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Chapter 1-10

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COMM 320
Robert Nason

COMM 320 Textbook Slides! Chapter 1: Introduction to Entrepreneurship What is Entrepreneurship? Academic definition: the process by which individuals pursue opportunities without regard to resources they currently control. Venture Capitalist: Entrepreneurship is the art of turning an idea into a business entrepreneurship 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. Corporate Entrepreneurship:  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 Entrepreneurial Firms:  Proactive  Innovative  Risk taking Conservative firms:  Take a more “wait and see” posture  Less innovative  Risk averse Why do people become entrepreneurs?  Desire to be their own boss  Desire to pursue their own ideas  Financial rewards Characteristics of successful entrepreneurs:  Passion for the business  The number on characteristic shared by successful entrepreneurs is a passion for the business  This passion typically stems from the entrepreneur’s belief that the business will positively influence people’s lives  Product/customer focus  A second defining characteristic of successful entrepreneurs is a product/customer focus  An entrepreneur’s keen focus on products and customers typically stems from the fact that most entrepreneurs are, at heart, craftspeople  Tenacity despite failure  Because entrepreneurs are typically trying something new, the failure rate is naturally high  A defining characteristic for successful entrepreneurs is their ability to persevere through setbacks and failures  Execution intelligence  The ability to fashion a solid business idea into a viable business is a key characteristic of successful entrepreneurs. Common Myths About Entrepreneurs 1. 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  Although no one is born to be an entrepreneur, there are common traits and characteristics of successful entrepreneurs: moderate risk taker, networker, achievement motivated, alert to opportunities, creative, decisive, energetic, has a strong work ethic, lengthy attention span, optimistic disposition, persuasive, promoter, resource assembler/leverage, self-confident, self-starter, tenacious, tolerant of ambiguity, visionary 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, behaviour that is often equated with risk taking 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 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 sild reputation, and a track record of success  These criteria favour older rather than younger entrepreneurs Types of start-up firms: 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 Lifestyle firms: firms that provide their owner or owners the opportunity to pursue a particular lifestyle, and make a living at it Entrepreneurial firms: firms that bring new products and services to the market by creating and seizing opportunities regardless of the resources they currently control Changing Demographics of Entrepreneurs: Women Entrepreneurs:  There were 6.2 million women-owned businesses in 2002 (the most recent statistics available)  This number was up 20% from 1997  There are a growing number of organizations that support and advocate for women-owned businesses Minority Entrepreneurs:  There has been a substantial increase in minority entrepreneurs in the US from 1996 to 2010  The biggest jump has come with Latino entrepreneurs, which increase from 11% to 23% from 1996 to 2010 Senior Entrepreneurs:  The percentage of US entrepreneurs who are seniors jumped from 15% to 23% from 1996 to 2010  The increase is attributed to corporate downsizing, a desire among older workers for more fulfillment in their lives, a need for additional income, and similar factors Young Entrepreneurs:  Interest among young people in entrepreneurial careers is high  According to a Harris Interactive survey, 40% of people eight to 21 years old said they’d like to start their own business one day  A total of 95% of the eight to 21 year olds said they know someone who has started their own business Economic Impact of Entrepreneurial Firms: Innovation:  Is the process of creating something new, which is central to the entrepreneurial process  Several studies have found that small businesses outperform their larger counterparts in terms of obtaining patents Job Creation:  Small businesses are the creators of most new jobs in the US, and employ half of all private sector employees  According to a survey, 02% of Americans say entrepreneurs are critically important to job creation Entrepreneurial Firms’ Impact on Society and Larger Firms: Society:  The innovations of entrepreneurial firms have a dramatic impact on society  Think of all new products and services that make our lives easier, enhance our productivity at work, improve our health, and entertain us in new ways Larger firms:  Many entrepreneurial firms have built their entire business models around products and services that help larger firm become more efficient and effective Entrepreneurial Process: 1. Deciding to become and 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 What is an opportunity?  