Existing Firms(3 of 3)
Factors that determine the nature and 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. Slow-growth industry firms must fight for market share, which may tempt them to lower price to gain market share. In fast-growth industries, there are enough customers to go
around, making price-cutting less likely.
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. As a result, firms with
high fixed costs are anxious to fill their capacity, and this anxiety may lead to price cutting.
4-22©2006 Prentice Hall
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.
4-23©2006 Prentice Hall
Bargaining Power of Suppliers(2 of 3)
Factors that have an impact on the ability of suppliers to exertpressure 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 there are only a few suppliers that supply a critical product to a large number of buyers, the supplier has an
advantage.
4-24©2006 Prentice Hall
Bargaining Power of Suppliers(3 of 3)
Factors that have an impact on the ability of suppliers to exertpressure 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. For example, there is little the computer industry can do when Intel or Microsoft raise their prices, as there are
simply no practical substitutes for their products.
4-25©2006 Prentice Hall
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.
4-26©2006 Prentice Hall
Bargaining Power of Buyers(2 of 3)
Factors that have an impact on the ability of suppliers to exertpressure 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. For
example, if the component sold by the supplier represents 50% of the cost of the buyer’s product, the buyer will bargain hard to get the best price for that component.
If the buyers are concentrated, meaning that 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.
4-27©2006 Prentice Hall
Bargaining Power of Buyers(3 of 3)
Factors that have an impact on the ability of suppliers to exertpressure on buyers (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 affects the buyer’s bargaining power. For example, a buyer who is purchasing a standard product like the corn syrup that goes into soft drinks, can play
one supplier against another until it gets the best combination of price and service.
4-28©2006 Prentice Hall
The Value 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 treat to industry profitability for each of the forces, as shown on the next slide.
– If a firm filled out the form shown on the next slide and several of the threats to industry profitability were high, the firm may want to reconsider entering the industry or think carefully about the position it would occupy.
4-29©2006 Prentice Hall
The Value of the Five Forces Model(2 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 Figure 4.2 on the next slide, and help a firm project the potential success of a new venture in a particular industry.
4-30©2006 Prentice Hall
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.
4-31©2006 Prentice Hall
Sources of Competitive Intelligence(1 of 2)
• 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.
4-32©2006 Prentice Hall
Sources of Competitive Intelligence(2 of 2)
Ways that a firm can ethically obtain information about its competitors
• Attend conference and trade shows
• Read industry related book, magazines, and Web sites• Talk to customers about what motivated them to buy your product
as opposed to your competitors’• Purchase competitors’ products to understand their features,
benefits, and shortcomings
• Study competitors’ Web sites
• Study Web sites that provide information about companies
4-33©2006 Prentice Hall
Completing a Competitive Analysis Grid(1 of 1)
• Competitive Analysis Grid– A tool for organizing the information a firm
collects about its competitors– It 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.
5-1©2006 Prentice Hall
Chapter 5
Entrepreneurship: Successfully Launching
New Ventures, 1/eBruce R. Barringer
R. Duane Ireland
5-2©2006 Prentice Hall
Chapter Objectives(1 of 2)
1. Describe a business model.2. Explain the concept of 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.
5-3©2006 Prentice Hall
Chapter Objectives(2 of 2)
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. Devise the term “target market.”
5-4©2006 Prentice Hall
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.
5-5©2006 Prentice Hall
Dell’s Business Model(1 of 1)
It is 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, shippers, customers and many others to make its business
model possible.
5-6©2006 Prentice Hall
Business Models
• Timing of Business Model Development– The development of a firm’s business model follows the
feasibility analysis stage of launching a new venture but comes before writing a business plan.
– If a firm has conducted a successful feasibility analysis and knows that it has a product or service with potential, the business model stage addresses how to surround it with a core strategy, a partnership network, a customer interface, distinctive resources, and an approach to creating value that represents a viable business.
5-7©2006 Prentice Hall
Importance of a Business ModelHaving a clearly articulated business model is
important because it does the following:
• Serves(bkerja) as an ongoing(brtrsan) extension(tmbhan) of feasibility analysis. A businessmodel 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(terang) a company’s core logic to all stakeholders, including the firm’s employees.
5-8©2006 Prentice Hall
How Business Models Emerge (1 of 2)
• The Value Chain(rantai)– 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.
5-9©2006 Prentice Hall
How Business Models Emerge (2 of 2)
• 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 (1) a single primary activity of the value chain (such as marketing and sales), (2) the interfacebetween one stage of the value chain and another (such as the interface between operations and outgoing logistics, or (3) one of the support activities (such as human resource management).
• Table 5.1 on the next slides provides examples of firms that were founded to enhance the value chain of a product or service in some meaningful way.
5-10©2006 Prentice Hall
Potential Fatal Flaws in Business Models
• Fatal Flaws(kcctan)– Two fatal flaws can render a business model untenable
from the beginning:• A complete misread of the customer• Utterly(dgn sm skali) unsound economics
Pets.com sported an unsound business model, and failed
5-11©2006 Prentice Hall
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– Business mission– Product/market scope– Basis for differentiation
5-12©2006 Prentice Hall
Core Strategy(2 of 3)
Primary Elements of Core Strategy
Business Mission
Product/Market Scope
A firm’s mission, or mission statement, describes why it exists and what its business model is supposed to accomplish. For
example, Southwest Airline’s Mission statement is as follows: “The mission of Southwest Airlines is dedication to the
highest level of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit.”
A company’s product/market scope defines the products and markets on which it will concentrate.
The choice of products has an important impact on a firm’s business model.
5-13©2006 Prentice Hall
Core Strategy(3 of 3)
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? Firms often differentiate them on the basis
of a cost leadership strategy or a differentiation strategy.
5-14©2006 Prentice Hall
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
5-15©2006 Prentice Hall
Strategic Resources(2 of 3)
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 over its rivals.
Examples are Sony’s competence in miniaturization, Dell’s competence in supply chain management, and 3M’s
competence in managing innovation.
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.
5-16©2006 Prentice Hall
Strategic Resources(3 of 3)
• 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 to 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.
5-17©2006 Prentice Hall
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 partners
5-18©2006 Prentice Hall
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 suppler for computer chips,
for example. Firms are developing more collaborative relationships with their suppliers, and finding ways to
motivate them to perform at higher levels.
Along with suppliers, firms partner with other companies to make their business models work. An entrepreneur’s
ability to launch a firm that achieves a sustainable competitive advantage may hinge as much on the skills of the partners that are involved as the skills within the firm itself. The most common types of partnerships are shown
on the next slide.
5-19©2006 Prentice Hall
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.• Dell sells strictly online while HP sells through retail stores.
– The three elements of a company’s customer interface are:• Target customer• Fulfillment and support• Pricing model
5-20©2006 Prentice Hall
Customer Interface(2 of 3)
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. The target
market a firm selects affects everything it does, from the strategic assets it acquires to the partnerships it forges to its
promotional campaigns.
Fulfillment and support describes the way a firm’s product or service “goes to market” or how it reaches it customers. It
also refers to the channels a company uses and what level of customer support it provides. All these issues impact the
shape and nature of a company’s business model.
5-21©2006 Prentice Hall
Customer Interface(3 of 3)
Primary Elements of Customer Interface
Pricing Structure
The third element of a company’s customer interface is its pricing structure, a topic that will be discussed in
more detail in Chapter 11. Pricing models vary, depending on a firm’s target market and its pricing
philosophy.
5-22©2006 Prentice Hall
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.
6-1©2006 Prentice Hall
Chapter 6
Entrepreneurship: Successfully Launching
New Ventures, 1/eBruce R. Barringer
R. Duane Ireland
6-2©2006 Prentice Hall
Chapter Objectives(1 of 2)
1. Identify the primary elements of a new venture team.
2. Explain the term “liabilities of newness.”3. Discuss the difference between heterogeneous and
homogenous founding teams.4. Identify the personal attributes that strengthen a
founder's chances of launching a successful new firm.
5. Explain the actions of an executive-search firm.
6-3©2006 Prentice Hall
Chapter Objectives(2 of 2)
6. Identify the two primary ways in which the nonemployee members of a start-up’s new venture team help the firm.
7. Describe a board of directors and explain the differences between inside directors and outside directors.
8. Describe the concept of signaling and explain why it’s important.
9. Discuss the purpose of forming an advisory board.10. Explain why new venture firms use consultants for help
and advice.
6-4©2006 Prentice Hall
New Venture Team
• New Venture Team– Is the group of founders, key employees, and advisers that
move a new venture from an idea to a fully functioning firm.
– Usually, the team doesn’t come together all at once. Instead, it is built as the new firm can afford to hire additional personnel.
– The team also involves more than paid employees.• Many firms have boards of directors, boards of advisers, and
professionals on whom they rely for direction and advice.
6-5©2006 Prentice Hall
Overcoming Liabilities of Newness
• Liabilities of Newness– New ventures have a high propensity to fail.– The high failure rate is due in part to what researchers call
the liability of newness, which refers to the fact that companies often falter because the people who start the firms can’t adjust quickly enough to their new roles and because the firm lacks a “track record” with outside buyers and sellers.
– Assembling a talented and experienced new venture team is one path that firms can take to overcome these limitations.
6-6©2006 Prentice Hall
The Founder or Founders(1 of 3)
• Founder or Founders– The characteristics of the founder or founders of a firm and
their early decisions have a significant impact on the manner in which the new venture team takes shape.
• Size of the Founding Team– Studies have shown that 50% to 70% of all new ventures
are started by more than one individual.– It is believed that new ventures started by a team rather
than a single entrepreneur have an advantage.
6-7©2006 Prentice Hall
The Founder or Founders(2 of 3)
Waveset Founding Team
It is generally believed that new ventures started by a team have an advantage over those started by an individual because a team brings more talent, resources, ideas, and
professional contacts to a new venture than does a sole
entrepreneur. In addition, the psychological support that
cofounders of a new business can offer one another is an important elements in the firm’s success.
6-8©2006 Prentice Hall
The Founder or Founders(3 of 3)
• Qualities of Founders– Several factors are thought to be significant to a founder’s
success.• Higher education• Prior entrepreneurial experience• Relevant industry experience• The ability to “network” effectively
– The importance of these attributes are described on the next two slides.
6-9©2006 Prentice Hall
Recruiting and Selecting Key Employees
• Recruiting Key Employees– Startups vary in terms of how quickly they need to add
personnel.– In some instances, the founders will work alone for a
period of time. In other instances, employees are hired immediately.
– Some founders draw upon their network of contacts to identify candidates for key positions (or go through placement offices like those at your college or university), and some rely on executive search firms.
6-10©2006 Prentice Hall
The Roles of the Board of Directors(1 of 3)
• Board of Directors– If a new venture organizes as a corporation, it is legally
required to have a board of directors.– A board of directors is a panel of individuals who are
elected by a corporation’s shareholders to oversee the management of the firm.
– A board is typically made up of both inside directors and outside directors.
• An inside director is a person who is also an officer of the firm.• An outside director is someone who is not employed by the firm.
6-11©2006 Prentice Hall
The Roles of the Board of Directors(2 of 3)
• Formal Responsibility of the Board– A board of directors has three formal responsibilities.
• Appoint the officers of the firm• Declare dividends• Oversee the affairs of the corporation
• Frequency of Meetings and Compensation– Most board of directors meet three to four times a year.– New ventures are more likely to pay their boards in
company stock or ask them to service on a voluntary basis, rather than pay a cash honorarium.
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The Roles of the Board of Directors(3 of 3)
Function Importance of Function
Provide Guidance
Lend Legitimacy
Although a board of directors has formal governance responsibilities, its most useful role is to provide guidance and support to the firm’s managers. Many founders and CEOs interact with their board members frequently and
obtain important input and advice.
Another important function of a board of directors is to lend legitimacy to a firm. Well-known and respected board
members bring instant credibility to the firm.
Ways a Board of Directors Can Help a New Venture Get Off to a Good Start
6-13©2006 Prentice Hall
Rounding Out the Team: The Role of Professional Advisors
Board of Advisors(pnnsht)
Lenders and Investors Other Professionals
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Board of Advisors(1 of 4)
• Board of Advisors– A board of advisors is a panel of experts who are asked by
a firm’s managers to provide counsel and advice on an ongoing basis.
– Unlike a board of directors, an advisory board possesses no legal responsibility for the firm and gives nonbinding advice.
– An advisory board can be set up for general purposes or can be set up to address a specific issue or need.
