ENTR 373 Exam 1 Ch. 1-5

Outline for a Comprehensive Feasibility Analysis

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Role of feasibility analysis in developing business ideas.

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Financial Feasibility Analysis

-Is the final component of a comprehensive feasibility analysis. -A preliminary financial assessment is sufficient.

Four Essential Qualities of an Opportunity

1. attractive 2. timely 3. durable 4. anchored in a product, service, or business that creates or adds value for its buyer or end user

Product/Customer Focus

-A second defining characteristic of successful entrepreneurs is a product/customer focus. -An entrepreneur's keen focus on products and customers typically stems from the fact that most entrepreneurs are, at heart, craftspeople.

Tenacity despite failure

-Because entrepreneurs are typically trying something new, the failure rate is naturally high. -A defining characteristic for successful entrepreneurs is their ability to persevere through setbacks and failures.

Feasibility Analysis

-Feasibility analysis is the process of determining whether a business idea is viable. -It is the preliminary evaluation of a business idea, conducted for the purpose of determining whether the idea is worth pursuing.

Industry/Target Market Feasibility Analysis

-Is an assessment of the overall appeal of the industry and the target market for the proposed business. -An industry is a group of firms producing a similar product or service. -A firm's target market is the limited portion of the industry it plans to go after.

Product/Service Feasibility Analysis

-Is an assessment of the overall appeal of the product or service being proposed. -Before a prospective firm rushes a new product or service into development, it should be sure that the product or service is what prospective customers want.

Organizational Feasibility Analysis

-Is conducted to determine whether a proposed business has sufficient management expertise, organizational competence, and resources to successfully launch a business. -Focuses on non-financial resources.

Corporate Entrepreneurship Entrepreneurial Firms vs. Conservative Firms

-Is the conceptualization of entrepreneurship at the firm level. -All firms fall along a conceptual continuum that ranges from highly conservative to highly entrepreneurial. -The position of a firm on this continuum is referred to as its entrepreneurial intensity. Proactive Innovative Risk taking vs. Take a more "wait and see" posture Less innovative Risk averse

Passion for the business

-The number one characteristic shared by successful entrepreneurs is a passion for the business. -This passion typically stems from the entrepreneur's belief that the business will positively influence people's lives.

Components of financial feasibility analysis

1. Total Start-Up Cash Needed 2. Financial Performance of Similar Businesses 3. Overall Financial Attractiveness of the Proposed Venture

Techniques for Generating Ideas

1. Brainstorming 2. Focus Groups 3. Library and Internet Research

Why Become an Entrepreneur? The three primary reasons that people become entrepreneurs and start their own firms

1. Desire to be own boss 2. Desire to pursue their own ideas 3. Financial rewards

Identifying Competitors: Types of Competitors New Ventures Face

1. Direct Competitors - businesses offering identical or similar products 2. Indirect competitors - businesses offering close substitute products 3. Future competitors - businesses that not yet direct or indirect but could be at any time

Components of industry/target market feasibility analysis

1. Industry Attractiveness 2. Target Market Attractiveness

Components of organizational feasibility analysis

1. Management Prowess 2. Resource Sufficiency

Characteristics of Successful Entrepreneurs Four Primary Characteristics

1. Passion for the business 2. Product/customer focus 3. Tenacity despite failure 4. Execution intelligence

Components of product/service feasibility analysis

1. Product/Service Desirability 2. Product/Service Demand

Forms of Feasibility Analysis

1. Product/Service Feasibility 2. Industry/Target Market Feasibility 3. Organizational Feasibility 4. Financial Feasibility

Types of Start-Up Firms

1. Salary-substitute firms - firms that basically provide their owner or owners a similar level of income to what they would be able to earn in a conventional job 2. Lifestyle firms - firms that provide their owners the opportunity to pursue a particular lifestyle, and make a living at it 3. Entrepreneurial firms - Firms that bring new products and services to the market by creating and seizing opportunities regardless of the resources they currently control

Techniques Available to Assess Industry Attractiveness

1. Study Environmental and Business Trends 2. The Five Competitive Forces Model

Three Ways to Identify an Opportunity

1. observing trends 2. solving a problem 3. finding gaps in the marketplace

According to the 2013 GEM study, _____% of Americans are actively engaged in starting a business or are the owner/manager of a business that is less than ____ years old. Books College Courses

12.7 3 Amazon.com lists over 36,900 books dealing with entrepreneurship and 89,900 focused on small business. -In 1985, there were about 250 entrepreneurship courses offered across all colleges in the United States. -Today, more than 2,000 colleges and universities in the United States (which is about two-thirds of the total) offer at least one course in entrepreneurship.

