Chapter 1

Introduction to
Entrepreneurship
Bruce R. Barringer
R. Duane Ireland

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 1-1

 Chapter Objectives
1 of 2

1. Explain entrepreneurship and discuss its

importance.
2. Describe corporate entrepreneurship and its use in
established firms.
3. Discuss three main reasons people decide to
become entrepreneurs.
4. Identify four main characteristics of successful
entrepreneurs.
5. Explain five common myths regarding
entrepreneurship.

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 Chapter Objectives
2 of 2

6. Explain how entrepreneurial firms differ from

salary-substitute and lifestyle firms.
7. Discuss the changing demographics of
entrepreneurs in the United States.
8. Discuss the impact of entrepreneurial firms on
economies and societies.
9. Identify ways in which large firms benefit from the
presence of smaller entrepreneurial firms.
10. Explain the entrepreneurial process.

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 Introduction to Entrepreneurship

There is tremendous According to the 2010 GEM

interest in study, 7.6% of Americans
are actively engaged in
entrepreneurship in the
starting a business or are
U.S. and around the world. the owner/manager of a
business that is less than
three years old.

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 Indications of Increased Interest
in Entrepreneurship
• Books
– Amazon.com lists over 35,600 books dealing with
entrepreneurship and 62,700 focused on small business.
• College Courses
– In 1985, there were about 250 entrepreneurship courses
offered across all colleges in the United States.
– Today, more than 2,000 colleges and universities in the
United States (which is about two-thirds of the total) offer at
least one course in entrepreneurship.

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Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 1-6
 What is Entrepreneurship?

• Academic Definition (Stevenson & Jarillo)

– Entrepreneurship is the process by which individuals pursue
opportunities without regard to resources they currently
control.
• Venture Capitalist (Fred Wilson)
– Entrepreneurship is the art of turning an idea into a
business.
• Explanation of What Entrepreneurs Do
– Entrepreneurs assemble and then integrate all the resources
needed – the money, the people, the business model, the
strategy – to transform an invention or an idea into a viable
business.
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 Corporate Entrepreneurship
1 of 2

• Corporate Entrepreneurship
– Is the conceptualization of entrepreneurship at the firm
level.
– All firms fall along a conceptual continuum that ranges
from highly conservative to highly entrepreneurial.
– The position of a firm on this continuum is referred to as its
entrepreneurial intensity.

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 Corporate Entrepreneurship
2 of 2

Entrepreneurial Firms Conservative Firms

• Proactive • Take a more “wait and see”

posture
• Innovative
• Less innovative
• Risk taking
• Risk averse

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 Why Become an Entrepreneur?

The 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

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Characteristics of Successful Entrepreneurs
1 of 3

Four Primary Characteristics

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Characteristics of Successful Entrepreneurs
2 of 3

• Passion for the Business

– The number one characteristic shared by successful
entrepreneurs is a passion for the business.
– This passion typically stems from the entrepreneur’s belief
that the business will positively influence people’s lives.
• Product/Customer Focus
– A second defining characteristic of successful
entrepreneurs is a product/customer focus.
– An entrepreneur’s keen focus on products and customers
typically stems from the fact that most entrepreneurs are, at
heart, craftspeople.
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Characteristics of Successful Entrepreneurs
3 of 3

• Tenacity Despite Failure

– Because entrepreneurs are typically trying something new,
the failure rate is naturally high.
– A defining characteristic for successful entrepreneurs is
their ability to persevere through setbacks and failures.
• Execution Intelligence
– The ability to fashion a solid business idea into a viable
business is a key characteristic of successful entrepreneurs.

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 Common Myths About Entrepreneurs
1 of 5

• Myth 1: Entrepreneurs Are Born, Not Made

– This myth is based on the mistaken belief that some people
are genetically predisposed to be entrepreneurs.
– The consensus of many studies is that no one is “born” to
be an entrepreneur; everyone has the potential to become
one.
– Whether someone does or doesn’t become an entrepreneur
is a function of their environment, life experiences, and
personal choices.