6-15©2006 Prentice Hall
Board of Advisors(2 of 4)
• Board of Advisors (continued)– Many people are more willing to serve on a company’s
board of advisors than its board of directors because it requires less time and there is no potential legal liability involved.
– Like the members of a board of directors, the members of a company’s board of advisors provide guidance and lend credibility to the firm.
– An example of a board of advisors is shown on the next slide.
6-16©2006 Prentice Hall
Board of Advisors(3 of 4)
Board of Advisors of BeautyBuys.com
Name Profession Role on Advisory Board
ChazzPalminteri
Lawrence K. Fleischman
Kim Lockerbie
Dr. Helen Flamenbaum
KZS Advertising
Hollywood actor, writer, and director
A full-service advertising and marketing firm
President of a financial consulting firm
A medical doctor specializing in dermatology
VP of Business Development for an advertising firm
Adds legitimacy to the firm
Adds legitimacy and provides the firm advice on financial issues
Adds legitimacy and provides the firm advice on advertising related issues
Adds legitimacy and provides the firm advice on medical related issues
Adds legitimacy and provides the firm advice on advertising related issues
6-17©2006 Prentice Hall
Board of Advisors(4 of 4)
• Guidelines to Organizing a Board of Advisors– Advisors will become disillusioned if they don’t play a
meaningful role in the firm’s development and growth.– A firm should look for board members who are compatible
and complement one another in terms of experience and expertise.
– When inviting people to serve on its board of advisors, a company should carefully spell out to the individuals involved the rules in terms of access to confidential information.
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Lenders and Investors(1 of 1)
• Lenders and Investors– Lenders and investors have a vested interest in the
companies they finance, often causing them to become very involved in helping the firms they fund.
– Like the other non-employee members of a firm’s new venture team, lenders and investors help new firms by providing guidance and lending advice.
– In addition, a firm’s lenders and investors assume the natural role of providing financial oversight.
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Other Professionals
• Other Professionals– The other professionals that make up a firm’s new venture
team, which vary by firm, include attorneys, accountants, and business consultants.
• Business Consultants– A business consultant is an individual who gives
professional or expert advice.– Business consultants fall into two categories: paid
consultants and consultants who are available for free or at a reduced rate through a nonprofit or governmental agency.
7-1©2006 Prentice Hall
Chapter 7
Entrepreneurship: Successfully Launching
New Ventures, 1/eBruce R. Barringer
R. Duane Ireland
7-2©2006 Prentice Hall
Chapter Objectives(1 of 2)
1. Explain the two functions of the financial management of a firm.
2. Identify the four main financial objectives of entrepreneurial firms.
3. Explain the difference between historical and pro forma financial statements.
4. Explain the purpose of an income statement.5. Explain the purpose of a balance sheet.
7-3©2006 Prentice Hall
Chapter Objectives(2 of 2)
6. Explain the purpose of a statement of cash flows.7. Discuss how financial ratios are used to analyze and
interpret a firm’s financial statements.8. Discuss the role of forecasts in projecting a firm's future
income and expenses.9. Explain what a completely new firm bases its forecasts
on.10. Explain what is meant by the term “percent of sales
method.”
7-4©2006 Prentice Hall
Financial Management(1 of 2)
• Financial Management– Financial management deals with two things: raising
money and managing a company’s finances in a way that achieves the highest rate of return.
– Chapter 10 focuses on raising money. This chapter focuses primarily on:
• How a new venture tracks its financial progress through preparing, analyzing, and maintaining past financial statements.
• How a new venture forecasts future income and expenses by preparing pro forma (or projected) financial statements.
7-5©2006 Prentice Hall
Financial Management(2 of 2)
The financial management of a firm deals with questions such as the following on an ongoing basis:
• How are we doing? Are we making or losing money?
• How much cash do we have on hand?
• Do we have enough cash to meet our short-term obligations?
• How efficiently are we utilizing our assets?
• How does our growth and net profits compare to those our industry peers?
• Where will the funds we need for capital improvements come from?• Are there ways we can partner with other firms to share risk and reduce the
amount of cash we need?
• Overall, are we in good shape financially?
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Financial Objectives of a Firm(1 of 2)
• Profitability– Is the ability to earn a profit.
• Many start-ups are not profitable during their first one to three years while they are training employees and building their brands.
• However, a firm must become profitable to remain viable and provide a return to its owners.
• Liquidity– Is a company’s ability to meet its short-term financial
obligations.• Even if a firm is profitable, it is often a challenge to keep enough
money in the bank to meet its routine obligations in a timely manner.
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Financial Objectives of a Firm(2 of 2)
• Efficiency– Is how productively a firm utilizes its assets relative to its
revenue and its profits.• Southwest Airlines, for example, uses its assets very productively.
Its turnaround time, or the time its airplanes sit on the ground while they are being unloaded and reloaded, is the lowest in the airline industry.
• Stability– Is the strength and vigor of the firm’s overall financial
posture. • For a firm to be stable, it must not only earn a profit and remain
liquid but also keep its debt in check.
7-8©2006 Prentice Hall
The Process of Financial Management(1 of 3)
• Importance of Financial Statements– To assess whether its financial objectives are being met,
firms rely heavily on analysis of financial statements.• A financial statement is a written report that quantitatively
describes a firm’s financial health. • The income statement, the balance sheet, and the statement of cash
flows are the financial statements entrepreneurs use most commonly.
• Forecasts– Are an estimate of a firm’s future income and expenses,
based on past performance, its current circumstances, and its future plans.
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The Process of Financial Management(2 of 3)
• Forecasts (continued)– New ventures typically base their forecasts on an estimate
of sales and then on industry averages or the experiences of similar start-ups regarding the cost of goods sold and on other expenses.
• Budgets– Are itemized forecasts of a company’s income, expenses,
and capital needs and are also an important tool for financial planning and control.
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The Process of Financial Management(3 of 3)
• Financial Ratios– Depict relationships between items on a firm’s financial
statements.– An analysis of its financial ratios helps a firm determine
whether it is meeting its financial objectives and how it stacks up against its industry peers.
• Importance of Financial Management– Many experienced entrepreneurs stress the importance of
keeping on top of the financial management of the firm.• In the competitive environment in which most firms exist, it’s
simply not good enough to shoot from the hip when making financial decisions.
7-11©2006 Prentice Hall
Financial Statements
• Historical Financial Statements– Reflect past performance and are usually prepared on a
quarterly and annual basis.• Publicly traded firms are required by the SEC to prepare financial
statements and make them available to the public.
• Pro Forma Financial Statements– Are projections for future periods based on forecasts and
are typically completed for two to three years in the future.• Pro forma financial statements are strictly planning tools and are
not required by the SEC.
7-12©2006 Prentice Hall
New Venture Fitness Drinks
• New Venture Fitness Drinks– To illustrate how financial statements are prepared, we
used New Venture Fitness Drinks, a fictitious sports drink company.
• New Venture Fitness Drinks has been in business for five years.• Targeting sports enthusiasts, the company sells a line of nutritional
fitness drinks.• It opened a single location in 1999, added a second location in
2004, and plans to add a third in 2005. • The company’s strategy is to place small restaurants, similar to
smoothie restaurants, near large outdoor sports complexes.• The company is profitable and is growing at a rate of 25% per year.
7-13©2006 Prentice Hall
Historical Financial Statements(1 of 2)
Three types of historical financial statements
Financial statement Purpose
Income Statement
Balance Sheet
Statement of cash flows
The income statement reflects the results of the operations of a firm over a specified period of time. It records all the
revenues and expenses for the given period and shows whether the firm is making a profit or is experiencing a loss.
The balance sheet is a snapshot of a company’s assets, liabilities, and owners’ equity at a specific point in time.
The statement of cash flows summarizes the changes in a firm’s cash position for a specified period of time and
details why the change occurred. The statement of cash flows is similar to a month-end bank statement.
7-14©2006 Prentice Hall
Historical Financial Statements(2 of 2)
• Ratio Analysis– The most practical way to interpret or make sense of a
firm’s historical financial statements is through ratio analysis, as shown in the next slide.
• Comparing a Firm’s Financial Results to Industry Norms– Comparing a firm’s financial results to industry norms
helps it determine how it stakes up against its competitors and if there are any financial “red flags” requiring attention.
7-15©2006 Prentice Hall
Forecasts(1 of 3)
• Forecasts– The analysis of a firm’s historical financial statements are
followed by the preparation of forecasts. – Forecasts are predictions of a firm’s future sales, expenses,
income, and capital expenditures.• A firm’s forecasts provide the basis for its pro forma financial
statements.• A well-developed set of pro forma financial statements help a firm
create accurate budgets, build financial plans, and manage its finances in a proactive rather than a reactive manner.
7-16©2006 Prentice Hall
Forecasts(2 of 3)
• Sales Forecast– A sales forecast is projection of a firm’s sales for a
specified period (such as a year).– It is the first forecast developed and is the basis for most of
the other forecasts. • A sales forecast for a new firm is based on a good-faith estimate of
sales and on industry averages or the experiences of similar start-ups.
• A sales forecast for an existing firm is based on (1) its record of past sales, (2) its current production capacity and product demand, and (3) any factors that will affect its future product capacity and product demand.
7-17©2006 Prentice Hall
Forecasts(3 of 3)
• Forecast of Costs of Sales and Other Items– Once a firm has completed its sales forecast, it must
forecast its cost of sales (or cost of goods sold) and the other items on its income statement.
– The most common way to do this is to use the percentage-of-sales method, which is a method for expressing each expense item as a percentage of sales.
• If a firm determines that it can use the percent-of-sales method and it follows the procedures described in the textbook, then the net result is that each expense item on its income statement will grow at the same rate as sales (with the exception of items that can be individually forecast, such as depreciation).
7-18©2006 Prentice Hall
Pro Forma Financial Statements(1 of 3)
• Pro Forma Financial Statements– A firm’s pro forma financial statements are similar to its
historical financial statements except that they look forward rather than track the past.
– The preparation of pro forma financial statements helps a firm rethink its strategies and make adjustments if necessary.
– The preparation of pro forma financials is also necessary if a firm is seeking funding or financing.
7-19©2006 Prentice Hall
Pro Forma Financial Statements(2 of 3)
Three types of pro forma financial statements
Financial statement Purpose
Pro Forma Income Statement
Pro Forma Balance Sheet
Pro Forma Statement of Cash flows
Financial statement that shows the projected results of the operations of a firm over a specific period.
Financial statement that shows a projected snapshot of a company’s assets, liabilities, and owner’s equity at a specific
point in time.
Financial statement that shows the projected flow of cash into and out of a company for a specific period.
7-20©2006 Prentice Hall
Pro Forma Financial Statements(3 of 3)
• Ratio Analysis– The same financial ratios used to evaluate a firm’s
historical financial statements should be used to evaluate the pro forma financial statements.
– This work is completed so the firm can get a sense of how its projected financial performance compares to its past performance and how its projected activities will affect its cash position and its overall financial soundness.
8-1©2006 Prentice Hall
Chapter 8
Entrepreneurship: Successfully Launching
New Ventures, 1/eBruce R. Barringer
R. Duane Ireland
8-2©2006 Prentice Hall
Chapter Objectives(1 of 2)
1. Identify the two most important issues to consider when leaving an employer.
2. Discuss the importance of nondisclosure and noncompete agreements.
3. Explain the criteria important in selecting an attorney for a new firm.
4. Discuss the importance of a founders’ agreement.5. Provide several suggestions for how new firms can
avoid litigation.
8-3©2006 Prentice Hall
Chapter Objectives(2 of 2)
6. Discuss techniques entrepreneurs use to promote high standards of business ethics in their firms.
7. Discuss the differences between sole proprietorships, partnerships, corporations, and limited liability companies.
8. Explain why most fast-growth entrepreneurial firms organize as corporations or limited liability companies rather than sole proprietorships or partnerships.
9. Explain double taxation.10. Explain the importance of the Electronic Signatures in
Global and International Commerce Act.
8-4©2006 Prentice Hall
Initial Ethical and Legal Issues Facing a New Firm
Ethically departing a former employer Choosing a lawyer
Drafting a founders’agreement Avoiding litigation
Choosing a form of business ownership
8-5©2006 Prentice Hall
Ethically Departing a Former Employer(1 of 2)
• Ethically Departing from an Employer– Behave in a Professional Manner(CARA/TNGKH LAKU)
• First, it is important that an employee give proper notice of an intention to quit and that the employee perform all assigned duties until the day of departure.