Age distribution of business owners

18-29 = 17.5% 30-39 = 25% 40-49 = 24% 50-59 = 21% 60+ = 12.5%

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

A moderate risk taker Persuasive Promoter Resource assembler/leverager Creative Self-starter Tenacious Tolerant of ambiguity Visionary Optimistic disposition A networker Achievement motivated Alert to opportunities Self-confident Decisive Energetic A strong work ethic Lengthy attention span

What is Entrepreneurship? Academic Definition Venture Capitalist Explanation of what Entrepreneurs do

Academic Definition (Stevenson & Jarillo): Entrepreneurship is the process by which individuals pursue opportunities without regard to resources they currently control. Venture Capitalist (Fred Wilson): Entrepreneurship is the art of turning an idea into a business. Explanation of What Entrepreneurs Do: Entrepreneurs assemble and then integrate all the resources needed - the money, the people, the business model, the strategy - to transform an invention or an idea into a viable business.

Trend 3: Technological Advances

Advances in technology frequently create business opportunities. Examples of Entire Industries that Have Been Created as the Result of Technological Advances --Computer industry --Internet --Biotechnology --Digital photography Once a technology is created, products often emerge to advance it. Example: H20Audio An example is H20Audio, a company started by four former San Diego State University students, that makes waterproof housings and earbuds for the Apple iPhone.

Barringer/Ireland Business Model Template

Barringer/Ireland Business Model Template -Although not everyone agrees precisely on the components of a business model, many agree that a successful business model has a common set of attributes. -These attributes can be laid out in a visual framework or template so it is easy to see the individual parts and their interrelationships. -The Barringer/Ireland Business Model Template is shown in the next slide. ***See ch. 4 slide 11 for graphic

What is an Opportunity?

An opportunity is a favorable set of circumstances that creates a need for a new product, service, or business.

Bargaining Power of Buyers

Bargaining Power of Buyers - Buyers can suppress the profitability of the industries from which they purchase by demanding price concessions or increases in quality. - For example, the automobile industry is dominated by a handful of large companies that buy products from thousands of suppliers in different industries. This allows the automakers to suppress the profitability of the industries from which they buy by demanding price reductions. Factors that have an impact on the ability of buyers to exert pressure on suppliers 1. Buyer group concentration - If there are only a few large buyers, and they buy from a large number of suppliers, they can pressure the suppliers to lower costs and thus affect the profitability of the industries from which they buy. 2. 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. 3. Degree of standardization of supplier's products - The degree to which a supplier's product differs from its competitors affects the buyer's bargaining power. 4. 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.

Bargaining Power of Suppliers

Bargaining Power of Suppliers - Suppliers can suppress the profitability of the industries to which they sell by raising prices or reducing the quality of the components they provide. - If a supplier reduces the quality of the components it supplies, the quality of the finished product will suffer, and the manufacturer will eventually have to lower its price. - If the suppliers are powerful relative to the firms in the industry to which they sell, industry profitability can suffer. Factors that have an impact on the ability of suppliers to exert pressure on buyers 1. Supplier concentration - When there are only a few suppliers that supply a critical product to a large number of buyers, the supplier has an advantage. 2. 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. 3. Attractiveness of substitutes - Supplier power is enhanced if there are no attractive substitutes for the product or services the supplier offers. 4. 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.

Brainstorming

Brainstorming -Is a technique used to generate a large number of ideas and solutions to problems quickly. -A brainstorming "session" typically involves a group of people, and should be targeted to a specific topic. -Rules for a brainstorming session: --No criticism. --Freewheeling is encouraged. --The session should move quickly. --Leap-frogging is encouraged.

Business Models

Business Model -A business model is a firm's plan or recipe for how it creates, delivers, and captures value for its stakeholders. -The proper time to develop a business model is following the feasibility analysis stage and prior to fleshing out the operational details of the company. -A firm's business model is integral to its ability to succeed both in the short and long term.

Personal Characteristics of the Entrepreneur

Characteristics that tend to make some people better at recognizing opportunities than others 1. prior experience 2. cognitive factors 3. social networks 4. creativity

Cognitive Factors

Cognitive Factors -Studies have shown that opportunity recognition may be an innate skill or cognitive process. -Some people believe that entrepreneurs have a "sixth sense" that allows them to see opportunities that others miss. -This "sixth sense" is called entrepreneurial alertness, which is formally defined as the ability to notice things without engaging in deliberate search.

Sources of Competitive Intelligence

Collecting Competitive Intelligence - To complete a competitive analysis grid, a firm must first understand the strategies and behaviors of its competitors. - The information that is gathered by a firm to learn about its competitors is referred to as competitive intelligence. - A new venture should take care that it collects competitive intelligence in a professional and ethical manner. Ethical ways to obtain information about competitors - Attend conferences and trade shows. - Purchase competitors' products. - Study competitors' Web sites and social media sites. - Set up Google e-mail alerts. - Read industry-related books, magazines, and Web sites. - Talk to customers about what motivated them to buy your product as opposed to your competitor's product.