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 Common Myths About Entrepreneurs
2 of 5
Although no one is “born” to be an entrepreneur, there are common traits and
characteristics of successful entrepreneurs

• A moderate risk taker • Optimistic disposition

• A networker • Persuasive
• Achievement motivated • Promoter
• Alert to opportunities • Resource assembler/leverager
• Creative • Self-confident
• Decisive • Self-starter
• Energetic • Tenacious
• Has a strong work ethic • Tolerant of ambiguity
• Lengthy attention span • Visionary
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 Common Myths About Entrepreneurs
3 of 5

• Myth 2: Entrepreneurs Are Gamblers

– Most entrepreneurs are moderate risk takers.
– The idea that entrepreneurs are gamblers originates from
two sources:
• Entrepreneurs typically have jobs that are less structured, and so
they face a more uncertain set of possibilities than people in
traditional jobs.
• Many entrepreneurs have a strong need to achieve and set
challenging goals, a behavior that is often equated with risk taking.

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 Common Myths About Entrepreneurs
4 of 5

• Myth 3: Entrepreneurs Are Motivated Primarily by

Money
– While it is naïve to think that entrepreneurs don’t seek
financial rewards, money is rarely the reason entrepreneurs
start new firms.
– In fact, some entrepreneurs warn that the pursuit of money
can be distracting.

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 Common Myths About Entrepreneurs
5 of 5

• Myth 4: Entrepreneurs Should Be Young and

Energetic
– Entrepreneurial activity is fairly easily spread out over age
ranges.
– While it is important to be energetic, investors often cite
the strength of the entrepreneur as their most important
criteria in making investment decisions.
• What makes an entrepreneur “strong” in the eyes of an investor is
experience, maturity, a solid reputation, and a track record of
success.
• These criteria favor older rather than younger entrepreneurs.

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 Types of Start-Up Firms

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Changing Demographics of Entrepreneurs
1 of 3

Women Entrepreneurs
• There were 6.2 million women-
owned businesses in 2002 (the
most recent statistics available)
• This number was up 20% from
1997.
• There are a growing number of
organizations that support and
advocate for women-owned
businesses.

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 Changing Demographics of Entrepreneurs
2 of 3

Minority Entrepreneurs Senior Entrepreneurs

• There has been a substantial • The percentage of U.S.

increase in minority entrepreneurs who are seniors
entrepreneurs in the U.S. from jumped from 15% to 23% from
1996 to 2010. 1996 to 2010.
• The biggest jump has come in • The increase is attributed to
Latino entrepreneurs, which corporate downsizing, a desire
increased from 11% to 23% among older workers for more
from 1996 to 2010. fulfillment in their lives, a need
for additional income, and
similar factors.
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Changing Demographics of Entrepreneurs
3 of 3

Young Entrepreneurs

• Interest among young people in entrepreneurial careers

is high.
• According to a Harris Interactive survey, 40% of people eight
to 21 years old said they’d like to start their own business
someday.
• A total of 59% of the 8- to 21- year olds said they know
someone who has started their own business.

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Economic Impact of Entrepreneurial Firms

• Innovation
– Is the process of creating something new, which is central to
the entrepreneurial process.
– Several studies have found that small businesses outperform
their larger counterparts in terms of obtaining patents.
• Job Creation
– Small businesses are the creators of most new jobs in the
U.S., and employ half of all private sector employees.
– According to a Kauffman Foundation survey, 92% of
Americans say entrepreneurs are critically important to job
creation.
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 Entrepreneurial Firms’ Impact on Society
and Larger Firms
• Impact on Society
– The innovations of entrepreneurial firms have a dramatic
impact on society.
– Think of all the new products and services that make our
lives easier, enhance our productivity at work, improve our
health, and entertain us in new ways.
• Impact on Larger Firms
– Many entrepreneurial firms have built their entire business
models around producing products and services that help
larger firms become more efficient and effective.

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 The Entrepreneurial Process

The Entrepreneurial Process Consists of Four Steps

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

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 Steps in the Entrepreneurial Process
1 of 2

Step 1
Step 2
Developing Successful Business Ideas

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 Steps in the Entrepreneurial Process
2 of 2

Step 3 Step 4

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 All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise,
without the prior written permission of the publisher. Printed in the
United States of America.