• If an employee is leaving a job to start a firm in the same industry, it is vital that he or she not take information that belongs to the current employer.
– Honor all Employment(PEKERJAAN) Agreements• Honor all nondisclosure and noncompete agreements entered into at
the time of employment. (see next slide)
8-6©2006 Prentice Hall
Ethically Departing a Former Employer(2 of 2)
Noncompete Agreement
Prevents(HLGAN) an individual from
competing against a former(DHLU)
employer for a specified period of time
Nondisclosure Agreement
Is a promise made by an employee or another
party to not disclose(MBRITAHU)
the company’s trade secrets
8-7©2006 Prentice Hall
Drafting a Founders’ Agreement(1 of 1)
• Founders’ Agreement– A founders’ agreement (or shareholders’ agreement) is a
written document that deals with issues such as the relative split of the equity among the founders of the firm, how individual founders will be compensated(BR GNTI RGI) for the cash or the “sweat equity” they put into the firm, and how long the founders will have to remain with the firm for their shares to fully vest.
– The items to include in the founders agreement are shown on the following slide.
8-8©2006 Prentice Hall
Avoiding Legal Disputes(MPSOALKAN )
• Avoiding Legal Disputes– Most legal disputes are the result of misunderstandings,
sloppiness, or a simple lack of knowledge of the law. Getting bogged down in legal disputes is something an entrepreneur should work hard to avoid.
– There are several steps that an entrepreneur can take to avoid legal disputes:
• Meet all contractual obligations • Avoid undercapitalization• Get everything in writing• Promote business ethics
8-9©2006 Prentice Hall
Promoting Business Ethics(1 of 3)
• Promoting Business Ethics in a New Venture– Code of Ethics
• A code of ethics describes the firm’s general value system, moral principles, and specific ethical rules that apply.
• The advantage of having a code of ethics is that it provides specific guidance to managers and employees regarding what is expected ofthem in terms of ethical behavior.
– Ethics Training Programs• Many organizations have formal ethics training programs that teach
employees how to respond to the types of ethical dilemmas that might arise on their jobs.
8-10©2006 Prentice Hall
Promoting Business Ethics(2 of 3)
Most common types of ethical problems to guard against
Type of ethical problem Description
Human resource ethical problems
Conflicts of interest
These problems relate to the equitable and just treatment of current and prospective employees.
Unethical behavior here can range from asking an inappropriate question in a job interview to treating
people unfairly because of their gender, ethnic background, religion, and so on.
These problems relate to situations that divide the loyalty of employees. For example, it would be
inappropriate for an employee of a company to award a business contract to a friend or family member
because of their personal relationship rather than for legitimate business reasons.
8-11©2006 Prentice Hall
Promoting Business Ethics(3 of 3)
Most common types of ethical problems to guard against (continued)
Type of ethical problem Description
Customer confidence
Inappropriate use of corporate resources
Problems in this area flare up when a company behaves in a way that shows a lack of respect for customers or a lack of concern with public safety.
Examples include misleading advertising and the sale of a product that a company knows is unsafe.
Problems in this area typically arise when a employees uses corporate resources for personal gain beyond
what is customary and reasonable. For example, an employees who spends two hours of every eight-hour workday surfing the Internet is guilty of excessive or
inappropriate use of corporate resources.
8-12©2006 Prentice Hall
Choosing a Form of Business Ownership
When a business is launched, a form of legal entity must be chosen. The most common legal entities are…
Sole Proprietorship
Corporation
Partnership
Limited LiabilityCompany
8-13©2006 Prentice Hall
Issues to Consider in Choosing a Legal Form of Business Ownership
• The cost of setting up and maintaining the legal form of ownership.
• The extent to which an entrepreneur can shield his or her personal assets from the liabilities of the business.
• Tax considerations• The ease of raising capital
8-14©2006 Prentice Hall
Sole Proprietorship(1 of 2)
• Sole Proprietorship – The simplest form of business entity is the sole
proprietorship.– A sole proprietorship is a form of business organization
involving one person, and the person and the business are essentially the same.
– A sole proprietorship is not a separate legal entity. The sole proprietor is responsible for all the liabilities of the business, and this is a significant drawback(klemhan)
8-15©2006 Prentice Hall
Sole Proprietorship(2 of 2)
Advantages and disadvantages of sole proprietorship
8-16©2006 Prentice Hall
Partnerships(1 of 2)
• Partnerships– If two or more people start a business, they must organize as a
partnership, corporation, or limited liability company.– Partnerships are organized as either general or limited partnerships.
• A general partnership is a form of business organization where two or more people pool(mgumpl) their skills, abilities, and resources to run a business.
• A limited partnership is a modified form of general partnership. The major difference between the two is that a limited partnership includes two classes of owners: general partners and limited partners. The general partners are liable for the debts and obligations of the partnership, but the limited partners are liable only up to the amount of their investment.
8-17©2006 Prentice Hall
Partnerships(2 of 2)
Advantages and disadvantages of a general partnership
8-18©2006 Prentice Hall
Corporations(1 of 5)
• Corporations– A corporation is a separate legal entity organized under the
authority of a state. – Corporations are organized as either C corporations or
subchapter S corporations. • C Corporations
– A C corporation is a separate legal entity that, in the eyes of the law, is separate from its owners.
– In most cases the corporation shields its owners, who are called shareholders, from personal liability for the debts of the corporation.
8-19©2006 Prentice Hall
Corporations(2 of 5)
• C Corporations (continued)– A corporation is governed by a board of directors, which is
elected by the shareholders.– A corporation is formed by filing articles of incorporation
with the secretary of state’s office in the state of incorporation.
– A corporation is taxed as a separate legal entity. • A disadvantage of corporations is that they are subject to double-
taxation, which means that a corporation is taxed on its net income and, when the same income is distributed to shareholders in the form of dividends, is taxed again on shareholders’ personal tax returns.
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Corporations(3 of 5)
Advantages and disadvantages of a C Corporation
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Corporations(4 of 5)
• Subchapter S Corporation– A subchapter S corporation combines the advantages of a
partnership and a C corporation. It is similar to a partnership in that the profits and losses of the business are not subject to double taxation.
– The subchapter S corporation does not pay taxes; instead, the profits or losses of the business are passed through to the individual tax returns of the owners.
– It is similar to a corporation in that the owners are not subject to personal liability for the behavior of the business.
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Corporations(5 of 5)
There are strict standards that a business must meet to qualify for status as a subchapter S corporation. The standards are shown below:
8-23©2006 Prentice Hall
Limited Liability Company(1 of 2)
• Limited Liability Company– The limited liability company (LLC) is a form of business
organization that is rapidly gaining popularity in the U.S.– Along with the subchapter S corporation, it is a popular
choice for start-up firms.• As with partnerships and corporations, the profits of an LLC flow
through to the tax returns of the owners and are not subject to double taxation.
• The main advantage of the LLC is that all partners enjoy limitedliability.
– The LLC combines the limited liability advantage of the corporation with the tax advantages of the partnership.
8-24©2006 Prentice Hall
Limited Liability Company(2 of 2)
Advantages and disadvantages of a Limited Liability Company
8-25©2006 Prentice Hall
The Legal Environment of the Internet
• Legal Environment of the Internet– Most new businesses will utilize the Internet in their
business operations.– When the Internet was introduced in the early 1990s, many
businesses approached it with an “anything goes” attitude, believing it was alright to do almost anything online.
– As time goes on, however, the legal system is getting a better grip on the Internet, and more laws and regulations are being passed.
8-26©2006 Prentice Hall
The World Wide Web(1 of 3)
Three Types of Web Sites
Type of Web Site Description Primary Legal Issues Involved
Shop-Window Web Site
This type of Web site provides information
about a company and its products but encourages
very little interaction.
• All content placed on the Web site should be original, unless permission has been obtained.
• Pricing information should be updatedfrequently.
• Misleading product descriptions cancause repercussions.
• Misleading advertising should be avoided.
8-27©2006 Prentice Hall
The World Wide Web(2 of 3)
Three Types of Web Sites (continued)
Type of Web Site Description Primary Legal Issues Involved
Contributed Content Web
Sites
Web sites that encourage visitors to
interact are exposed to several additional
forms of legal risks.
The most common problem in this area arises when sites encourage
visitors to interact by making discussion boards or chat rooms available. Reasonable measures
should be taken to control the material that appears on the Web site. These measures need to be addressed in a
Web site’s “terms and conditions” so that anyone viewing the Web site is aware of the steps taken to prevent
problems from occurring.
8-28©2006 Prentice Hall
The World Wide Web(3 of 3)
Three Types of Web Sites (continued)
Type of Web Site Description Primary Legal Issues Involved
Full E-Commerce Web Site
Full E-Commerce Web sites sell goods and
services via the Web.
New businesses that plan to sell products or services via the Web
should consult with an attorney to be sure they know all the current laws
and regulations that apply. An important caveat of selling online is to
make sure to form a legally binding contract with the purchaser. To do
this, many sites require their customers to scroll through a list of
terms and conditions and click on an “I accept” button before a purchase
can be completed.
8-29©2006 Prentice Hall
Trademarks and Domain Names(1 of 3)
• Trademarks– The emergence of the Internet has led to a variety of issues
in trademark law and practice.– Because it is so easy to find a company with the same name
as your company’s name on the Internet, trademark disputes often arise.
• For example, in the past, a consulting firm in Michigan operating under the name Ivey Consulting may have never known that a similar firm in California operated under the same name. Now, its easy for the firms to stumble across one another surfing the Internet, which could result in a trademark infringement suit by the company that first registered the name.
8-30©2006 Prentice Hall
Trademarks and Domain Names(2 of 3)
• Domain Names– A domain name is a company’s Internet address (e.g.,
www.intel.com).– Most companies want their domain name to be the same as
their company’s name.– It is easy to register a domain name through an online
registration service (www.networksolutions.com).• Until recently, some people, called cybersquatters, registered the
domain names of companies and people for the sole purpose of trying to resell the names (for a substantial profit) to those companies or individuals. (Next slide)
8-31©2006 Prentice Hall
Trademarks and Domain Names(3 of 3)
• Domain Names– To stop the practice of cybersquatting, Congress passed the
Anticybersquatting Consumer Protection Act in 1999.• Probably the most famous domain name dispute in the history of
the Internet involved the actress Julia Roberts. In June 2000, an international arbitration panel ruled that an accused cybersquatterwho registered the domain name (www.juliaroberts.com) had no legitimate interest in the name and registered it in bad faith. The panel awarded the name to Julia Roberts. In finding bad-faith intent, the arbitration panel cited evidence that the defendant had registered the names of several famous movie and sports figures and even tried to auction off the name Julia Robert’s domain name on eBay’s Web site.
8-32©2006 Prentice Hall
Electronic Contracts and Digital Signatures
• Legally Binding Contracts Online– As a result of the Electronic Signatures in Global and
International Commerce Act, contracts negotiated online have the same legal standing as traditional legal contracts signed in ink.
– Online contracts are often signed with digital signatures.• A digital signature is a computer-generated block of text that
accurately identifies both the signer and the content, helping to ensure the authenticity and integrity of electronic documents.
9-1©2006 Prentice Hall
Chapter 9
Entrepreneurship: Successfully Launching
New Ventures, 1/eBruce R. Barringer
R. Duane Ireland
9-2©2006 Prentice Hall
Chapter Objectives(1 of 2)
1. Explain the purpose of a business plan.2. Discuss how a business plan can be a dual-use
document.3. Explain how the process of writing a business plan
can be as important as the plan itself.4. Identify the advantages and disadvantages of using
software packages to assist in the preparation of a business plan.
5. Explain the difference between a summary business plan, a full business plan, and an operational business plan.
9-3©2006 Prentice Hall
Chapter Objectives(2 of 2)
6. Explain why the executive summary may be the most important section of a business plan.
7. Describe a milestone and how milestones are used in business plans.
8. Explain the purpose of a “sources and uses of funds”statement.
9. Describe a liquidity event.10. Detail the parts of an oral presentation of a business
plan.
9-4©2006 Prentice Hall
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.• Inside the firm, the plan helps the company develop a “road map”
to follow in executing its strategies and plans.• Outside the firm, it introduces potential investors and other
stakeholders with the business opportunity the firm is pursuing and how it plans to pursue it.