Completing a Competitive Analysis Grid

Competitive Analysis Grid - A tool for organizing the information a firm collects about its competitors. - A competitive analysis grid can help a firm see how it stacks up against its competitors, provide ideas for markets to pursue, and identify its primary sources of competitive advantage. ***see ch. 5 slide 42 for graphic

Core Strategy

Core Strategy - The first component of the business model is core strategy. - A core strategy describes how the firm plans to compete relative to its competitors. - The primary elements of core strategy are: -- Business Mission -- Basis of Differentiation -- Target Market -- Product/Market Scope Business Mission - A business's mission or mission statement describes why it exists and what its business model is supposed to accomplish. - If carefully written and used properly, a mission statement can articulate a business's overarching priorities and act as its financial and moral compass. - A well-written mission statement is something that a business can continually refer back to as it makes important decisions in other elements of its business model. Basis of Differentiation - It's important that a business clearly articulate the points that differentiate its product or service from competitors. - A company's basis of differentiation is what causes consumers to pick one company's products over another's. - It is what solves a problem or satisfies a customer need. - It is best to limit a company's basis of differentiation to two to three key points. - Make sure that your points of differentiation refer to benefits rather than features. Target Market - The identification of the target market in which the firm will compete is extremely important. - A target market is a place within a larger market segment that represents a narrow group of customers with similar interests. - A firm's target market should be made explicit in the business model template. Product/Market Scope - A company's product/market scope defines the products and markets on which it will concentrate. - Most firms start with a narrow (or limited) product/market scope, and pursue adjacent product and market opportunities as the company grows and becomes more financially secure. - In completing the business model template, a company should be very clear about its initial product/market scope and project 3-5 years in the future in terms of anticipated expansion.

Creativity Five Steps to Generating Creative Ideas

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. Five Steps to Generating Creative Ideas 1. Preparation 2. Incubation 3. Insight (Eureka! Business idea conceived, problem solved) 4. Evaluation 5. Elaboration

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.

Trend 1: Economic Forces

Economic trends help determine areas that are ripe for new start-ups and areas that start-ups should avoid. Example of Economic Trend Creating a Favorable Opportunity --A weak economy favors start-ups that help consumers save money. --An example is GasBuddy.com, a company started to help consumers save money on gas.

Industry Types and the Opportunities They Offer

Emerging Industries - Industries in which standard operating procedures have yet to be developed. -- Opportunity: First-mover advantage. Fragmented Industries - Industries that are characterized by a large number of firms of approximately equal size. -- Opportunity: Consolidation. Mature Industries - Industries that are experiencing slow or no increase in demand. -- Opportunities: Process innovation and after-sale service innovation. Declining Industries - Industries that are experiencing a reduction in demand. -- Opportunities: Leadership, establishing a niche market, and pursuing a cost reduction strategy. Global Industries - Industries that are experiencing significant international sales. -- Opportunities: Multidomestic and global strategies.

Studying Industry Trends

Environmental Trends - Include economic trends, social trends, technological advances, and political and regulatory changes. - For example, industries that sell products to seniors are benefiting by the aging of the population. Business Trends - Other trends that impact an industry. - For example, are profit margins in the industry increasing or falling? Is innovation accelerating or waning? Are input costs going up or down?

Encouraging New Ideas

Establishing 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 it's 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 and should be encouraged at the organizational and individual supervisory level.

The Five Competitive Forces Model

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. - They help determine the average rate of return for the firms in an industry. - 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. 1. Threat of substitutes 2. Threat of new entrants 3. Rivalry among existing firms 4. Bargaining power of suppliers 5. Bargaining power of buyers

Financial Performance of Similar Businesses

Financial Performance of Similar Businesses - Estimate the proposed start-up's financial performance by comparing it to similar, already established businesses. - There are several ways to doing this, all of which involve a little ethical detective work. -- First, there are many reports available, some for free and some that require a fee, offering detailed industry trend analysis and reports on thousands of individual firms. -- Second, simple observational research may be needed. For example, the owners of New Venture Fitness Drinks could estimate their sales by tracking the number of people who patronize similar restaurants and estimating the average amount each customer spends.