Copyright ©2012 Pearson Education, Inc.

publishing as Prentice Hall

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 1-28

 Chapter 2

Recognizing
Opportunities and
Generating Ideas
Bruce R. Barringer
R. Duane Ireland
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 2-29
 Chapter Objectives
1 of 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
instrumental in creating business opportunities.
5. List the personal characteristics that make some
people better at recognizing business opportunities
than others.
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 Chapter Objectives
2 of 2

6. Identify the five steps in the creative process.

7. Describe the purpose of brainstorming and its use
as an idea generator.
8. Describe how to use library and Internet research to
generate new business ideas.
9. Explain the purpose of maintaining an idea bank.
10. Describe three steps for protecting ideas from being
lost or stolen.

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 What is An Opportunity?
1 of 2

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

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 What is an Opportunity?
2 of 2

Four Essential Qualities of an Opportunity

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 Three Ways to Identify an Opportunity

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 First Approach: Observing Trends
1 of 2

• Observing Trends
– Trends create opportunities for entrepreneurs to pursue.
– The most important trends are:
• Economic forces
• Social forces
• Technological advances
• Political action and regulatory change
– It’s important to be aware of changes in these areas.

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 First Approach: Observing Trends
2 of 2

Environmental Trends Suggesting Business

or Product Opportunity Gaps

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 Trend 1: Economic Forces

Example of Economic Trend

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

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 Trend 2: Social Forces

Examples of Social Trends

Social trends alter how
people and businesses • Aging of baby boomers
behave and set their • The increasing diversity of
priorities. These trends the workplace
• Increasing interest in social
provide opportunities for networks such as Facebook
new businesses to and Twitter
accommodate the • An increasing focus on health
changes. and wellness
• Increasing interest in “green”
products
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 Trend 3: Technological Advances
1 of 2

Examples of Entire Industries

Advances in technology that Have Been Created as the
frequently create business Result of Technological
Advances
opportunities.
• Computer industry
• Internet
• Biotechnology
• Digital photography

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 Trend 3: Technological Advances
2 of 2

Example: H20Audio
Once a technology is
An example is H20Audio, a
created, products often company started by four
emerge to advance it. former San Diego State
University students, that
makes waterproof housings
for the Apple iPhone and
iPod.

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 Trend 4: Political Action and Regulatory
Changes
1 of 2

General Example
Political action and Laws to protect the environment
regulatory changes also have created opportunities for
provide the basis for entrepreneurs to start firms that
opportunities. help other firms comply with
environmental laws and
regulations.

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 Trend 4: Political Action and Regulatory
Changes
2 of 2

Specific Example

Company created to help The No Child Left Behind Act

of 2002 requires states to
other companies comply
develop criterion-based
with a specific law. assessments in basic skills to be
periodically given to students in
certain grades. Kim and Jay
Kleeman, two high school
teachers, started Shakespeare
Squared, a company that helps
high schools comply with the
act.
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 Second Approach: Solving a Problem
1 of 2

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

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 Second Approach: Solving a Problem
2 of 2

• A problem facing the U.S. and

other countries is finding
alternatives to fossil fuels.
• A large number of
entrepreneurial firms, like
this solar farm, are being
launched to solve this problem.

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 Third Approach: Finding Gaps in the
Marketplace
1 of 2

• Gaps in the Marketplace

– A third approach to identifying opportunities is to find a
gap in the marketplace.
– A gap in the marketplace is often created when a product or
service is needed by a specific group of people but doesn’t
represent a large enough market to be of interest to
mainstream retailers or manufacturers.

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 Third Approach: Finding Gaps in the
Marketplace
2 of 2

Specific Example
Product gaps in the In 2000 Tish Cirovolv
marketplace represent realized there were no guitars
potentially viable on the market made
business opportunities. specifically for women. To
fill this gap, she started Daisy
Rock Guitars, a company that
makes guitars just for women.