9-5©2006 Prentice Hall
Why Read 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, which articulates the vision and future plans of the firm, 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 other
external stakeholders. The key is to include facts generated through a properly conducted feasibility analysis. A
business plan rings hollow if it is based strictly on what an entrepreneur or team of founders “thinks” will happen.
9-6©2006 Prentice Hall
Guidelines for Writing a Business Plan(1 of 3)
• 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 in everything they do, departing from the basic structure of the conventional business plan format is usually a mistake.
– Typically, investors are very busy people and want a plan where they can easily find critical information.
9-7©2006 Prentice Hall
Guidelines for Writing a Business Plan(2 of 3)
• 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, entrepreneursshould 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.
9-8©2006 Prentice Hall
Guidelines for Writing a Business Plan(3 of 3)
• 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.
9-9©2006 Prentice Hall
Outline of Business Plan(1 of 1)
• 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 decide which elements to include in his or her plan.
9-10©2006 Prentice Hall
Exploring Each Section of the Plan(1 of 10)
• Cover Page and Table of Contents– The cover page should include the name of the company,
its address, its phone number, the data, and contact information for the lead entrepreneur.
• The 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.
• In many instances, an investor will first ask for a copy of the executive summary and will request a copy of the full business plan only if the executive summary is sufficiently convincing.
9-11©2006 Prentice Hall
Exploring Each Section of the Plan(2 of 10)
• The Business– The most effective way to introduce the business is to
describe the opportunity the entrepreneur has identified–that is, the problem to solve or the need to be filled–and then describe how the business plans to address the issue.
– The description of the opportunity should be followed by a brief history of the company, along with the company’s mission statement and objectives.
– An explanation of the company’s competitive advantage and a brief description of the business model follow.
9-12©2006 Prentice Hall
Exploring Each Section of the Plan(3 of 10)
• Management Team– As mentioned earlier, one of the most important things
investors want to see when reviewing the viability of new ventures is the strength of its management team.
– If the team doesn’t “pass muster,” most investors won’t read further.
– The material in this section should include a brief summary of the qualifications of each member of the management team, including his or her relevant employment and professional experiences, significant accomplishments, and educational background.
9-13©2006 Prentice Hall
Exploring Each Section of the Plan(4 of 10)
• Company Structure, Ownership, and Intellectual Property– This section should begin by describing the structure of the new
venture, including the reporting relationships among the top management team members.
– The next part of the section should explain how the firm is legally structured.
– The third part of this section should discuss the intellectual property the firm owns, including patents, trademarks, and copyrights.
• This is a very important issue. Intellectual property forms the foundation for the valuation and competitive advantage of many entrepreneurial companies.
9-14©2006 Prentice Hall
Exploring Each Section of the Plan(5 of 10)
• Industry Analysis– This section should begin by discussing the major trends in
the industry in which the firm intends to compete along with important characteristics of the industry, such as its size, attractiveness, and profit potential.
– This section should also discuss how the firm will diminish or sidestep the forces that suppress its industry’s profitability.
– The firm’s target market should be discussed next, along with an analysis of how it will compete in that market.
9-15©2006 Prentice Hall
Exploring Each Section of the Plan(6 of 10)
• Marketing Plan– This marketing plan should immediately follow the
industry analysis and should provide details about the new firm’s products or services.
– After reading this section of the plan, an investor should be confident that the firm’s overall approach to its target market and its product strategy, pricing strategy, channels of distribution, and promotional strategy are in sync with one another and make sense.
9-16©2006 Prentice Hall
Exploring Each Section of the Plan(7 of 10)
• Operations Plan– This section of the plan deals with the day-to-day
operations of the company. – An overview of the manufacturing plan (or service delivery
plan) should be followed by a description of the network of suppliers, business partners, and service providers that will be necessary to build the product or produce the service the firm will sell.
– Any risks or regulations pertaining to the operations of the firm should be disclosed, such as nonroutine regulations regarding waste disposal and worker safety.
9-17©2006 Prentice Hall
Exploring Each Section of the Plan(8 of 10)
• Financial Plan– The financial section of the plan must demonstrate the
financial viability of the business. A careful reader of the plan will scrutinize this section.
– The financial plan should begin with an explanation of the funding that will be needed by the business during the next three to five years along with an explanation of how the funds will be used.
• This information is called a sources and uses of funds statement. – The next portion of this section includes financial
projections, which are intended to further demonstrate the financial viability of the business.
9-18©2006 Prentice Hall
Exploring Each Section of the Plan(9 of 10)
• Financial Plan (continued)– The financial projections should include three to five years
of pro forma income statements, balance sheets, and statements of cash flows, as described in Chapter 7.
– It is important to remember that the business plan should be based on realistic projections.
• If it is not and the company gets funding or financing, there will most certainly be a day of reckoning. Investors and bankers hold entrepreneurs accountable for the numbers in their projections.
9-19©2006 Prentice Hall
Exploring Each Section of the Plan(10 of 10)
• Critical Risk Factors– Although a variety of potential critical risks may exist, a
business should tailor this section to depict its truly criticalrisks.
• Appendix– Any material that does not easily fit into the body of a
business plan should appear in an appendix. Examples of materials that might appear in the Appendix include:
• Resumes of the top management team members, photos or diagrams of product or product prototypes, certain financial data, and market research projections.
9-20©2006 Prentice Hall
Presenting the Business Plan to Investors(1 of 3)
• Making a Presentation to Investors– If the business plan successfully elicits the interest of
potential investors, the next step is to meet with the investor and present the plan in person.
– The first meeting with an investor is generally very short, about one hour. The investor will typically ask the firm to make a 20- to 30- minute presentation using PowerPointslides and use the rest of the time to respond to questions.
– If the investor is impressed and wants to learn more about the venture, the firm will be asked back for a second meeting.
9-21©2006 Prentice Hall
Presenting the Business Plan to Investors(2 of 3)
• Tips on Making an Oral Presentation to Investors– When asked to meet with an investor, the founders or a
new venture should prepare a set of PowerPoint slides that will fill the time slot permitted.
– The presentation should be smooth and well rehearsed. The slides should be sharp and not cluttered with material.
• The first rule in making an oral presentation is to follow instructions. If an investor tells an entrepreneur that he or she has one hour and that the hour will consist of a 30-minute presentation and a 30-minute question-and-answer period, the presentation shouldn’t last more than 30 minutes.
9-22©2006 Prentice Hall
Presenting the Business Plan to Investors(3 of 3)
The most important issues to cover in a PowerPoint presentation to investors(including recommendations for the number of slides to use for each topic)
10-1©2006 Prentice Hall
Chapter 10
Entrepreneurship: Successfully Launching
New Ventures, 1/eBruce R. Barringer
R. Duane Ireland
10-2©2006 Prentice Hall
Chapter Objectives(1 of 2)
1. Explain why most new ventures need to raise money at some point during their early life.
2. Identify the three sources of personal financing available to entrepreneurs.
3. Provide examples of how entrepreneurs bootstrap to raise money or cut costs.
4. Identify the three steps involved in properly preparing to raise debt or equity financing.
5. Explain the role of an elevator speech in attracting financing for a firm.
10-3©2006 Prentice Hall
Chapter Objectives(2 of 2)
6. Discuss the difference between equity funding and debt financing.
7. Describe the difference between a business angel and a venture capitalist.
8. Explain why an initial public offering is an important milestone for a firm.
9. Discuss the SBA Guaranteed Loan Program.10. Explain the advantages of leasing for an entrepreneurial
firm.
10-4©2006 Prentice Hall
The Importance of Getting Financing or Funding
• Understanding the Alternatives for Financing or Funding– Few people deal with the process of raising investment
capital until they need to raise capital for their own firm.– As a result, many entrepreneurs go about raising capital
haphazardly because they lack experience.– To be successful in this area, it is important for
entrepreneurs to understand the role of investment capital in the success of a new businesses, and the options available to entrepreneurial firms for obtaining financing or funding.
10-5©2006 Prentice Hall
Sources of Personal Financing(1 of 3)
• Sources of Personal Financing– Typically, the seed (or initial) money that gets a company
off the ground comes from the founders themselves—from their personal savings, mortgages(CAGARAN), and credit cards.
• All founders contribute sweat equity to their ventures, which represents the value of the time and effort that a founder puts into a new firm.
• Love Money– Friends and family are the second source of funds for many
new ventures. This form of contribution is often called “love money.”
10-6©2006 Prentice Hall
Sources of Personal Financing(2 of 3)
• Love Money (continued)– Love money can consist of outright gifts, loans, or
investments, but often comes in the form of forgone or delayed compensation or reduced or free rent.
• Bootstrapping– Another source of seed money for new ventures is
bootstrapping. • Bootstrapping is the use of creativity, ingenuity, and any means
possible to obtain resources other than borrowing money or raising capital from traditional sources.
10-7©2006 Prentice Hall
Sources of Personal Financing(3 of 3)
There are many ways entrepreneurs bootstrap to raise money or cut costs. Some of the most common examples include the following:
• Minimizing personal expenses and putting all profits back into the
business
• Avoiding unnecessary expenses, such as lavish office space or furniture
• Establishing partnerships and sharing expenses with partners
• Leasing equipment rather than buying
• Sharing office space or employees with other businesses
• Utilizing the services or a university or community incubator• Buying items cheaply but prudently through discount outlets or onlineauctions, such as eBay, rather than at full-price stores
10-8©2006 Prentice Hall
Preparing to Raise Debt or Equity Financing(1 of 1)
Two most common alternatives for raising money
Alternative Explanation
Equity funding
Debt financingDebt financing is getting a loan. The most common sources of debt financing are commercial banks and the Small Business
Administration (through its guaranteed loan program).
Equity funding means exchanging partial ownership in a firm, usually in the form of stock, for funding. Angel investors, private
placement, venture capital, and initial public offerings are themost common sources of equity funding. Equity funding is not a
loan—the money that is received is not paid back. Instead, equity investors become partial owners of a firm.
10-9©2006 Prentice Hall
Preparing An Elevator Speech(1 of 1)
• Elevator Speech– An elevator speech is a brief, carefully constructed
statement that outlines the merits of a business opportunity.– Why is it called an elevator speech?
• If an entrepreneur stepped into an elevator on the 25th floor of a building and found that by a stroke of luck a potential investor was in the same elevator, the entrepreneur would have the time it takes to get from the 25th floor to the ground floor to try to get the investor interested in his or her opportunity. This type of chance encounter with an investor calls for a quick pitch of one’s business idea. This quick pitch has taken on the name “elevator speech.”
• Most elevator speeches are 45 seconds to two minutes long.
10-10©2006 Prentice Hall
Sources of Equity Funding
Venture Capital Business Angels
Initial Public Offerings
10-11©2006 Prentice Hall
Business Angels(1 of 2)
• Business Angels– Are individuals who invest their personal capital
directly in start-ups. – The prototypical business angel is about 50 years
old, has high income and wealth, is well educated, has succeeded as an entrepreneur, and is interested in the startup process.
– The number of angel investors in the U.S. has increased dramatically over the past decade.
10-12©2006 Prentice Hall
Business Angels(2 of 2)
• Business Angels (continued)– Business angels are valuable because of their
willingness to make relatively small investments. • This gives access to equity funding to a start-up that
needs just $50,000 rather than the $1 million minimum investment that most venture capitalists require.
– Business angels are difficult to find. Most angels remain fairly anonymous and are matched up with entrepreneurs through referrals.
10-13©2006 Prentice Hall
Venture Capital(1 of 3)
• Venture Capital– Is money that is invested by venture-capital firms in start-
ups and small businesses with exceptional growth potential. – There are about 650 venture-capital firms in the U.S. that
provide funding to about 3,000 to 4,000 firms per year.• Venture-capital firms are limited partnerships of money managers
who raise money in “funds” to invest in start-ups and growing firms. The funds, or pool of money, are raised from wealthy individuals, pension plans, university endowments, foreign investors, and similar sources. A typical fund is $75 million to $200 million and invests in 20 to 30 companies over a three- to five-year period.
10-14©2006 Prentice Hall
Venture Capital(2 of 3)
• Venture Capital (continued)– The investment preferences of venture-capitalist are fairly
narrow. • For example, in 2002, 20% of all venture-capital investments were
in the software industry. Telecommunications, networking, computers and peripherals, semiconductors, medical devices, and biotechnology are other industries attracting funding from venture capitalists.
• Many entrepreneurs get discouraged when they are repeatedly rejected for venture capital funding, even though they may have an excellent business plan.
• Venture capitalists are looking for the “home run” and so reject the majority of the proposals they consider.