Financials

Financials - The third component of a firm's business model focuses on its financials. - This is the only section of a firm's business model that describes how it earns money—thus, it is extremely important. - For most businesses, the manner in which it makes money is one of the most fundamental aspects of its business model. Revenue Streams - A firm's revenue streams describe the ways in which it makes money. - Some businesses have a single revenue stream while others have several. - For example, most restaurants have a single revenue stream. Their customers order a meal and pay for it. Other restaurants may have several revenue streams—including meals, a catering service, product sales (such as bottle barbeque sauce for a barbeque restaurant), and apparel products with the name of the restaurant on them. Cost Structure - A business's cost structure describes the most important costs incurred to support its business model. - It costs money to establish a basis of differentiation, develop core competencies, acquire and develop key assets, and so forth. - Generally, the goal for this box in a firm's business model template is threefold: -- Identify whether the business is a cost-driven or value-driven business. -- Identify the nature of a business's costs. -- Identify the business's major cost categories. Financing/Funding - Many business models rely on a certain amount of financing or funding to bring their business model to life. - At the business model stage projections do not need to be completed to determine the exact amount of money that is needed. An approximation is sufficient. - There are three categories of costs to consider: -- Capital costs. -- One-time expenses, such as building a Web site and training initial employees. -- Provisions for ramp-up expenses (most businesses incur costs before they earn revenues). - Some entrepreneurs are able to draw from personal resources to fund their business. In other cases, the business may be simple enough that it is funded from its own profits from day one. - In many cases, however, an initial infusion of funding or financing is needed. - The business model template should indicate the appropriate amount of funding that will be needed and where the money will most likely come from.

How Industry and Firm-Level Factors Affect Performance

Firm-Level Factors - Include a firm's assets, products, culture, teamwork among its employees, reputation, and other resources. Industry-Level Factors - Include threat of new entrants, rivalry among existing firms, bargaining power of buyers, and related factors. Conclusion - In various studies, researchers have found that from 8% to 30% of the variation in firm profitability is directly attributable to the industry in which a firm competes. - Therefore, the overall attractiveness of an industry should be part of the equation when an entrepreneur decides whether to pursue a particular opportunity.

First Application of the Five Forces Model

First Application of the Model - the forces model can be used to assess the attractiveness of an industry by determining the level of threat to industry profitability for each of the forces. - If a firm fills out the form shown on the next slide and several of the threats to industry profitability are high, the firm may want to reconsider entering the industry or think carefully about the position it would occupy. ***see ch.5 slide 31 for graphic

First Screen

First Screen -Shown in Appendix 3.1 is a template for completing a feasibility analysis. -It's called "First Screen" because it's a tool that can be used in the initial pass at determining the feasibility of a business idea. -If a business idea cuts muster at this stage, the next step is to complete a business plan.

Product/Service Desirability

First, ask the following questions to determine the basic appeal of the product or service. 1. Does it make sense? Is it reasonable? Is it something consumers will get excited about? 2. Does it take advantage of an environmental trend, solve a problem, or take advantage of a gap in the marketplace? 3. Is this a good time to introduce the product or service to the market? 4. Are there any fatal flaws in the product or service's basic design or concept? Second, Administer a Concept Test -A concept statement should be developed. -A concept statement is a one-page description of a business that is distributed to people who are asked to provide feedback on the potential of the business idea. -The feedback will hopefully provide the entrepreneur: --A sense of the viability of the product or service idea. --Suggestions for how the idea can be strengthened or "tweaked" before proceeding further.

Focus Groups

Focus Group -A focus group is a gathering of five to ten people, who have been selected based on their common characteristics relative to the issues being discussed. -These groups are led by a trained moderator, who uses the internal dynamics of the group environment to gain insight into why people feel the 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.

Entrepreneurial Firms' Impact on Society and Larger Firms: Impact on Society Impact on 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.

Third Approach: Finding Gaps in the Marketplace

Gaps in the Marketplace -A third approach to identifying opportunities is to find a gap in the marketplace. -A gap in the marketplace is often created when a product or service is needed by a specific group of people but doesn't represent a large enough market to be of interest to mainstream retailers or manufacturers. Product gaps in the marketplace represent potentially viable business opportunities. Specific Example: Tish Cirovolv realized there were no guitars on the market made specifically for females. To fill this gap, she started Daisy Rock Guitars, a company that makes guitars just for women and girls.

What is Industry Analysis?

Industry - An industry is a group of firms producing a similar product or service, such as music, Pilates and yoga studios, and solar panel manufacturing. - Industry Analysis Is business research that focuses on the potential of an industry. Importance - Once it is determined that a new venture is feasible in regard to the industry and market in which it will compete, a more in-depth analysis is needed to learn the ins and outs of the industry. - The analysis helps a firm determine if the target market it identified during feasibility analysis is favorable for a new firm.

Industry Attractiveness

Industry Attractiveness -Industries vary in terms of their overall attractiveness. -In general, the most attractive industries have the characteristics depicted on the next slide. -Particularly important—the degree to which environmental and business trends are moving in favor rather than against the industry. Characteristics of Attractive Industries -Are young rather than old. -Are early rather than late in their life cycle. -Are fragmented rather than concentrated. -Are growing rather than shrinking. -Are selling products and services that customers "must have" rather than "want to have." -Are not crowded. -Have high rather than low operating margins. -Are not highly dependent on the historically low price of key raw materials.

