Instructor:

Dr. Artur Yetvart

Mumcu
Entrepreneurship 30+ years experience
and Its Applications Industry
Consulting
Higher Education
Author
Speaker
[Link] Yetvart Mumcu Media Contributor
Expert Witness
[Link]@[Link] 2

1-1

Participant Course
Introductions Description
This course is ideal for any professional interested in
improving their hard and soft skills in business.
Name ?
Students, managers, entrepreneurs, and specialists, including
Affiliation – Occupation ? consultants and analysts, will benefit from the interactive,
Industry experience ? guided approach to learning and the opportunity to grow
What do you hope to learn from this course? their global network online.
The focus on the mechanics of leadership, influence, and
How will you apply this knowledge to your
strategy, combined with technical business and finance
existing role? skills, provides a comprehensive learning experience for
3
working professionals in managerial and leadership roles in
a range of industries.

Course Format and

Course Goals
Activities
• Design, direct, and shape organizational processes Lectures
• Influence the context and environment in which decisions Review Questions
get made Q&A / Discussions
• Implement strategies, plans, and projects on time, on
Assignments (individual, team)
budget, and at the highest quality
• Spearhead learning initiatives that enable your Course Project (Weekly progress)
organization to improve and innovate Midterm-Final Exams
• Manage and lead change in organizations of varying
sizes.

1
 Course Sections
Chapter 01: Introduction to Entrepreneurship
Chapter 02: Recognizing Opportunitunities and Generating Ideas
Chapter 1
Chapter 03: Feasibility Analysis
Chapter 04: Writing a Business Plan
Chapter 05: Industry and Competitor Analysis
Midterm Examination
Chapter 06: Developing an Effective Business Model
Chapter 07: Prepairing the Proper Ethical and Legal Foundation
Chapter 08: Assessing a New Ventures Financial Strength and Viability
Chapter 09: Building a New Venture Team
Introduction to
Chapter 10: Getting Financing or Funding Entrepreneurship

1-8

Chapter Objectives Chapter Objectives

(1 of 2) (2 of 2)

1. Explain entrepreneurship and discuss its 6. Explain how entrepreneurial firms differ from
importance. salary-substitute and lifestyle firms.
2. Describe corporate entrepreneurship and its use in 7. Discuss the changing demographics of
established firms. entrepreneurs in the United States.
3. Discuss the three main reasons that people decide to
become entrepreneurs. 8. Identify ways in which large firms benefit from the
presence of smaller entrepreneurial firms.
4. Identify four main characteristics of successful
entrepreneurs. 9. Explain the entrepreneurial process.
5. Explain the five common myths regarding
entrepreneurship.

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What is Entrepreneurship? What is Entrepreneurship?

(1 of 2) (2 of 2)

• Origin of the Word “Entrepreneur” • Entrepreneurship Defined

– The word was originally used to describe people who “take – The essence of entrepreneurial behavior is identifying
on the risk” between buyers and sellers or “undertake” a opportunities and putting useful ideas into practice.
task such as starting a new venture.
– The set of tasks called for by this behavior can be
– The “undertake” interpretation of the word has been central
to its usage in English. accomplished by either an individual or a group and
typically requires creativity, drive, and a willingness to take
• Difference Between an Inventor and an Entrepreneur risks.
– An inventor creates something new.
– An entrepreneur puts together all the resources needed—the
money, the people, the strategy, and the risk-bearing ability
to transform the invention into a viable business.

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2
 Corporate Entrepreneurship Corporate Entrepreneurship
(1 of 2) (2 of 2)

• Corporate Entrepreneurship Entrepreneurial Firms Conservative Firms

– Corporate Entrepreneurship is the conceptualization of
• Proactive • Take a more “wait and see”
entrepreneurship at the firm level.
posture
– All firms fall along a conceptual continuum that ranges • Innovative
from highly conservative to highly entrepreneurial. • Less innovative
• Risk taking
– The position of a firm on this continuum is referred to as • Risk adverse
its entrepreneurial intensity.

1-13 1-14

Why Become an Entrepreneur? Characteristics of Successful Entrepreneurs

(1 of 3)

Four Primary Characteristics of Successful Entrepreneurs

There are three 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

1-15 1-16

Characteristics of Successful Entrepreneurs Characteristics of Successful Entrepreneurs

(2 of 3) (3 of 3)

1) Passion for the Business 3) Tenacity Despite Failure

– The number one characteristic shared by successful – Because entrepreneurs are typically trying something new,
entrepreneurs is a passion for the business. the failure rate is naturally high.
– This passion typically stems from the entrepreneur’s belief – A defining characteristic for successful entrepreneurs is
that the business will positively influence people’s lives. their ability to persevere through setbacks and failures.
2) Product/Customer Focus 4) Execution Intelligence
– A second defining characteristic of successful – The ability to fashion a solid business idea into a viable
entrepreneurs is a product/customer focus. business is a key characteristic of successful entrepreneurs.
– An entrepreneur’s keen focus on products and customers • The ability to translate thought, creativity, and imagination into
typically stems from the fact that most entrepreneurs are, at action and measurable results is the essence of execution
intelligence.
heart, craftspeople.
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3
 What is Entrepreneurship
Common Myths About Entrepreneurs
Entrepreneurship Meaning (1 of 5)
The Money Gig
• [Link] Myth 1: Entrepreneurs Are Born Not Made
QgFd1g – This myth is based on the mistaken belief that some people
are genetically predisposed to be entrepreneurs.
– The consensus of many studies is that no one is “born” to
be an entrepreneur; everyone has the potential to become
one.
– Whether someone does or doesn’t become an entrepreneur
is a function of the environment, life experiences, and
personal choices.

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Common Myths About Entrepreneurs Common Myths About Entrepreneurs

(2 of 5) (3 of 5)

Although no one is “born” to be an entrepreneur, there are common

personality traits and characteristics of successful entrepreneurs Myth 2: Entrepreneurs Are Gamblers
– A second myth about entrepreneurs is that they are
• Achievement motivated • Optimistic disposition gamblers and take big risks. The truth is, most
entrepreneurs are moderate risk takers.
• Alert to opportunities • Persuasive
– The idea that entrepreneurs are gamblers originates from
• Creative • Promoter
two sources:
• Decisive • Resource assembler • Entrepreneurs typically have jobs that are less structured, and so
• Energetic • Self-confident they face a more uncertain set of possibilities than people in
traditional jobs.
• Has a strong work ethic • Tenacious
• Many entrepreneurs have a strong need to achieve and set
• Is a moderate risk taker • Tolerant of ambiguity challenging goals, a behavior that is often equated with risk taking.
• Lengthy attention span • Visionary
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Common Myths About Entrepreneurs Common Myths About Entrepreneurs

(4 of 5) (5 of 5)

Myth 3: Entrepreneurs Are Motivated Primarily by Myth 4: Entrepreneurs Should Be Young And Energetic
Money – The most vibrant age range for early stage entrepreneurial
– While it is naive to think that entrepreneurs don’t seek activity is 25 to 34 years old.
financial rewards, money is rarely the reason entrepreneurs – While it is important to be energetic, investors often cite
start new firms. the strength of the entrepreneur as their most important
– In fact, some entrepreneurs warn that the pursuit of money criteria in making investment decisions.
can be distracting. • What makes an entrepreneur “strong” in the eyes of an investor is
experience, maturity, a solid reputation, and a track record of
success.
• These criteria often favor older rather than younger entrepreneurs.

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4
 Types of Start-Up Firms Demographics of Entrepreneurs
(1 of 3)

Types of Start-up Firms 1) Women Entrepreneurs

– There were 252 million women-owned businesses in 2021, the
most recent year the U.S. Census Bureau collected business
ownership data. That number is up 20% from 2001.
2) Minority Entrepreneurs
– The number of minority-owned businesses has also risen
sharply.
• There were 1.2 million African-American owned businesses in 2002, up
45% from 1997.
• There were 1.1 million Asian-owned businesses in 2002, up 24% from
1997.
• There were 206,125 Native American-owned businesses in 2002, up
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24% from 1997. 1-26

Demographics of Entrepreneurs Demographics of Entrepreneurs

(2 of 3) (3 of 3)

3) Senior Entrepreneurs (+ 55 years old) 4) Young Entrepreneurs

– Although the Census Bureau does not collect data on senior – Interest in entrepreneurship among young people is also
entrepreneurs, there is strong evidence to suggest that the growing.
number of older people starting their own businesses is • At the high school level, a Gallup study revealed that 7 out of 10 high
rapidly growing. school students want to start their own companies.
– The dramatic increase in the number of senior entrepreneurs • Interest in entrepreneurship on college campuses is growing.
According to a recent study, 1,992 two- and four-years colleges and
is attributed to a number of factors, including: universities now offer at least one course in entrepreneurship, up from
• Corporate downsizing. 300 in the 1984-1985 school year.
• An increasing desire among older workers for more personal • Although the bulk of entrepreneurship education takes place within
fulfillment in their lives. business schools, many other colleges and departments are offering
• Growing worries among seniors that they need to earn additional entrepreneurship courses as well, including engineering, agriculture,
income to pay for future health care services and other expenses. theater, dance, education, law, and nursing.

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Economic Impact of Entrepreneurial Economic Impact of Entrepreneurial

Firms Firms
(1 of 2) (2 of 2)

1) Innovation 3) Globalization
– Is the process of creating something new, which is central – Today, over 97% of all U.S. exporters are small businesses
to the entrepreneurial process. with fewer than 500 employees.
– Small entrepreneurial firms are responsible for 55% of all – Export markets are vital to the U.S. economy and provide
innovations in the U.S. outlets for the sale of U.S. produced products and services.
2) Job Creation
– In the past two decades, economic activity has moved in
the direction of smaller entrepreneurial firms, which may
be due to their unique ability to innovate and focus on
specialized tasks.

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5
 Entrepreneurial Firms’ Impact on
The Entrepreneurial Process
Society and Larger Firms
1) Impact on Society The Entrepreneurial Process Consists of Four Steps
– The innovations of entrepreneurial firms have a dramatic
Step 1: Decision to become an entrepreneur
impact on society.
– Think of all the new products and services that make our Step 2: Developing successful business ideas
lives easier, enhance our productivity at work, improve our Step 3: Moving from an idea to an entrepreneurial firm
health, and entertain us in new ways.
Step 4: Managing and growing an entrepreneurial firm
2) 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.

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Steps in the Entrepreneurial Process Steps in the Entrepreneurial Process

(2 of 2)
(1 of 2)
Step 3 Step 4
Step 1 Step 2

Developing Successful Business Ideas

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Chapter Objectives
(1 of 2)

Chapter 2 1. Explain why it’s important to start a new firm when

its “window of opportunity” is open.
2. Explain the difference between an opportunity and
an idea.
3. Describe the three general approaches entrepreneurs
use to identify opportunities.
4. Identify the four environmental trends that are most
Recognizing Opportunities instrumental in creating business opportunities.
and Generating Ideas 5. List the personal characteristics that make some
people better at recognizing business opportunities
than others.

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6
 Chapter Objectives What is An Opportunity?
(2 of 2) (1 of 2)

6. Identify the five steps in the creative process. • Opportunity Defined

7. Describe the purpose of brainstorming and its use – An opportunity is a favorable set of circumstances that
as an idea generator. creates the need for a new product, service, or business
idea.
8. Describe how to use surveys to generate new – Most entrepreneurial firms are started in one of two ways:
business ideas. • Some firms are internally stimulated. An entrepreneur decides to
9. Explain the purpose of maintaining an idea bank. start a firm, searches for and recognizes an opportunity, then starts a
business.
10. Describe three steps for protecting ideas from being • Other firms are externally stimulated. An entrepreneur recognizes
lost or stolen. a problem or an opportunity gap and creates a business to fill it.

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What is an Opportunity? Window of Opportunity

(2 of 2)

An opportunity has four essential features

• Window of Opportunity
– The term “window of opportunity” is a metaphor describing the
time period in which a firm can realistically enter a new market.
• Once the market for a new product is established, its window of opportunity
opens, and new entrants flow in.
• At some point, the market matures, and the window of opportunity (for new
entrants) closes.

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Three Ways to Identify An Opportunity First Approach: Observing Trends

(1 of 2)

1) Observing Trends
– The first approach to identifying opportunities is to observe
trends and study how they create opportunities for
entrepreneurs to pursue.
– There are two ways that entrepreneurs can get a handle on
changing environmental trends:
• They can carefully study and observe them.
• They can purchase customized forecasts and market analyses from
independent research firms.

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7
 First Approach: Observing Trends
What is Trend (2 of 2)

Environmental Trends Suggesting Business or

• [Link] Product Opportunity Gaps

zyrzg

1-43 2-44

Trend 1: Economic Forces Trend 2: Social Forces

(1 of 2)

• Economic Forces • Social Forces

– Economic forces affect consumers’ level of disposable – Changes in social trends provide openings for new
income. businesses on an ongoing basis.
– When studying how economic forces affect opportunities, it
– The continual proliferation of fast-food restaurants, for
is important to evaluate who has money to spend and who
is trying to cut costs. example, isn’t happening because people love fast food. It
• An increase in the number of women in the workforce and their is happening because people are busy, and have disposable
related increase in disposable income is largely responsible for the income.
number of boutique clothing stores targeting professional women
that have opened in the past several years.
– Similarly, the Sony Walkman was developed not because
• Many large firms are trying to cut costs. Entrepreneurs have taken consumers wanted smaller radios but because people
advantage of this trend by starting firms that help other firms wanted to listen to music while on the go.
control costs.

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Trend 2: Social Forces Trend 3: Technological Advances

(2 of 2)

Examples of Social Forces That Allow For New

Business Opportunities • Technological Advances
– Given the rapid pace of technological change, it is vital that
• Family and work patterns. entrepreneurs keep on top of how new technologies affect current
• The aging of the population. and future business opportunities.
• The increasing diversity in the workplace.
– Entire industries have emerged as the result of technological
advances.
• The globalization of industry. • Examples include the computer industry, the Internet, biotechnology, and
• The increasing focus on health care and fitness. digital photography.
– Once a new technology is created, new businesses form to take the
• The increas in computers and the Internet.
technology to a higher level.
• The increase in the number of cell phone users. • For example, RealNetworks was started to add audio capability to the
Internet.
• New forms of entertainment.
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8
 Trend 4: Political and Regulatory
Changes Branding Trends 2023
• Political and Regulatory Changes • [Link]
– Political and regulatory changes provide the basis for new CJIYw
business opportunities.
• For example, laws that protect the environment have created
opportunities for entrepreneurs to start firms that help other firms
comply with environmental laws and regulations.
• Similarly, many entrepreneurial firms have been started to help
companies comply with the Sarbanes-Oxley Act of 2002. The act
requires certain companies to keep all their records, including
e-mail messages and electronic documents, for at least five years.

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Second Approach: Solving a Problem Second Approach: Solving a Problem

(1 of 2) (2 of 2)

2) Solving a Problem Businesses Created to Solve a Problem

Sometimes identifying
These problems can be
opportunities simply
pinpointed through observing
involves noticing a problem
trends and through more simple
and finding a way to
means, such as intuition or chance.
solve it.

For example, Symantec Corp.

created Norton antivirus Some business ideas are clearly
software to guard computers initiated to solve a problem.
against viruses.
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Third Approach: Finding Gaps in the Personal Characteristics of the

Marketplace Entrepreneur
3) Gaps in the Marketplace Characteristics that tend to make some people better at
– A third approach to identifying opportunities is to find a recognizing opportunities than others
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 Prior Experience Social Networks
represent a large enough market to be of interest to
mainstream retailers or manufacturers.

Cognitive Factors Creativity

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9
 Prior Industry Experience Cognitive Factors

1) Prior Industry Experience 2) Cognitive Factors

– Several studies have shown that prior experience in an – Studies have shown that opportunity recognition may be an
industry helps an entrepreneur recognize business innate skill or cognitive process.
opportunities. There are several explanations for this. – Some people believe that entrepreneurs have a “sixth
• By working in an industry, an individual may spot a market niche
sense” that allows them to see opportunities that others
that is underserved.
miss.
• It is also possible that by working in an industry, an individual
builds a network of social contacts who provide insights that lead to – This “sixth sense” is called entrepreneurial alertness, which
recognizing new opportunities. is formally defined as the ability to notice things without
engaging in deliberate search.

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Social Networks Social Networks

(1 of 3) (2 of 3)

3) Social Networks • Nature of Strong-Tie Vs. Weak-Tie Relationships

– The extent and depth of an individual’s social network – Strong-tie relationship are characterized by frequent
affects opportunity recognition. interaction and form between coworkers, friends, and
– People who build a substantial network of social and spouses.
professional contacts will be exposed to more opportunities
and ideas than people with sparse networks. – Weak-tie relationships are characterized by infrequent
interaction and form between casual acquaintances.
– In one survey of 65 start-ups, half the founders reported
that they got their business idea through social contacts. • Result
• Strong-Tie Vs. Weak-Tie Relationships – It is more likely that an entrepreneur will get new business
– All of us have relationships with other people that are ideas through weak-tie rather than strong-tie relationships.
called “ties.” (See next slide.) (See next slide.)