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Personal Characteristics of the Entrepreneur

Characteristics that tend to make some people better at

recognizing opportunities than others

Prior Experience Cognitive Factors

Social Networks Creativity

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 Prior Experience

• Prior Industry Experience

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

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 Cognitive Factors

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

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 Social Networks
1 of 3

• Social Networks
– The extent and depth of an individual’s social network
affects opportunity recognition.
– People who build a substantial network of social and
professional contacts will be exposed to more opportunities
and ideas than people with sparse networks.
– Research results suggest that between 40% and 50% of
people who start a business got their idea via a social
contact.
• Strong Tie Vs. Weak Tie Relationships
– All of us have relationships with other people that are
called “ties.” (See next slide.)
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 Social Networks
2 of 3

• Nature of Strong-Tie Vs. Weak-Tie Relationships

– Strong-tie relationship are characterized by frequent
interaction and form between coworkers, friends, and
spouses.
– Weak-tie relationships are characterized by infrequent
interaction and form between casual acquaintances.
• Result
– It is more likely that an entrepreneur will get new business
ideas through weak-tie rather than strong-tie relationships.
(See next slide.)

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 Social Networks
3 of 3

Why weak-tie relationships lead to more new business ideas

than strong-tie relationships
Strong-Tie Relationships Weak-Tie Relationships
These relationships, which These relationships, which
typically form between like- form between casual
minded individuals, tend to acquaintances, are not as
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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 Creativity
1 of 2

• Creativity
– Creativity is the process of generating a novel or useful
idea.
– Opportunity recognition may be, at least in part, a creative
process.
– For an individual, the creative process can be broken down
into five stages, as shown on the next slide.

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 Creativity
2 of 2

Five Steps to Generating Creative Ideas

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 Full View of the Opportunity Recognition
Process
Depicts the connection between an awareness of emerging trends
and the personal characteristics of the entrepreneur

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 Techniques for Generating Ideas

Brainstorming Focus Groups

Library and
Internet Research

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 Focus Groups

• Focus Group
– A focus group is a gathering of five to ten people, who
have been selected based on their common characteristics
relative to the issues being discussed.
– These groups are led by a trained moderator, who uses the
internal dynamics of the group environment to gain insight
into why people feel the way they do about a particular
issue.
– Although focus groups are used for a variety of purposes,
they can be used to help generate new business ideas.

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 Library and Internet Research
1 of 3

• Library Research
– Libraries are an often underutilized source of information
for generating new business ideas.
– The best approach is to talk to a reference librarian, who
can point out useful resources, such as industry-specific
magazines, trade journals, and industry reports.
– Simply browsing through several issues of a trade journal
or an industry report on a topic can spark new ideas.

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 Library and Internet Research
2 of 3

Examples of Useful Search

Large public and Engines and Industry Reports
university libraries • BizMiner
typically have access to • ProQuest
search engines and • IBISWorld
industry reports that would • Mintel
cost thousands of dollars • LexisNexis Academic
to access on your own.

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 Library and Internet Research
3 of 3

• Internet Research
– If you are starting from scratch, simply typing “new
business ideas” into a search engine will produce links to
newspapers and magazine articles about the “hottest” new
business ideas.
– If you have a specific topic in mind, setting up Google or
Yahoo! e-mail alerts will provide you with links to a
constant stream of newspaper articles, blog posts, and news
releases about the topic.
– Targeted searches are also useful.

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 Other Techniques

• Customer Advisory Boards

– Some companies set up customer advisory boards that meet
regularly to discuss needs, wants, and problems that may
lead to new ideas.
• Day-In-The-Life Research
– A type of anthropological research, where the employees of
a company spend a day with a customer.

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 Encouraging New Ideas

• Establishing a Focal Point for Ideas

– Some firms meet the challenge of encouraging, collecting,
and evaluating ideas by designating a specific person to
screen and track them—for if it’s everybody’s job, it may
be no one’s responsibility.
– Another approach is to establish an idea bank (or vault),
which is a physical or digital repository for storing ideas.
• Encouraging Creativity at the Firm Level
– Creativity is the raw material that goes into innovation and
should be encouraged at the organizational and individual
supervisory level.