A favourable set of circumstances that creates a need for a new product, service, or business 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 Ways to identify an opportunity: 1. Observing trends  Trends create opportunities for entrepreneurs to pursue  The most important trends are:  Economic forces: state of the economy, level of disposable income, consumer spending patterns o Economic trends help determine areas that are ripe for new start-ups and areas that start-ups should avoid o Examples of economic trend creating a favourable opportunity: a weak economy favours start-ups that help consumers save money; GasBuddy.com states to help consumers save money on gas  Social forces: social and cultural trends, demographic changes, what people think is “in” o Social trends alter how people and businesses behave and set their priorities. These trends provide opportunities for new businesses to accommodate the changes o Examples of social trends: aging baby boomers, increasing diversity in the workplace, increase in interest in social media, health awareness, green products  Technological advances: new technologies, emerging technologies, new uses of old technologies o Advances in technology frequently create business opportunities o Once a technology is created, products often emerge to advance it o Examples: computer industry, internet, biotechnology, digital photography  Political action and regulatory change: new changes in political arena, new laws and regulations o Political action and regulatory changes also provide the basis for opportunities o Ex: laws to protect the environment have created opportunities for entrepreneurs to start firms that help other firms comply with environmental laws and standards  It’s important to be aware of changes in these areas 2. Solving a problem  Sometimes identifying opportunities simply involves noticing a problem and finding a way to solve it  These problems can be pinpointed through observing trends and through more simple means, such as intuition, serendipity, or change  A problem facing US and other countries is finding alternatives to fossil fuels  A large number of entrepreneurial firms, like solar farms, are being launched to solve this problem 3. Finding 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  Ex: in 2000 tish cirovolv realized that there were no guitars on the market made specifically for women. To fill this gap, she started Daisy Rock Guitars, a company that makes guitars just for women. Personal Characteristics of an Entrepreneur: Prior Experience:  Several studies have shown that prior experience in an industry helps and 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 Cognitive Factors:  Studies have shown that opportunity recognition may be an innate skill or cognitive process  Some people believe that entrepreneurs have a 6 sense that allows them to see opthrtunities that others miss  This 6 sense is called entrepreneurial alertness, which is formally defined as the ability to notice things without engaging in deliberate search 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 vs Weak tie relationships:  Strong-tie relationships are characterized by frequent interaction and form between coworkers, friends, and spouses o Typically form between like-minded individuals, tend to reinforce insights and ideas that people already have  Weak-tie relationships are characterized by infrequent interaction and form between casual acquaintances o Not as apt to be between like-minded individuals, so one person may say something that sparks a completely new idea  It is more likely that an entrepreneur will get new business ideas through weak-tie rather than strong-tie relationships 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: 1. Preparation 2. Incubation 3. Insight (Eureka, business idea conceived, problem solved) 4. Evaluation 5. Elaboration Full view of the Opportunity Recognition Process: Combination of environmental trends and personal characteristics of entrepreneur which identify business, product, or service opportunity gap, which generates new business, product, and service ideas. Techniques for generating ideas: 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 brainstorming session:  No criticism  Freewheeling is encouraged  Session should move quickly  Leap-frogging is encouraged Focus Groups:  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 Library Research:  Libraries are often an 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 libraries typically have access to search engines and industry reports that would costs thousands of dollars to access on your own 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 email 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 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 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 is everybody’s job, it may be no one’s responsibility  Another approach is to establish an idea bank 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 Protecting Ideas from being Lost or Stolen 1. The idea should be put in a tangible form such as entered into a physical idea logbook or saved on a computer and the date of the idea was first thought of should be entered 2. The idea should be secured. This may seem an obvious step, but it is often overlooked 3. Avoid making an inadvertent or voluntary disclosure of an idea, in a manner that forfeits the right to claim exclusive rights to it. Chapter 3: Feasibility Analysis What is feasibility Analysis?  The process of determining whether a business idea is viable  It is the preliminary evaluation of a business idea, conducted for the purpose of determining whether the idea is worth pursuing When to conduct a feasibility Analysis:  The proper time to conduct a feasibility analysis is early in the thinking through the prospects for a new business  The thought is to screen ideas before a lot of resources are spent on them Outline for a comprehensive feasibility analysis: 1. Product/service feasibility a. Product/service desirability b. Product/service demand 2. Industry/target market feasibility a. Industry attractiveness b. Target market attractiveness 3. Organizational feasibility a. Management prowess b. Resource sufficiency 4. Financial feasibility a. Total start-up cash needed b. Financial performance of similar businesses c. Overall financial attractiveness of the proposed venture 5. Overall assessment Product/service feasibility analysis  An assessment of the overall appeal of the product or service being proposed  Before a prospective firm rushes a new product or service into development, it should be sure that the product or service is what prospective customers want  Product/Service desirability: o Does it make sense? Is it reasonable? Is it something consumers will get excited about? o Does it take advantage of an environmental trend, solve a problem, or take advantage of a gap in the marketplace? o Is this a good time to introduce the product or service to the market? o Are there any fatal flaws in the product or service’s basic design or concept?  