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Social Networks Creativity

(3 of 3) (1 of 2)

Why weak-tie relationships lead to more new business ideas

than strong-tie relationships • Creativity
– Creativity is the process of generating a novel or useful
Strong-Tie Relationships Weak-Tie Relationships idea.
– Opportunity recognition may be, at least in part, a creative
These relationships, which The relationships, which process.
typically form between like- form between casual – For an individual, the creative process can be broken down
minded individuals, tend to acquaintances, are not as into five stages, as shown on the next slide.
reinforce insights and ideas apt to be between like-
that people already have. minded individuals, so one
person may say something
to another that sparks a
completely new idea.
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10
 Creativity Full View of the Opportunity
(2 of 2) Recognition Process
Five Steps to Generating Creative Ideas Depicts the connection between an awareness of emerging trends and
the personal characteristics of the entrepreneur

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Techniques For Generating Ideas 1) Brainstorming

(1 of 2)

• Brainstorming
– Is a technique used to generate a large number of ideas and
1) Brainstorming solutions to problems quickly.
– A brainstorming “session” typically involves a group of
people, and should be targeted to a specific topic.
2) Focus Groups
– Rules for a brainstorming session:
• No criticism.
3) Surveys • Freewheeling is encouraged.
• The session should move quickly.
4) Other Techniques • Leap-frogging is encouraged.

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1) Brainstorming 2) Focus Groups

(2 of 2)

• Brainstorming (continued) • Focus Group

– There are two reasons brainstorming generates ideas that – A focus group is a gathering of five to ten people, who have
might not arise otherwise: been selected based on their common characteristics
• Because no criticism is allowed, people are more likely to offer relative to the issues being discussed.
ideas than they would in a traditional setting. – These groups are led by a trained moderator, who uses the
• Brainstorming sessions can generate more ideas than a traditional internal dynamics of the group environment to gain insight
meeting because brainstorming focuses on creativity rather than
evaluation. into why people feel they way they do about a particular
– In most meetings, one person suggests an idea, and immediately the issue.
rest of the group begins evaluating it. This happens because most – Although focus groups are used for a variety of purposes,
people are better at criticizing ideas than they are at suggesting new
ones. they can be used to help generate new business ideas.

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11
 3) Surveys 3) Surveys
(1 of 2) (2 of 2)

• Survey Example of a suspect survey technique

– A survey is a method of gathering information from a
sample of individuals. The sample is usually just a fraction Self-Selected Opinion Poll Result
of the population being surveyed.
• The most effective surveys sample a “random” portion of the Most call-in television Most people who take the time
population, meaning that the sample is not selected haphazardly or surveys or magazine write-in to participate in a self-selected
only from people who volunteer to participate. polls are highly suspect opinion poll do so because
• The quality of survey data is determined largely by the purpose of because the participants their have either strong
the survey and how it is conducted. represent what’s called a positive or strong negative
self-selected opinion poll. feels about the a particular
– Surveys generate new product, service, and business ideas product or topic.
because they ask specific questions and get specific
answers.
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4) Other Techniques Encouraging New Ideas

• Customer Advisory Boards • Establishing a Focal Point for Ideas

– Some companies set up customer advisory boards that meet – Some firms meet the challenge of encouraging, collecting,
regularly to discuss needs, wants, and problems that may and evaluating ideas by designating a specific person to
screen and track them—for if its everybody’s job, it may be
lead to new ideas.
no one’s responsibility.
• Day-In-The-Life Research – Another approach is to establish an idea bank (or vault),
– A type of anthropological research, where the employees of which is a physical or digital repository for storing ideas.
a company spend a day with a customer. • 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.

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Chapter Objectives
(1 of 3)

Chapter 3 1. Explain what a feasibility analysis is and why it’s

important.
2. Discuss the proper time to complete a feasibility
analysis when developing a business venture.
3. Describe the purpose of a product/service feasibility
analysis and the two primary issues that a proposed
Feasibility Analysis
business should consider in this area.
4. Identify three primary purposes of concept testing.
5. Explain a concept statement and its contents.

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12
 Chapter Objectives Chapter Objectives
(2 of 3) (3 of 3)

6. Define the term usability testing and explain why 10. Explain the importance of financial feasibility
it’s important. analysis and list the most critical issues to consider
7. Describe the purpose of industry/market feasibility in this area.
analysis and the three primary issues to consider in
this area.
8. Explain the difference between primary research
and secondary research.
9. Describe the purpose of organizational feasibility
analysis and list the two primary issues to consider
in this area.
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What Is Feasibility Analysis? What Is Feasibility Analysis?

• Feasibility Analysis • [Link]
– Feasibility analysis is the process of determining whether a QBAc
business idea is viable.
– It is the preliminary evaluation of a business idea,
conducted for the purpose of determining whether the idea
is worth pursuing.
– Feasibility analysis takes the guesswork (to a certain
degree) out of a business launch, and provides an
entrepreneur with a more secure notion that a business idea
is feasible or viable.

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When To Conduct a Feasibility Analysis Feasibility Analysis

• Timing of Feasibility Analysis Role of feasibility analysis in developing successful business ideas
– 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 shown in the figure on the next
slide.

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13
 1. Product/Service Feasibility Analysis Preparing a Concept Statement
(1 of 3)

• Product/Service Feasibility Analysis • Concept Statement

– Is an assessment of the overall appeal of the product or – Before a company undertakes product/service feasibility
service being proposed. analysis, a concept statement should be developed.
– The idea is that before a prospective firm rushes a product – A concept statement is a one page description of a business
or service into development, it should be confident that the that is distributed by a startup entrepreneur to people who
product or service is what its prospective customers want. are asked to provide feedback on the potential of the
– The two components of a product/service feasibility business idea.
analysis are: – The feedback will hopefully provide the entrepreneur (1) a
• Concept testing. sense of the viability of the business idea, and (2)
• Usability testing. suggestions for how the idea can be strengthened before
proceeding further.

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Preparing a Concept Statement Preparing a Concept Statement

(3 of 3)
(2 of 3)

• Information to Include
– A description of the product or service being offered.
– The intended target market.
– The benefits of the product or service.
– A description of how the product will be positioned relative New Venture Fitness
to similar ones in the market. Drink’s Concept Statement
– A description of how the product or service will be sold and
distributed.
– Information about the founder or founders of the firm.

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Usability Test Usability Test

(1 of 2) (2 of 2)

• Usability Testing • Usability Testing (continued)

– Is the method by which users of a product are asked to – Prototype
perform certain tasks in order to measure the product’s • Conducting a usability test typically requires the development of a
ease-of-use and the user’s perception of the experience. prototype.
– Usability tests are sometimes called user tests, beta tests, or • A prototype is the first physical depiction of a new product, which
is usually still in a rough or tentative mode.
field trials, depending on the circumstances involved.
• While it is tempting to rush a new product or service to market,
– Virtual Prototype
conducting a usability test is a good investment of an • A virtual prototype is a computer-generated 3D image of an idea. It
entrepreneur’s or firm’s resources. displays an invention as a 3D model that can be viewed from all
• Many products that consumers find frustrating to work with have sides and rotated 360 degrees.
been brought to market too quickly.

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14
 1. Product/Service Feasibility Analysis
How to Conduct Project
in Action
Feasibility Study ?
Role of feasibility analysis in the development of successful business ideas at Activision
(an electronic games company) • [Link]
The Activision “Green Light Process” 51QCPU

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2. Industry/Market Feasibility Analysis 2. Industry/Market Feasibility Analysis

(1 of 6) (2 of 6)

Characteristics of attractive industries for new ventures

• Industry/Market Feasibility Analysis
– Is an assessment of the overall appeal of the market for the
• Are large and growing (with growth being more
product or service being proposed. important than size).
– For industry feasibility analysis, there are three primary
• Are important to the customer.
issues that a proposed business should consider:
• Industry attractiveness, market timeliness, and the identification of • Are fairly young rather than older and more mature.
a niche market.
• Have high rather than low operating margins.
• Industry Attractiveness • Are not crowded.
– A primary determinant of a new venture’s feasibility is the
attractiveness of the industry it chooses.

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2. Industry/Market Feasibility Analysis

(3 of 6) Market Feasibility Study
• Industry Attractiveness • [Link]
– Although the criteria shown on the preceding slide is an lQ23I
ideal list, the extent to which a new business’s proposed
industry’s growth possibilities satisfy these criteria should
be taken seriously.
– In addition to evaluating an industry’s growth potential, a
new venture will want to know more about the industry it
plans to enter.
– This can be accomplished through both primary and
secondary research, as explained in the next slide.

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15
 2. Industry/Market Feasibility Analysis 2. Industry/Market Feasibility Analysis
(4 of 6) (5 of 6)

Role of Primary and Secondary Research in Investigating Market Timeliness Considerations

Industry Attractiveness
Nature of Product or Major Considerations
Service Introduction
Type of Research How It Is Conducted
Improvement on • Is the window of opportunity open or closed?
This is research that is original and is collected by the something already • Is now a good time for a new market entrant (i.e.,
Primary entrepreneur. In assessing the attractiveness of a new available in the are customers buying, are industry incumbents
research market, this typically involves an entrepreneur talking to marketplace making money?)
potential customers and key industry participants.

Breakthrough new • Should we try to capture a first-mover advantage?

This is research that probes data that are already collected.
Secondary Examples of where this data might come from are: product or service,
research industry-related publications, government statistics, which should establish a
competitor’s Web sites, and industry reports from research new market segment
firms like Forrester Research.

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2. Industry/Market Feasibility Analysis

(6 of 6) Niche Marketing Examples
• Identification of a Niche Market • [Link]
– A niche market is a place within a larger market segment nPGaJo
that represents a narrower group of customers with similar
interests.
– For a new firm, selling to a niche market makes sense for at
least two reasons.
• It allows a firm to establish itself within an industry without
competing against major competitors head on.
• A niche strategy allows a firm to focus on serving a specialized
market very well instead of trying to be everything to everybody in
a broad market, which is nearly impossible for a new entrant.

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3. Organizational Feasibility Analysis 3. Organizational Feasibility Analysis

(1 of 4) (2 of 4)

• Organizational Feasibility • Management Prowess

– Is concerned with determining whether the business itself – A firm should candidly evaluate the prowess, or ability, of
has sufficient skills and resources to bring a particular its management team to satisfy itself that management has
the requisite passion and expertise to launch the venture.
product or service idea to market successfully.
– Two of the most important factors in this area are:
– There are two primary issues to consider in this area:
• The passion that the solo entrepreneur or the founding team has for
• Management prowess. the business idea.
• Resource sufficiency. • The extent to which the solo entrepreneur or the founding team
understands the markets in which the firm will participate.
– Solo entrepreneurs or founding teams with established
social and professional networks also have an advantage.

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16
 3. Organizational Feasibility Analysis 3. Organizational Feasibility Analysis
(3 of 4) (4 of 4)

Examples of nonfinancial resources that may be critical to

• Resource Sufficiency the successful launch of a new business
– This topic pertains to an assessment of whether an
• Availability of affordable office or lab space.
entrepreneur has sufficient resources to launch the
• Likelihood of local and state government support of the business.
proposed venture.
• Quality of the labor pool available.
– The focus here should be on nonfinancial resources in that
• Proximity to key suppliers and customers.
financial feasibility is considered separately.
• Willingness of high quality employees to join the firm.
– To test resource sufficiency, a firm should list the 6 to 12 • Likelihood of establishing favorable strategic partnerships.
most critical nonfinancial resources that will be needed to • Proximity to similar firms for the purpose of sharing knowledge.
move the business idea forward successfully. • Possibility of obtaining intellectual property protection in key areas.
• If critical resources are not available in certain areas, it may be
impractical to proceed with the business idea.

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4. Financial Feasibility Analysis 4. Financial Feasibility Analysis

(1 of 5) (2 of 5)

• Financial Feasibility • Total Start-Up Cash Needed

– For feasibility analysis, a quick financial assessment is – The first issue refers to the to the total cash needed to
usually sufficient. prepare the business to make its first sale.
– The most important issues to consider at this stage are: – An actual budget should be prepared that lists all the
• Total start-up cash needed. anticipated capital purchases and operating expenses
• Financial performance of similar businesses. needed to generate the first $1 in revenues.
• Overall attractiveness of the proposed venture. – When projecting start-up expenses, it is better to
overestimate rather than underestimate the costs involved.
• Murphy’s Law is prevalent in the start-up world—things will go
wrong. It is a rare start-up that doesn’t have some setbacks in
getting up and running.

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4. Financial Feasibility Analysis 4. Financial Feasibility Analysis

(3 of 5) (4 of 5)

• Financial Performance of Similar Businesses • Overall Attractiveness of the Investment

– Estimate the proposed start-up’s financial performance by – A number of other financial factors are associated with
comparing it to similar, already established businesses. promising business startups.
– There are several ways to doing this, all of which involve a – In the feasibility analysis stage, the extent to which a
little ethical detective work. business opportunity is positive relative to each factor is
• First, there are many reports available, some for free and some that
based on an estimate rather than actual performance.
require a fee, offering detailed industry trend analysis and reports
on thousands of individual firms. – The table on the next slide lists the factors that pertain to
• Second, simple observational research may be needed. For the overall attractiveness of the financial feasibility of the
example, the owners of New Venture Fitness Drinks could estimate business idea.
their sales by tracking the number of people who patronize similar
restaurants and estimating the average amount each customer
spends.
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17
 4. Financial Feasibility Analysis
(5 of 5)

Financial Factors Associated With Promising Business Opportunities

Chapter 4
• 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. Writing a Business Plan
• Internally generated funds to finance and sustain growth.
• Availability of an exit opportunity for investors to convert equity to cash.

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Chapter Objectives Chapter Objectives

(1 of 2) (2 of 2)

1. Explain the purpose of a business plan. 6. Explain why the executive summary may be the
2. Discuss how a business plan can be a dual-use most important section of a business plan.
document.
3. Explain how the process of writing a business plan 7. Describe a milestone and how milestones are used
can be as important as the plan itself. in business plans.
4. Identify the advantages and disadvantages of using 8. Explain the purpose of a “sources and uses of
software packages to assist in preparing a business funds” statement.
plan.
5. Explain the difference between a summary business 9. Describe a liquidity event.
plan, a full business plan, and an operational 10. Detail the parts of an oral presentation of a business
business plan. plan.

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Who Reads the Business Plan—And

What Is a Business Plan?
What Are They Looking For?
• Business Plan There are two primary audiences for a firm’s business plan
– A business plan is a written narrative, typically 25 to 35
pages long, that describes what a new business plans to Audience What They are Looking For
accomplish.
• Dual-Use Document A clearly written business plan, which articulates the
A Firm’s vision and future plans of the firm, helps the employees of
– For most new ventures, the business plan is a dual-purpose Employees a firm operate in sync and move forward in a consistent
document used both inside and outside the firm. and purposeful manner.
• Inside the firm, the plan helps the company develop a “road map”
A firm’s business plan must make the case that the firm is a
to follow in executing its strategies and plans.
Investors and good use of an investor’s funds or the attention of other
• Outside the firm, it introduces potential investors and other Other External external stakeholders. The key is to include facts generated
stakeholders to the business opportunity the firm is pursuing and Stakeholders through a properly conducted feasibility analysis. A
how it plans to pursue it. business plan rings hollow if it is based strictly on what an
entrepreneur or team of founders “thinks” will happen.

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18
 Guidelines for Writing a Business Plan
What is a Business Plan? (1 of 3)

• [Link] • Structure of the Business Plan

KIAah0 – To make the best impression, a business plan should follow
a conventional structure, such as the outline for the
business plan shown in the chapter.
– Although some entrepreneurs want to demonstrate
creativity in everything they do, departing from the basic
structure of the conventional business plan format is
usually a mistake.
– Typically, investors are very busy people and want a plan
where they can easily find critical information.

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Guidelines for Writing a Business Plan Guidelines for Writing a Business Plan
(2 of 3) (3 of 3)

Types of Business Plans

• Content of the Business Plan
– The business plan should give clear and concise
information on all the important aspects of the proposed
venture.
– It must be long enough to provide sufficient information
yet short enough to maintain reader interest.
– For most plans, 25 to 35 pages is sufficient.
• Types of Business Plans
– There are three types of business plans, which are shown
on the next slide.

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How to Write a Business Plan Outline of Business Plan

• [Link] • Outline of Business Plan

Kzy7FD8 – Most business plans do not include all the elements
introduced in the sample plan; we include them here for the
purpose of completeness.
– Each entrepreneur must decide which elements to include
in his or her plan.

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19
 Exploring Each Section of the Plan Exploring Each Section of the Plan
(1 of 10) (2 of 10)

1. Cover Page and Table of Contents 3. The Business

– The cover page should include the name of the company, – The most effective way to introduce the business is to
its address, its phone number, the date, and contact describe the opportunity the entrepreneur has identified–
information for the lead entrepreneur.
that is, the problem to solve or the need to be filled–and
2. The Executive Summary then describe how the business plans to address the issue.
– The executive summary is a short overview of the entire – The description of the opportunity should be followed by a
business plan; it provides a busy reader with everything brief history of the company, along with the company’s
that needs to be known about the new venture’s distinctive
mission statement and objectives.
nature.
• In many instances, an investor will first ask for a copy of the – An explanation of the company’s competitive advantage
executive summary and will request a copy of the full business plan and a brief description of the business model follow.
only if the executive summary is sufficiently convincing.