Economic Impact of Entrepreneurial Firms: Innovation Job Creation

Innovation -Is the process of creating something new, which is central to the entrepreneurial process. -Small innovative firms are 16 times more productive than larger innovative firms in terms of patents per employee. Job Creation -Small businesses create a substantial number of net new jobs in the United States. -Firms with 500 or fewer employees create 65% of new jobs on an annual basis.

Library and Internet Research

Library Research -Libraries are an often underutilized source of information for generating new business ideas. -The best approach is to talk to a reference librarian, who can point out useful resources, such as industry-specific magazines, trade journals, and industry reports. -Simply browsing through several issues of a trade journal or an industry report on a topic can spark new ideas. Large public and university libraries typically have access to search engines and industry reports that would cost thousands of dollars to access on your own. Examples of Useful Search Engines and Industry Reports -BizMiner -ProQuest -IBISWorld -Mintel -LexisNexis Academic Internet Research -If you are starting from scratch, simply typing "new business ideas" into a search engine will produce links to newspapers and magazine articles about the "hottest" new business ideas. - If you have a specific topic in mind, setting up Google mail alerts will provide you with links to a constant stream of newspaper articles, blog posts, and news releases about the topic. -Targeted searches are also useful.

Management Prowess

Management Prowess -A proposed business 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 sole entrepreneur or the founding team has for the business idea. --The extent to which the sole entrepreneur or the founding team understands the markets in which the firm will participate.

Common Myths About Entrepreneurs

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 their environment, life experiences, and personal choices. Myth 2: Entrepreneurs Are Gamblers -Most entrepreneurs are moderate risk takers. -The idea that entrepreneurs are gamblers originates from two sources: --Entrepreneurs typically have jobs that are less structured, and so they face a more uncertain set of possibilities than people in traditional jobs. --Many entrepreneurs have a strong need to achieve and set challenging goals, a behavior that is often equated with risk taking. Myth 3: Entrepreneurs Are Motivated Primarily by Money -While it is naïve to think that entrepreneurs don't seek financial rewards, money is rarely the reason entrepreneurs start new firms. -In fact, some entrepreneurs warn that the pursuit of money can be distracting. Myth 4: Entrepreneurs Should Be Young and Energetic -Entrepreneurial activity is fairly easily spread out over age ranges. -While it is important to be energetic, investors often cite the strength of the entrepreneur as their most important criteria in making investment decisions. --What makes an entrepreneur "strong" in the eyes of an investor is experience, maturity, a solid reputation, and a track record of success. --These criteria favor older rather than younger entrepreneurs. Myth 5: Entrepreneurs Love the Spotlight -While some entrepreneurs are flamboyant, the vast majority of them do not attract public attention. -As evidence of this, consider the following question: "How many entrepreneurs could you name?" --Most of us could come up with Jeff Bezos of Amazon.com, Mark Zuckerberg of Facebook, Steve Jobs of Apple, and maybe Larry Page and Sergey Brin of Google. --But few could name the founders of Twitter, YouTube, Netflix, or DIRECTV, even though we frequently use those firms' services.

First Approach: Observing Trends

Observing Trends -Trends create opportunities for entrepreneurs to pursue. -The most important trends are: --Economic forces --Social forces --Technological advances --Political and regulatory change -It's important to be aware of changes in these areas. *See slide 8

Operations

Operations - The final quadrant in a firm's business model focuses on operations. - Operations are both integral to a firm's overall business model and represent the day-to-day heartbeat of a firm. Product (or Service) Production - This section focuses on how a firm's products and/or services are produced. - For example, if a firm sells a physical product, the product can be manufactured or produced in-house, by a contract manufacturer, or via an outsource provider. -- This decision has a major impact on all aspects of a firm's business model. - If a firm is producing a service rather than a physical product, a brief description of how the service will be produced should be provided. Channels - A company's channels describe how it delivers its product or service to its customers. - Businesses either sell direct, through intermediaries (such as distributors and wholesalers), or via a combination of both. - Some firms employ a sales force that calls on potential customers to try to close sales. This is an expensive strategy but necessary in some instances. Key Partners - The final element of a firm's business model is key partners. - Start-ups, in particular, typically do not have sufficient resources (or funding) to perform all the tasks necessary to make their business models work, so they rely on key partners to perform important roles. - The table on the next slide identifies the most common types of business partnerships. ***See ch. 4 slide 29 for graphic Most common types of business partnerships 1. Joint venture 2. Network 3. Consortia 4. Strategic Alliance 5. Trade Associations

Overall Financial Attractiveness of the Proposed Venture

Overall Financial Attractiveness of the Proposed Investment -A number of other financial factors are associated with promising business start-ups. -In the feasibility analysis stage, the extent to which a business opportunity is positive relative to each factor is based on an estimate rather than actual performance. -The table on the next slide lists the factors that pertain to the overall attractiveness of the financial feasibility of the business idea. Financial Factors Associated With Promising Business Opportunities -Steady and rapid growth in sales during the first 5 to 7 years in a clearly defined market niche. -High percentage of recurring revenue—meaning that once a firm wins a client, the client will provide recurring sources of revenue. -Ability to forecast income and expenses with a reasonable degree of certainty. -Internally generated funds to finance and sustain growth. -Availability of an exit opportunity for investors to convert equity to cash.