Concept test: o A concept statement should be developed o 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 o 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 strengthen or tweaked before proceeding further  Product/service demand: o Step 1: administer a buying intentions survey  Is an instrument that is used to gauge customer interest in a product or service  It consists of a concept statement or a similar description of a product or survey with a short survey attached to gauge customer interest  Internet sites like SurveyMonkey make administering a buying intentions survey easy and affordable o Step 2: conduct library, internet, and gumshoe research  The second way to assess the demand for a product or service is by conducting library, internet and gumshoe research  Reference librarians can often point you towards resources to help you investigate a business idea, such as industry-specific trade journals and industry reports  Internet searches can often yield important information about the potential viability of a product or service idea  Gumshoe research:  A gumshoe is a detective or an investigator that scrounges around for information or clues wherever they can be found  Be a gumshoe. Ask people what they think about your product or service idea/ if your idea is to sell educational toys, spend a week volunteering at a daycare centre and watch how children interact with toys Industry/target market feasibility analysis  This is an assessment of the overall appeal of the industry and the target market for the propose business  An industry is a group of firms producing similar product or service  A firms target market is the limited portion of the industry it plans to go after  Components of an industry/target market analysis: o Industry attractiveness o Target market attractiveness Industry attractiveness:  Industries vary in terms of their overall attractiveness  The degree to which environmental and business trends are moving in favour rather than against the industry  Characteristics of attractive industries: o Young rather than old o Early rather than late in their life cycle o Fragmented rather than concentrated o Growing rather than shrinking o Selling products and services that customers “must have” rather than “want to have” o Are not crowded o Have high rather than low operating margins o Are not highly dependent on the historically low price of key raw materials Target Market Attractiveness:  The challenge in identifying an attractive target market is to find a market that’s large enough for the proposed business but is yet small enough to avoid attracting larger competitors  Assessing the attractiveness of a target market is tougher than an entire industry  Often, considerable ingenuity must be employed to find information to assess the attractiveness of a specific target market Organizational Feasibility Analysis  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  Components of organisational feasibility analysis: o Management prowess o Resource sufficiency Management Prowess:  A proposed business should candidly evaluate the prowess, or ability, of its management team to satisfy itself that management hast the requisite passion and expertise to launch the venture  Two of the most important factors in this area are: o The passion that the sole entrepreneur or the founding team has for the business idea o The extent to which the sole entrepreneur or the founding team understands the markets in which the firm will participate 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 successful o If critical resources are not available in certain areas, it may be impractical to proceed with the business idea  Examples of non-financial resources: o Affordable office space o Lab space, manufacturing space, or space to launch a service business o Availability of contract manufacturers or service providers o Key management employees (now and in the future) o Key support personnel (now and in the future) o Ability to obtain intellectual property protection o Ability to form favourable business partnerships Financial Feasibility Analysis:  The final component of a comprehensive feasibility analysis  A preliminary financial assessment is sufficient 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 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 of doing this, all of which involve a little ethical detective work o 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 o Simple observational research may be needed. For example the owners of NV Fitness Drinks could estimate their sales by tracking the number of people who patronize similar restaurants and estimating the average amount each customer spends Overall Financial Attractiveness of the Proposed Venture:  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 ideas: o Steady and rapid growth in sales during the first 5 to 7 years in a clearly defined market niche o High percentage of recurring revenue – meaning that once a firm wins a client, the client will provide recurring sources of revenue o Ability to forecast income and expenses with a reasonable degree of certainty o Internally generated funds to finance and sustain growth o Availability of an exit opportunity for investors to convert equity to cash Chapter 5: Industry and Competitor Analysis Industry: a group of firms producing a similar product or service, such as airlines, fitness