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Exploring Each Section of the Plan Exploring Each Section of the Plan
(3 of 10) (4 of 10)

4. Management Team 5. Company Structure, Ownership, and Intellectual

– As mentioned earlier, one of the most important things Property
investors want to see when reviewing the viability of new – This section should begin by describing the structure of the
ventures is the strength of its management team. new venture, including the reporting relationships among
– If the team doesn’t “pass muster,” most investors won’t the top management team members.
read further. – The next part of the section should explain how the firm is
– The material in this section should include a brief summary legally structured.
of the qualifications of each member of the management – The third part of this section should discuss the intellectual
team, including his or her relevant employment and property the firm owns, including patents, trademarks, and
professional experiences, significant accomplishments, and copyrights.
educational background.
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Exploring Each Section of the Plan Exploring Each Section of the Plan
(5 of 10) (6 of 10)

6. Industry Analysis 7. Marketing Plan

– This section should begin by discussing the major trends in – This marketing plan should immediately follow the
the industry in which the firm intends to compete along industry analysis and should provide details about the new
with important characteristics of the industry, such as its firm’s products or services.
size, attractiveness, and profit potential. – After reading this section of the plan, an investor should be
– This section should also discuss how the firm will diminish confident that the firm’s overall approach to its target
or sidestep the forces that suppress its industry’s market and its product strategy, pricing strategy, channels
profitability. of distribution, and promotional strategy are in sync with
– The firm’s target market should be discussed next, along one another and make sense.
with an analysis of how it will compete in that market.

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20
 Exploring Each Section of the Plan Exploring Each Section of the Plan
(7 of 10) (8 of 10)

8. Operations Plan 9. Financial Plan

– The financial section of the plan must demonstrate the
– This section of the plan deals with the day-to-day
financial viability of the business. A careful reader of the
operations of the company. plan will examine this section.
– An overview of the manufacturing plan (or service delivery – The financial plan should begin with an explanation of the
plan) should be followed by a description of the network of funding that will be needed by the business during the next
suppliers, business partners, and service providers that will three to five years along with an explanation of how the
be necessary to build the product or produce the service the funds will be used.
firm will sell. • This information is called a sources and uses of funds statement.
– Any risks or regulations pertaining to the operations of the – The next portion of this section includes financial
firm should be disclosed, such as nonroutine regulations projections, which are intended to further demonstrate the
regarding waste disposal and worker safety. financial viability of the business.

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Exploring Each Section of the Plan Exploring Each Section of the Plan
(9 of 10) (10 of 10)

9. Financial Plan (continued) 10. Critical Risk Factors

– The financial projections should include three to five years – Although a variety of potential critical risks may exist, a
of pro forma income statements, balance sheets, and business should tailor this section to depict its truly critical
statements of cash flows. risks.
– It is important to remember that the business plan should be 11. Appendix
based on realistic projections. – Any material that does not easily fit into the body of a
• If it is not and the company gets funding or financing, there will
business plan should appear in an appendix. Examples of
most certainly be a day of reckoning. Investors and bankers hold
entrepreneurs accountable for the numbers in their projections. materials that might appear in the appendix include:
• Resumes of the top management team members, photos or
diagrams of product or product prototypes, certain financial data,
and market research projections.

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Putting It All Together Presenting the Business Plan to Investors

(1 of 3)

The 10 Most Important Questions a Business Plan Should Answer

• Making a Presentation to Investors
Is the business just an idea, or is it an Is the firm organized in an appropriate manner?
opportunity with real potential? Are its strategy and business practices legal and – If the business plan successfully elicits the interest of
ethical? potential investors, the next step is to meet with the
Is the product or service viable? Does it add Is the management team experienced, skilled, investors and present the plan in person.
significant value to the customer? Was a
feasibility analysis completed?
and up to the task of launching the new firm? – The first meeting with an investor is generally very short,
about one hour. The investor will typically ask the firm to
Does the firm have a well-defined target How will the firm’s competitors react to its make a 20- to 30-minute presentation using PowerPoint
market? entrance into their markets?
slides and use the rest of the time to respond to questions.
Does the firm have an exciting and sensible Are the financial projections realistic, and do – If the investor is impressed and wants to learn more about
business model? Will other firms be able to they project a bright future for the firm? What the venture, the firm will be asked back for a second
easily copy it? rate of return can investors expect?
meeting.
Is the industry in which the product or What are the critical risks surrounding the business,
service will be competing growing, stable, and does the management team have contingency
4-125 4-126
or declining? plans in place if risks become actual problems?

21
 Creating A Startup Investors Presenting the Business Plan to Investors
(2 of 3)
Presentation
• [Link] • Tips on Making an Oral Presentation to Investors
NUB1M – When asked to meet with an investor, the founders of a new
venture should prepare a set of PowerPoint slides that will
fill the time slot permitted.
– The presentation should be smooth and well rehearsed.
The slides should be sharp and not cluttered with material.
• The first rule in making an oral presentation is to follow
instructions. If an investor tells an entrepreneur that he or she has
one hour and that the hour will consist of a 30-minute presentation
and a 30-minute question-and-answer period, the presentation
shouldn’t last more than 30 minutes.

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Presenting the Business Plan to Investors

(3 of 3)
Ten PowerPoint Slides to Include in an Investor Presentation
1. Title slide
Chapter 5
2. Problem
3. Solution
4. Business model
5. Management team
6. Industry and target market
7. Competition
Industry and Competitor
8. Intellectual property
Analysis
9. Financial projections
[Link] status, amount of money requested, and projected
use of funds 4-129 5-130

What is Industry Analysis? Why is Industry Analysis Important?

• Industry • Why is this Topic Important?

– An industry is a group of firms producing a similar product – Once it is determined that a new venture is feasible in
or service, such as airlines, fitness drinks, furniture, or regard to the industry and market in which it will compete,
electronic games. a more in-depth analysis is needed to learn the ins and outs
• Industry Analysis of the industry the firm plans to enter.
– Is business research that focuses on the potential of an – This analysis helps a firm determine if the target markets it
industry. identified during feasibility analysis are accessible and
which ones represent the best point of entry for a new firm.

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22
 Industry Versus Firm-Specific
Three Key Questions
Factors
When studying an industry, an entrepreneur must answer
three questions before pursuing the idea of starting a firm • Firm-Level Factors
– Include a firm’s assets, products, culture, teamwork among
its employees, reputation, and other resources.
Question 1 Question 2 Question 3
• Industry-Level Factors
Is the industry Does the industry Are there positions in the – Include threat of new entrants, rivalry among existing
accessible—in other industry that will avoid
contain markets that firms, bargaining power of buyers, and related factors.
words, is it a realistic some of the negative
are ripe for innovation
place for a new
or are underserved?
attributes of the Conclusion
venture to enter? industry as a whole?
– 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.

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The Five Competitive Forces That The Five Competitive Forces That
Determine Industry Profitability Determine Industry Profitability
(1 of 3) Porter’s Five Forces
• Explanation Porter’s Five Forces Model
– The five competitive forces model is a framework for Threat of substitute products
understanding the structure of an industry. Potential new entrants
Rivalry among competitors
– The model is composed of the forces that determine
Bargaining power of buyers
industry profitability.
– Each of the five forces impacts the average rate of return
Bargaining power of suppliers
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.
5-135 Rameshwar patel 5-136

The Five Competitive Forces That

Porter Five Forces Determine Industry Profitability
• [Link] Threat of Potential
Entrants
FuU-E

Bargaining Power Degree of Existing Bargaining

of suppliers Rivalry Power of Buyers

Threat of
Substitutes

Degree of existing rivalry. Determined by number of firms, relative size, degree of differentiation
between firms, demand conditions, exit barriers
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23
 1) Rivalry Among Existing Firms 1) Rivalry Among Existing Firms
(1 of 3) (2 of 3)

Factors that determine the nature and intensity of

• Rivalry Among Existing Firms the rivalry among existing firms in an industry
– In most industries, the major determinant of industry
The more competitors there are, the more likely it is that
profitability is the level of competition among existing one or more will try to gain customers by cutting its
firms. Number and balance of price. Price-cutting occurs more often when all the
competitors competitors in an industry are about the same size and
– Some industries are fiercely competitive, to the point where when there is no clear market leader.
prices are pushed below the level of costs, and industry-
wide losses occur. The degree to which products differ from one
product to another affects industry rivalry. For
– In other industries, competition is much less intense and Degree of difference example, the firms in commodity industries (such as
price competition is subdued. between products paper products) tend to compete on price because
there is little difference between one manufacturer’s
products and another’s.

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Rivalry Among Existing Firms The Five Competitive Forces That

(3 of 3) Determine Industry Profitability
Factors that determine the nature and intensity of the rivalry
among existing firms in an industry (continued)
Threat of Potential
Entrants
The competition among firms in a slow-growth industry is
stronger than among those in fast-growth industries. Slow-
Growth rate of an growth industry firms must fight for market share, which
may tempt them to lower prices to gain market share. In
industry fast-growth industries, there are enough customers to go Bargaining Power of Bargaining Power
Degree of Existing
around, making price-cutting less likely. suppliers Rivalry of Buyers

Firms that have high fixed costs must sell a higher Bargaining power of suppliers.
volume of their product to reach the break-even point Determined by number of suppliers and
Level of fixed costs than firms with low fixed costs. As a result, firms with their degree of differentiation, the
portion of a firm’s inputs obtained from Threat of Substitutes
high fixed costs are anxious to fill their capacity, and this a particular supplier, the portion of a
anxiety may lead to price-cutting. supplier’s sales sold to a particular firm,
switching costs, and potential for vertical
integration.

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2) Bargaining Power of Suppliers 2) Bargaining Power of Suppliers

(1 of 3) (2 of 3)

Factors that have an impact on the ability of suppliers to exert

• Bargaining Power of Suppliers pressure on buyers
– Suppliers can suppress the profitability of the industries to
which they sell by raising prices or reducing the quality of When there are only a few suppliers that supply a critical
Supplier
the components they provide. concentration product to a large number of buyers, the supplier has an
advantage.
– 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.
Switching costs are the fixed costs that buyers encounter
– If the suppliers are powerful relative to the firms in the Switching costs
when switching or changing from one supplier to another.
If switching costs are high, a buyer will be less likely to
industry to which they sell, industry profitability can suffer. switch suppliers.

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24
 2) Bargaining Power of Suppliers The Five Competitive Forces That
(3 of 3) Determine Industry Profitability
Factors that have an impact on the ability of suppliers to exert Bargaining Power of Buyers Determined by
number of buyers, the firm’s degree of
pressure on buyers (continued) differentiation, the portion of a firm’s inputs
Threat of Potential
Entrants sold to a particular buyer, the portion of a
buyer’s purchases bought from a particular
Supplier power is enhanced if there are no attractive firm, switching costs, and potential for vertical
Attractiveness of substitutes for the product or services the supplier offers. integration.
substitutes For example, there is little the computer industry can do
when Intel or Microsoft raise their prices, as there are Bargaining Power of Bargaining Power
Degree of Existing
simply no practical substitutes for their products. suppliers Rivalry of Buyers

The power of a supplier is enhanced if there is a credible

Threat of forward possibility that the supplier might enter the buyer’s
Threat of Substitutes
integration industry.

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3) Bargaining Power of Buyers 3) Bargaining Power of Buyers

(1 of 3) (2 of 3)

Factors that have an impact on the ability of suppliers to exert

• Bargaining Power of Buyers pressure on buyers
– Buyers can suppress the profitability of the industries from
If the buyers are concentrated, meaning that there are
which they purchase by demanding price concessions or only a few large buyers, and they buy from a large
Buyer group
increases in quality. concentration number of suppliers, they can pressure the suppliers to
lower costs and thus affect the profitability of the
– For example, the automobile industry is dominated by a industries from which they buy.
handful of large companies that buy products from
thousands of suppliers in different industries. This allows
The greater the importance of an item is to a buyer, the
the automakers to suppress the profitability of the more sensitive the buyer will be to the price they pay.
Buyer’s costs
industries from which they buy by demanding price For example, if the component sold by the supplier
represents 50% of the cost of the buyer’s product, the
reductions. buyer will bargain hard to get the best price for that
component.

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3) Bargaining Power of Buyers The Five Competitive Forces That

(3 of 3) Determine Industry Profitability
Factors that have an impact on the ability of suppliers to exert
pressure on buyers (continued)
Threat of Potential
Entrants
The degree to which a supplier’s product differs from its
competitors affects the buyer’s bargaining power. For
Degree of example, a buyer who is purchasing a standard product,
standardization of like the corn syrup that goes into soft drinks, can play
supplier’s products one supplier against another until it gets the best Bargaining Power of Degree of Existing Bargaining Power
combination of price and service. suppliers Rivalry of Buyers

Threat of substitutes.
Threat of The power of buyers is enhanced if there is a credible Determined by number
backward threat that the buyer might enter the supplier’s industry. Threat of Substitutes of potential substitutes,
integration their closeness in
function and relative
price.

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25
 4) Threat of Substitutes 4) Threat of Substitutes
(1 of 2) (2 of 2)

• Threat of Substitutes • Threat of Substitutes (continued)

– The price that consumers are willing to pay for a product – The extent to which substitutes suppress the profitability of
depends in part on the availability of substitute products. an industry depends on the propensity for buyers to
– For example, there are few if any substitutes for substitute between alternatives.
prescription medicines, which is one of the reasons the – This is why firms in an industry often offer their customers
pharmaceutical industry is so profitable. amenities to reduce the likelihood that they will switch to a
– In contrast, when close substitutes for a product exist, substitute product, even in light of a price increase.
industry profitability is suppressed, because consumers will
opt out if the price gets too high.

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The Five Competitive Forces That 4) Threat of New Entrants

Determine Industry Profitability (1 of 6)

Threat of potential
entrants. Determined by
attractiveness of industry, Threat of Potential
• Threat of New Entrants
height of entry barriers
(e.g., start-up costs, brand
Entrants
– If the firms in an industry are highly profitable, the industry
loyalty, regulation, etc.)
becomes a magnet to new entrants.
– Unless something is done to stop this, the competition in
Bargaining Power
Bargaining Power of
suppliers
Degree of Existing
Rivalry of Buyers 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.
Threat of Substitutes
• A barrier to entry is a condition that creates a disincentive for a new
firm to enter an industry.

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4) Threat of New Entrants 4) Threat of New Entrants

(2 of 6) (3 of 6)

Barriers to Entry Barriers to Entry (continued)

Barrier to Entry Explanation Barrier to Entry Explanation

Entrenched competitors may have cost advantages not

Industries that are characterized by large economies of scale related to size. For example, the existing competitors in an
Economies of scale are difficult for new firms to enter, unless they are willing to Cost advantages
independent of size industry may have purchased property when it was much
accept a cost disadvantage. less expensive than a new entrant would have to pay.

Industries such as the soft drink industry that are Distribution channels are often hard to crack. This is
characterized by firms with strong brands are difficult to Access to distribution particularly true in crowded markets, such as the convenience
Product differentiation
break into without spending heavily on advertising. channels store market. For a new sports drink to be placed on the shelf,
it has to displace a product that is already there.

The need to invest large amounts of money to gain entrance In knowledge intensive industries, such as biotechnology and
to an industry is another barrier to entry. For example, it Government and software, patents, trademarks, and copyrights form major
Capital requirements
now takes about two years and $4 million to develop an legal barriers barriers to entry. Other industries, such as broadcasting,
electronic game. Many new firms do not have the capital to require the granting of a license by a public authority.
compete at this level.
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26
 4) Threat of New Entrants 4) Threat of New Entrants
(4 of 6) (5 of 6)

Nontraditional Barriers to Entry

• Nontraditional Barriers to Entry
Barrier to Entry Explanation
– It is difficult for start-ups to execute barriers to entry that
are expensive, such as economies of scale, because money If a start-up puts together a world-class management team,
Strength of management it may give potential rivals pause in taking on the start-up in
is usually tight. team its chosen industry.
– Start-ups have to rely on nontraditional barriers to entry to
discourage new entrants, such as assembling a world-class First-mover advantage
If a start-up pioneers an industry or a new concept within an
existing industry, the name recognition that the start-up
management team that would be difficult for another establishes may create a formidable barrier to entry.
company to replicate.
If the employees of a start-up are highly motivated by the
Passion of the unique culture of a start-up, and anticipate large financial
management team and rewards through stock options, this is a combination that
employees cannot be replicated by larger firms. Think of the employees
of a biotech firms trying to find a cure for a disease.

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4) Threat of New Entrants The Five Competitive Forces That

(6 of 6) Determine Industry Profitability
Nontraditional Barriers to Entry (continued) Threat of potential Bargaining power of buyers. Determined by
entrants. Determined by number of buyers, the firm’s degree of
attractiveness of industry, Threat of Potential differentiation, the portion of a firm’s inputs
Barrier to Entry Explanation height of entry barriers sold to a particular buyer, the portion of a
Entrants
(e.g., start-up costs, brand
buyer’s purchases bought from a particular
loyalty, regulation, etc.)
firm, switching costs, and potential for vertical
If a start-up is able to construct a unique business model and
integration.
Unique business model establish a network of relationships that makes the business
model work, this set of advantages creates a barrier to entry.
Bargaining Power of Degree of Existing Bargaining Power
suppliers Rivalry of Buyers

Some Internet domain names are so “spot-on” in regard to

Internet domain name a specific product or service that they give a start-up a
meaningful leg up in terms of e-commerce opportunities. Bargaining power of suppliers.
Threat of substitutes.
Determined by number of suppliers and
their degree of differentiation, the Determined by number
portion of a firm’s inputs obtained from Threat of Substitutes of potential substitutes,
Inventing a new If a start-up invents a new approach to an industry and a particular supplier, the portion of a their closeness in
approach to an industry supplier’s sales sold to a particular firm, function and relative
executes it in an exemplary fashion, these factors create a switching costs, and potential for vertical
and executing the idea in price.
barrier to entry for potential imitators. integration.
an exemplary fashion
Degree of existing rivalry. Determined by number of firms, relative size, degree of differentiation
between firms, demand conditions, exit barriers
5-159 5-160

The Value of the Five Forces Model The Value of the Five Forces Model
(1 of 4) (2 of 4)

Determining the Attractiveness of an Industry Using the Five Forces Model

• First Application of the 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, as
shown on the next slide.
– If a firm filled out the form shown on the next slide and
several of the threats to industry profitability were high, the
firm may want to reconsider entering the industry or think
carefully about the position it would occupy.