10-15©2006 Prentice Hall
Venture Capital(3 of 3)
• Venture Capital (continued)– An important part of obtaining venture-capital funding is
going through the due diligence process, which refers to the process of investigating the merits of a potential venture and verifying the key claims made in the business plan.
– Venture capitalists invest money in start-ups in “stages,”meaning that not all the money that is invested is disbursed at the same time.
– Some venture capitalists also specialize in certain “stages”of funding.
• For example, some venture capital firm specialize in seed funding while others specialize in first-stage or second-stage funding.
10-16©2006 Prentice Hall
Initial Public Offering(1 of 3)
• Initial Public Offering– An initial public offering (IPO) is a company’s first sale of
stock to the public. When a stock goes public, its stock is traded on one of the major stock exchanges.
– Most entrepreneurial firms that go public trade on the NASDAQ, which is weighted heavily toward technology, biotech, and small-company stocks.
– An IPO is an important milestone for a firm. Typically, a firm is not able to go public until it has demonstrated that it is viable and has a bright future.
10-17©2006 Prentice Hall
Initial Public Offering(2 of 3)
Four reasons that motivate firms to go public
Reason 1
Is a way to raise equity capital to fund current and future operations
Reason 4
By going public, a firm creates
another form of currency that can be used to grow
the company
Reason 3
An IPO is a liquidity event that provides a means
for a company shareholders (including its
investors) to cash out their
investments
Reason 2
An IPO raises a firm’s public
profile, making it easier to attract
high-quality customers,
alliance partners, and employees
10-18©2006 Prentice Hall
Initial Public Offering(3 of 3)
• Initial Public Offering (continued)– Although there are many advantages to going public, it is a
complicated and expensive process. • The first step in initiating a public offering is to hire an investment
bank. An investment bank is an institution, such as Credit Suisse First Boston, that acts as an advocate and adviser and walks a firm through the process of going public.
• As part of this process, the investment bank typically takes the firm’s top management team wanting to go public on a road show, which is a whirlwind tour that consists of meetings in key cities where the firm presents its business plan to groups of investors (in an effort to drum up interest in the IPO).
10-19©2006 Prentice Hall
Sources of Debt Financing
Commercial Banks
SBA Guaranteed Loans
10-20©2006 Prentice Hall
Commercial Banks
• Banks– Historically, commercial banks have not been viewed as
practical sources of financing for start-up firms. – This sentiment is not a knock against banks; it is just that
banks are risk adverse, and financing start-ups is a risky business.
• As shown in Table 10.1 (on a previous slide), banks are interested in firms that have a strong cash flow, low leverage, audited financials, good management, and a healthy balance sheet.
• Although many new ventures have good management, few have the other characteristics, at least initially.
10-21©2006 Prentice Hall
SBA Guaranteed Loans(1 of 3)
• The SBA Offers Three Loan Programs– 7(a) Loan Guarantee, Microloan, and 504 Certified
Development Company Loan– The SBA does not currently have funding for direct loans
nor does it provide grants or low interest loans for business start-up or expansion.
• Philosophy Behind SBA Programs– The SBA provides loan guarantees to small businesses
unable to secure financing on reasonable terms through normal lending channels.
10-22©2006 Prentice Hall
SBA Guaranteed Loans(2 of 3)
• Philosophy Behind SBA Programs – The programs operate through private-sector lenders that
provide loans which are, in turn, guaranteed by the SBA.• What Can the Loan Funds Be Used For?
– Working capital to expand an existing business or start a new one
– Real estate renovation, purchase or construction– Equipment purchases
• Who is Eligible– Almost all small businesses are eligible for the SBA
programs.
10-23©2006 Prentice Hall
SBA Guaranteed Loans(3 of 3)
• Amount of Funds Available– The SBA can guarantee as much as 85% on loans of up to
$150,000 and 75% on loans of more than $150,000.– In most cases, the maximum guaranty is $1 million.
• Collateral– In most cases, the individual obtaining the loan must
pledge all his or her available collateral to obtain the loan.
10-24©2006 Prentice Hall
Creative Sources of Financing or Funding
Small Business Innovation
Research Grants
Leasing Strategic Partners
10-25©2006 Prentice Hall
Leasing(Slide 1 of 2)
• Leasing– A lease is a written agreement in which the owner of a
piece of property allows an individual or business to use the property for a specified period of time in exchange for payments.
– The major advantage of leasing is that it enables a company to acquire the use of assets with very little or no down payment.
• The two most common types of leases that new ventures enter intoare leases for facilities and leases for equipment.
• For example, many new businesses lease computers from Dell. The advantage for the new business is that it can gain access to the computers it needs with very little money invested up front.
10-26©2006 Prentice Hall
Leasing(Slide 2 of 2)
• Leasing (continued)– Most leases involve a modest down payment and monthly
payments during the duration of the lease.– At the end of an equipment lease, the new venture typically
has the option to stop using the equipment, purchase it for fair market value, or renew the lease.
– Leasing is almost always more expensive than paying cash for an item, so most entrepreneurs think of leasing as an alternative to equity or debt financing.
10-27©2006 Prentice Hall
Government Grants(1 of 3)
• SBIR and SBTT Programs– The Small Business Innovation Research (SBIR) and the
Small Business Technology Transfer (SBTT) programs are two important sources of early-stage funding for technology firms.
– These programs provide cash grants to entrepreneurs who are working on projects in specific areas.
• The main difference between the SBIR and the SBTT programs is that the SBTT program requires the participation of researchers working at universities or other research institutions.
10-28©2006 Prentice Hall
Government Grants(2 of 3)
• SBIR Program– The SBIR Program is a competitive grant program that
provides over $1 billion per year to small businesses in early-stage and development projects.
– Each year, 10 federal departments and agencies are required by the SBIR to reserve a portion of the R&D funds for awards to small businesses.
– Guidelines for how to apply for the grants are provided on each agency’s Web site.
10-29©2006 Prentice Hall
Government Grants(3 of 3)
• SBIR Program (continued)– The SBIR is a three phase program, meaning that firms that
qualify have the potential to receive more than one grant to fund a particular proposal.
– Historically, less than 15% of all phase I proposals are funded. The payoff for successful proposals, however, is high.
– The money is essentially free. It is a grant, meaning that it doesn’t have to be paid back and no equity in the firm is at stake.
10-30©2006 Prentice Hall
Strategic Partners
• Strategic Partners– Strategic partners are another source of capital for new
ventures.• Biotechnology, for example, relies heavily on partners for financial
support. Biotech firms, which are typically small, often partner with larger drug companies to conduct clinical trials and bring products to market.
– Alliances also help firms round out their business models and conserve resources.
• As we discussed in Chapter 5, Dell can focus on its core competency of assembling computers because it has assembled a network of strategic partners that provides it critical support.
11-1©2006 Prentice Hall
Chapter 11
Entrepreneurship: Successfully Launching
New Ventures, 1/eBruce R. Barringer
R. Duane Ireland
11-2©2006 Prentice Hall
Chapter Objectives(1 of 2)
1. Explain the purpose of market segmentation.2. Describe the importance of selecting a target
market. 3. Explain why it’s important for a start-up to
establish a unique position in its target market.4. Describe why it’s important to position a
company’s products on benefits rather than features.
5. Illustrate the two major ways in which a company builds a brand.
11-3©2006 Prentice Hall
Chapter Objectives(2 of 2)
6. Identify the four components of the marketing mix.7. Explain the difference between a core product and an
actual product.8. Contrast cost-based pricing and value-based pricing.9. Explain the differences between advertising and public
relations.10. Weigh the advantages and disadvantages of selling
direct versus selling through intermediaries.
11-4©2006 Prentice Hall
Selecting a Market and Establishing a Position
(1 of 1)
• Important Questions That All Startups Must Ask– In order to succeed, a new firm must address this important
issue: Who are our customers are how will we appeal to them?
– A well-managed start-up approaches this query by following a three-step process:
• Segmenting the market, selecting or developing a niche with a target market, and establishing a unique position in the target market.
11-5©2006 Prentice Hall
Segmenting the Market
• Market Segmentation– The first step in selecting a target market is to study the
industry in which the firm intends to compete and determine the different target markets in that industry.
• This process is called market segmentation and is important because a new firm typically only has enough resources to target one market segment, at least initially.
• Markets can be segmented in a number of different ways, including product type, price point, and customers served.
• For example, the computer industry can be segmented by product type (i.e., handheld computers, laptops, PCs, microcomputers, and mainframes) or customers served (i.e., individuals, businesses, schools, and government).
11-6©2006 Prentice Hall
Selecting a Target Market
• Target Market– Once a firm has segmented the market, the next step is to
select a target market. The market must be sufficiently attractive and the firm must have the capabilities to serve it.
– Typically, a firm doesn’t target an entire segment of a market because many market segments are too large to target successfully.
• Instead, most firms target a niche with the segment.• For example, one segment of the computer industry is handheld
computers. Within this segment, there are several smaller nichemarkets that represent a narrower group of customers with similar interests.
11-7©2006 Prentice Hall
Establishing a Unique Position(1 of 2)
• Positioning– After selecting a target market, the firm’s next step is to
establish a “position” within it that differentiates it from its competitors.
– In a sense, a position is the part of a market or of a segment of the market the firm is claiming as its own.
– A firm establishes a unique position in its customers’ minds by consistently drawing attention to two or three of its product’s attributes that define the essence of what the product is and what separates it from its competitors.
11-8©2006 Prentice Hall
Establishing a Unique Position(2 of 2)
• Positioning (continued)– Firms often develop a “tagline” to reinforce the position
they have staked out in their market, or a phrase that is used consistently in a company’s literature, advertisements, promotions, stationary, and even invoices and thus becomes associated with the company.
– An example is Nike’s familiar tagline, “Just do it.”• The beauty of this simple three-word expression is that it applies
equally to a 21-year-old triathlete and a 65-year-old mall walker.• This clever tagline, along with Nike’s positioning strategy, helped
it expand its product line beyond running shoes to athletic products for all age-groups.
11-9©2006 Prentice Hall
Selling Benefits Rather Than Features(1 of 2)
• Selling Benefits Rather Than Features– Many entrepreneurs make the mistake of positioning their
company’s products or services on features rather than benefits.
– A positioning or marketing strategy that focuses on the features of a product, such as its technical merits, is usually much less effective than a campaign focusing on what the merits of the product can do.
– Consider the example of the following slide.
11-10©2006 Prentice Hall
Selling Benefits Rather Than Features(2 of 2)
Two different approaches to promoting a cell phone
Approach Illustration
Selling Features
Selling Benefits
Conclusion
“Our cell phones are equipped with sufficient memory to store 100 phone numbers.”
“Our cell phones let you store up to 100 phone numbers, giving you the phone numbers of your family and your
friends at your fingertips.”
While features are nice, they typically don’t entice someone to buy a product. The first statement tells a prospect how many phone
numbers the cell phone will hold, but doesn’t tell the prospect why that’s important. The second statement tells a prospect why having
sufficient memory to store 100 phone numbers is important, and how buying the product will enhance his or her life.
11-11©2006 Prentice Hall
Establishing a Brand(1 of 3)
• Establishing a Brand– A brand is the set of attributes—positive or negative—that
people associated with a company.• These attributes can be positive, such as trustworthy, dependable,
or easy to deal with.• Or they can be negative, such as cheap, unreliable, or difficult to
deal with.– The customer loyalty a company crates through its brand is
one of its most valuable assets.• Brand Management
– Some companies monitor the integrity of their brandsthrough a program called “brand management.”
11-12©2006 Prentice Hall
Establishing a Brand(2 of 3)
• Establishing a Brand– So how does a firm establish a brand?
• On a philosophical level, a firm must have meaning in its customer’s lives. It must create value—something for which customers are willing to pay.
• On a more practical level, brands are built through a number of techniques, including advertising, public relations, sponsorships, support of social causes, and good performance.
• A firm’s name, logo, Web site design, and even its letterhead are part of its brand.
• It’s important for start-ups, particularly if they plan to sell to other businesses, to have a polished image immediately so that they have creditability when they approach their potential customers.
11-13©2006 Prentice Hall
Establishing a Brand(3 of 3)
• Power of a Strong Brand– Ultimately, a strong brand can be a very powerful asset for
a firm.– Fifty-two percent of consumers say that a known and
trusted brand is a reason to buy a product.
• Cobranding– One technique that companies use to strengthen their
brands is to enter into a cobranding arrangements with other firms.