drinks, furniture, or electronic games Industry analysis: business research that focuses on the potential of an industry Importance of Industry Analysis:  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 favourable for a new firm The Three Questions 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? How Industry and firm-level factors affect performance:  Firm-level factors o Firm’s assets, products, culture, teamwork among employees, reputation, and other revenues  Industry-level factors: o Threat of new entrants, rivalry among existing firms, bargaining power of buyers, and related factors  Conclusion o On various studies, researchers have found that from 8% to 30% of the variation in firm profitability is directly attributable to the industry in which a firm competes Techniques available to assess industry attractiveness:  Study environmental and Business Trends: o Environmental:  Economic trends, social trends, technological advances, and political and regulatory changes  Ex: industries that sell products to seniors are benefiting by the aging of the population o Business Trends:  Other trends that impact an industry  Ex: are profit margins in the industry increasing or falling? Is innovation accelerating or waning? Are input costs going up or down?  Explanation of the Five Force Model: o The five competitive forces model is a framework for understanding the structure of an industry o The model is composed of the forces that determine industry profitability o They help determine the average rate of return for the firms in an industry o Each of the five forces impacts the average rate of return for the firms in an industry by applying pressure on industry profitability o 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 The 5 Forces: Threat of Substitutes:  The price that consumers are willing to pay for a product depends in part on the availability of substitute products  Ex: there are few if any substitutes for prescription medicines, which is why the pharma 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 substitutes 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  Ex: an independently owned coffee shop doesn’t just sell coffee, it also offers 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 or less expensive alternatives 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 o A barrier to entry is a condition that creates a disincentive for a new firm to enter an industry  Barriers to entry: o 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 o Product differentiation: industries such as the soft drink industry that are characterised by firms with strong brands are difficult to break into without spending heavily on advertising o Capital requirements: the need to invest large amounts of money to gain entrance to an industry is another barrier to entry o Cost advantages independent of size: existing firms may have cost advantages not related to size. Ex: the existing firms in an industry may have purchased land when it was less expensive than it is today o Access to distribution channels: distribution channels are often hard to crack this is particularly true in crowded markets, such as the convenience store market o Government and legal barriers: some industries, such as broadcasting, require the granting of a license by a public authority to compete  Non-traditional Barriers to entry: o It is difficult for start-ups to execute barriers to entry that are expensive, such as economies of scale, because money is usually tight o Start-ups have to reply on non-traditional barriers to entry to discourage new entrants, such as assembling a world-class management team that would be difficult for another company to replicate o Strength of management team: if a start-up puts together a world- class management team, it may give potential rivals a pause in taking on the start-up in its chosen industry o 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 barrier to entry o Passion of the management team and employees: if the employees of a start-up are motivated by the unique culture of the start-up, and anticipate a large financial reward, this is a combination that cannot be replicated by larger firms o Unique business model: if a start-up is able to construct a unique business model and establish a network of relationships that makes this business model work, this set of advantages create a barrier to entry o 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 capabilities o Inventing a new approach to an industry: if a start-up invest a new approach to an industry and executes it in an exemplary fashion, these factors create a barrier to entry for potential imitators 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 rivalry: o 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 o Degree of difference between products: the degree to which products differ from one product to another affects industry rivalry o Growth rate of an industry: the competition among firms in a slow- growth industry is stronger than among those in fast-growth industries o Level of fixed costs: firms that have high fixed costs must sell a higher volume of their product to reach the breakeven point than firms with low fixed costs 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: o 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 o Switching costs: switching costs are the fixed costs that buyers encounter when stitching or changing from one supplier to another. If switching costs are high, a buyer will be less likely to switch suppliers o Attractiveness of substitutes: supplier power is enhanced if there are no attractive substitutes for the product or service the supplier offers o Threat of forward integration: the power of a supplier is enhanced if there is a credible possibility that the supplier might enter the buyers industry Bargaining Power of Buyers:  Buyers can suppress