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27
 The Value of the Five Forces Model The Value of the Five Forces Model
(3 of 4) (4 of 4)

Using the Five Forces Model to Pose Questions to Determine the Potential
• Second Application of the Model Success of a New Venture in a Particular Industry
– 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.

5-163 5-164

Competitor Analysis Identifying Competitors

Types of Competitors New Ventures Face
• What is a Competitor Analysis?
– A competitor analysis is a detailed analysis of a firm’s
competition.
– It helps a firm understand the positions of its major
competitors and the opportunities that are available.
– A competitive analysis grid is a tool for organizing the
information a firm collects about its competitors.

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Sources of Competitive Intelligence Sources of Competitive Intelligence

(1 of 2) (2 of 2)

Ways that a firm can ethically obtain information about its

• Collecting Competitive Intelligence competitors
– To complete a competitive analysis grid, a firm must first
• Attend conference and trade shows.
understand the strategies and behaviors of its competitors.
• Read industry-related books, magazines, and Web sites.
– The information that is gathered by a firm to learn about its • Talk to customers about what motivated them to buy your product
competitors is referred to as competitive intelligence. as opposed to your competitors.
– A new venture should take care that it collects competitive • Purchase competitor’s products to understand their features,
benefits, and shortcomings.
intelligence in a professional and ethical manner.
• Study competitor’s Web sites.
• Study Web sites that provide information about companies.

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28
 Completing a Competitive Analysis Grid Completing a Competitive Analysis Grid
(2 of 2)
(1 of 2)

Competitive Analysis Grid for Activision

• 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.

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Completing a Competitive Analysis Grid Sources of Competitive Intelligence

(2 of 2)
(2 of 2)

Competitive Analysis Two Primary Sources of Competitive Information

ampleeport  36mo36k 17885

  21085
• Hire Competitors Employees
ample ew 36mo36k 21049
lternate1   26249

ample 36mo36k 17518

lternate2    26198
eyforredictedeliabilitywner
atisfactionandepreciationating
ample 15350
   36mo36k
lternate3
    24550

   




 ett  Wors 
er e

nformationisnotavailable
ewodelisneworredesigned

5-171 5-172

Sources of Competitive Intelligence

(2 of 2)

Two Primary Sources of Competitive Information

Chapter 6
• Go to the cafe after the Trade Show

Developing an
Effective Business
Model

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29
 Chapter Objectives Chapter Objectives
1 of 2 2 of 2

1. Describe a business model. 6. Identify a business model’s four major components.

2. Explain business model innovation. 7. Explain the meaning of the term business concept
3. Discuss the importance of having a clearly blind spot.
articulated business model. 8. Define the term core competency and describe its
4. Discuss the concept of the value chain. importance.
5. Identify a business model’s two potential fatal 9. Explain the concept of supply chain management.
flaws. 10. Explain the concept of fulfillment and support.

6-175 6-176

Introduction Introduction
• The proper time to determine a company’s business • In this chapter we’ll first discuss business models and
model is following the initial validation of the business their importance.
idea and prior to fleshing out the operational details of • We then introduce and discuss a template for developing
the firm. a business model. The template, called the
• Chapter 1 dealt with the decision to become an Barringer/Ireland Business Model Template, consists of 4
entrepreneur. Chapters 2–3 considered the initial categories and 12 items that make up a firm’s business
validation of the business idea. This chapter deals with model.
determining a business model, while Chapters 5–15 deal • The template, which can be completed on an 8 ½ by 11
with the topics needed to implement a firm’s business sheet of paper or blown up and placed on the wall,
• model and grow the firm. provides a nice visual mechanism to think through and
display the elements of a firm’s business model.

1-177 1-178

Introduction What is a Business Model?

• A critical factor is that similar to feasibility • Model

– A model is a plan or diagram that’s used to make or
analysis, a firm’s business model should describe something.
not be completed in isolation. The
• Business Model
founders of a firm should “get out of the – A firm’s business model is its plan or diagram for how it
building” and talk to potential customers as competes, uses its resources, structures its relationships,
a firm’s business model takes shape. interfaces with customers, and creates value to sustain itself
on the basis of the profits it generates.
• This is a facet of developing an effective – The term “business model” is used to include all the
business model that we stress throughout activities that define how a firm competes in the
the chapter. marketplace.
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30
 Dell’s Business Model Dell’s Business Model
2 of 2
1 of 2
Dell’s Approach to Selling PCs versus Traditional Manufacturers
• Beyond Its Own Boundaries
– It’s 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.

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The Importance of Business Models What is Business Model

Having a clearly articulated business model is important
because it does the following: • [Link]
• Serves as an ongoing extension of feasibility analysis. A business
TwZ4q0
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 firm’s employees.
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Diversity of Business Models How Business Models Emerge

1 of 3

• There is no standard business • The Value Chain

model for an industry or for – The value chain is the string of activities that moves a
a target market within an product from the raw material stage, through
industry. manufacturing and distribution, and ultimately to the end
Diversity or Variety in user.
• However, over time, the most
Business Models successful business models – By studying a product’s or service’s value chain, an
in an industry predominate. organization can identify ways to create additional value
and assess whether it has the means to do so.
• There are always opportunities
for business model innovation. – Value chain analysis is also helpful in identifying
opportunities for new businesses and in understanding how
business models emerge.
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31
 How Business Models Emerge How Business Models Emerge
2 of 3 3 of 3

The Value Chain

• The Value Chain (continued)
– Entrepreneurs look at the value chain of a product or a
service to pinpoint where the value chain can be made more
effective or to spot where additional “value” can be added.
– This type of analysis may focus on:
• A single primary activity such as marketing and sales.
• The interface between one stage of the value chain and another,
such as the interface between operations and outgoing logistics.
• One of the support activities, such as human resource management.

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Potential Fatal Flaws in Business Models Components of a Business Model

• Fatal Flaws Four Components of a Business Model

– Two fatal flaws can render a business model untenable
from the beginning:
• A complete misread of the customer
• Utterly unsound economics

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Core Strategy 1. Core Strategy

1 of 3 2 of 3

Primary Elements of Core Strategy

• Core Strategy
– The first component of a business model is the core
strategy, which describes how a firm competes relative to A firm’s mission, or mission statement,
Mission
describes why it exists and what its business
its competitors. Statement
model is supposed to accomplish.
• Primary Elements of Core Strategy
– Mission statement
– Product/market scope A company’s product/market scope defines the
Product/Market
– Basis for differentiation Scope products and markets on which it will
concentrate.

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32
 1. Core Strategy 2. Strategic Resources
3 of 3 1 of 3

Primary Elements of Core Strategy

• Strategic Resources
– A firm is not able to implement a strategy without
resources, so the resources a firm has affect its business
It is important that a new venture
model substantially.
differentiate itself from its competitors in
some way that is important to its customers. • For a new venture, its strategic resources may initially be limited to
Basis of
If a new firm’s products or services aren’t the competencies of its founders, the opportunity they have
Differentiation
different from those of its competitors, why identified, and the unique way they plan to serve their market.
should anyone try them? – The two most important strategic resources are:
• A firm’s core competencies
• Strategic assets

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2. Strategic Resources 2. Strategic Resources

2 of 3 3 of 3

Primary Elements of Strategic Resources

• Importance of Strategic Resources
A core competency is a resource or capability that – New ventures ultimately try to combine their core
serves as a source of a firm’s competitive advantage. competencies and strategic assets to create a sustainable
Core Examples include Sony’s competence in
competitive advantage.
Competencies miniaturization and Dell’s competence in supply
chain management. – This factor is one that investors pay close attention to when
evaluating a business.
Strategic assets are anything rare and valuable that a – A sustainable competitive advantage is achieved by
Strategic firm owns. They include plant and equipment, implementing a value-creating strategy that is unique and
Assets location, brands, patents, customer data, a highly not easy to imitate.
qualified staff, and distinctive partnerships.
– This type of advantage is achievable when a firm has
strategic resources and the ability to use them.
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3. Partnership Network 3. Partnership Network

1 of 3 2 of 3

Primary Elements of Partnership Network

• Partnership Network
– A firm’s partnership network is the third component of a
A supplier is a company that provides parts or
business model. New ventures, in particular, typically do
Suppliers services to another company. Intel is Dell’s primary
not have the resources to perform key roles. suppler for computer chips, for example.
– 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 Firms partner with other companies to make their
competitive advantage. business models work. An entrepreneur’s ability to
Other Key launch a firm that achieves a competitive
– A firm’s partnership network includes:
Relationships advantage may hinge as much on the skills of the
• Suppliers partners as on the skills within the firm itself.
• Other key relationships

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33
 3. Partnership Network
3 of 3 What is Joint Venture
The Most Common Types of Business Partnerships
• [Link]
DM6OT1k

6-199 1-200

4. Customer Interface
What is Strategic Alliances 1 of 3

• [Link] • Customer Interface

0f7zzg – The way a firm interacts with its customer hinges on how it
chooses to compete.
• For example, [Link] sells books over the Internet while
Barnes & Noble sells through its traditional bookstores and online.
– The three elements of a company’s customer interface are:
• Target customer
• Fulfillment and support
• Pricing model

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4. Customer Interface 4. Customer Interface

2 of 3 3 of 3

Primary Elements of Customer Interface Primary Elements of Customer Interface

Target A firm’s target market is the limited group of

Market individuals or businesses that it goes after or tries to
appeal to. The third element of a company’s customer
Pricing interface is its pricing structure. Pricing models
Structure vary, depending on a firm’s target market and its
pricing philosophy.
Fulfillment and support describes the way a firm’s
Fulfillment product or service reaches its customers. It also
and Support refers to the channels a company uses and what level
of customer support it provides.

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34
 Recap: The Importance of Business
Pricing Strategy Models
• [Link] • Business Models
j3H0jg – It is very useful for a new venture to look at itself in a
holistic manner and understand that it must construct an
effective “business model” to be successful.
– Everyone that does business with a firm, from its customers
to its partners, does so on a voluntary basis. As a result, a
firm must motivate its customers and its partners to play
along.
– Close attention to each of the primary elements of a firm’s
business model is essential for a new venture’s success.

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Introduction
Chapter 7 • We begin this chapter with a discussion of the most important
initial ethical and legal issues facing a new firm, including
establishing a strong ethical organizational culture, choosing a
lawyer, drafting a founders’ agreement, and avoiding litigation.
• Next, we discuss the different forms of business organization,
including sole proprietorships, partnerships, corporations, and
1. Establishing a Strong limited liability companies.
Ethical Culture Preparing the Proper
Ethical and Legal
Foundation

7-207 1-208

Quick Facts
• National Business Ethics Survey in 2007 • New ventures must deal with important
• 2000 American workers ethical and legal issues.
• Findings: • Ethic errors made early on can be
• 55% observed – violated ethical extremely costly.
standards, policy or law • A tendency for entrepreneurs to
• Of these employees observed the overestimate their knowledge of the law.
misconduct – 42% reported it

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35
 1. Establishing a Strong Top 10 most common types of
Ethical Culture ethical misconduct
• One of the most important things the founders of an entrepreneurial 1. Putting own interest %22
venture can do is establish a strong ethical culture for their firms.
The data regarding business ethics are both encouraging and 2. Abusive behaviour %21
discouraging. The most recent version of the National Business 3. Lying to employees %20
Ethics Survey was published in 2013. This survey is the only
4. Misreporting hours worked %17
longitudinal study that tracks the experiences of employees within
• organizations regarding business ethics. 5. Internet abuse %16
• According to the survey, 41 percent of the 6,420 employees 6. Safety violations %15
surveyed reported that they had observed misconduct or unethical 7. Lying to stakeholders %14
behavior in the past year. Of the employees who observed
misconduct, 63 percent reported their observation to a supervisor or 8. Discrimination %13
another authority in their firm. 9. Stealing %11
• The 10 most common types of misconduct or unethical behavior
observed by the employees surveyed are shown in :
[Link] harassment %10
1-211 7-212

1. Establishing a Strong Ethical

Culture
• Lead by example 1.1. Establish a Code of Conduct
• Leaders - make ethics and integrity a • a formal statement of an organization’s
part of daily conversations and decision values on certain ethical and social issues.
making
• Supervisors who emphasize integrity
• Peers who encourage to act ethically

7-213 7-214

Google Code of Conduct: Table of Contents

Serve Our Users
Integrity
Usefulness
Privacy and Freedom of Expression 1.2. Implement an Ethics Training Program
Responsiveness
Take Action – Educate business ethics to employees to
Respect Each Other
Equal Opportunity Employment deal with ethical dilemmas and improve
Positive Environment
Drugs and Alcohol
overall ethical conduct.
Safe Workplace – An ethical dilemma - a situation that
Avoid Conflicts of Interest
Personal Investments involves doing something - beneficial to
Outside Employment and Inventions
Outside Board Memberships
oneself or organization - but may be
Business Opportunities unethical.
Friends and Relatives; Co-Worker Relationships
Gifts, Entertainment and Payments
Reporting
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36
 What is Ethical Dilemma 2. Potential Payoffs

• [Link]
Gc3X-Q

1-217 7-218

2. Dealing Effectively with

Legal Issues Choosing an Attorney
• Those leading entrepreneurial ventures • Select a attorney early
can also expect to encounter a number of – As early as possible when developing a
important legal issues when launching and business venture.
then, at least initially, operating their firm. – Critical - attorney is familiar with start-up
issues.
• We discuss a number of these issues
• Intellectual Property
next.
– For issues dealing with intellectual property
(patents, trademarks, and copyrights) -
essential to use a solicitor who specializes in
this field.
1-219 7-220

Drafting a Founder /
Shareholder’s Agreement
• A written document - deals with issues: • Two important issues addressed:
– Relative split of the equity among the – What happens to equity if :
founders – how individual founders will • founder dies
be compensated for cash or “sweat • decides to leave company.
equity” they put into the company,
– How long the founders will have to
remain for their shares to fully vest.

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37
 Items Included in the Founder’s
Avoiding Legal Disputes
Agreement
• Nature of the prospective business. • Most legal disputes - misunderstandings,
• A brief business plan. sloppiness or a simple lack of knowledge
• Identity and proposed titles of the founders. of the law.
• Legal form of business ownership.
• Getting bogged down in legal disputes -
• Consideration paid for stock or ownership
share of each of the founders. something an entrepreneur should work
• Identification of any intellectual property hard to avoid.
signed over to the business.
• Description of the initial operating capital.
• Buyback clause.
7-223 7-224

• Meet all contractual obligations on time

• Several steps:
– Paying vendors, contractors, and
– Meet all contractual obligations employees as agreed
– Avoid undercapitalisation – Delivering goods or services as promised
– Get everything in writing – If not met, communicate to parties involved
– Set standards immediately.

7-225 7-226

• Avoid Undercapitalisation • Get Everything in Writing

– If a new business is starved for money – – Many dispute arises due to lack of written
very likely to experience financial agreement or do not anticipate potential
problems – lead to litigation. areas of dispute
– Should raise enough fund – better – Tempting to show business partners or
overestimate employees that they are ‘trusted’ by
downplaying the need for a written
– Should monitor growth to conserve cash agreement
– It’s a mistake
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38
• Disputes are much easier to resolve if the • Non disclosure
rights and obligations – in writing – A promise made by an employee or another
party to not disclose the company’s trade
• Two important written agreements –
secrets.
majority of companies ask the employees
to sign
• Non compete agreement
– Non disclosure
– Prevents an individual from competing against
– Non compete agreement a former employer for a specified period of
time.

7-229 7-230

• Set Standards • When legal disputes do occur

– Set standards that govern employees’ – Negotiation or mediation rather than more
behavior beyond what can be expressed expensive and potentially damaging litigation
via a code of conduct. • Mediation – a process in which a third party
helps those involved reach an agreement
– E.g. moonlighting, conflicts of interest,
• A simple apology
inappropriate use of company resources
• A sincere pledge – offending party - to
– Policies and procedures should be make amend
established to deal with these issues
7-231 7-232

3. Choosing a Form of Business

Organisation
There are 4 form of Business: • Cost of setting up and maintaining the
[Link] Proprietorship legal form of ownership.
[Link] • Extent to which entrepreneurs can shield
[Link] personal assets from the liabilities
4. Limited Liability Company • Tax considerations.
• The ease of raising capital.

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39
 3.1. Sole Proprietorship
• Just one business owner
– Simplest form of business entity. • Personal names or trade names can be
– Involving one person. used as business names
– Not a separate legal entity - sole proprietor is • Application of business name form must
responsible for all the liabilities of the be filled in before a business can be
business - significant drawback. registered.

7-235 7-236

* Relevant authorities - Registrar of Business, • Advantages of a Sole Proprietorship

reserves the right to reject any submitted name if – Creating one is easy and inexpensive.
it is deemed misleading or inappropriate. – Owner maintains complete control - retains
all of profits.
* Certain names e.g. associated with government – Business losses can be deducted against sole
agencies or royalty (i.e. "national", "chartered" or proprietor’s other sources of income (e.g lost
"di-Raja") cannot be registered 10k, gained 100k)
– Easy to dissolve.