• Cobranding refers to a relationship between two or more firms where the firm’s brands promote each other.
11-14©2006 Prentice Hall
The Four Ps of Marketing for New Ventures
Marketing Mix
Product Price
Promotion Place (or distribution)
11-15©2006 Prentice Hall
Product(1 of 2)
• Product– A firm’s product, in the context of the marketing mix, is the
good or service it offers to its target market. – The initial rollout is one of the most critical times in the
marketing of a new product. • All new firms face the challenge that they are unknown and that it
takes a leap of faith for their first customers to buy their products.• Some start-ups meet this challenge by using reference accounts.• A reference account is an early user of a firm’s product or service
who is willing to give a testimonial regarding his or her experience with the product or service.
11-16©2006 Prentice Hall
Product(2 of 2)
• Core Product vs. Actual Product– As a firm prepares to sell its product, an important
distinction should be made between the core product and the actual product.
– The core product is the product itself, such as a CD that contains an antivirus program.
– The actual product, which is what the customer buys, may have up to five attributes: a quality level, features, design, a brand name and packaging.
11-17©2006 Prentice Hall
Price(1 of 2)
• Price– Price is the amount of money consumers pay to buy a
product. It is the only element of the marketing mix that produces revenue; all other elements represent a cost.
– The price a company charges for its products sends an important message to its target market.
• For example, Oakley positions its sunglasses as innovative, state-of-the-art products that are both high quality and visually appealing. This position in the market suggests a premium pricethat Oakley charges.
– Most entrepreneurs use one of two methods to set the price for their products, as shown on the next slide.
11-18©2006 Prentice Hall
Price(2 of 2)
Cost-Based vs. Value-Based Pricing
Approach to Pricing
Description
Cost-Based Pricing
Value-Based Pricing
In cost-based pricing, the list price is determined by adding a markup percentage to a product’s cost. The advantage of this method is that it is straightforward, and it is relatively easy to
justify the price of a good or service. The disadvantage is that it is not always easy to estimate what the costs of a product will be.
In value-based pricing, the list price is determined by estimating what consumers are willing to pay for a product and then backingoff a bit to provide a cushion. What a consumer is willing to pay is determined by his or her perceived value of the product and by the number of choices available in the marketplace. Most experts
recommend value-based prices because it hinges on the consumer’s perception of what a product or service is worth.
11-19©2006 Prentice Hall
Promotion(1 of 4)
• Promotion– Refers to the activities the firm takes to communicate the
merits of its product to its target market. – There are several common activities that entrepreneurs use
to promote their products and services.
• Advertising– Advertising is making people aware of a product or service
in hopes of persuading them to buy it.
11-20©2006 Prentice Hall
Promotion(2 of 4)
• Advertising (continued)– Advertising’s major goals are to do the following:
• Raise customer awareness of a product• Explain a product’s comparative benefits• Create associations between a product and a certain lifestyle
– Advertising has some major weaknesses, including the following:• Low credibility• The possibility that a high percentage of the people who see the ad will not
be interested• Message clutter• Relatively costly compared to other forms of promotions• The perception that advertising is intrusive
11-21©2006 Prentice Hall
Promotion(3 of 4)
• Public Relations– One of the most cost-effective ways to increase the
awareness of the company’s products is through public relations.
– Public relations refer to efforts to establish and maintain a company’s image with the public.
– The major difference between public relations and advertising is that public relations is not paid for—directly.
• The cost of public relations to a firm is the effort it makes tonetwork with journalists and other people to try to interest them in saying or writing good thing about the company and its products.
11-22©2006 Prentice Hall
Promotion(4 of 4)
Techniques that are defined as public relations
11-23©2006 Prentice Hall
Place (or Distribution)(1 of 2)
• Place– Place, or distribution, encompasses all the activities that
move a firm’s product from its place of origin to the consumer.
– The first choice a firm has to make regarding distribution is whether to sell its products directly to consumers or through intermediaries (such as wholesalers and retailers).
– Within most industries, both choices are available, so the decision typically depends on how a firm believes its target market wants to buy its product.
11-24©2006 Prentice Hall
Place (or Distribution)(2 of 2)
Selling direct versus selling through intermediaries
Approach to Distribution
Description
Selling Direct
Selling Through
Intermediaries
Many firms sell direct to customers. Being able to control the process of moving their products from their place of origin to the end user instead of relying on third parties is a major advantage of selling direct. The disadvantage of selling direct is that a firm has more of its capital tied up because it must own or rent retail
outlets and must field a sales force.
Firms who sell through intermediaries pass off their products towholesalers who place them in retail outlets to be sold. An
advantage of this approach is that the firm does not need to ownas much of the distribution channel. The disadvantage of selling through intermediaries is that a firm loses control of its product.
12-1©2006 Prentice Hall
Chapter 12
Entrepreneurship: Successfully Launching
New Ventures, 1/eBruce R. Barringer
R. Duane Ireland
12-2©2006 Prentice Hall
Chapter Objectives(1 of 2)
1. Define the term “intellectual property” and describe its importance.
2. Discuss the four major forms of intellectual property: patents, trademarks, copyrights, and trade secrets.
3. Specify the rules of thumb for determining whether a particular piece of intellectual property is worth the time and expense of protecting.
4. Describe the six-step process for obtaining a patent.5. Identify the four types of trademarks.
12-3©2006 Prentice Hall
Chapter Objectives(2 of 2)
6. Identify the types of material that are eligible for copyright protection.
7. Discuss the legal environment that facilitates trade secret protection.
8. Identify the most common types of trade secret disputes.
9. Identify some of the physical measures that firms take to protect their trade secrets.
10. Explain the two primary reasons for conducting an intellectual property audit.
12-4©2006 Prentice Hall
The Importance of Intellectual Property
• Intellectual Property– Is any product of human intellect that is intangible but has
value in the marketplace.– It is called “intellectual” property because it is the product
of human imagination, creativity, and inventiveness.
• Importance– Traditionally, businesses have thought of their physical
assets, such as land, buildings, and equipment as the most important.
– Increasingly, however, a company’s intellectual assets are the most important.
12-5©2006 Prentice Hall
Determining What Intellectual Property to Protect
Criteria 1
Determine whether the intellectual property in
question is directly related to the firm’s
competitive advantage
Criteria 2
Decide whether the intellectual property in
question has value in the marketplace
12-6©2006 Prentice Hall
The Four Key Forms of Intellectual Property
Patents
Copyrights
Trademarks
Trade Secrets
12-7©2006 Prentice Hall
Patents(1 of 3)
• Patents– A patent is a grant from the federal government conferring
the rights to exclude others from making, selling, or using an invention for the term of the patent. (see the next slide)
• Increasing Interest in Patents– There is increasing interest in patents, as shown in Table
12.2.• Since Patent #1 was granted in 1790, the U.S. Patent & Trademark
Office has granted over six million patents.• The patent office is strained. It now takes an average of 27.7
months from the date of first filing to receive a U.S. patent.
12-8©2006 Prentice Hall
Patents(2 of 3)
Proper Understanding of What a Patent Means
A patent does not give its owner the right to make, use or sell an invention: rather, the right granted is only to exclude others from doing so.
As a result, if an inventor obtains a patent for a new kind of computer chip, and the chip would infringe on a prior patent owned by Intel, the inventor has no right to make, use, or sell the chip.
To do so, the inventor would need to obtain permission from Intel. Intel may refuse permission, or ask that a licensing fee be paid for the rights to infringe on its patent.
While this system may seem odd, it is really the only way the system could work. Many inventions are improvements on existing inventions, and the system allows the improvements to be (patented) and sold, but only with the permission of the original inventors, who usually benefit by obtaining licensing income in exchange for their consent.
12-9©2006 Prentice Hall
Patents(3 of 3)
• Business Method Patent– Recently, utility patent law has added business method
patents.– A business method patent is a patent that protects an
invention that is or facilitates a method of doing business.– The most notable business method patents that have been
awarded have been Amazon.com’s one-click ordering system, Priceline.com’s “name-your-price” business model and Netflix’s method for allowing customers to set up a rental list of movies to be mailed to them.
12-10©2006 Prentice Hall
Trademarks(1 of 6)
A trademark is any word, name, symbol, or device used to
identify the source or origin of products or services and to
distinguish those products or services from others.
Trademarks also provide consumers with useful
information. For example, consumers know what to expect
when they log onto Yahoo! Think how confusing it would be if any Internet site was allowed
to call itself Yahoo!
12-11©2006 Prentice Hall
Trademarks(2 of 6)
Illustration of the Multifaceted Nature of Trademark Protection
Name is trademarked
Symbol is trademarked
Slogan is trademarked
Cisco
12-12©2006 Prentice Hall
Trademarks(3 of 6)
Trademark Law Protects the Following Items
12-13©2006 Prentice Hall
Trademarks(4 of 6)
Trademark Law Protects the Following Items (continued)
12-14©2006 Prentice Hall
Trademarks(5 of 6)
Exclusions From Trademark Protection
12-15©2006 Prentice Hall
Additional Information About Trademarks(6 of 6)
• Duration– Once a trademark has been used in interstate commerce, it
can be registered with the U.S. Patent and Trademark Office for a renewable term of 10 years, and can theoretically be registered forever, as long as the trademark stays in use.
• Registering Trademarks– Technically, a trademark does not need to be registered to
receive protection. Once it is used, it is protected.• There are many advantages, however, to registering the market
with the U.S. Patent and Trademark Office.
12-16©2006 Prentice Hall
Copyrights(1 of 5)
• Copyrights– A copyright is a form of intellectual property protection
that grants to the owner of a work of authorship the legal right to determine how the work is used and to obtain economic benefits from the work.
– A work does not have to have artistic merit to be eligible for copyright protection.
• As a result, things such as operating manuals are eligible for copyright protection.
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Copyrights(2 of 5)
What is Protected by a Copyright?
12-18©2006 Prentice Hall
Copyrights(3 of 5)
What is Protected by a Copyright? (continued)
12-19©2006 Prentice Hall
Copyrights(4 of 5)
• Exclusions From Copyright Protection– The main exclusion is that copyright laws cannot protect
ideas.• For example, an entrepreneur may have the idea to open a soccer-
themed restaurant. The idea itself is not eligible for copyrightprotection. However, if the entrepreneur writes down specifically what his or her soccer-themed restaurant will look like and how it will operate, that description is copyrightable.
• The legal principle describing this concept is called the idea-expression dichotomy. An idea is not copyrightable, but the specific expression of an idea is.
12-20©2006 Prentice Hall
Copyrights(5 of 5)
• How to Obtain a Copyright– Copyright law protects any work of authorship the moment
it assumes a tangible form. Technically, it is not necessary to provide a copyright notice or register work with the U.S. Copyright Office.
– The following steps can be taken, however, to enhance copyright protection.
• Copyright protection can be enhanced by attaching the copyright notice, or “copyright bug” to something.
• Further protection can be obtained by registering the work with the U.S. Copyright Office.
12-21©2006 Prentice Hall
Trade Secrets(1 of 5)
• Trade Secrets– A trade secret is any formula, pattern, physical device, idea,
process, or other information that provides the owner of the information with a competitive advantage in the marketplace.
– Trade secrets include marketing plans, product formulas, financial forecasts, employee rosters, logs of sales calls, and similar types of proprietary information.
– The Federal Economic Espionage Act, passed in 1996, criminalizes the theft of trade secrets.
12-22©2006 Prentice Hall
Trade Secrets(2 of 5)
What Qualifies For Trade Secret Protection?
12-23©2006 Prentice Hall
Trade Secrets(3 of 5)
Trade Secret Protection MethodsPhysical Measures
12-24©2006 Prentice Hall
Trade Secrets(4 of 5)
Trade Secret Protection MethodsPhysical Measures (continued)
12-25©2006 Prentice Hall
Trade Secrets(5 of 5)
Trade Secret Protection MethodsWritten Agreements
It is important for a company’s employees to know that it is their duty to keep trade secrets and other
forms of confidential information secret. For the best protection, a firm should ask its employees to sign
nondisclosure and noncompete agreements, as discussed in Chapter 6.
12-26©2006 Prentice Hall
Conducting an Intellectual Property Audit(1 of 2)
• Intellectual Property Audit– The first step a firm should take to protect its intellectual
property is to complete an intellectual property audit.– An intellectual property audit is conducted to determine the
intellectual property a firm owns.– There are two reasons for conducting an intellectual
property audit:• First, it is prudent for a company to periodically determine whether
its intellectual property is being properly protected.• Second, it is important for a firm to remain prepared to justify its
valuation in the event of a merger or acquisition.
