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Chapter 1-10

COMM 320 Chapter 1-10: 311721202-Untitled
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Department
Commerce
Course
COMM 320
Professor
Robert Nason
Semester
Fall

Description
COMM 320 NOTES FOR FINAL Chapter 1 – Introduction to Entrepreneurship • Academic Definition (Stevenson & Jarillo) o Entrepreneurship is the process by which individuals pursue opportunities without regard to resources they currently control. • Venture Capitalist (Fred Wilson) o Entrepreneurship is the art of turning an idea into a business. • Explanation of What Entrepreneurs Do o 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. • Corporate Entrepreneurship o At the firm level o All firms fall along a conceptual continuum that ranges from highly conservative to highly entrepreneurial o Entrepreneurial; proactive, innovative, risk taking o Conservative; take a more “wait and see”, less innovation, risk averse 3 primary reasons that people become entrepreneurs and start their own firms: • Desire to be their own boss • Desire to pursue their own ideas • Financial rewards 4 Characteristics of successful Entrepreneurs: 1. Passion for the business – stems from the entrepreneur’s belief that the business will positively influence people’s lives. 2. Product/customer focus - 3. Tenacity despite failure – perseverance, determination through setbacks and failures 4. Execution intelligence – the ability to provide a solid business idea into a viable business Common MYTHS about Entrepreneurs: 1. Entrepreneurs are Born, not Made a. Mistaken belief that some people are genetically predisposed to be entrepreneurs b. No one is “born” to be an entrepreneur c. Their environment, life experiences, and personal choices 2. Entrepreneurs are Gamblers a. Moderate risk takers b. Less structured so they face more uncertain set of possibilities than people in traditional jobs 3. Entrepreneurs are motivated primarily by money 4. Entrepreneurs should be young and energetic Types of Start-up firms: 1. Salary – substitute firms 2. Lifestyle firms 3. Entrepreneurial firms • Women Entrepreneurs • Minority Entrepreneurs • Senior Entrepreneurs • Young Entrepreneurs Economic Impact of Entrepreneurial Firms • Innovation • Job creation • Impact on society; enhances our productivity & improve health • Impact on larger firms; help larger firms become more efficient and effective The 4 Entrepreneurial Process 1. Deciding to become an entrepreneur 2. Developing successful business ideas 3. Moving from an idea to an entrepreneurial firm 4. Managing and growing the entrepreneurial firm Chapter 2 – Recognizing Opportunities and Generating Ideas Opportunity: a favorable set of circumstances that creates a need for a new product, service, or business. o 4 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 3 ways to identify an Opportunity: 1. Observing trends • Economic forces: State of economy, level of disposable income, consumer spending patterns. Ex. a weak economy favors start-ups that help consumer save money (GasBuddy.com) • Social forces: Social and cultural trends, demographic changes, what people think is “in”. It alter how people/businesses behave; accommodate the changes. Ex. increased diversity, social network, focus on health, interest in “green” • Technological advances: New technologies, emerging technologies, new uses of old technologies. • Political action and regulatory change: New changes in political arena, new laws and regulations. 1 Solving a problem • Can be pinpointed through observing trends • Ex. finding alternatives to fossil fuels 2. Gaps 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. Personal characteristics of Entrepreneur: • Prior experience • Cognitive factors; “sixth sense” – entrepreneurial alertness • Social networks o Strong ties vs Weak ties relationship ▪ It is more likely that an entrepreneur will get new ideas though WEAK ties rather than strong ties. Strong; tend to reinforce insights and ideas that people already have. Weak; may say something that sparks a completely new idea • Creativity; generating useful idea o 5 steps: ▪ Preparation ▪ Incubation ▪ Insight – Eureka! – Problem solved ▪ Evaluation ▪ Elaboration o Techniques for generating ideas: Brainstorming, focus groups, library and internet research, Customer advisory boards, Day-in-the-life research o Encouraging new ideas: Establish a focal point for idea; an idea bank (vault), Encouraging creativity at the firm level Protecting ideas: • Step 1 – should be in tangible form • Step 2 – should be secured • Step 3 – avoid making voluntary disclosure of an idea CHAPTER 3 – FEASIBILITY ANALYSIS Feasibility analysis: process of determining whether a business idea is viable. The preliminary evaluation. The proper timing is to conduct early. Forms of feasibility analysis: 1. Product/service feasibility a. Product/service desirability: does it take advantage of a gap? Is this a good time? i. Administer concept test (one page description of a business) b. Product/service demand i. Administer a buying intentions survey ii. Conduct library, internet, Gumshoe research (detective that scrounges around for information) 2. Industry/target market feasibility a. Industry attractiveness: are you growing? Early life cycle? Old? “must have”? high margin? b. Target market attractiveness: find a large enough market but small enough to avoid attracting large competitors. 