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3.2. Partnerships

• Disadvantages of a Sole Proprietorship Partnerships

– Liability is unlimited. – If two or more people start a business -
– Business relies on skills and abilities of a organized as a partnership, private or public
single owner. limited company.
– Raising capital can be difficult. – Can be organized as either general or limited
– Business ends at the owner’s death or loss of partnerships.
interest. • A general partnership - two or more
– Liquidity of the owner’s investment is low. people pool their skills, abilities and
resources to run a business.
– Low corporate image
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40
 – A limited partnership - a modified form of • Advantages of a General Partnership
general partnership. The major difference – Creating one is relatively easy and
between the two: inexpensive.
– Skills and abilities of more than one individual
– General partners - liable for debts and are available.
obligations of partnership – Having more than one owner may make it
Limited partners - liable only up to amount of easier to raise funds.
their investment. – Business losses can be deducted against
partners’ other sources of income.

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3.3. Corporations
• Disadvantages of a General Partnership
• A corporation is a separate legal entity
– Liability on the part of each general partner is
organized under the authority of a state.
unlimited.
Corporations are organized as either C
– Business relies on skills and abilities of a fixed
corporations or subchapter S corporations.
number of partners.
– Because decision making among partners is • The following description pertains to C
shared - disagreements can occur. corporations, which are what most people
– Business ends with the death or withdrawal of think of when they hear the Word
one partner unless otherwise stated. corporation.
– Liquidity of each partner’s investment is low.
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3.4. Limited Liability

Company
• A C corporation is a separate legal entity • The limited liability company (LLC) is a form of business
organization that is rapidly gaining popularity in the United
that, in the eyes of the law, is separate States.
from its owners. In most cases, the • The concept originated in Germany and was first introduced in
the United States in the state of Wyoming in 1978. Along with
corporation shields its owners, who are the subchapter S corporation, it is a popular choice for start-
called shareholders, from personal up firms.
liability for the debts and obligations of the • As with partnerships and corporations, the profits of an LLC
flow through to the tax returns of the owners and are not
corporation. subject to double taxation.

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41
 Chapter Objectives
1 of 2

Chapter 8 1. Learn about the importance of understanding the

financial management of an entrepreneurial firm.
2. Identify the four main financial objectives of
entrepreneurial firms.
Assessing a New
3. Describe the process of financial management as
Venture’s Financial used in entrepreneurial firms.
Strength and 4. Explain the difference between historical and pro
Viability forma financial statements.
5. Describe the different historical financial statements
and their purpose.
Copyright ©2016 Pearson 8-247 Copyright ©2016 Pearson 8-248
Education, Inc. Education, Inc.

Chapter Objectives
2 of 2 Introduction
6. Discuss the role of forecasts in projecting a firm’s • An entrepreneur’s ability to pursue an opportunity and turn the
future income and expenses. opportunity into a viable entrepreneurial firm hinges largely on
the availability of money.
7. Explain the purpose of pro forma financial statements.
• Regardless of the quality of a product or service, a company
can’t be viable in the long run unless it is successful
financially.
• Money either comes from external sources (such as investors
or lenders) or is internally generated through earnings. It is
important for a firm to have a solid grasp of how it is doing
financially.
• One of the most common mistakes young entrepreneurial
firms make is not emphasizing financial management and
Copyright ©2016 Pearson
Education, Inc.
8-249
putting in place appropriate forms of financial controls. 1-250

Financial Management Financial Objectives of a Firm

1 of 2

• Financial Management
– Financial management deals with two things: raising
• To assess whether its financial
money and managing a company’s finances in a way that objectives are being met, firms rely
achieves the highest rate of return
– This chapter focuses primarily on: heavily on analyses of financial
• How a new venture tracks its financial progress through preparing, statements, forecasts, and budgets.
analyzing, and maintaining past financial statements.
• How a new venture forecasts future income and expenses by
preparing pro forma (or projected) financial statements.
• A financial statement is a written
report that quantitatively describes a
firm’s financial health.
Copyright ©2016 Pearson 8-251 Copyright ©2016 Pearson 8-252
Education, Inc. Education, Inc.

42
 Financial Objectives of a Firm The Process of Financial Management
1 of 3 1 of 4

Primary Financial objectives of Entrepreneurial

Firms • Importance of Financial Statements
– To assess whether its financial objectives are being met,
firms rely heavily on analysis of financial statements.
• A financial statement is a written report that quantitatively
describes a firm’s financial health.
• The income statement, the balance sheet, and the statement of cash
flows are the financial statements entrepreneurs use most
commonly.
• The income statement, the balance sheet, and the
statement of cash flows are the financial statements
entrepreneurs use most commonly.
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The Process of Financial Management The Process of Financial Management

2 of 4 3 of 4

• Forecasts • Financial Ratios

Are an estimate of a firm’s future income and expenses, – Depict relationships between items on a firm’s financial
statements.
based on past performance, its current circumstances, and
– An analysis of its financial ratios helps a firm determine
its future plans.
whether it is meeting its financial objectives and how it
• Budgets stacks up against industry peers.
– Are itemized forecasts of a company’s income, expenses, • Importance of Financial Management
and capital needs and are also an important tool for – Many experienced entrepreneurs stress the importance of
financial planning and control. keeping on top of the financial management of the firm.

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The Process of Financial Management Financial Statements

4 of 4

There are two types of financial statemets:

• Historical Financial Statements
– Reflect past performance and are usually prepared on a
quarterly and annual basis.
• Publicly traded firms are required by the SEC to prepare financial
statements and make them available to the public.
• Pro Forma Financial Statements
– Are projections for future periods based on forecasts and
are typically completed for two to three years in the future.
• Pro forma financial statements are strictly planning tools and are
not required by the SEC.
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43
 Importance of Keeping Good Records Historical Financial Statements
Three types of historical financial statements

Financial Statement Purpose

Reflects the results of the operations of a firm over a

The first step toward Income Statement specified period of time. It records all the revenues and
prudent financial expenses for the given period and shows whether the
firm is making a profit or is experiencing a loss.
management is keeping
good records. Balance Sheet Is a snapshot of a company’s assets, liabilities, and
owner’s equity at a specific point in time.

Summarizes the changes in a firm’s cash position for

Statement of cash flows a specified period of time and details why the changes
occurred.

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FINANCIAL RATIOS: How to Analyze Forecasts

1 of 4
Financial Statements
• [Link] • Forecasts
wpeG8c8 – The analysis of a firm’s historical financial statements are
followed by the preparation of forecasts.
– Forecasts are predictions of a firm’s future sales, expenses,
income, and capital expenditures.
• A firm’s forecasts provide the basis for its pro forma financial
statements.
• A well-developed set of pro forma financial statements helps a firm
create accurate budgets, build financial plans, and manage its
finances in a proactive rather than a reactive manner.

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Forecasts Forecasts
2 of 4 3 of 4
Historical and Forecasted Annual Sales for New Venture Fitness Drinks
• Sales Forecast
– A sales forecast is a projection of a firm’s sales for a
specified period (such as a year).
– It is the first forecast developed and is the basis for most of
the other forecasts.
• A sales forecast for a new firm is based on a good-faith estimate of
sales and on industry averages or the experiences of similar start-
ups.
• A sales forecast for an existing firm is based on (1) its record of
past sales, (2) its current production capacity and product demand,
and (3) any factors that will affect its future product capacity and
product demand.

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44
 Forecasts Pro Forma Financial Statements
4 of 4

• Forecast of Costs of Sales and Other Items • Pro Forma Financial Statements
– Once a firm has completed its sales forecast, it must – A firm’s pro forma financial statements are similar to its
forecast its cost of sales (or cost of goods sold) and the historical financial statements except that they look forward
other items on its income statement. rather than track the past.
– The most common way to do this is to use the percentage- – The preparation of pro forma financial statements helps a
of-sales method, which is a method for expressing each firm rethink its strategies and make adjustments if
expense item as a percentage of sales. necessary.
• If a firm determines that it can use the percent-of-sales method and
it follows the procedures described in the textbook, then the net – The preparation of pro forma financials is also necessary if
result is that each expense item on its income statement will grow a firm is seeking funding or financing.
at the same rate as sales (with the exception of items that can be
individually forecast, such as depreciation).

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Types of Pro Forma Financial

Statements
Financial Statement Purpose
Chapter 9
Pro Forma Income Shows the projected financial results of the
Statement operations of a firm over a specific period.

Shows a projected snapshot of a company’s Building a New-

Pro Forma Balance assets, liabilities, and owner’s equity at a specific
Sheet point in time. Venture Team
Pro Forma Statement Shows the projected flow of cash into and out of a
of Cash flows company for a specific period.

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Chapter Objectives Chapter Objectives

1 of 2 2 of 2

1. Identify the primary elements of a new venture team. 6. Describe a board of directors and explain the
2. Explain the term liabilities of newness. difference between inside directors and outside
3. Discuss the difference between heterogeneous and directors.
homogenous founding teams. 7. Identify the two primary ways in which the
nonemployee members of a start-up’s new-venture
4. Identify the personal attributes that strengthen a team help the firm.
founder's chances of successfully launching an
8. Describe the concept of signaling and explain why
entrepreneurial venture. it’s important.
5. Describe how to construct a “skills profile,” and 9. Discuss the purpose of forming an advisory board.
explain how it helps a start-up identify gaps in its 10. Explain why new venture firms use consultants for
new-venture team. help and advice.
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45
 New Venture Team Liabilities of Newness

• New Venture Team • New ventures have a high propensity to

– Is the group of founders, key employees, and advisers that fail.
move a new venture from an idea to a fully functioning • The high failure rate is due in part to
firm. Liabilities of liabilities of newness, which refers to the
– Usually, the team doesn’t come together all at once. Newness fact that new companies often falter
Instead, it is built as the new firm can afford to hire because the people involved can’t adjust
additional personnel. fast enough to their new roles and because
– The team also involves more than paid employees. the firm lacks a track record of success.
• Many firms have boards of directors, boards of advisers, and • Assembling a talented and experienced
professionals on whom they rely for direction and advice.
management team is one path that firms
can take to overcome these limitations.
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Separate Elements of a New Venture The Founder or Founders

Team 1 of 2

• Founder or Founders
– The characteristics of the founder or founders of a firm and
their early decisions have a significant impact on the
manner in which the new venture team takes shape.
• Size of the Founding Team
– Studies have shown that 50% to 70% of all new ventures
are started by more than one individual.
– It is believed that new ventures that are started by a team
rather than a single individual have an advantage.

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Factors that Contribute to a Founder or

The Founder or Founders
2 of 2 Founders’ Success
1 of 3

Factors That May Contribute to a • Firm Started by a Team

Founders’ Success
– Start-ups started by a team can provide greater resources, a
• Firm started by a team broader diversity of viewpoints, and a broader array of other
Qualities of • Higher education positive attributes than ventures started by individuals.
• Prior entrepreneurial experience
Founders • Higher Education
• Relevant industry experience
– Entrepreneurial skills are enhanced through higher
• The ability to “network” effectively
education.

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46
Factors that Contribute to a Founder or Factors that Contribute to a Founder or
Founders’ Success Founders’ Success
2 of 3 3 of 3

• Prior Entrepreneurial Experience • Broad Social and Professional Network

– Founders familiar with the entrepreneurial process are more – Founders with broad social and professional networks have
likely to avoid costly mistakes than founders without similar potential access to additional know-how, capital, and
experience. customer referrals.
• Relevant Industry Experience
– Founders with relevant industry experience are more likely
to have:
• Better established professional networks.
• More applicable marketing and management skills.

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Skills Profile for New Venture Fitness

Recruiting and Selecting Key Employees
Drinks
• Recruiting Key Employees
– Startups vary in terms of how quickly they need to add
personnel.
– In some instances, the founders will work alone for a
period of time. In other instances, employees are hired
immediately.
– A skills profile is a chart that depicts the most important
skills that are needed and where skills gaps exist in a new
firm.

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The Roles of the Board of the Directors The Roles of the Board of the Directors
1 of 2 2 of 2

• Board of Directors • Formal Responsibility of the Board

– If a new venture organizes as a corporation, it is legally – A board of directors has three formal responsibilities.
required to have a board of directors. • Appoint the officers of the firm.
– A board of directors is a panel of individuals who are • Declare dividends.
elected by a corporation’s shareholders to oversee the • Oversee the affairs of the corporation.
management of the firm. • Frequency of Meetings and Compensation
– A board is typically made up of both inside directors and – Most board of directors meet three to four times a year.
outside directors. – New ventures are more likely to pay their board members
• An inside director is a person who is also an officer of the firm.
in company stock or ask them to service on a voluntary
• An outside director is someone who is not employed by the firm.
basis rather than pay a cash honorarium.

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47
 What a Board of Directors Can Do to Rounding out the Team: The Role of
Help a Start-Up Get Off to a Good Start Professional Advisors

Function Importance of Function

Although a board of directors has formal Board of Advisors

Provide governance responsibilities, its most useful role is
Guidance to provide guidance and support to the firm’s
managers.
Lenders and Investors Other Professionals
Another function of a board of directors is to lend
Lend legitimacy to a firm. Well-known and respected
Legitimacy board members bring instant credibility to a firm.

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Board of Advisors Board of Advisors

1 of 2 2 of 3

• Board of Advisors • Board of Advisors (continued)

– A board of advisors is a panel of experts who are asked by – Many people are more willing to serve on a company’s
a firm’s managers to provide counsel and advice on an board of advisors than its board of directors because it
ongoing basis. requires less time and there is no potential legal liability
– Unlike a board of directors, an advisory board possesses no involved.
legal responsibility for the firm and gives nonbinding – Like the members of a board of directors, the members of a
advice. company’s board of advisors provide guidance and lend
– An advisory board can be established for general purposes credibility to the firm.
or can be set up to address a specific issue or need.

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Board of Advisors Lenders and Investors

3 of 3

• Guidelines to Organizing a Board of Advisors • Lenders and Investors

– Advisors will become disillusioned if they don’t play a – Lenders and investors have a vested interest in the
meaningful role in the firm’s development and growth. companies they finance, often causing them to become very
– A firm should look for board members who are compatible involved in helping the firms they fund.
and complement one another in terms of experience and – Like the other non-employee members of a firm’s new
expertise. venture team, lenders and investors help new firms by
– When inviting people to serve on its board of advisors, a providing guidance and lending advice.
company should carefully spell out to the individuals – In addition, a firm’s lenders and investors assume the
involved the rules in terms of access to confidential natural role of providing financial oversight.
information.

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48
 Ways Lenders and Investors Add Value Ways Lenders and Investors Add Value
to an Entrepreneurial Firm to an Entrepreneurial Firm
1 of 2 2 of 2

Help identify and recruit key Provide insight into the

markets that the new venture Help to arrange business
management personnel Recruit customers partnerships
plans to enter

Help the venture fine-tune its Serve as a sounding board Serve on the board of Provide a sense of stability
business model for new ideas directors or board of advisors and calm

Serve on the new venture’s

Provide introductions to board of directors or board of
additional sources of capital advisors

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Other Professionals Volunteer Consultants

• Other Professionals
– The other professionals that make up a firm’s new venture
team include attorneys, accountants, and business SCORE currently has
consultants. over 10,500
• Business Consultants volunteer business
– A business consultant is an individual who gives consultants working
professional or expert advice. with entrepreneurs.
– Business consultants fall into two categories: paid
consultants and consultants who are available for free or at
a reduced rate through a nonprofit of governmental agency.

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Case Study: S-Core IT Solutions

Chapter 10

• A software solution provider to more than 140

clinics.
• Aiming for > 1000 clinics by the end of 2015
Getting Financing or • Awarded with the Cradle Fund’s (an agency
Funding under Ministry of Finance, Malaysia), the
CIP500 Grant in September 2010
• Awarded MSC Status – August 2011
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49
 1. The Importance of Getting
Funding
• Founded by Zaidi and Shahrulnizam – home-based
since 2004 • Few people know - deal with the process of
• Specialises in Clinic and Hospital Management raising investment capital for their start-up.
System • Many go about task of raising capital
haphazardly (unsystematically):
• Lack experience and don’t know much about
their choices.

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3. Alternatives for Raising Money -

2. Why Most New Ventures Need Funding PEDO
Three Reasons

Personal Funds Equity Capital

Other Creative
Debt Financing
Sources

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a. Personal Financing
Friends and Family
• Vast majority of founders contribute • 2nd source of funds:
• ‘friendly’ loans or investments
personal funds - along with sweat
• outright gifts
equity
• delayed compensation
• Sweat equity - value of time and • reduced or free rent
effort
E.g. Founder of Gateway computer got his start
with a USD10,000 loan from his grandmother.

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50
 Examples of Bootstrapping Methods

Bootstrapping Buying used instead of Leasing equipment

new equipment instead of buying
• Finding ways to avoid the need for
external financing or funding through *Applying for and *Obtaining payments in
obtaining grants advance from customers
creativity, innovation, economical,
cost-cutting, or any means necessary. Minimizing personal Coordinating purchases
• Difficult for new companies to get expenses with other businesses

financing or funding early on - bootstrap Sharing office space Avoiding unnecessary

out of necessity. with other businesses expenses

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Matching a New Venture’s Characteristics with the

Appropriate Form of Financing or Funding

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‘Preparing an Elevator Speech’

• A brief, carefully constructed statement -

outlines merits of a business opportunity

• Why is it called an elevator speech?