12-27©2006 Prentice Hall
Conducting an Intellectual Property Audit(2 of 2)
• The Process of Conducting an Intellectual Property Audit– The first step is to develop an inventory of a firm’s existing
intellectual property. The inventor should include the firm’s present registrations of patents, trademarks, and copyrights.
– The second step is to identify works in progress to ensure that they are being documented and protected in a systematic, orderly manner.
13-1©2006 Prentice Hall
Chapter 13
Entrepreneurship: Successfully Launching
New Ventures, 1/eBruce R. Barringer
R. Duane Ireland
13-2©2006 Prentice Hall
Chapter Objectives(1 of 2)
1. Explain the term “sustained growth.”2. Describe the potential downsides to firm growth.3. Discuss the six most common reasons firms pursue
growth.4. Explain the advantages of having a scalable
business model.5. Describe the basic idea behind benchmarking and
how benchmarking can be used to help a firm execute a successful growth strategy.
13-3©2006 Prentice Hall
Chapter Objectives(2 of 2)
6. Describe the managerial capacity problem and how it inhibits firm growth.
7. Discuss the day-to-day challenges of growing a firm.8. Identify the three myths that surround firm growth.9. Identify the most prevalent growth-related firm
attributes.10. Describe the importance of having a commitment to
growth.
13-4©2006 Prentice Hall
Growth: A Double-Edge Sword(1 of 2)
• Nature of Firm Growth– Most entrepreneurial firms want to grow. Especially in the
short run, growth in sales revenue is an important indicator of an entrepreneurial venture’s potential to survive today and be successful in the future.
• Growth is exciting and fast-paced and for most firms is an indication of success.
– Growth, however, is a double-edge sword. It can threaten the stability of a firm’s operations in every area, from human resources to finance, if it is not managed properly.
13-5©2006 Prentice Hall
Growth: A Double-Edge Sword(2 of 2)
• Nature of Firm Growth (continued)– Firms pursue growth deliberately. That is not to say,
however, that firms can always choose the pace of their growth.
– A firm’s pace of growth is the rate at which it is growing on an annual basis.
• Sometimes firms are forced into a high-growth mode sooner than they would like. For example, when a firm develops a product orservice that meets such a pervasive need that orders roll in very quickly, it must adjust quickly or risk faltering.
13-6©2006 Prentice Hall
Reasons for Firm Growth(1 of 2)
Reasons for Firm Growth
Reason for Growth Why This Reason May Motivate a Firm to Grow
Capturing Economies of Scale
Executing a Scalable Business Model
Market Leadership
Economies of scale occur when increasing production lowers the average cost of each unit produced.
A scalable business model is one in which increased revenues cost less to deliver than current revenues, so profit margins increase as sales go up. This is typically found in companies that have large up-front costs but have products with small
per-unit variable costs.
Many firms work hard to achieve market leadership, to realize economics of scale in production, and be
recognized as the brand leader.
13-7©2006 Prentice Hall
Reasons for Firm Growth(2 of 2)
Reasons for Firm Growth (continued)
Reason for Growth
Influence, Power, and Survivability
Need to Accommodate the Growth of Key
Customers
Ability to Attract and Retain Talented
Employees
Larger businesses usually have more influence and power than smaller firms in regard to setting standards for an
industry, getting a “foot in the door” with major customers and suppliers, and garnering prestige.
Why This Reason May Motivate a Firm to Grow
Sometimes firms are compelled to grow to accommodate the growth of a key customer.
Growth is a firm’s primary mechanism to generate promotional opportunities for employees.
13-8©2006 Prentice Hall
Benchmarking Against Successful Growth Firms
(1 of 1)
• Benchmarking– The basic idea behind benchmarking is that a firm can
improve the quality of an activity by identifying and copying the methods of other firms that have been successful in that area.
• For example, if a small electronics firm in the Midwest decided to start exporting to Europe, it would be wise to identify other small electronics firms in the Midwest that export to Europe so it could study their methods and experiences.
• If the firm you try to “benchmark against” is not a direct or indirect competitor, it will usually be willing to help.
13-9©2006 Prentice Hall
Managerial Capacity Problem(1 of 4)
• Managerial Capacity– In her thoughtful book, The Theory of the Growth of the
Firm, Edith T. Penrose argues that firms are collections of productive resources that are organized in an administrative framework.
– As a firm goes about its routine activities, it recognizes opportunities to grow.
– The problem with this is that firms are not always prepared or able to grow, because of limited “managerial capacity."
13-10©2006 Prentice Hall
Managerial Capacity Problem(2 of 4)
• A Firm’s Administrative Framework– A firm’s administrative framework consists of two kinds of
services that are important to firm growth.• Entrepreneurial services generate new market, product, and service
ideas, while managerial services administer the routine functions of the firm and facilitate the profitable execution of new opportunities.
• However, the introduction of new product and service ideas requires substantial managerial services (or managerial capacity) to be properly implemented and supervised.
• This is a complex problem because if a firm has insufficient managerial services to properly implement its entrepreneurial ideas, it can’t grow.
13-11©2006 Prentice Hall
Managerial Capacity Problem(3 of 4)
• A Firm’s Administrative Framework (continued)– Continuation From Previous Slide
• The reason a firm can’t quickly increase its managerial services to accommodate new product or service ideas, is that it is expensive to hire new employees, and it takes time for new managers to be socialized into the firm’s culture, acquire firm-specific skills and knowledge, and establish trusting relationships with other members of the firm.
• When a firm’s managerial resources are insufficient to take advantage of its new product and service opportunities, the subsequent bottleneck is referred to as the managerial capacity problem.
13-12©2006 Prentice Hall
Managerial Capacity Problem(4 of 4)
• Additional Challenges– As a firm grows, it is faced with the dual challenges of
adverse selection and moral hazard.• Adverse selection means that as the number of employees a firm
needs increases, it becomes increasingly difficult for it to find the right employees, place them in appropriate positions, and provide adequate supervision.
• Moral hazard means that as a firm grows and adds personnel, the new hires typically do not have the same ownership incentives asthe original founders, so the new hires may not be as motivated as the founders to put in long hours and may even try to avoid hardwork.
13-13©2006 Prentice Hall
Typical Challenges of Growing a Firm(1 of 2)
Challenges
Challenge Explanation
Cash Flow Management
Price Stability
As discussed in Chapters 7 and 9, as a firm grows, it requires an increasing amount of cash to service its customers. Growth usually increases rather than decreases the challenges involved with cash flow management because an increase in sales means
that more cash will be flowing in and out of the firm.
If firm growth comes at the expense of a competitor’s market share, a price war can result. Because a price war typically helps
no one but the customer, any growth strategy should consider competitors’ responses and their effect on price stability.
13-14©2006 Prentice Hall
Typical Challenges of Growing a Firm(2 of 2)
Challenges
Challenge Explanation
Quality Control
Capital Constraints
Firm growth is typically accomplished by an increase in firm activity. This means that a firm must handle more service
requests and paperwork and contend with more customers and vendors. If a firm does not increase its resources to manage
growth, then product or service quality may decline.
Capital constraints are an ever-present problem for growing firms. Growth increases rather than decreases the challenges
in this area.
13-15©2006 Prentice Hall
Myths About Growth(1 of 2)
Myth 1: Growth Companies are Predominately Technology and Health
Care Companies
Because so much attention has been paid to how quickly some well-
known technology and health-care companies have grown, it is easy to get the idea that growth companies
are primarily technology and health-care. This is not necessarily the case.
Myth 2: Rapid-Growth Firms Emerge Only In Rapid-Growth Industries
Of course, rapid-growth firms do exist in rapid-growth markets, but
there are many examples of firms in fairly ordinary industries that have maintained impressive growth rates.
13-16©2006 Prentice Hall
Myths About Growth(2 of 2)
Myth 3: To Grow Quickly, You Must Have a First-Mover Advantage
As discussed in Chapter 3, a first-mover advantage is not always
advantageous. Many firms have grown quickly by capturing a first-mover advantage, but many firms
have also growth quickly by entering an industry later on.
14-1©2006 Prentice Hall
Chapter 14
Entrepreneurship: Successfully Launching
New Ventures, 1/eBruce R. Barringer
R. Duane Ireland
14-2©2006 Prentice Hall
Chapter Objectives(1 of 2)
1. Explain the difference between internal and external growth strategies.
2. Identify the keys to effective new product development.
3. Explain the common reasons new products fail.4. Discuss a market penetration strategy.5. Explain the term “international new venture.”6. Explain the objectives a company can achieve by
acquiring another business.
14-3©2006 Prentice Hall
Chapter Objectives(2 of 2)
7. Identify a promising acquisition candidate’s characteristics.
8. Explain the term “licensing” and how licensing can be used as a growth strategy.
9. Explain the term “strategic alliance” and describe the difference between technological alliances and marketing alliances.
10. Explain the term “joint venture” and describe the difference between a scale joint venture and a link joint venture.
14-4©2006 Prentice Hall
Internal and External Growth Strategies(1 of 1)
Internal Growth Strategies
Rely on effects generated within the firm itself, such as new product development, other
product related strategies, and international expansion
External Growth Strategies
Rely on establishing relationships with third parties, such as
mergers, acquisitions, strategic alliances, joint ventures,
licensing, and franchising
14-5©2006 Prentice Hall
Internal Growth Strategies
New Product Development
Other Product-Related Strategies
International Expansion
14-6©2006 Prentice Hall
Advantages and Disadvantages of Internal Growth Strategies
Table 14.1Advantages and Disadvantages of Internal Growth Strategies
Advantages Disadvantages
• Incremental, even-paced growth
• Provides maximum control
• Preserves organizational culture
• Encourages internal entrepreneurship
• Allows firms to promote from within
• Slow form of growth
• Need to develop new resources• Investment in a failed internal growthstrategy can be difficult to recoup
• Adds to industry capacity
14-7©2006 Prentice Hall
New Product Development(1 of 2)
• New Product Development– Involves the creation and sale of new products (or services)
as a means of increasing firm revenues.– In many fast-paced industries, new product development is
a competitive necessity.• For example, the average product life cycle in the computer
software industry is 14 to 16 months.• Because of this, to remain competitive, software companies must
always have new products in their pipeline.
14-8©2006 Prentice Hall
New Product Development(2 of 2)
• Find a need and fill it
• Develop products that add value
• Get quality right and pricing right
• Focus on a specific target market
• Conduct ongoing feasibility analysis
Keys to Effective New Product and Service Development
• Inadequate feasibility analysis
• Overestimation of market potential
• Bad timing
• Inadequate feasibility analysis
• Inadequate promotions
• Poor service
Common Reasons That New Products Fail
14-9©2006 Prentice Hall
Other Product Related Strategies(1 of 2)
Product Related Strategies
Product Strategy Description
Improving an Existing Product
or Service
Increasing the Market Penetration
of an Existing Product or Service
Often, a business can increase its revenue by improving an existing product or service—enhancing quality, making it
larger or smaller, making it more convenient to use, or making it more up-to-date.
A market penetration strategy seeks to increase the sales of a product or service through greater marketing efforts or
through increased production capacity and efficiency.
14-10©2006 Prentice Hall
Other Product Related Strategies(2 of 2)
Product Related Strategies (continued)
Product Strategy Description
Extending Product Lines
Geographic Expansion
A product line extension strategy involves making additional versions of a product so that it will appeal to
different clientele.
Many entrepreneurial businesses grow by simply expanding from their original location to additional geographic sites.
14-11©2006 Prentice Hall
International Expansion(1 of 1)
• International Expansion– Another common form of growth for entrepreneurial firms.– International new ventures are businesses that, from their
inception, seek to derive significant competitive advantage by using their resources to sell products or services in multiple countries.
– Although there is vast potential associated with selling overseas, it is a fairly complex form of growth.
14-12©2006 Prentice Hall
External Growth Strategies
Licensing Mergers and Acquisitions
Strategic alliances and joint ventures
Franchising (covered in Chapter 15)
14-13©2006 Prentice Hall
Advantages and Disadvantages of External Growth Strategies
Table 14.4Advantages and Disadvantages of External Growth Strategies
Advantages Disadvantages
• Reducing competition
• Getting access to proprietary products• Gaining access to new products and
markets• Access to technical expertise• Access to an established brand name• Economies of scale• Diversification of business risk
• Incompatibility of top management
• Clash of corporate cultures
• Operational problems
• Increased business complexity
• Loss of organizational flexibility
• Antitrust implications
14-14©2006 Prentice Hall
Mergers and Acquisitions(1 of 1)
• Mergers and Acquisitions– Many entrepreneurial firms grow through mergers and
acquisitions. • An acquisition is the outright purchase of one firm by another.• A merger is the pooling of interests to combine two or more firms
into one.