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Protecting Ideas From Being Lost or Stolen

• Step 1
– The idea should be put in a tangible form such as entered
into a physical idea logbook or saved on a computer disk,
and the date the idea was first thought of should be entered.
• Step 2
– The idea should be secured. This may seem like an obvious
step, but is often overlooked.
• Step 3
– Avoid making an inadvertent or voluntary disclosure of an
idea, in a manner that forfeits the right to claim exclusive
rights to it.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 2-63

 All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise,
without the prior written permission of the publisher. Printed in the
United States of America.

Copyright ©2012 Pearson Education, Inc.

publishing as Prentice Hall

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 2-64

 Chapter 3

Feasibility Analysis
Bruce R. Barringer
R. Duane Ireland

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-65

 Chapter Objectives
1 of 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 an entrepreneurial venture.
3. Describe the purpose of a product/service feasibility
analysis and the two primary issues that a proposed
business should consider in this area.
4. Explain a concept statement and its components.
5. Describe the purpose of a buying intentions survey
and how it’s administered.
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 Chapter Objectives
2 of 3

6. Explain the importance of library, Internet, and

gumshoe research.
7. Describe the purpose of industry/market feasibility
analysis and the two primary issues to consider in
this area.
8. Discuss the characteristics of an attractive industry.
9. Describe the purpose of organizational feasibility
analysis and list the two primary issues to consider
in this area.

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 Chapter Objectives
3 of 3

10. Explain the importance of financial feasibility

analysis and list the most critical issues to consider
in this area.

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 What Is Feasibility Analysis?

• Feasibility analysis is the

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

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 When To Conduct a Feasibility Analysis

• Timing of Feasibility Analysis

– The proper time to conduct a feasibility analysis is early in
thinking through the prospects for a new business.
– The thought is to screen ideas before a lot of resources are
spent on them.
• Components of a Properly Conducted Feasibility
Analysis
– A properly conducted feasibility analysis includes four
separate components, as discussed in the following slides.

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 Feasibility Analysis

Role of feasibility analysis in developing business ideas.

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 Forms of Feasibility Analysis

Industry/Target Market
Product/Service Feasibility
Feasibility

Organizational Feasibility Financial Feasibility

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 Outline for a Comprehensive Feasibility
Analysis

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 Product/Service Feasibility Analysis
1 of 2

Purpose
• Is an assessment of the overall
Product/Service appeal of the product or service
Feasibility Analysis being proposed.
• Before a prospective firm rushes
a new product or service into
development, it should be sure
that the product or service is what
prospective customers want.

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 Product/Service Feasibility Analysis
2 of 2

Components of product/service
feasibility analysis

Product/Service Product/Service
Desirability Demand

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 Product/Service Desirability
1 of 3

First, ask the following questions to determine the basic

appeal of the product or service.

• Does it make sense? Is it reasonable? Is it something consumers

will get excited about?
• Does it take advantage of an environmental trend, solve a
problem, or take advantage of a gap in the marketplace?
• Is this a good time to introduce the product or service to the
market?
• Are there any fatal flaws in the product or service’s basic design
or concept?

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 Product/Service Desirability
2 of 3

• Second, Administer a Concept Test

– A concept statement should be developed.
– A concept statement is a one-page description of a business
that is distributed to people who are asked to provide
feedback on the potential of the business idea.
– The feedback will hopefully provide the entrepreneur:
• A sense of the viability of the product or service idea.
• Suggestions for how the idea can be strengthened or “tweaked”
before proceeding further.

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 Product/Service Desirability
3 of 3

New Venture
Fitness Drink’s
Concept Statement

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 Product/Service Demand
1 of 6

• Product/Service Demand
– There are two steps to assessing product/service demand.
– Step 1: Administer a Buying Intentions Survey
– Step 2: Conduct Library, Internet, and Gumshoe research

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 Product/Service Demand
2 of 6

• Buying Intentions Survey

– Is an instrument that is used to gauge customer interest in a
product or service.
– It consists of a concept statement or a similar description of
a product or survey with a short survey attached to gauge
customer interest.
– Internet sites like SurveyMonkey make administering a
buying intentions survey easy and affordable.