• If an entrepreneur stepped into an elevator
on 25th floor of a building - found that by a
stroke of luck a potential investor was in the
same elevator - would have the time it
takes to get from the 25th floor to the
ground floor to try to get the investor
interested in his or her opportunity.

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51
 Guidelines for Preparing an Elevator
• This quick pitch has taken on the Speech
name “elevator speech.”
• Most elevator speeches - 45 seconds
to two minutes long.

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b. Equity Funding Business Angels

• Individuals - invest their personal capital

Business Venture directly in start-ups.
Angels Capital • Typical business angel
• about 50 years old
• has high income and wealth
Initial Public • well educated
Offerings • has succeeded as an entrepreneur
(IPO) • interested in the start-up process.
• Number of angel investors - has increased
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dramatically over the past decade. 10-310

Venture Capital

VC companies interested in investing in

start ups and small businesses with
• Valuable - willingness to make relatively small exceptional growth potential.
investments.
• Needs just RM 50,000 rather than the RM 1
million minimum investment - most venture
capitalists require.
• Difficult to find
• Most angels remain fairly anonymous - matched
up with entrepreneurs through referrals.
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52
• limited partnerships of money managers • Venture-capital companies fund very few
who raise money in “funds” to invest in entrepreneurial companies in comparison
start-ups and growing companies. to business angels.
• Many entrepreneurs get discouraged -
• Funds or pool of money - raised from repeatedly rejected for funding, even
successful companies, wealthy though they have an excellent business
individuals, pension plans, university plan.
endowments, foreign investors, and • Still, for the companies that qualify - a
similar sources. viable alternative.
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Cradle Investment Programme

• An important part of obtaining venture-
capital funding - due diligence • Pre-seed funding programme for viable
process. ideas
• VCs invest money in start-ups in • Enables innovators and innovative
“stages,” meaning - not all the money entrepreneurs to make the jump from -
invested - disbursed at the same time. having an innovative technology idea to
become a successful start-up.
• Some venture capitalists also specialize
in certain “stages” of funding.
• Grant – up to RM150,000 for innovative
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technology ideas with commercialisation10-316
potential.

Track Record • Looking for ideas that fall under the areas of ICT
• As of May 2008, about 270 technopreneurs and high growth, including:
have benefited from the Cradle Investment • Software and information services
Programme (CIP). • Internet: e-services, e-commerce and e-
content
• Received RM 50,000 per idea, a total of • Communication and networking mobile data
RM15.7 million for commercialising their
ideas. • High tech consumer and business products
• Electronic and semi-conductors
• 42% of the ideas completed have reached • Medical devices and advance materials
commercialisation stage - the highest rate of • Biotechnology and life sciences
commercialization amongst grants in the • Environmental resources management and
nation. renewable energy
• Technology innovation for any industry
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53
 Malaysia Venture Capital Berhad
(MAVCAP)
• In evaluating an investment opportunity, VCs factor
prospective rate of return of business within a set
• Incorporated in 2001 by the Malaysian Government
time period.
• The nation’s largest venture capital (VC) company • Having studied in detail - key factors related to the
which focuses on investments in the local ICT potential of the investee company such as:
sectors • composition and competency of the founders and
• Its mission: management team
• market opportunity and scalability
• serve as an ideal training ground to groom
• product strength
venture capitalists,
• potential exit strategy within the funding cycle
• empower entrepreneurs to create wealth Evaluate business proposition rigorously prior to
• generate attractive returns for its investments any investment commitment made.
• Focuses on the ICT sector and high-growth 10-319 10-320

industries

Initial Public Offering

• Sale of stock to the public - traded on one of Four reasons that motivate companies go
the major stock exchanges. public
• Most entrepreneurial companies go public Reason 1 Reason 2 Reason 3 Reason 4
raises a a liquidity event
trade on the KLSE - weighted heavily toward company’s By going
a way to to cash out their
technology, biotech, and small-company raise equity public profile, investments. public, a
making it company
stocks. capital to
easier to creates another
fund current form of
• An important milestone for a company. and future
attract high-
quality
‘currency’ to
grow the
operations.
• Not able to go public until it has demonstrated customers, company.
partners, and
- viable and has a bright future. employees.

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c. Debt Financing

• Many advantages to go public -

complicated and expensive process.
• The first step in initiating a public Commercial
offering is to hire an institution - acts Banks
as an advocate and adviser and
walks a company through the
process of going public.

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54
 Commercial Banks

• Have not been viewed as practical sources • Interested in companies - strong cash
of financing for start-up companies.
flow, low leverage, audited financials,
good management and a healthy
• This sentiment is not a knock against
banks - they are risk adverse and balance sheet.
financing start-ups is a risky business.
• Although many new ventures have good
• BETTER NOT for a new venture – management, only few have these
BANCRUPT!!! strong characteristics (financial track
record).
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d. Creative Sources of
SME Bank
Financing or Funding
• Designed to function - one-stop financing and
business development centre, SME Bank is
dedicated to accelerate growth of SMEs. Leasing Strategic
Partners

• Principal activities - to provide financing as well

as business advisory services to Malaysian
SMEs Government
Grants

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Leasing

• Most - a modest down payment and

A written agreement in which the owner of monthly payments during the duration of
the lease.
a piece of property allows an individual or
• At the end, new venture has the option to
business to use the property for a stop, purchase it for fair market value, or
specified period of time in exchange for renew.
payments. • Leasing – more expensive than paying cash
for an item.
• An alternative to equity or debt financing.

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55
 Government Grants Strategic Partners

• MyCreative Ventures Sdn Bhd, a government

• Early-stage funding for technology
investment arm, was launched by Prime
companies. (MTDC, MOSTI, MARDI)
Minister Datuk Seri Najib Razak today to spur
Malaysia's creative industry via strategic and
• These programs provide cash grants to innovative funding.
entrepreneurs who are working on projects in
specific areas.
• The initiative was initally announced by Najib
during 2012 budget proceedings, where
RM200 million was allocated for this purpose.

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Chapter Objectives
(1 of 2)

Chapter 11 1. Explain the purpose of market segmentation.

2. Describe the importance of selecting a target
market.
3. Explain why it is important for a start-up to
establish a unique position in its target market.
Unique 4. Describe the importance of the ability to position a
company’s products on benefits rather than features.
Marketing 5. Illustrate the two major ways in which a company
Issues builds a brand.

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Selecting a Target Market and

Chapter Objectives Establishing
(2 of 2)
a Position in the Market
(1 of 2)
6. Identify the four components of the marketing mix. • Important Questions That All Start-ups Must Ask
7. Explain the difference between a core product and – In order to succeed, a new firm must address this important
an actual product. issue: Who are our customers and how will we appeal to
them?
8. Contrast cost-based pricing and value-based
– A well-managed start-up approaches this query by
pricing.
following a three-step process:
9. Explain the differences between advertising and • Segmenting the market.
public relations. • Selecting a target market.
• Establishing a unique position in the target market.
10. Weigh the advantages and disadvantages of selling
direct versus selling through intermediaries.

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56
 Selecting a Target Market and
Establishing a Position in the Market Segmenting the Market
(2 of 2)
• Market Segmentation
The Process of Selecting a Target Market and Positioning Strategy – The first step in selecting a target market is to study a firm’s
industry and determine the different potential target markets
in that industry.
• This process is called market segmentation.
• Markets can be segmented in a number of different ways, including
product type, price point, and customers served.
• For example, the computer industry can be segmented in the
following ways:
– Product type (handheld computers, laptops, PCs, minicomputers,
and mainframes).
– Customers served (individuals, business, education, and
government).

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Selecting a Target Market Establishing a Unique Position

(1 of 2)

• Target Market • Positioning

– Once a firm has segmented the market, the next step is to – After selecting a target market, the firm’s next step is to
select a target market. The market must be sufficiently establish a “position” within the market that differentiates it
attractive and the firm must have the capabilities to serve it. from its competitors.
– Typically, a firm doesn’t target an entire segment of a • In a sense, a “position” is the part of a market or of a segment of
market because many market segments are too large to the market the firm is claiming as its own.
target successfully. – A firm establishes a unique position in its customers’ minds
• Instead, most firms target a niche within a segment. by consistently drawing attention to two or three of its
• For example, one segment of the computer industry is handheld product’s attributes that define the essence of what the
computers. Within this segment, there are several smaller niche product is and what separates it from its competitors.
markets that represent a narrower group of customers with similar
needs.
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Establishing a Unique Position Taglines

(2 of 2)

• Positioning (continued) Match the Company to Its Tagline

– Firms often develop a “tagline” to reinforce the position
they have staked out in their market, or a phrase that is used
consistently in a company’s literature and thus becomes
associated with the company.
– An example is Nike’s familiar tagline, “Just do it.”
• The beauty of this simple three-word expression is that it applies
equally to a 21-year-old triathlete and a 65-year-old mall walker.

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57
 Selling Benefits Rather Than Features Selling Benefits Rather Than Features
(1 of 2) (2 of 2)
Two different approaches to promoting a cell phone
• Selling Benefits Rather Than Features
Approach Illustration
– Many entrepreneurs make the mistake of positioning their
“Our cell phones are equipped with sufficient memory to
company’s products or services on features rather than Selling Features store 100 phone numbers.”
benefits.
– A positioning or marketing strategy that focuses on the Selling Benefits
“Our cell phones lets you store up to 100 phone numbers,
giving you the phone numbers of your family and your
features of a product, such as its technical merits, is usually friends at your fingertips.”
much less effective than a campaign focusing on what the
While features are nice, they typically don’t entice someone to buy a
merits of the product can do. product. The first statement tells a prospect how many phone
– Consider the example of the following slide. Conclusion numbers the cell phone will hold, but doesn’t tell the prospect why
that’s important. The second statement tells a prospect why having
sufficient memory to store 100 phone number is important, and how
buying the product will enhance his or her life.

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Establishing a Brand Establishing a Brand

(1 of 4) (2 of 4)

What’s a Brand? Different Ways of Thinking About the

• Establishing a Brand Meaning of a Brand
– A brand is the set of attributes—positive or negative—that
people associate with a company.
• These attributes can be positive, such as trustworthy, dependable, or
easy to deal with.
• Or they can be negative, such as cheap, unreliable, or difficult to
deal with.
– The customer loyalty a company creates through its brand
is one of its most valuable assets.
• Brand Management
– Some companies monitor the integrity of their brands
through a program called “brand management.”

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Establishing a Brand Establishing a Brand

(3 of 4) (4 of 4)

• Establishing a Brand • Power of a Strong Brand

– So how does a firm establish a brand? – Ultimately, a strong brand can be a very powerful asset for
• On a philosophical level, a firm must have meaning in its a firm.
customer’s lives. It must create value—something for which
customers are willing to pay. • Cobranding
• On a more practical level, brands are built through a number of – One technique that companies use to strengthen their
techniques, including advertising, public relations, sponsorships, brands is to enter into cobranding arrangements with other
support of social causes, and good performance.
• A firm’s name, logo, Web site design, and even its letterhead are
firms.
part of its brand. – Cobranding refers to a relationship between two or more
• It’s important for start-ups to have a polished image immediately so firms where the firm’s brands promote each another.
that they have creditability when they approach potential
customers.

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58
 The Four Ps of Marketing for New
Product
Ventures
• Product
Product Price
– A firm’s product, in the context of the marketing mix, is the
good or service it offers to its target market.
– The initial rollout is one of the most critical times in the
marketing of a new product.
Marketing Mix • All new firms face the challenge that they are unknown and that it
takes a leap of faith for their first customers to buy their products.
• Some start-ups meet this challenge by using reference accounts.
– A reference account is an early user of a firm’s product or service who
is willing to give a testimonial regarding his or her experience with
Place
Promotion the product or service.
(or distribution)

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Core Product vs. Actual Product Price

• Core Product vs. Actual Product • Price

– Price is the amount of money consumers pay to buy a
– As a firm prepares to sell its product, an important product.
distinction should be made between the core product and • It is the only element of the marketing mix that produces revenue;
the actual product. all other elements represent a cost.
– The core product is the product itself, such as a CD that – The price a company charges for its products sends an
important message to its target market.
contains an antivirus program. • For example, Oakley positions its sunglasses as innovative, state-
– The actual product, which is what the customer buys, may of-the-art products that are both high quality and visually
appealing.
have up to five attributes: • This position in the market suggests a premium price that Oakley
• A quality level, features, design, a brand name, and packaging. charges.
– Most entrepreneurs use one of two methods to set the price
for their products, as shown on the next slide.

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Approaches to Pricing Promotion

(1 of 2)

Two Approaches to Pricing

• Promotion
Approach to Description – Refers to the activities the firm takes to communicate the
Pricing
merits of its product to its target market.
In cost-based pricing, the list price is determined by adding a
markup percentage to a product’s cost. The advantage of this
– There are several common activities that entrepreneurs use
Cost-Based
Pricing method is that it is straightforward, and it is relatively easy to to promote their products and services.
justify the price of a good or service. The disadvantage is that it is
not always easy to estimate what the cost of a product will be. • Advertising
In value-based pricing, the list price is determined by estimating – Advertising is making people aware of a product or service
what consumers are willing to pay for a product and then backing in hopes of persuading them to buy it.
Value-Based off a bit to provide a cushion. What a consumer is willing to pay
Pricing is determined by his or her perceived value of the product and by
the number of choices available in the marketplace. Most experts
recommend value-based pricing because it hinges on the
consumer’s perception of what a product or service is worth.

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59
 Promotion Putting Together an Advertisement
(2 of 2)

Steps Involved in Putting Together an Advertisement

• Advertising (continued)
– Advertising’s major goals are to do the following:
• Raise customer awareness of a product.
• Explain a product’s comparative benefits.
• Create associations between a product and a certain lifestyle.
– Advertising has some major weaknesses, including the following:
• Low credibility.
• The possibility that a high percentage of the people who see the ad will not
be interested.
• Message clutter.
• Relatively costly compared to other forms of promotions.
• The perception that advertising is intrusive.

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Google AdWords and AdSense Program Google AdWords and AdSense Program
(1 of 2) (2 of 2)

• AdWords • AdSense
– Allows advertisers to buy keywords on the Google Home – Allows advertisers to buy ads that will be shown on other
Page. Web sites instead of Google’s Home Page.
– Triggers text-based ads to the side (and sometimes above) – Google selects sites of interest to the advertiser’s
search results when the keyword is used. customers.
– The program includes local, national, and international – Advertisers are charged on a pay-per-click or a per-
distribution. thousand impression basis.
– Advertisers pay a certain amount per click. – Advertisers benefit because the content of the ad is often
– Advertisers benefit because they are able to place their ads relevant to the Web site.
in front of people who are already searching for – Web site owners benefit by using the service to monetize
information about their product. their Web site.

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Public Relations Public Relations Techniques

Public Relations Techniques
• Public Relations
– One of the most cost-effective ways to increase the Press release Media coverage
awareness of the products of a company is through public
relations.
Articles in industry
– Public relations refers to efforts to establish and maintain a press and periodicals
Blogging
company’s image with the public.
– The major difference between public relations and
advertising is that public relations is not paid for—directly. Monthly newsletter News conference
• The cost of public relations to a firm is the effort it makes to
network with journalists and other people to try to interest them in
saying or writing good things about the company and its products. Civic, social, and community
involvement
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60
 Place (or Distribution) Approaches to Distribution
Selling direct versus selling through intermediaries
• Place
– Place, or distribution, encompasses all the activities that Approach to
Description
Distribution
move a firm’s product from its place of origin to the
Many firms sell direct to customers. Being able to control the
consumer. process of moving their products from their place of origin to the
Selling Direct
– The first choice a firm has to make regarding distribution is end user instead of relying on third parties is a major advantage
of selling direct. The disadvantage of selling direct is that a firm
whether to sell its products directly to consumers or has more of its capital tied up because it must own or rent retail
through intermediaries (such as wholesalers and retailers). outlets and must field a sales force.

– Within most industries, both choices are available, so the Firms who sell through intermediaries pass off their products to
Selling wholesalers who place them in retail outlets to be sold. An
decision typically depends on how a firm believes its target Through advantage of this approach is that the firm does not need to own
market wants to buy its product. Intermediaries as much of the distribution channel. The disadvantage of selling
through intermediaries is that a firm loses control of its product.

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Visual Depiction of Selling Direct Versus

Selling Through Intermediaries
Selling Direct Versus Selling Through Intermediaries Chapter 12

The Importance
of Intellectual
Property
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Chapter Objectives Chapter Objectives

(1 of 2) (2 of 2)

1. Define the term “intellectual property” and describe 6. Identify the types of material that are eligible for
its importance. copyright protection.
2. Discuss the four major forms of intellectual 7. Discuss the legal environment that facilitates trade
property: patents, trademarks, copyrights, and trade secret protection.
secrets. 8. Identify the most common types of trade secret
3. Specify the rules of thumb for determining whether disputes.
a particular piece of intellectual property is worth 9. Describe some of the physical measures that firms
the time and expense of protecting. take to protect their trade secrets.
4. Describe the six-step process for obtaining a patent. 10. Explain the two primary reasons for conducting an
5. Identify the four types of trademarks. intellectual property audit.