• Purpose of Acquisitions – Acquiring another business can fulfill several of a
company’s needs, such as expanding its product line, gaining access to distribution channels, achieving competitive economies of scale, or expanding the company’s geographic reach.
14-15©2006 Prentice Hall
Licensing(1 of 2)
• Licensing– Is the granting of permission by one company to another
company to use a specific form of its intellectual property under clearly defined conditions.
– Virtually any intellectual property a company owns that is protected by a patent, trademark, or copyright can be licensed to a third party.
• Licensing Agreement– The terms of a license are spelled out by a licensing
agreement.
14-16©2006 Prentice Hall
Licensing(2 of 2)
Types of Licensing
Type of Licensing Description
Technology Licensing
Merchandise and Character Licensing
Is the licensing of proprietary technology that the licensor typically controls by virtue of a
utility patent.
Is the licensing of a recognized trademark or brand that the licensor typically controls through a
registered trademark or copyright.
14-17©2006 Prentice Hall
Strategic Alliances (1 of 2)
• Strategic Alliances– A strategic alliance is a partnership between two or more
firms developed to achieve a specific goal.– Alliances tend to be informal and do not involve the
creation of a new entity.– According to a recent survey, over three-fourths of
technology businesses are active in strategic alliances, with the typical participant active in seven alliances.
14-18©2006 Prentice Hall
Strategic Alliances (2 of 2)
Types of Strategic Alliances
Type of Alliance Description
Technology Alliances
Marketing Alliances
Typically match a company with a distribution system with a company that has a product to sell in
order to increase sales of a product or service.
Feature cooperation in research and development, engineering, and manufacturing.
14-19©2006 Prentice Hall
Joint Ventures (1 of 2)
• Joint Ventures– A joint venture is an entity created when two or more firms
pool a portion of their resources to create a separate, jointly owned organization.
– A common reason to form a joint venture is to gain access to a foreign market. In these cases, the joint venture typically consists of the firm trying to reach a foreign market and one or more local partners.
14-20©2006 Prentice Hall
Joint Ventures (2 of 2)
Types of Joint Ventures
Type of Joint Venture Description
Scale Joint Venture
Link Joint VentureIn a link joint venture, the position of the parties is not
symmetrical, and the objectives of the partners may diverge. For example, many of the joint ventures between
food companies provide one partner with access to distribution channels and the partner more products to sell.
In a scale joint venture, the partners collaborate at a single point in the value chain to gain economies of scale in
production or distribution. This type of joint venture can be a good vehicle for developing new products or services.
14-21©2006 Prentice Hall
Advantages and Disadvantages of Participating in Strategic Alliances and Joint Ventures
Advantages Disadvantages
• Gain access to a particular resource
• Economies of scale
• Risk and cost sharing
• Gain access to a foreign market
• Learning
• Speed to market
• Neutralizing or blocking competitors
• Loss of proprietary information
• Management complexities
• Financial and organizational risks
• Risk becoming depending on a partner
• Partial loss of decision autonomy
• Partners’ cultures may clash
• Loss of organizational flexibility
15-1©2006 Prentice Hall
Chapter 15
Entrepreneurship: Successfully Launching
New Ventures, 1/eBruce R. Barringer
R. Duane Ireland
15-2©2006 Prentice Hall
Chapter Objectives(1 of 2)
1. Explain what franchising is and how it differs from other forms of business ownership.
2. Describe the differences between a product and trademark franchise and a business format franchise.
3. Explain the differences among an individual franchise agreement, an area franchise agreement, and a master franchise agreement.
4. Describe the advantages of setting up a franchise system as a means of firm growth.
5. Identify the rules of thumb for determining when franchising is an appropriate form of growth for a particular business.
15-3©2006 Prentice Hall
Chapter Objectives(2 of 2)
6. Discuss the factors to consider in determining whether owning a franchising is a good fit for a particular person.
7. Identify the costs associated with buying a franchise.8. Discuss the advantages and disadvantages of buying a
franchise.9. Identify the common mistakes franchise buyers make.10. Describe the purpose of the Uniform Franchise Offering
Circular.
15-4©2006 Prentice Hall
Introduction to Franchising
• Introduction– Franchising is a popular method of business expansion and
is growing in popularity.– In 1950, fewer than 100 franchisors existed in the U.S.
Today, there are roughly 1,200. • The number of franchise systems grows by about 200 per year.
• History– The word “franchise” comes from an old dialect of French
and means privilege or freedom.
15-5©2006 Prentice Hall
What is Franchising?
• Franchising– Franchising is a form of business organization in which a
firm that already has a successful product or service (franchisor) licenses its trademark and method of doing business to other business or individual (franchisee) in exchange for a franchise fee and an ongoing royalty payment.
– Some franchisors are established firms (like McDonald’s) while others are first-time enterprises being launched by entrepreneurs.
15-6©2006 Prentice Hall
Types of Franchise Systems(1 of 2)
• Product and Trademark Franchise– An arrangement under which the franchisor grants to the
franchisee the right to buy its products and use its trade name.
– This approach typically connects a single manufacturer with a network of dealers or distributors.
• For example, General Motors has established a network of dealersthat sell GM cars and use the GM trademark in their advertising and promotions.
• Other examples of product and trademark franchisors include agricultural machinery dealers, soft drink bottlers, and beer distributorships.
15-7©2006 Prentice Hall
Types of Franchise Systems(2 of 2)
• Business Format Franchise– An arrangement under which the franchisor provides a
formula for doing business to the franchisee along with training, advertising, and other forms of assistance.
– Fast-food restaurants, convenience stores, and motels are well-known examples of business format franchises.
• Business format franchises are by far the most popular form of franchising, particularly for entrepreneurial firms.
• Business format franchisors obtain the majority of their revenues from their franchisees in the form of royalties and franchise fees.
15-8©2006 Prentice Hall
Types of Franchise Agreement
• Individual Franchise Agreement– The most common type of agreement—involves the sale of
a single franchise for a specific location.• Area Franchise Agreement
– Allows a franchisee to own and operate a specific number of outlets in a particular geographic area.
• Master Franchise Agreement– Similar to an area franchise agreement, with one major
difference.• In addition to having the right to operate a specific number of
locations in a particular area, a master franchisee has the right to offer and sell the franchise to other people in its area.
15-9©2006 Prentice Hall
When to Franchise?(From the Franchisor’s Point of View)
(1 of 2)
• Approach Franchising With Caution and Care– Establishing a franchise system should be approached
carefully and deliberately. – Franchising is a complicated business endeavor, and an
entrepreneur must look closely at all its aspects before deciding to franchise.
• Regulations– An entrepreneur should also be aware that over the years a
number of fraudulent franchise organizations have come and gone and have left financially ruined franchise owners behind.
• As a result, franchising is a heavily regulated path to business growth.
15-10©2006 Prentice Hall
When to Franchise?(2 of 2)
• When Is Franchising Most Appropriate?– Franchising is most appropriate when a firm has a strong or
potentially strong trademark, a well-designed business method, and a desire to grow.
– A franchise system will ultimately fail if the franchisee’s brand doesn’t add value for customers and its business method is flawed or poorly developed.
15-11©2006 Prentice Hall
Advantages and Disadvantages of Franchising As a Method of Business Expansion
Advantages Disadvantages
• Rapid, low-cost market expansion
• Income from franchise fees and royalties
• Franchisee motivation
• Access to ideas and suggestions
• Cost savings
• Increased buying power
• Profit sharing
• Loss of control
• Friction with franchisees
• Managing growth
• Differences in required business skills
• Legal expenses
15-12©2006 Prentice Hall
Buying a Franchise(From the Franchisee’s Point of View)
(1 of 2)
• Buying a Franchise– Purchasing a franchise is an important business decision
involving a substantial financial commitment.– Potential franchise owners should strive to be as well
informed as possible before purchasing a franchise and should be well aware that it is often legally and financially difficult to exit a franchise relationship.
• Close scrutiny of a potential franchise opportunity includes activities such as meeting with the franchisor, reading the Uniform Franchise Offering Circular (explained later), soliciting legal and financial advice, and talking to present and former franchisees of the system you are interested in.
15-13©2006 Prentice Hall
Buying a Franchise(2 of 2)
Answering the following questions will help determine if franchising is right for you.
• Are you willing to take orders? Franchisors are typically very particular about how outlets operate.
• Are you willing to be part of a franchise “system” rather than an independentbusinessperson?
• How will you react if you make a suggestion to your franchisor and your suggestion
is rejected?
• What are you looking for in a business? How hard do you want to work?
• How willing are you to put your money at risk?• How will you feel if your business is operating at a net loss but you still have to pay
royalties on your gross income?
15-14©2006 Prentice Hall
The Cost of a Franchise(1 of 1)
Costs involved with purchasing and owning a franchise
15-15©2006 Prentice Hall
Advantages and Disadvantages of Buying a Franchise
Advantages Disadvantages
• A proven product or service within an established market
• An established trademark or business system
• Franchisor’s training, technical support,
and managerial experience
• An established marketing network
• Franchisor ongoing support
• Availability of financing (in some cases)
• Potential for business growth
• Cost of the franchise
• Restrictions on creativity
• Duration and nature of the commitment
• Risk of fraud, misunderstandings, or lack of
franchisor commitment
• Problems of termination or transfer• Poor performance on the part of other
franchisees
• Potential for failure
15-16©2006 Prentice Hall
Watch Out! Common Misconceptions About Franchising
Common Misconceptions About Franchising
• Franchising is a safe investment• A strong industry ensures franchise success• A franchise is a “proven” business system• There is no need to hire a franchise attorney or an accountant• The best systems grow rapidly and it is best to be part of a rapid-growth system• I can operate my franchise outlet for less than the franchisor predicts• The franchisor is a nice person—he’ll help me out if I need it
15-17©2006 Prentice Hall
Legal Aspects of the Franchise Relationship(1 of 2)
• Federal Rules and Regulations– The offer and sale of a franchise is regulated at the federal
level.• According to Federal Trade Commission (FTC) rule 436,
franchisors must furnish potential franchisees with written disclosures that provides information about the franchisor, the franchised business, and the franchise relationship.
• In most cases, the disclosures are made through a lengthy document referred to as the Uniform Franchise Offering Circular (UFOC).
• The UFOC contains 23 categories of information that give a prospective franchisee a broad base of information about the background and financial health of the franchisor.
15-18©2006 Prentice Hall
Legal Aspects of the Franchise Relationship(2 of 2)
• State Rules and Regulations– In addition to the FTC disclosure requirements, 17 states
have laws providing additional protection to potential franchisees.
• The states include California, Florida, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Texas, Utah, Virginia, Washington and Wisconsin.
• In most of these states, a franchisor is required to file its UFOC with a designated state agency, making the UFOC public record.
15-19©2006 Prentice Hall
More About Franchising(1 of 3)
• Franchise Associations– Many franchise systems have organized franchise associations to
represent the franchisees’ collective interests and to provide a forum for franchisees to communicate with each other.
• Franchise Ethics– The majority of franchisors and franchisees are highly ethical. There
are certain features of franchising, however, that make it subject to ethical abuse. These features are as follows:
• The get rich quick mentality, the false assumption that buying a franchise is a guarantee of business success, and conflicts of interest between franchisors and franchisees.
15-20©2006 Prentice Hall
More About Franchising(2 of 3)
• International Franchising– International opportunities for franchising are becoming
more prevalent as the markets for certain franchised products in the U.S. have become saturated.
– For example, heavily franchised companies, such as McDonald’s and KFC, are experiencing much of their growth in international markets.
– Foreign firms are also taking advantage of the trend towards globalization and are offering franchises in the U.S.
15-21©2006 Prentice Hall
More About Franchising(3 of 3)
For U.S. citizens, these are some of the steps to take before buying a franchise
• Consider the value of the franchisor’s name in the foreign country
• Get a good lawyer
• Determine whether the product or service is salable in the foreign country
• Uncover whether the franchisor has experience in international markets
• Find out how much training and support you will receive from the franchisor
• Evaluate currency restrictions