Trend 4: Political Action and Regulatory Changes

Political action and regulatory changes also provide the basis for opportunities. General Example Laws to protect the environment have created opportunities for entrepreneurs to start firms that help other firms comply with environmental laws and regulations. Company created to help other companies comply with the law. Specific Example OSHA is a government agency that formulates and enforces safety, health, and environmental regulations for the workplace. Safety Compliance Company was started to help other companies comply with OSHA regulations.

Prior Experience

Prior Industry Experience -Several studies have shown that prior experience in an industry helps an entrepreneur recognize business opportunities. --By working in an industry, an individual may spot a market niche that is underserved. --It is also possible that by working in an industry, an individual builds a network of social contacts who provide insights that lead to recognizing new opportunities.

Product/Service Demand

Product/Service Demand -There are two steps to assessing product/service demand. -Step 1: Talking Face-to-Face with Potential Customers. -Step 2: Using Online Tools, Such as Google AdWords and Landing Pages, To Assess Demand. Talking Face-to-Face with Potential Customers -The only way to know if your product or service is what people want is by talking to them. -The idea is to gauge customer reaction to the general concept of what you want to sell, and tweak, revise, and improve on the idea based on the feedback. -In some cases, talking with potential customers will cause an entrepreneur to abandon an idea. --Entrepreneurs are often surprised to find that a product idea they think solves a problem gets lukewarm reception when they talk to actual customers. Utilizing Online Tools, Such as Google AdWords and Landing Pages, to Assess Demand -The second way to assess demand is to utilize online tools to gauge reaction from potential customers. -Some entrepreneurs purchase text ads on search engines that show up when a user is searching for a product that is close to their idea. If the searcher clicks on the text ad, they are directed to a landing page that describes the idea. There may be a link on the landing page that says "For future updates please enter your e-mail address." Demand for the idea can be assessed by how many people click on the text ad and enter their e-mail address. Utilizing Online Tools, Such as Google AdWords and Landing Pages, to Assess Demand (continued) -A variety of additional online tools are available to help assess the demand for a new product or service. -Examples include: --Sites that provide feedback on business ideas (Foundersuite, Quirky). --Market Research (CrowdPicker, Google Trends). --Online Surveys (Survey Monkey, Google Consumer Surveys). --Q&A Sites (Quora, Stack Overflow).

Resource Sufficiency

Resource Sufficiency -This topic pertains to an assessment of whether an entrepreneur has sufficient resources to launch the proposed venture. -To test resource sufficiency, a firm should list the 6 to 12 most critical nonfinancial resources that will be needed to move the business idea forward successfully. --If critical resources are not available in certain areas, it may be impractical to proceed with the business idea. Examples of nonfinancial resources that may be critical to the successful launch of a new business: -Affordable office space. -Lab space, manufacturing space, or space to launch a service business. -Availability of contract manufacturers or service providers. -Key management employees (now and in the future). -Key support personnel (now and in the future). -Ability to obtain intellectual property protection. -Ability to form favorable business partnerships.

Resources

Resources - The second component of a business model is resources. - Resources are the inputs a firm uses to produce, sell, distribute, and service a product or service. - A firm's most important resources, both tangible and intangible, must be both difficult to imitate and hard to find a substitute for. -- This stipulation is necessary for an individual company's business model to be competitive over the long term. Core Competencies - A core competency is a specific factor or capability that supports a firm's business model and sets it apart from rivals. - A core competency can take on various forms, such as technical know-how, an efficient process, a trusting relationship with customers, expertise in product design, and so forth. - Most start-ups will list two to three core competencies in their business model template. Key Assets - Key assets are the assets that a firm owns that enable its business model to work. The assets can be physical, financial, intellectual, or human. -- Physical assets include physical space, equipment, vehicles, and distribution networks. -- Intellectual assets include resources such as patents, trademarks, copyrights, and trade secrets, along with a company's brand and its reputation. -- Financial assets include cash, lines of credit, and commitments from investors. -- Human assets include a company's founder or founders, its key employees, and its advisors.

Rivalry Among Existing Firms

Rivalry Among Existing Firms - In most industries, the major determinant of industry profitability is the level of competition among existing firms. - Some industries are fiercely competitive, to the point where prices are pushed below the level of costs, and industry-wide losses occur. - In other industries, competition is much less intense and price competition is subdued. Factors that determine the intensity of the rivalry among existing firms in an industry 1. Number and balance of competitors - The more competitors there are, the more likely it is that one or more will try to gain customers by cutting its price. 2. Degree of difference between products - The degree to which products differ from one product to another affects industry rivalry. 3. Growth rate of an industry - The competition among firms in a slow-growth industry is stronger than among those in fast-growth industries. 4. Level of fixed costs - 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.