the profitability of the industries from which they purchase by demanding price concessions or increases in quality  For example, the automobile industry is dominated by a handful of large companies that buy products from thousands of suppliers in different industries. This allows the automakers to suppress the profitability of the industries from which they buy by demanding price reductions  Factors that have an impact on the ability of suppliers to exert pressure of buyers: o 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 o 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 o Degree of standardization of supplier’s products: the degree to which a supplier’s product differ from its competitors affects the buyer’s bargaining power o Threat of backward integration: the power of buyers is enhanced if there is a credible threat that they buyer might enter the suppliers industry First application of the five forces model:  The five forces model can be used to assess the attractiveness of an industry by determining the level of threat to industry profitability for each of the forces  If a firm fills out the form below 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 Second application of the five forces 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 below, and help a firm project the potential success of a new venture in a particular industry Industry types and the opportunities they offer:  Emerging industries: industries in which standard operating procedures have yet to be developed o Opportunity: first-mover advantage  Fragmented industries: industries that are characterized by a large number of firms of approximately equal size o Opportunity: consolidation  Mature industries: industries that are experiencing slow or no increase in demand o Opportunity: process innovation and after-sale service innovation  Declining industries: industries that are experiencing a reduction in demand o Opportunity: leadership, establishing a niche market, pursuing a cost reduction strategy  Global industries: industries that are experiencing significant international sales o Opportunity: multidomestic and global strategies What is Competitor Analysis?  A competitor analysis is a detail 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 Types of Competitors new ventures face:  Direct competitors: businesses offering identical or similar products  Indirect competitors: businesses offering close substitute products  Future competitors: businesses that are not yet direct or indirect competitors but could be at any time Sources of Competitive Intelligence:  To complete a competitive analysis grid, a firm must first understand the strategies and behaviours 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  Many companies attend trade shows to not only display their products, but to see what their competitors are up to Ethical ways to obtain information about competitors:  Attend conferences and trade shows  Purchase competitors’ products  Study competitors’ web sites  Set up Google and Yahoo! Email 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 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 new ideas for markets to pursue, and identify its primary sources of competitive advantage Chapter 6: Developing an Effective Business Model What is a business model? Model: 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, uses its resources, structures its relationships, interfaces with customers, and creates value to sustain itself on the basis of the profits it generates  The term “business model” is used to include all the activities that define how a firm competes in the marketplace Dell’s business model:  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, customers, and many others to make its business model work. Having a clearly articulated business model is important because it does the following:  Serves as an ongoing extension of feasibility analysis. A business model continually asks the question, “Does this business make sense?”  Focuses attention on how all the elements of a business fit together and constitute a working whole  Describes why the network of participants needed to make a business idea viable are willing to work together  Articulates a company’s core logic to all stakeholders, including the firms employees Diversity or Variety in business models:  There is no standard business model for an industry or for a target market within an industry  However, over time, the most successful business models in an industry predominate  There are always opportunities for business model innovation The Value Chain:  The value chain is a 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 chains analysis is also helpful in identifying opportunities for new businesses and in understanding how business models emerge  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: o A single primary activity such as marketing and sales o The interface between one stage of the value chain and another, such as the interface between operations and outgoing logistics o One of the support activities, such as human resource management Fatal flaws of business models:  A complete misread of the customer  Utterly unsound economics Four components of a business model: 1. Core strategy: describes how a firm competes relative to its competitors o Business mission statement: describes why it exists and what its business model is supposed to accomplish o Product/market scope: defines the products and markets on which it will concentrate o Basis for 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? 