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61
 Determining What Intellectual
The Importance of Intellectual Property
Property to Protect
• Intellectual Property
– Is any product of human intellect that is intangible but has Criteria 1 Criteria 2
value in the marketplace.
Determine whether the Decide whether the
– It is called “intellectual” property because it is the product intellectual property in intellectual property in
of human imagination, creativity, and inventiveness. question is directly question has value in the
related to the firm’s
• Importance competitive advantage
marketplace

– Traditionally, businesses have thought of their physical

assets, such as land, buildings, and equipment as the most
important.
– Increasingly, however, a company’s intellectual assets are
the most important.
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Common Mistakes Firms Make in

The Four Key Forms of
Regard to Protecting Their Intellectual
Property Intellectual Property

Not properly identifying Not fully recognizing

all of their the value of their
Patents Trademarks
intellectual property intellectual property

Not using their Copyrights Trade Secrets

Not legally protecting
intellectual property as
the intellectual property
part of their overall
that needs protecting
plan for success

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Proper Understanding for What a

Patents
Patent Means
• Patents
A patent does not give its owner the right to make, use, or sell an invention: rather, the
– A patent is a grant from the federal government conferring right granted is only to exclude others from doing so.
the rights to exclude others from making, selling, or using As a result, if an inventor obtains a patent for a new kind of computer chip, and the
an invention for the term of the patent. (See the next slide chip would infringe on a prior patent owned by Intel, the inventor has no right to
for a full explanation) make, use, or sell the chip.

• Increasing Interest in Patents To do so, the inventor would need to obtain permission from Intel. Intel may refuse
permission, or ask that a licensing fee be paid for the rights to infringe on its patent.
– There is increasing interest in patents. While this system may seem odd, it is really the only way the system could work.
• Since Patent #1 was granted in 1790, the U.S. Patent and Many inventions are improvements on existing inventions, and the system allows the
Trademark Office has granted over six million patents. improvements to be (patented) and sold, but only with the permission of the original
inventors, who usually benefit by obtaining licensing income in exchange for their
• The patent office is strained. It now takes an average of 29.1
consent.
months from the date of first filing to receive a U.S. patent.

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62
Growth in Patent Applications in the Three Basic Requirements for
United States Obtaining a Patent

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Types of Patents Business Method Patents

(Special Utility Patent)

• Business Method Patent

Type of Patent Types of Inventions Covered Duration
– A business method patent is a patent that protects an
New or useful process, machine,
manufacture, or composition of
20 years from the invention that is or facilitates a method of doing business.
Utility date of the original
material or any new and useful application – The most notable business method patents that have been
improvement thereof
awarded:
Invention of new, original, and 14 years from the • [Link]’s one-click ordering system.
Design ornamental designs for date of the original
manufactured products application
• [Link]’s “name-your-price” business model.
• Netflix’s method for allowing customers to set up a rental list of
movies to be mailed to them.
Any new varieties of plants that can 20 years from the
Plant date of the original
be reproduced asexually
application

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The Process of Obtaining a Patent Patent Infringement

• Patent Infringement
– Takes place when one party engages in the unauthorized
use of another party’s patent.
– The tough part (particularly from a small entrepreneurial
firm’s point of view) is that patent infringement cases are
costly to litigate.
• A typical patent infringement case costs each side at least $500,000
to litigate.

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63
 Illustration of the Multifaceted Nature of
Trademarks
Trademark Protection
• Trademark
– A trademark is any word, name, symbol, or device used to
Name is trademarked
identify the source or origin of products or services and to
distinguish those products or services from others.
Symbol is trademarked
– Trademarks also provide consumers with useful
information. Slogan is trademarked
• For example, consumers know what to expect when they see an
Abercrombie & Fitch store.
• Think how confusing it would be if any retail store could use the
name Abercrombie & Fitch.

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Types of Trademarks Types of Trademarks

(1 of 2) (2 of 2)

Type of Trademark Types of Marks Covered Duration Type of Trademark Types of Marks Covered Duration
Any word, name, symbol, or Trademarks or service marks used
device used to identify and Renewable every Renewable every
Trademark 10 years, as long as Collective mark by the members of a cooperative,
distinguish one company’s goods association, or other collective 10 years, as long as
from another. the mark remains the mark remains
in use group.
in use
Examples: Dell, Nokia, Oracle, Examples: Rotary International,
Palapa Azul, Flavorx International Franchise Association

Similar to trademarks; are used Renewable every Marks, words, names, symbols,
Service mark to identify the services or Renewable every
10 years, as long as or devices used by a person other 10 years, as long as
intangible activities of a business, the mark remains than its owner to certify a
rather than a business’s physical Certification mark the mark remains
in use particular quality about a good in use
products. or service.
Examples: [Link], Orbitz, Examples: Florida Oranges, ISO
eBay, [Link], Pandora 9000, Underwriters Laboratories

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What is Protected Under Trademark

Law? Exclusions from Trademark Protection
Subject to Certain Restrictions

• Exclusions from Trademark Protection

Words Fragrances
– Immoral or scandalous matter
– Deceptive matter
• For example, a food company couldn’t register the name “Fresh
Numbers and letters Shapes Florida Oranges” if the oranges weren’t from Florida.
– Descriptive market
• Marks that are merely descriptive of a product or service cannot be
Designs or logos Colors trademarked. For example, if you develop a new type of golf ball,
you can’t get a trademark on the words “golf ball.”
– Surnames
• A trademark consisting primarily of a surname, such as Anderson
Sounds Trade dress or Smith, is typically not protectable.

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64
 Additional Information About
The Process of Obtaining a Trademark
Trademarks
• Duration
– Once a trademark has been used in interstate commerce, it
can be registered with the U.S. Patent and Trademark
Office for a renewable term of 10 years, and can
theoretically be registered forever, as long as the trademark
stays in use.
• Registering Trademarks
– Technically, a trademark does not need to be registered to
receive protection. Once it is used, it is protected.
• There are many advantages, however, to registering a trademark
with the U.S. Patent and Trademark Office.

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Copyrights What is Protected By a Copyright?

Subject to Certain Restrictions

• Copyrights
Literary works Musical compositions
– A copyright is a form of intellectual property protection
that grants to the owner of a work of authorship the legal
right to determine how the work is used and to obtain the
economic benefits from the work. Computer software Dramatic works

– A work does not have to have artistic merit to be eligible

for copyright protection. Pantomimes and Pictorial, graphic, and
• As a result, things such as operating manuals and sales brochures choreographic works sculptural works
are eligible for copyright protection.

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Exclusions From Copyright Protection Obtaining a Copyright

• The Idea-Expression Dichotomy • How to Obtain a Copyright

– The main exclusion is that copyright laws cannot protect – Copyright law protects any work of authorship the moment
ideas. it assumes a tangible form. Technically, it is not necessary
• For example, an entrepreneur may have the idea to open a soccer- to provide a copyright notice or register work with the U.S.
themed restaurant. The idea itself is not eligible for copyright Copyright Office.
protection. However, if the entrepreneur writes down specifically – The following steps can be taken, however, to enhance
what his or her soccer-themed restaurant will look like and how it
will operate, that description is copyrightable.
copyright protection.
• The legal principle describing this concept is called the idea- • Copyright protection can be enhanced by attaching the copyright
notice, or “copyright bug” to something.
expression dichotomy. An idea is not copyrightable, but the
specific expression of an idea is. • Further protection can be obtained by registering the work with the
U.S. Copyright Office.

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65
 Copyright Infringement Trade Secrets

• Copyright Infringement • Trade Secrets

– Copyright infringement occurs when one work derives – A trade secret is any formula, pattern, physical device, idea,
from another or is an exact copy or shows substantial process, or other information that provides the owner of the
similarity to the original work. information with a competitive advantage in the
– To prove infringement, a copyright owner is required to marketplace.
show that the alleged infringer had prior access to the – Trade secrets include marketing plans, product formulas,
copyrighted work and that the work is substantially similar financial forecasts, employee rosters, logs of sales calls,
to the owner’s. and similar types of proprietary information.
– Copyright infringement costs the owners of copywritten – The Federal Economic Espionage Act, passed in 1996,
material an estimated $20 billion per year. criminalizes the theft of trade secrets.

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What Qualifies For Trade Secret

Trade Secret Protection Methods
Protection?
• Trade Secret Protection • Physical Measures For Protecting Trade Secrets
– Not all information qualifies for trade secret protection. – Restricting access to confidential material.
• In general, information that is known to the public or that
competitors can discover through legal means doesn’t qualify for – Labeling documents “proprietary,” “restrictive,” or
trade secret protection. “secret.”
– The strongest case for trade secret protection is information – Password protecting confidential computer files.
that is characterized by the following: – Maintaining log books for visitors.
• Is not known outside the company.
• Is known inside the company on a “need-to-know” basis only. – Maintaining log books for access to sensitive material.
• Is safeguarded by stringent efforts to keep the information secret. – Maintaining adequate overall security measures.
• Is valuable and provides the company a competitive edge.
• Was developed at great cost, time, and effort.

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Conducting an Intellectual Property Conducting an Intellectual Property

Audit Audit
(1 of 2) (2 of 2)

• Intellectual Property Audit • The Process of Conducting an Intellectual Property

– The first step a firm should take to protect its intellectual Audit
property is to complete an intellectual property audit. – The first step is to develop an inventory of a firm’s existing
– An intellectual property audit is conducted to determine the intellectual property. The inventory should include the
intellectual property a firm owns. firm’s present registrations of patents, trademarks, and
– There are two reasons for conducting an intellectual copyrights.
property audit: – The second step is to identify works in progress to ensure
• First, it is prudent for a company to periodically determine whether that they are being documented and protected in a
its intellectual property is being properly protected. systematic, orderly manner.
• Second, it is important for a firm to remain prepared to justify its
valuation in the event of a merger or acquisition.

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66
 Chapter Objectives
(1 of 2)

Chapter 13
1. Explain the term sustained growth.
2. Describe the potential downsides to firm growth.
3. Discuss the seven most common reasons firms
pursue growth.
4. Explain the advantages of having a scalable
Preparing for and business model.
Evaluating the 5. Describe the basic idea behind benchmarking and
Challenges how benchmarking can be used to help a firm
execute a successful growth strategy.
of Growth
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Chapter Objectives Growth: A Double-Edged Sword

(2 of 2)

6. Describe the managerial capacity problem and how • Nature of Firm Growth
it inhibits firm growth. – Most entrepreneurial firms want to grow.
– Growth in sales revenue is exciting and is an important
7. Discuss the day-to-day challenges of growing a indicator of an entrepreneurial venture’s potential for future
firm. success.
• Double-Edged Sword
8. Identify the three myths surrounding firm growth. – Growth, however, is a double-edged sword.
9. Identify the most prevalent growth-related firm – While growth is an indication of a firm’s success, it can
attributes. threaten the stability of a firm’s operations in every area,
from human resources to finances, if not managed properly.
10. Describe the importance of having a commitment to – Sometimes, if a firm’s product takes off, it is forced into a
growth. rapid-growth mode sooner than it would like.

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Reasons for Firm Growth Reasons for Firm Growth

(1 of 3) (2 of 3)

Reasons for Firm Growth Reasons for Firm Growth (continued)

Reason for Growth Why This Reason May Motivate a Firm to Grow Reason for Growth Why This Reason May Motivate a Firm to Grow

Capturing Economies of Economies of scale occur when increasing production lowers Many firms work hard to achieve market leadership, to
Scale the average cost of each unit produced. Market Leadership realize economies of scale in production and be
recognized as the brand leader.

Capturing Economies of Economics of scope are similar to economies of scale, expect Larger businesses usually have more influence and power
the advantage comes through the scope (or range) of a firm’s Influence, Power, and than smaller firms in regard to setting standards for an
Scope Survivability
operations rather then from its scale of production. industry, getting a “foot in the door” with major customers
and suppliers, and garnering prestige.

A scalable business model is one in which increased revenues Need to

Executing a Scalable cost less to deliver than current revenues, so profit margins Accommodate the Sometimes firms are compelled to grow to accommodate the
Business Model increase as sales go up. This situation is typically found in Growth of Key growth of a key customer.
companies that have large up-front costs but have products Customers
with small per-unit variable costs.
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67
 Reasons for Firm Growth Benchmarking Against
(3 of 3)
Successful Growth Firms
Reasons for Firm Growth (continued)
• Benchmarking
Reason for Growth Why This Reason May Motivate a Firm to Grow
– By benchmarking, a firm improves the quality of an
Ability to Attract and
activity by identifying and copying the methods of other
Growth is a firm’s primary mechanism to generate
Retain Talented promotional opportunities for employees. firms that have been successful in that area.
Employees
• For example, if a small electronics firm in the Midwest decided to
start exporting to Europe, it would be wise to identify other small
electronics firms in the Midwest that export to Europe so it could
study their methods and experiences.
• If the firm you try to “benchmark against” is not a direct or indirect
competitor, it will usually be willing to help.

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Challenges of Growth Managerial Capacity Problem

(1 of 6)

• Challenges of Growth • Managerial Capacity

– Although growth has many advantages, it is a challenging – In her thoughtful book, The Theory of the Growth of the
and rigorous process. Firm, Edith T. Penrose argues that firms are collections of
– Firm growth often includes: productive resources that are organized in an administrative
• Raising additional capital. framework.
• Recruiting new employees. – As a firm goes about its routine activities, it recognizes
• Learning how to supervise a larger organization. opportunities to grow.
• Accepting more risk. – The problem with this scenario is that firms are not always
• Increased anxiety for the owners and managers of a firm. prepared or able to grow because of limited “managerial
capacity.”

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Managerial Capacity Problem Managerial Capacity Problem

(2 of 6) (3 of 6)

• A Firm’s Administrative Framework • A Firm’s Administrative Framework (continued)

– A firm’s administrative framework consists of two kinds of – Continuation From Previous Slide
services that are important to firm growth. • The reason a firm can’t quickly increase its managerial services
• Entrepreneurial services generate new market, product, and service (to take advantage of new product or service ideas) is that it is
ideas, while managerial services administer the routine functions of expensive to hire new employees, it takes time for new hires to
the firm and facilitate the profitable execution of new opportunities. be socialized into the culture of a firm, and it takes time for new
• New product and service ideas require substantial managerial employees to acquire firm-specific skills and establish trusting
services (or managerial capacity) to be successfully implemented. relationships with other members of the firm.
• This is a complex problem because if a firm has insufficient • When a firm’s managerial resources are insufficient to take
managerial services to properly implement its new product and advantage of its new product and service opportunities, the
service ideas, it can’t grow. subsequent bottleneck is referred to as the managerial capacity
problem.

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68
 Managerial Capacity Problem Managerial Capacity Problem
(4 of 6) (5 of 6)

Basic Model of Firm Growth

• Additional Challenges
– As a firm grows, it is faced with the dual challenges of
adverse selection and moral hazard.
• Adverse selection means that as the number of employees a firm
needs increases, it becomes increasingly difficult for the firm to
find the right employees, place them in appropriate positions, and
provide adequate supervision.
• Moral hazard means that as a firm grows and adds personnel, the
new hires typically do not have the same ownership incentives as
the original founders, so the new hires may not be as motivated as
the founders to put in long hours and may even try to avoid hard
work.

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Managerial Capacity Problem Typical Challenges of Growing a Firm

(6 of 6) (1 of 2)

The Impact of the Managerial Capacity Problem

Challenge Explanation

As a firm grows, it requires an increasing amount of cash to

service its customers. Growth usually increases rather than
Cash Flow decreases the challenges involved with cash flow management
Management because an increase in sales means that more cash will be
flowing in and out of the firm.

If firm growth comes at the expense of a competitor’s market

Price Stability share, a price war can result. Because a price war typically helps
no one but the customer, any growth strategy should consider
competitors’ responses and their effect on price stability.

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Typical Challenges of Growing a Firm Myths About Growth

(2 of 2) (1 of 2)

Challenge Explanation Myth 1: Growth Companies are Myth 2: Rapid-Growth Firms Emerge
Predominately Technology and Health Only In Rapid-Growth Industries
Care Companies
Firm growth is typically accomplished by an increase in firm
activity. This means that a firm must handle more service
Quality Control requests and paperwork and contend with more customers and
Because so much attention has been Of course, rapid-growth firms do
vendors. If a firm does not increase its resources to manage
paid to how quickly some well- exist in rapid-growth markets, but
growth, then product or service quality may decline.
known technology and health-care there are many examples of firms in
companies have grown, it is easy to fairly ordinary industries that have
Capital constraints are an ever-present problem for growing get the idea that growth companies maintained impressive growth rates.
Capital
firms. Growth increases rather than decreases the challenges are primarily technology and health
Constraints care. This is not necessarily the case.
in this area.

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69
 Myths About Growth Attributes of Successful Growth Firms
(2 of 2) (1 of 2)

• Growth-Oriented Vision
Myth 3: To Grow Quickly, You Must
Have a First-Mover Advantage – A growth-oriented vision and/or mission statement clearly
communicates to relevant stakeholders the importance of
growth to an organization.
As discussed in Chapter 3, a first-
mover advantage is not always • Commitment to Growth
advantageous. Many firms have
grown quickly by capturing a first-
– A drive and commitment to achieve growth is frequently
mover advantage, but many firms mentioned as a necessary precursor for successful growth.
have also grown quickly by entering
an industry later on. • Business Growth Planning
– Planning helps a firm organize for growth and address the
relevant managerial and strategic issues necessary to
maintain growth.

