Entrepreneurial Opportunity Recognition - Exam 2

MICRO INDUSTRY how to determine whether a company is economically viable

a) how much will it cost to attract and maintain customers b) are gross margins sufficient to cover the necessary cost structure c) are operating cash cycles favorable

MICRO INDUSTRY how to firms develop a sustainable competitive advantage

a) proprietary elements such as patents and trade secrets b) superior organizational processes, capabilities, or resource that are difficult for others to duplicate or imitate c) an economically viable business model, in that the company will not run out of cash quickly

how to determine what level of risk that you're willing to bear

a) will you risk a secure salary and the things that go along with your current employment, and if so - for how long b) will you risk losing control of your business c) will you put your own money at risk? if so, how much d) will you risk your home or time with your family and loved ones? e) do those you love accept the risk you plan to take?

MICRO MARKET three ways to define a market segment

a. by who the customers are (age, gender, education) b. by where the customers are (geographic location) c. by how the customers behave (what are their habits? are they health conscious? are they athletes or couch potatoes?)

by collecting information about trends from sources external to your firm, you will be able to

better evaluate whether making large scale changes related to your products/service is appropriate

MACRO INDUSTRY a good industry is more than...

good market, business idea, or management team ex. the DSL market has very positive characteristics in terms of current size and future growth, but the industry is not favorable for new businesses to enter due to high supplier power and intense competitive rivalry

MICRO INDUSTRY how can firms be successful even in an unattractive industry?

have a developed a sustainable competitive advantage

MICRO INDUSTRY when is a patent not useful?

if a competitor can develop a different product or service that is a cheaper and/or more effective alternative to yours

MICRO MARKET why first mover advantage isn't always great

if you are not well-prepared, later entrants who are better prepared will quickly overtake your business

micro-market: target segment benefits and attractiveness

if your opportunity does not provide a differentiated solution to a customer's pain- better, faster, or cheaper- forget it and move on to something else

MICRO MARKET will there be other avenues for growth available to you

is it likely that entry into your target market will provide entry into other segments that you may want to consider in the future? and can you develop capabilities that are transferable from one segment to another?

how can you recognize trends or changes in the marketplace

it is helpful to have a wide array of contacts within your industry who can help you to spot such trends

MACRO INDUSTRY defining an industry

it is important to have focus and not be too broad do not be so narrow that you do not recognize other substitutes for your products or services

trap 1: the large market fallacy

large markets that are growing fast are likely to attract lots of other competitors, often large companies with lots of resources. further, such markets often have low barriers to entry, making it difficult to compete. it may instead be better to pursue a large part of a smaller market than to go after a small part of a large market

downside of venture capital?

once you accept venture capital, the business is no longer truly yours

MACRO MARKET founders desire

one of the first things to decide: is the goal to run a small business or become a national player in the marketplace?

connections DOWN the value chain

potential customers in target markets that you might eventually serve in addition to the markets you plan to target at the outset

Palm example

shows example of not trying to do too much instead it often pays off to do things simple, offer a product or service that fills a specific need, and focus on developing processes that ensure quality

Digital Equipment Corporation example

simply collecting the information and then ignoring it is not good; you must fully integrate the information as being important and useful

connections UP the value chain

suppliers who deal with leaders in your industry and with firms in other industries that must offer products/services that are substitutes for the offerings that you provide

team domain: ability to execute CSFs

the ability of you and your team to execute on critical success factors. if you cannot deliver results here, then this opportunity is not for you

trap 4: the me-too trap

the combination of high threat of entry (macro industry) and lack of sustainable advantage for new entrants (micro industry) can cause a large number of competitors to pursue the same opportunity. thus, the combination of low barriers to entry and lack of sustainable competitive advantage should be a red flag

trap 3: the no sustainable business model trap

the relationship between target segment benefits and attractiveness (micro market) and sustainable advantage (micro industry) must be viable. this is to say that you must have an economically viable business model for fulfilling customer needs

what makes venture capitalists take the risk

they have to see that you are willing to bear a certain level of personal risk in your own business

importance of understanding customer needs

this is a key attribute for the leaders of a company-- to understand that customer tastes, needs, preferences, and so forth change over time and that companies must be able to ADAPT IN ORDER TO SURVIVE

trap 5: the hubris trap

this related to the overconfidence of entrepreneurs who have experienced past success. for example, what Louis Borders learned through his success creating Borders Books did not translate to his starting Webvan (the online grocery delivery service). in fact, his past experience actually may have gotten in the way- by trying to apply principles from one industry toward another industry, which did not operate by the same set of rules