2. Strategic resources: a firm is not able to implement a strategy without resources, so the resources a firm has affect 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 o Core competencies: resources or capabilities that serves as a source of a firm’s competitive advantage. Ex: competence in miniaturization or supply chain management o Strategic assets: anything rare and valuable that a firm owns. Ex: plan and equipment, location, brands, patents, customer data, highly qualified staff, and distinctive partnerships. o 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 3. Partnership network: new ventures 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 o Suppliers: a company that provides parts or services to another company. o Partners: firms partner with other companies to make their business models work. An entrepreneur’s ability to launch a firm that achieves a competitive advantage may hinge as much on the skills of the partners as on the skills within the firm itself. o Types of partnerships:  Joint Venture: an entity created by two or more firms pooling a portion of their resources to create a separate, jointly owned organization  Network: a hub and wheel configuration with a local firm at the hub organizing the interdependencies of a complex array of firms  Consortia: a group of organizations with similar needs that band together to create a new entity to address those needs  Strategic alliance: an agreement between two or more firms that establishes an exchange relationship but has no joint ownership involved  Trade associations: organizations that are formed by firms in the same industry to collect and disseminate trade info, offer legal and technical advice, furnish industry-related training, and provide a platform for collective lobbying. 4. Customer Interface: the way a firm interacts with its customer hinges on how it chooses to compete o Target customer: a limited group of individuals or business that it goes after or tries to appeal to o Fulfillment and support: the way a firm’s product or services reaches its customers. It also refers to the channels a company uses and what level of customer support it provides o Pricing structure: pricing models vary, depending on a firm’s target market and its pricing philosophy Chapter 4: Writing a Business Plan Business plan:  a written narrative, typically 25 to 35 pages long, that describes what a new business plans to accomplish  for most new ventures, the business plan is a dual-purpose document used both inside and outside the firm Primary audiences of a business plan:  The firm’s employees: a clearly written business plan helps the employees of a firm operate in sync and move forward in a consistent and purposeful manner.  Investors/external stakeholders: a firm’s business plan must make the case that the firm is a good use of an investor’s funds or the attention of others Structure of a business plan:  To make the best impression, a business plan should follow a conventional structure  Although some entrepreneurs want to demonstrate creativity, departing from the basic structure of the conventional business plan is usually a mistake  Typically, investors are busy people and want a plan where they can easily find critical information  Software packages: o There are many software packages available that employ an interactive, menu-driven approach to assist in the writing of a business plan o Some of these programs are very helpful. However, entrepreneurs should avoid a boilerplate plan that looks as though it came from a canned sources  Sense of excitement: o Along with facts and figures, a business plan needs to project a sense of anticipation and excitement about the possibilities that surround a new venture Content of the Business plan:  The business plan should give clear and concise information on all the important aspects of the proposed venture  It must be long enough to provide sufficient information yet short enough to maintain reader interest  For most plans, 25 to 35 pages is sufficient Types of business plans:  Summary business plan: 10-15 pages; works best for new ventures in the early stages of development that want to “test the waters” to see if investors are interested in their idea  Full business plan: 25-35 pages; works best for new ventures who are at the point where they need funding or financing; serves as a blueprint for the company’s operations  Operational business plan: 40-100 pages; meant primarily for an internal audience; works best as a tool for creating a blueprint for a venture’s operations and providing guidance to operational managers Recognizing the elements of the plan may change:  New insights invariable emerge when an entrepreneur or a team of entrepreneurs immerse themselves in writing the business plan and start getting feedback from others Outline of a business plan:  Most business plans do not include all the elements introduced below  Each entrepreneur must decide which elements to include in their plan 1. Executive summary:  A short overview of the entire business pan  Provides a busy reader with everything that needs to be known about the new venture’s distinctive nature  Shouldn’t exceed two single-spaced pages  In many instances an investor will ask for a copy of a firm’s executive summary and will ask for a copy of the entire plan only if the executive summary is sufficiently convincing  Arguably the most important section of a business plan 2. Industry Analysis  This section should begin by describing the industry the business will enter in terms of its size, growth rate, and sales projections  Items to include: o Industry size, growth rate, and sales projections o Industry structure o Nature of participants o Kew success factors o Industry trends o Long-term prospects  Before a business selects a target market it should have a good grasp of its industry – including where its promising areas are and where its points of vulnerability are  The industry that a company participates in largely defines the playing field that a firm will participate in 3. Company Description  General description of the company  Items to include:
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