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Attributes of Successful Growth Firms

(2 of 2)

• Participation in Business Alliances

Chapter 14
– Business alliances help firms share costs, increase speed to
market, gain economies of scale, and gain access to
essential resources, knowledge, and foreign markets.
• Geographic Location that Facilitates Knowledge
Absorption
– A firm located in a geographic area that is in close Strategies for
proximity to important external sources of knowledge will
have better access to the knowledge and will be able to
Firm Growth
substitute a portion of the externally derived knowledge for
more expensive internally generated knowledge.
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Chapter Objectives Chapter Objectives

(1 of 2) (2 of 2)

1. Explain the difference between internal growth 7. Identify a promising acquisition candidate’s
strategies and external growth strategies. characteristics.
2. Identify the keys to effective new product 8. Explain the term “licensing” and how licensing can
development. be used as a growth strategy.
3. Explain the common reasons new products fail. 9. Explain “strategic alliances” and describe the
4. Discuss a market penetration strategy. difference between technological alliances and
5. Explain “international new venture” and its marketing alliances.
importance to entrepreneurial firms. 10. Explain “joint ventures” and describe the difference
6. Discuss the objectives a company can achieve by between a scale joint venture and a link joint
acquiring another business. venture.

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70
Internal and External Growth Strategies Internal and External Growth Strategies
(1 of 2) (2 of 2)

Internal and External Growth Strategies

Internal Growth Strategies External Growth Strategies

Involve efforts taken within the Rely on establishing relationships

firm itself, such as new product with third parties, such as
development, other product- mergers, acquisitions, strategic
related strategies, and alliances, joint ventures,
international expansion. licensing, and franchising.

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Advantages and Disadvantages of

Internal Growth Strategies Internal Growth Strategies
Advantages Disadvantages

• Incremental, even-paced growth • Slow form of growth

New product Other product- International • Provides maximum control • Need to develop new resources
development related strategies expansion • Investment in a failed internal growth
• Preserves organizational culture
strategy can be difficult to recoup
• Encourages internal entrepreneurship
• Adds to industry capacity
• Allows firms to promote from within

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New Product Development New Product Development

(1 of 2) (2 of 2)

• New Product Development

Keys to Effective New Product and Common Reasons That New
– Involves the creation and sale of new products (or services) Service Development Products Fail
as a means of increasing firm revenues.
• Find a need and fill it • Inadequate feasibility analysis
– In many fast-paced industries, new product development is
• Develop products that add value • Overestimation of market potential
a competitive necessity.
• Get quality right and pricing right • Bad timing
• For example, the average product life cycle in the computer
• Focus on a specific target market • Inadequate advertising and promotions
software industry is 14 to 16 months.
• Conduct ongoing feasibility analysis • Poor service
• Because of this, to remain competitive, software companies must
always have new products in their pipeline.

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71
 Other Product-Related Strategies Other Product-Related Strategies
(1 of 2) (2 of 2)

Product-Related Strategies Product-Related Strategies (continued)

Product Strategy Description Product Strategy Description

Improving an Often, a business can increase its revenue by improving an A product line extension strategy involves making
existing product or service—enhancing quality, making it Extending Product additional versions of a product so that it will appeal to
Existing Product Lines
or Service larger or smaller, making it more convenient to use, or different clientele or making related products to sell to the
making it more up-to-date. same clientele.

Increasing the A market penetration strategy seeks to increase the sales of Many entrepreneurial businesses grow by simply expanding
Market Penetration Geographic
a product or service through greater marketing efforts or Expansion from their original location to additional geographic sites.
of an Existing through increased production capacity and efficiency.
Product or Service

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International Expansion International Expansion

(1 of 3) (2 of 3)

• International Expansion • Foreign-Market Entry Strategies

– Another common form of growth for entrepreneurial firms. – Exporting
– International new ventures are businesses that, from their • Producing a product at home and shipping it to a foreign market.
inception, seek to derive significant competitive advantage – Licensing
by using their resources to sell products or services in • An arrangement whereby a firm with the proprietary rights to a
multiple countries. product grants permission to another firm to manufacture that
product for specified royalties or other payments.
– Although there is vast potential associated with selling
overseas, it is a fairly complex form of growth. – Joint Ventures
• Involves the establishment of a firm that is jointly owned by two or
more otherwise independent firms.
– Fuji-Xerox is a joint venture between an American and a Japanese
company.

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International Expansion External Growth Strategies

(3 of 3)

• Foreign-Market Entry Strategies

– Franchising Mergers and
Licensing
• An agreement between a franchisor (a company like McDonald’s acquisitions
Inc. that has an established business method and brand) and a
franchisee (the owner of one or more McDonald’s restaurants).
– Turnkey Project
• A contractor from one country builds a facility in another country,
trains the personnel that will operate the facility, and turns over the
keys to the project when it is completed and ready to operate. Strategic alliances Franchising (covered
and joint ventures in Chapter 15)
– Wholly Owned Subsidiary
• A company that has made the decision to manufacture a product in
a foreign country and establish a permanent presence.
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72
 Advantages and Disadvantages of
Mergers and Acquisitions
External Growth Strategies (1 of 2)

Advantages Disadvantages
• Mergers and Acquisitions
• Reducing competition • Incompatibility of top management – Many entrepreneurial firms grow through mergers and
acquisitions.
• Getting access to proprietary products • Clash of corporate cultures
• An acquisition is the outright purchase of one firm by another.
• Gaining access to new products and • Operational problems • A merger is the pooling of interests to combine two or more firms
markets into one.
• Increased business complexity
• Access to technical expertise
• Access to an established brand name
• Loss of organizational flexibility • Purpose of Acquisitions
• Economies of scale • Antitrust implications – Acquiring another business can fulfill several of a
• Diversification of business risk company’s needs, such as:
• Expanding its product line.
• Gaining access to distribution channels.
• Achieving competitive economies of scale.

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Mergers and Acquisitions Licensing

(2 of 2) (1 of 2)

The Process of Completing the Acquisition of Another Firm • Licensing

– Is the granting of permission by one company to another
company to use a specific form of its intellectual property
under clearly defined conditions.
– Virtually any intellectual property a company owns that is
protected by a patent, trademark, or copyright can be
licensed to a third party.
• Licensing Agreement
– The terms of a license are spelled out by a licensing
agreement.

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Licensing Strategic Alliances

(2 of 2) (1 of 2)

Types of Licensing
• Strategic Alliances
– A strategic alliance is a partnership between two or more
Type of Licensing Description
firms developed to achieve a specific goal.
Is the licensing of proprietary technology that
– Strategic alliances tend to be informal and do not involve
Technology
Licensing the licensor typically controls by virtue of a the creation of a new entity.
utility patent. – Participating in strategic alliances can boost a firm’s rate of
product innovation and foreign sales.
Merchandise and Is the licensing of a recognized trademark or brand
Character that the licensor typically controls through a
Licensing registered trademark or copyright.

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73
 Strategic Alliances Joint Ventures
(2 of 2) (1 of 2)

Types of Strategic Alliances

• Joint Ventures
– A joint venture is an entity created when two or more firms
Type of Alliance Description
pool a portion of their resources to create a separate, jointly
owned organization.
Technology Feature cooperation in research and development,
Alliances engineering, and manufacturing.
– A common reason to form a joint venture is to gain access
to a foreign market. In these cases, the joint venture
typically consists of the firm trying to reach a foreign
market and one or more local partners.
Marketing Typically match a company with a distribution
Alliances system with a company that has a product to sell.

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Advantages and Disadvantages of

Joint Ventures
(2 of 2) Participating in Strategic Alliances and Joint
Types of Joint Ventures
Ventures
Advantages Disadvantages
Type of Joint Venture Description
• Gain access to a particular resource • Loss of proprietary information
In a scale joint venture, the partners collaborate at a single
point in the value chain to gain economies of scale in
• Economies of scale • Management complexities
Scale Joint
Venture production or distribution. This type of joint venture can be • Risk and cost sharing • Financial and organizational risks
a good vehicle for developing new products or services.
• Gain access to a foreign market • Risk becoming dependent on a partner

In a link joint venture, the position of the parties is not • Learning • Partial loss of decision autonomy
Link Joint Venture symmetrical, and the objectives of the partners may • Speed to market • Partners’ cultures may clash
diverge. For example, many of the joint ventures between
food companies provide one partner access to distribution • Neutralizing or blocking competitors • Loss of organizational flexibility
channels and the other partner more products to sell.

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Chapter Objectives
(1 of 3)

Chapter 15 1. Explain franchising and how it differs from other

forms of business ownership.
2. Describe the differences between a product and
trademark franchise and a business format
franchise.
3. Explain the differences among an individual
franchise agreement, an area franchise agreement,
Franchising and a master franchise agreement.
4. Describe the advantages of establishing a franchise
system as a means of firm growth.

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74
 Chapter Objectives Chapter Objectives
(2 of 3) (3 of 3)

5. Identify the rules of thumb for determining when 9. Identify the common mistakes franchise buyers
franchising is an appropriate form of growth for a make.
particular business. 10. Describe the purpose of the Uniform Franchising
6. Discuss the factors to consider in determining if Offering Circular.
owning a franchise is a good fit for a particular
firm.
7. Identify the costs associated with buying a
franchise.
8. Discuss the advantages and disadvantages of buying
a franchise.

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Introduction to Franchising What is Franchising?

• Introduction • Franchising
– Franchising is growing in popularity. – Franchising is a form of business organization in which a
– Today, there are roughly 2,500 franchise systems. firm that already has a successful product or service
– Franchises account for 1/3 of all retail sales in the U.S. (franchisor) licenses its trademark and method of doing
business to another business or individual (franchisee) in
• History exchange for a franchise fee and an ongoing royalty
– The word “franchise” comes from an old dialect of French payment.
and means privilege or freedom. – Some franchisors are established firms (like McDonald’s)
– Many of the most popular franchises, including KFC while others are first-time enterprises being launched by
(1952), McDonald’s (1955), and H&R Block (1958) started entrepreneurs.
as early as the 1950s.

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Two Types of Franchise Systems Two Types of Franchise Systems

(1 of 2) (2 of 2)

• Product and Trademark Franchise • Business Format Franchise

– An arrangement under which the franchisor grants to the – An arrangement under which the franchisor provides a
franchisee the right to buy its products and use its trade formula for doing business to the franchisee along with
name. training, advertising, and other forms of assistance.
– This approach typically connects a single manufacturer – Fast-food restaurants, convenience stores, and motels are
with a network of dealers or distributors. well-known examples of business format franchises.
• For example, General Motors has established a network of dealers • Business format franchises are by far the most popular form of
that sell GM cars and use the GM trademark in their advertising franchising, particularly for entrepreneurial firms.
and promotions. • Business format franchisors obtain the majority of their revenues
• Other examples of product and trademark franchisors include from their franchisees in the form of royalties and franchise fees.
agricultural machinery dealers, soft drink bottlers, and beer
distributorships.

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75
 Types of Franchise Agreements Types of Franchise Agreements
(1 of 3) (2 of 3)

Individual Franchise Agreement Area Franchise Agreement

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Types of Franchise Agreements When to Franchise

(3 of 3) From the Franchisor’s Point of View
(1 of 2)

Master Franchise Agreement

• Approach Franchising With Caution and Care
– Establishing a franchise system should be approached
carefully and deliberately.
– Franchising is a complicated business endeavor, and an
entrepreneur must look closely at all its aspects before
deciding to franchise.
• Regulations
– An entrepreneur should also be aware that over the years a
number of fraudulent franchise organizations have come and
gone and have left financially ruined franchise owners behind.
• As a result, franchising is a heavily regulated path to business growth.

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When to Franchise
From the Franchisor’s Point of View Steps to Franchising a Business
(2 of 2)
Nine Steps in Setting Up a Franchise System
• When Is Franchising Most Appropriate?
– Franchising is most appropriate when a firm has a strong or
potentially strong trademark, a well-designed business
method, and a desire to grow.
– A franchise system will ultimately fail if the franchisee’s
brand doesn’t add value for customers and its business
method is flawed or poorly developed.

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76
 Selecting and Developing Selecting and Developing
Effective Franchisees Effective Franchisees
(1 of 2) (2 of 2)
Qualities to Look for In Prospective Franchisees Ways Franchisors Can Develop the Potential of Their Franchisees
• Good work ethic • Provide mentoring that supersedes routine training
• Ability to follow instructions • Keep operating manuals up-to-date
• Ability to operate with minimal supervision • Keep product, services, and business systems up-to-date
• Team oriented • Solicit input from franchisees to reinforce their importance in
the larger franchise system
• Experience in the industry in which the franchise competes
• Encourage franchisees to develop a franchise association
• Adequate financial resources and good credit history
• Ability to make suggestions without becoming confrontational • Maintain the franchise system’s integrity
or upset if the suggestions are not adopted
• Represents the franchisor in a positive manner

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Advantages and Disadvantages of Buying a Franchise

Franchising As a Method of Business From the Franchisee’s Point of View
(1 of 2)
Expansion
Advantages Disadvantages
• Buying a Franchise
• Rapid, low-cost market expansion • Profit sharing
– Purchasing a franchise is an important business decision
• Income from franchise fees and involving a substantial financial commitment.
• Loss of control
royalties
• Friction with franchisees
– Potential franchise owners should strive to be as well
• Franchisee motivation informed as possible before purchasing a franchise and
• Managing growth
• Access to ideas and suggestions should be aware that it is often legally and financially
• Differences in required business skills
• Cost savings difficult to exit a franchise relationship.
• Legal expenses • Close scrutiny of a potential franchise opportunity includes
• Increased buying power
activities such as meeting with the franchisor, reading the Uniform
Franchise Offering Circular (explained later), soliciting legal and
financial advice, and talking to present and former franchisees of
the system you are interested in.

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Buying a Franchise The Costs Involved With Buying a

From the Franchisee’s Point of View Franchise
(2 of 2) (1 of 3)
Answering the following questions will help determine if
franchising is right for you
• Initial Franchise Fee
– The initial fee varies depending on the franchisor.
• Are you willing to take orders? Franchisors are typically very particular about how
outlets operate. • Capital Requirements
• Are you willing to be part of a franchise “system” rather than an independent
– The costs vary but may include the cost of buying real estate,
businessperson?
the cost of putting up a building, the purchase of inventory,
• How will you react if you make a suggestion to your franchisor and your suggestion
and the cost of obtaining a business license.
is rejected?
• What are you looking for in a business? How hard do you want to work? • Continuing Royalty Payment
• How willing are you to put your money at risk? – Typically 3% to 7% of monthly gross income.
• How will you feel if your business is operating at a net loss but you still have to pay
royalties on your gross income?

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77
 The Costs Involved With Buying a
The Costs Involved With Buying a Franchise
Franchise (3 of 3)
(2 of 3)

• Advertising Fees Initial Costs to the Franchisee of a Sample of Franchise Organizations

– Franchisees are often required to pay into a national or
regional advertising fund.
• Other Fees
– Other fees may be charged for various activities, including:
• Training additional staff.
• Providing management expertise when needed.
• Providing computer assistance.
• Providing a host of other items or support services.

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Advantages and Disadvantages of

Steps in Purchasing a Franchise
Buying a Franchise
Advantages Disadvantages Seven Steps in Purchasing a Franchise
• A proven product or service within an • Cost of the franchise
established market • Restrictions on creativity
• An established trademark or business
• Duration and nature of the commitment
system
• Risk of fraud, misunderstandings, or lack of
• Franchisor’s training, technical support,
franchisor commitment
and managerial experience
• Problems of termination or transfer
• An established marketing network
• Poor performance on the part of other
• Franchisor ongoing support franchisees
• Availability of financing (in some cases) • Potential for failure
• Potential for business growth

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Watch Out! Common Misconceptions Legal Aspects of the Franchise

About Franchising Relationship
(1 of 2)

Common Misconceptions About Franchising • Federal Rules and Regulations

– The offer and sale of a franchise is regulated at the federal
• Franchising is a safe investment. level.
• A strong industry ensures franchise success. • According to Federal Trade Commission (FTC) rule 436,
• A franchise is a “proven” business system. franchisors must furnish potential franchisees with written
disclosures that provide information about the franchisor, the
• There is no need to hire a franchise attorney or an accountant.
franchised business, and the franchise relationship.
• The best systems grow rapidly and it is best to be part of a rapid-growth system.
• In most cases, the disclosures are made through a lengthy document
• I can operate my franchise outlet for less than the franchisor predicts. referred to as the Uniform Franchise Offering Circular (UFOC).
• The franchisor is a nice person—he’ll help me out if I need it. • The UFOC contains 23 categories of information that give a
prospective franchisee a broad base of information about the
background and financial health of the franchisor.

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78
 Legal Aspects of the Franchise
More About Franchising
Relationship (1 of 2)
(2 of 2)

• State Rules and Regulations • Franchise Ethics

– In addition to the FTC disclosure requirements, 17 states – The majority of franchisors and franchisees are highly
have laws providing additional protection to potential ethical.
franchisees. – There are certain features of franchising, however, that
• These states include California, Florida, Hawaii, Illinois, Indiana, make it subject to ethical abuse. These features are as
Maryland, Michigan, Minnesota, New York, North Dakota, Rhode follows:
Island, South Dakota, Texas, Utah, Virginia, Washington, and • The get rich quick mentality.
Wisconsin.
• The false assumption that buying a franchise is a guarantee of
• In most of these states, a franchisor is required to file its UFOC business success.
with a designated state agency, making the UFOC public record.
• Conflicts of interest between franchisors and franchisees.

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More About Franchising

(2 of 2)

• International Franchising
– International opportunities for franchising are becoming
more prevalent for the following two reasons:
• The markets for certain franchised products in the U.S. have
become saturated (i.e., fast food).
• The trend towards globalization continues.
– Steps to take before buying a franchise overseas:
• Consider the value of the franchisor’s name in the foreign country.
• Get a good lawyer.
• Determine whether the product or service is salable in the foreign
country.
• Find out how much training and support you will receive from the
franchisor.

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79