Second Application of the Five Forces Model

Second Application of the Model - The second way a new firm can apply the five forces model to help determine whether it should enter an industry is by using the model to answer several key questions. - The questions are shown in the figure on the next slide, and help a firm project the potential success of a new venture in a particular industry. ***see ch. 5 slide 33 for graphic

Social Networks Strong tie vs. Weak Tie Why weak-tie relationships lead to more new business ideas than strong-tie relationships

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. -Research results suggest that between 40% and 50% of people who start a business got their idea via a social contact. Strong Tie Vs. Weak Tie Relationships -All of us have relationships with other people that are called "ties." Nature of Strong-Tie Vs. Weak-Tie Relationships -Strong-tie relationships are characterized by frequent interaction and form between coworkers, friends, and spouses. -Weak-tie relationships are characterized by infrequent interaction and form between casual acquaintances. Result -It is more likely that an entrepreneur will get new business ideas through weak-tie rather than strong-tie relationships. Why weak-tie relationships lead to more new business ideas than strong-tie relationships: -Strong-Tie Relationships: These relationships, which typically form between like-minded individuals, tend to reinforce insights and ideas that people already have. -Weak-Tie Relationships: These relationships, which form between casual acquaintances, are not as apt to be between like-minded individuals, so one person may say something to another that sparks a completely new idea.

Trend 2: Social Forces

Social trends alter how people and businesses behave and set their priorities. These trends provide opportunities for new businesses to accommodate the changes. Examples of Social Trends --Aging of the population. --The increasing diversity of the workplace. --Increased participation in social networks. --Growth in the uses of mobile devices. --An increasing focus on health and wellness.

Second Approach: Solving a Problem

Solving a Problem -Sometimes identifying opportunities simply involves noticing a problem and finding a way to solve it. -These problems can be pinpointed through observing trends and through more simple means, such as intuition, serendipity, or chance. -Many companies have been started by people who have experienced a problem in their own lives, and then realized that the solution to the problem represented a business opportunity. -A problem facing the U.S. and other countries is finding alternatives to fossil fuels. -A large number of entrepreneurial firms, like this wind farm, are being launched to solve this problem.

General Categories of Business Models

Standard Business Models -The first category is standard business models. -Standard business models depict existing plans or recipes firms can use to determine how they will create, deliver, and capture value. -There are a number of standard or common business models, which are shown on the next two slides. Standard Business Models 1. Advertising Business Model - Google, Facebook 2. Auction Business Model - eBay, uBid.com 3. Bricks and Clicks Business Model - Apple, Barnes & Noble 4. Franchise Business Model - Panera Bread, 24-Hour Fitness 5. Freemium Business Model - Dropbox, Pandora 6. Low-Cost Business Model - Southwest Airlines, Walmart 7. Manufacturer/Retailer Business Model - Fitbit, Tesla Motors 8. Peer-to-Peer Business Model - Airbnb, Uber 9. Razor and Blades Business Model - Game Consoles and Games, Printers and Ink Cartridges 10. Subscription Business Model - Birchbox, Netflix 11. Traditional Retailer Business Model - Amazon, Whole Foods Markets Disruptive Business Models -The second category is disruptive business models. -Disruptive business models, which are rare, are ones that do not fit the profile of a standard business model. -They are impactful enough that they disrupt or change the way business is conducted in an industry or an important niche within an industry. -The next slides depict four business models that were disruptive when they were introduced. Disruptive Business Models 1. Direct-to-Consumer Computer Sales (which allowed consumers to customize their computers) - Dell 2. Online Text Ads on Search Engines (allowed advertisers to place ads for products that searchers were already searching for) - Yahoo, Google 3. Software as a Service (SaaS) (By moving software to the cloud, allowed users to access the software and their data from anywhere there was an Internet connection) - Salesforce.com 4. Cloud-based Service to Connect Riders and People Willing to Provide Rides (Provided riders with an app that connects them with the owners of private cars) - Uber, Lyft

Steps in the Entrepreneurial Process

Step 1: Deciding to become an entrepreneur. -intro to entrepreneurship Step 2: Developing successful business ideas. -recognizing opportunities and generating ideas -feasibility analysis -developing an effective business model -industry and competitor analysis -Writing a business plan Step 3: Moving from an idea to an entrepreneurial firm. -preparing the proper ethical and legal foundation -assessing a new venture's financial strength and viability -building a new venture team -getting financing or funding Step 4: Managing and growing the entrepreneurial firm. -unique marketing issues -the importance of intellectual property -preparing for and evaluating the challenges of growth -strategies for firm growth -franchising

The Entrepreneurial Process: The Entrepreneurial Process Consists of Four Steps

Step 1: Deciding to become an entrepreneur. Step 2: Developing successful business ideas. Step 3: Moving from an idea to an entrepreneurial firm. Step 4: Managing and growing the entrepreneurial firm.