MACRO MARKET measure market trends in as many ways as possible

you need to consider demographic, sociocultural, technological, regulatory, or other natural trends different trends may paint varying pictures of the landscape for your market and some trends may be more relevant for your market than others get as detailed of an evaluation as possible consider how these different trends work together to tell a story of what the future of the market means for your business

three key elements that drive an entrepreneur's dream

1) a mission that determines what kind of business to build or what kinds of markets to serve 2) a set of personal aspirations that guides the level of achievement to be sought 3) some level of risk propensity that indicates what sort of risks are to be taken and what kind of sacrifices are to be made in pursuit of the dream

to overcome business plan flaws

1) come up with an idea that you think might fly, one that solves genuine customer problems or needs 2) assess and shape your idea using the seven domains framework 3) write a customer-driven feasibility study- a memo to yourself- that lays out the conclusions you've reached from your data and analysis

how to define personal aspirations

1) how big they want the business to become in terms of sales, profits, number of employees, number of locations, and so forth 2) what role that they want in the organization, in terms of wanting to be a leader or manager 3) how long they want to remain involved in the organization

two deal-breaker domains

1) micro-market: target segment benefits and attractiveness 2) team domain: ability to execute on CSFs

good entrepreneurial ideas tend to come from the following

1) opportunities created by macro-trends (Whole Foods) 2) opportunities found by living and experiencing the customer's problems (Nike) 3) opportunities created through scientific research (SmithKline Becham's Zantac) 4) opportunities proven elsewhere that you can transform and adapt for the local context of where you hope to do business (Starbucks)

Mullins 5 common traps

1) the large market fallacy 2) the better mousetrap fallacy 3) the no sustainable business model trap 4) the me-too trap 5) the hubris trap

Mullins suggests three common flaws in business plans that fail to raise capital

1) the opportunity is fundamentally flawed 2) the persuasive nature of business plans, with its main purpose often being to raise money, forces their proponent entrepreneurs into the "everything about my opportunity is wonderful" mode 3) most business plans are focused on the entrepreneurs, their idea, and why the idea is wonderful. they are "me focused" and "my-idea focused" rather than "customer focused"

MACRO INDUSTRY 5 macro level factors (Porter's Five Forces)

1) threat of entry 2) buyer power 3) supplier power 4) threat of substitutes 5) competitive rivalry

how to identify critical success factors

1) which few activities are the ones that, if gone wrong, will almost always have severely negative effects on company performance? 2) which decisions or activities, done right, will almost always deliver disproportionately positive effects on performance?

MICRO MARKET four things you need to look at when evaluating a business

1) who are your target customers 2) are your solutions superior to what is already in the marketplace 3) growth potential in the market for your idea 4) will there be other avenues of growth available to you

MACRO MARKET three questions to ask about long-term growth potential

1. is the market large enough to allow many competitors the opportunity to serve different segments without getting each other's way 2. what are the predictions for your market's short-term growth rate? 3. what are the predictions for your market's long-term growth rate?

MACRO MARKET what should you never do with your business idea?

FALL IN LOVE!!!!!! ex. Thinking Machine - blindly building a business around a cool product or service without fully considering whether there is truly a market demand

MACRO INDUSTRY is growth an indicator of profitability?

NO! even though fast growing markets can be attractive, you can't forget that entrepreneurial opportunity is one that enables you to extract profit

MACRO INDUSTRY do industries remain constant?

NO!!! they vary in attractiveness over time

MICRO INDUSTRY knowledge is gained from experience and success in one industry and can sometimes...

blind entrepreneurs to important differences within other industries - ex. the experience of Louis Borders in the book retail industry led him to believe that firms who build the largest and most sophisticated physical infrastructure will develop a competitive advantage within the dot.com or e-commerce marketplace; instead, eBay demonstrated that those who could develop viable businesses with minimal physical infrastructure and maintain high gross margins would be the most successful

connections ACROSS the value chain

competitors and with firms from other industries that offer substitutes, so that you can gain some perspective to accurately gauge changes in market conditions

entrepreneurs must be able to identify

critical success factors within their industry and assemble a team that can execute on these factors

MICRO MARKET what is the first thing to look at when evaluating a business?

determine who your target customers are (what is their pain and what solutions do you offer to them?)

MACRO MARKET trends are critical for determining what

determining long-term growth potential

MICRO MARKET what is the second thing to look at when evaluating a business?

do the solutions you have to offer are in some way superior to what already exists in the marketplace

MICRO MARKET why you need to determine with growth of the market

does the market have legs? you need to consider the size of your target market and how fast it is growing

trap 2: the better mousetrap fallacy

especially in technologically driven industries, entrepreneurs often try to capitalize on technology for its own sake. doing so rather than asking what the technology can do that benefits some target segment of customers is a trap. better technology- a better mousetrap- does not necessarily equal a better solution for a customer

Schwinn example

failure shows that recruiting and maintaining experienced executive who can execute is often critical to success