3. Organizational feasibility a. Management prowess: evaluate the prowess, or ability, of its management team b. Resource sufficiency: nonfinancial resources i. Ex. affordable office space, key management employees, intellectual property protection, form favorable business partnerships 4. Financial feasibility a. Total start-up cash needed b. Financial performance of similar businesses c. Overall financial attractiveness of the proposed venture i. Financial factors associated with promising business opportunities: 1. Steady & rapid growth in sales 2. Ability to forecast income and expenses with a reasonable degree of certainty 3. Internally generated funds 4. Availability of an exit opportunity for investors to convert equity to cash First Screen: a tool that can be used in the initial pass at determining the feasibility of a business idea. If the idea cuts muster at this stage, the next step is to complete a business plan. CHAPTER 5 – INDUSTRY AND COMPETITOR ANALYSIS Industry: focuses on group of firms producing similar product or services. • The analysis helps a firm determine if the target market it identified during feasibility analysis is favorable for a new firm. 3 key questions: 1. Is the industry accessible – in other words, is it 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? 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. Techniques available to assess industry attractiveness: 1. Study environmental and business trends a. Environmental trend; economic, social, technological, political. Ex. sell to seniors are benefiting by the aging of the population. b. Business trend; other trends that impact an industry 2. The 5 FORCE MODEL (LOW, MEDIUM OR HIGH?) – help determine industry profitability and the avg rate of return for the firms in an industry. (apply pressure on industry profitability) a. Threat of substitutes – when close substitutes for a product exist, industry profitability is suppressed. Firms often offer their customers amenities to avoid the switch to a substitute. b. Threat of new entrants – keep the number of new entrants low by BARRIERS TO ENTRY: i. Economies of scale: Industries that are characterized by large economies of scale are difficult for new firms to enter ii. Product differentiation iii.Capital requirements iv.Cost advantages independent of size v. Access to distribution channels vi.Government and legal barriers Non-traditional barriers to entry: 1. Strength of management team 2. First-mover advantage 3. Passion of management team and employees 4. Unique business model 5. Internet domain name 6. Inventing a new approach to an industry c. Rivalry among existing firms i. Number and balance of competitors ii. Degree of difference between products iii.Growth rate of an industry iv.Level of fixed costs c. Bargaining power of suppliers: they sell by raising prices or reducing the quality of the components they provide. i. Supplier concentration ii. Switching costs iii.Attractiveness of substitutes iv.Thread of forward integration d. Bargaining power of buyers: by demanding price concessions or increases in quality. i. Buyer group concentration ii. Buyer’s costs iii.Degree of standardization of supplier’s products iv.Threat of backward integration First application: low, medium, or high? Second application: pose questions to determine the success Types of industry: 1. Emerging industries 2. Fragmented industries 3.Mature industries 4.Declining 5.Global Competitor analysis: helps a firm understand the positions of its major competitors and the opportunities that are available. Types of competitors: 1. Direct competitors – offer identical or similar products 2. Indirect competitors – offer close substitutes products 3. Future competitors – not yet direct or indirect but could be at any time. Sources of COMPETITIVE INTELLIGENCE: • The information that is gathered by a firm to learn about its competitors is referred to as competitive intelligence. • Collects in a professional and ethical manner • Ex. attend conferences, study product, read about them, talk to customers • Analysis grid: help a firm see how it stacks up against its competitors and identify its primary sources of competitive advent CHAPTER 6 – DEVELOPING AN EFFECTIVE BUSINESS MODEL • Include all the activities that define how a firm competes in the marketplace • ‘Beyond its own boundaries’ Importance of Business Models • Serves as an ongoing extension of feasibility analysis. • Does this business make sense? How Business models emerge • Value chain: string of activities that moves a product from raw material stage, through manufacturing and distribution and ultimately to the end user. By studying its value chain, you can identify ways to create ADDITIONAL VALUE. It also helpful in identifying opportunities. a. Primary activities – inbound logistics -> operations -> outbound logistics -> marketing and sales -> services b. Support activities – Firm infrastructure -> Human resource management -> technology development -> resource procurement Fatal flaws: 2 fatal flaws can render a business model untenable from the beginning: • A complete misread of the customer • Utterly unsound economics COMPONENTS OF A BUSINESS MODEL • Core strategy a. Business mission: describes why it exists and what its suppose to accomplish b. Product/market scope: defines the products and markets on which it will concentrate c. Basis for differentiation: differentiate from its competitors • Strategic Resources d. Core competencies: a resource or capability that serves as a source of a firm’s competitive advantage. Ex. Sony; miniaturization, Dell; supply chain management e. Strategic assets: rare and valuable that the firm owns. Ex. patents, customer data, location, equipment, etc. This factor is one that inventors pay close attention to when evaluating a business. • Partnership Network f. Suppliers g. Partners h. Other key relationships Most common types of partnerships • Joint Venture • Network • Consortia • Strategic alliance • Trade associations • Customer interface i. Target customer j. Fulfillment and support: describes the way a firm’s product or service reaches its customers. It also refers to the channels a company uses and what level of customer support it provides. k. Pricing structure: varies on target market CHAPTER 9 – BUILDING A NEW-VENTURE TEAM • Is the group of founders, key employees and advisors that move a new venture from an idea to a fully functioning firm. • The team is built when the firm can afford to hire additional personnel. • Also includes Board of directors, boards of advisors, professionals. Liabilities of Newness • High failure rate due in part to liabilities of newness; people involved can’t adjust fast enough to their roles and lacks a track record of success. • Assembling a talented and experienced management team can overcome these limitations. Separate elements of a new-venture team • Board of directors: are elected by a corporation’s shareholders to oversee the management of the firm. Inside and outside directors; inside->officer l. Formal responsibility – appoint, declare dividends, oversee affairs m. Frequency of meetings and compensation – meet 3-4 times/yr, pay in company stock or ask to serve on a voluntary basis. n. They can help by: provide guidance, lend legitimacy, • Role of professional advisors o. Board of advisors – provide counsel and advice, possesses no legal responsibility, give nonbinding advice, no potential legal liability p. Lenders and investors – providing financial oversight i. Ways they add value: 1. Help identify and recruit key management personnel 2. Help the venture fine-tune its business model 3. Provide introductions to additional sources of capital 4. Provide insight into the markets that the new venture plans to enter 5. Serve as a sounding board for new ideas 6. Serve on the new venture’s board of directors or board of advisors 7. Recruit customers 8. Help to arrange business partnership 9. Provide a sense of stability and calm q. Other professionals – attorneys, accountants, and business consultants (paid or free service) Advantages and Disadvantages of starting a venture as a team 1. Advantages a. Teams bring more talent, resources, and idea b. Bring a broader and deeper network of social and professional contacts c. Psychological support that the cofounders can offer one another. 2. Disadvantages a. May not get along b. Conflicts can arise when firm is “equal”; needs a formal structure c. Similar areas of expertise; they may duplicate rather complement d. Can easily disagree in terms of work habits, level of passion, risk, and how it should be run. Key element of a successful founding team • Heterogeneous rather homogeneous • Different backgrounds Preferred attributes of sole entrepreneurs and members of a new-venture team • Higher education • Prior entrepreneurial experience • Relevant industry experience • Broad social and professional network Recruiting and selecting employees • Recruiting: a skills profile CHAPTER 10 – GETTING FUNDING OR FINANCING • Importance of getting financing or funding o the nature of the funding and financing process o Why most new ventures need funding, the reasons are: ▪ Cash flow challenges – inventory must be purchased, pay employees, advertising before cash is generated from sales. ▪ Capital investments – cost of buying building, equipment, etc. ▪ Lengthy product development cycles – the up-front costs often exceeds firm’s ability. Alternatives for raising money for a new venture nd rd • Personal funds; sweat equity (2 source: ex. friends and family) (3 source: bootstrapping – finding ways to avoid the need for external financing through creativity, cost cutting, etc. o Examples of Bootstrapping methods ▪ Buying used instead of new ▪ Obtain payments in advance from customers ▪ Sharing office space ▪ Hiring interns ▪ Avoid unnecessary expenses Preparing to raise debt or Equity financing 1. Determine precisely how much money is needed 2. Determine the type of financing or funding that is the most appropriate 3. Develop a strategy for engaging potential investors or bankers 2 most common alternatives 1. Equity funding – means exchanging partial ownership in a firm, usually in the form of stock, for funding. o Sources of equity funding ▪ Venture capital: invested by venture capital firms; looks for the “home run” They also invest in “stages” ▪ Business angels: individuals who invest their personal capital directly in start-ups. Business angel are about 50 year old, has high income and wealth. Invest between 10k and 500k in a single company. Are looking for the potential to grow between 30% to 40% per year. ▪ Initial public offerings: company’s first sale of stock to the public. When a company goes public, its stock is traded on one of the major stock exchanges. • Reasons that motivate firms to go public o Is a way to raise equity capital to fund current and future operations. o Raises a firm’s public profile, making it easier to attract high-quality customers and business partners. o Is a liquidity event that provides a means for a means for a company’s investors to recoup their investments. o Creates a form of currency that can be used to grow the company via acquisitions. 2. Debt Financing o Sources of debt financing ▪ Commercial banks: have not been viewed as a practical source of financing for start-ups. Banks are interested in strong cash flow, low leverage, and healthy balance sheet. ▪ SBA Guaranteed loans: Approx. 50% of the 9,000 banks in the US participate in the SBA Guaranteed loan program. • The 7(A) Loan Guaranteed program – available to small businesses. • Size and types of loans – can guarantee as much as 85% on loans up to 150k and 75% over 150k. ▪ Vendor credit: trade credit, is when a vendor extends credit to a bu
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