Target Market Attractiveness

Target Market Attractiveness -The challenge in identifying an attractive target market is to find a market that's large enough for the proposed business but is yet small enough to avoid attracting larger competitors. -Assessing the attractiveness of a target market is tougher than assessing the attractiveness of an entire industry. -Often, considerable ingenuity must be employed to find information to assess the attractiveness of a specific target market.

Execution intelligence

The ability to fashion a solid business idea into a viable business is a key characteristic of successful entrepreneurs.

Threat of New Entrants

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. Barriers to Entry 1. Economies of Scale - 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. 2. Product differentiation - 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. 3. Capital requirements - The need to invest large amounts of money to gain entrance to an industry is another barrier to entry. 4. Cost advantages independent of size - Existing firms may have cost advantages not related to size. For example, the existing firms in an industry may have purchased land when it was less expensive than it is today. 5. Access to distribution channels - Distribution channels are often hard to crack. This is particularly true in crowded markets, such as the convenience store market. 6. Government and legal barriers - Some industries, such as banking and broadcasting, require the granting of a license by a public authority to compete. 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. Nontraditional Barriers to Entry 1. 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. 2. First-mover advantage - If a start-up pioneers an industry or a new concept within an industry, the name recognition the start-up establishes may create a barrier to entry. 3. Passion of the management team and employees - If the employees of a start-up are motivated by the unique culture of a start-up, and anticipate a large financial reward, this is a combination that cannot be replicated by larger firms. 4. Unique business model - If a start-up is able to construct a unique business model and establish a network of relationships that makes the business model work, this set of advantages creates a barrier to entry. 5. Internet domain name - Some Internet domain names are so "spot-on" that they give a start-up a meaningful leg up in terms of e-commerce opportunities. 6. Inventing a new approach to an industry - 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.

Threat of Substitutes

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. - 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. - This independently owned coffee shop doesn't just sell coffee. - It also offers its patrons a convenient and pleasant place to meet, socialize, and study. - It provides these amenities to decrease the likelihood that its customers will "substitute" coffee at this shop for less expensive alternatives.

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 Conducted Feasibility Analysis -A properly conducted feasibility analysis includes four separate components, as discussed in the following slides.

Total Start-Up Cash Needed

Total Start-Up Cash Needed -The first issue refers to the total cash needed to prepare the business to make its first sale. -An actual budget should be prepared that lists all the anticipated capital purchases and operating expenses needed to generate the first $1 in revenues. -The point of this exercise is to determine if the proposed venture is realistic given the total start-up cash needed.

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 to obtain a competitive advantage.

Three Key Questions

When studying an industry, an entrepreneur must answer three questions before pursuing the idea of starting a firm. 1. Is the industry accessible—in other words, is it a realistic place for a new venture to enter? 2. Does the industry contain markets that are ripe for innovation or are underserved? 3. Are there positions in the industry that avoid some of the negative attributes of the industry as a whole?

Changing Demographics of Entrepreneurs: Women Minorities Senior Young

Women Entrepreneurs -While men are more likely to start businesses than women, the number of women-owned businesses is increasing. -There were 8.6 women-owned businesses in the United States in 2013, generating over $1.3 trillion in revenue and employing nearly 7.8 million people. -In some industries, women control a significant share of the business. --Women-owned businesses account for 52% of all businesses in health care. Minority Entrepreneurs -There has been a substantial increase in minority entrepreneurs in the United States. -Between 2002 and 2007 (the most recent statistics available), minority-owned firms outpaced the growth of non-minority firms in gross receipts, employment, and number of firms. -In 2007, there were about 1.9 million African American-owned firms in the United States, 1.5 million Asian American-owned firms, and 2.3 million Hispanic-owned firms. Senior Entrepreneurs -The numbers of seniors (those 50 years old and older) starting businesses is substantial and growing. -In 2012, 20% of new businesses were started by people between 50 and 59 years old, while another 12.5 percent were founded by individuals 60 years old and older. -This increase is attributed to corporate downsizing, an increasing desire among older people for more personal fulfillment in their lives, growing worries about the cost of health care, and similar factors. Young Entrepreneurs -A desire to pursue an entrepreneurial career is high among young people. -According to a recent Gallop survey, about 4 in 10 kids in grades 5-12 say they plan to start their own business. -About 59% of students in grades 5-12 say their school offers classes in how to start a business. -About one-third of young people say their parents or guardians have started a business, which provides them a firsthand look at the entrepreneurial lifestyle.