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 Product/Service Demand
3 of 6

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 Product/Service Demand
4 of 6

• Library, Internet, and Gumshoe Research

– The second way to assess the demand for a product or
service is by conducting library, Internet, and gumshoe
research.
– Reference librarians can often point you toward resources
to help you investigate a business idea, such as industry-
specific trade journals and industry reports.
– Internet searches can often yield important information
about the potential viability of a product or service idea.

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 Product/Service Demand
5 of 6

Explanation
• A gumshoe is a detective or an
investigator that scrounges around
Gumshoe Research for information or clues wherever
they can be found.
• Be a gumshoe. Ask people
what they think about your product
or service idea.
If your idea is to sell educational
toys, spend a week volunteering at a
day care center and watch how
children interact
with astoys.
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 Product/Service Demand
6 of 6

• One of the most effective

things an entrepreneur
can do to conduct a
thorough product/service
feasibility analysis is to
hit the streets and talk to
potential customers.

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Industry/Target Market Feasibility Analysis
1 of 2

Purpose
• Is an assessment of the overall
appeal of the industry and the
Industry/Target Market target market for the proposed
Feasibility Analysis business.
• An industry is a group of firms
producing a similar product or
service.
• A firm’s target market is the
limited portion of the industry it
plans to go after.

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Industry/Target Market Feasibility Analysis
2 of 2

Components of industry/target market

feasibility analysis

Target Market
Industry Attractiveness
Attractiveness

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 Industry Attractiveness
1 of 2

• Industry Attractiveness
– Industries vary in terms of their overall attractiveness.
– In general, the most attractive industries have the
characteristics depicted on the next slide.
– Particularly important—the degree to which environmental
and business trends are moving in favor rather than against
the industry.

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 Industry Attractiveness
2 of 2

Characteristics of Attractive Industries

• Are young rather than old
• Are early rather than late in their life cycle
• Are fragmented rather than concentrated
• Are growing rather than shrinking
• Are selling products and services that customers “must have” rather than
“want to have”
• Are not crowded
• Have high rather than low operating margins
• Are not highly dependent on the historically low price of key raw materials

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 Target Market Attractiveness

• Target Market Attractiveness

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

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 Organizational Feasibility Analysis
1 of 2

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

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 Organizational Feasibility Analysis
2 of 2

Components of organizational
feasibility analysis

Management Prowess Resource Sufficiency

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 Management Prowess

• Management Prowess
– A proposed business should candidly evaluate the prowess,
or ability, of its management team to satisfy itself that
management has the requisite passion and expertise to
launch the venture.
– Two of the most important factors in this area are:
• The passion that the sole entrepreneur or the founding team has for
the business idea.
• The extent to which the sole entrepreneur or the founding team
understands the markets in which the firm will participate.

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 Resource Sufficiency
1 of 2

• Resource Sufficiency
– This topic pertains to an assessment of whether an
entrepreneur has sufficient resources to launch the
proposed venture.
– To test resource sufficiency, a firm should list the 6 to 12
most critical nonfinancial resources that will be needed to
move the business idea forward successfully.
• If critical resources are not available in certain areas, it may be
impractical to proceed with the business idea.

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 Resource Sufficiency
2 of 2

Examples of nonfinancial resources that may be critical

to the successful launch of a new business
• Affordable office space
• Lab space, manufacturing space, or space to launch a service business
• Availability of contract manufacturers or service providers
• Key management employees (now and in the future)
• Key support personnel (now and in the future)
• Ability to obtain intellectual property protection
• Ability to form favorable business partnerships

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 Financial Feasibility Analysis
1 of 2

Purpose
• Is the final component of a
Financial Feasibility comprehensive feasibility analysis.
Analysis • A preliminary financial assessment
is sufficient.

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 Financial Feasibility Analysis
2 of 2

Components of financial
feasibility analysis

Total Start-Up Cash Financial Performance of

Needed Similar Businesses

Overall Financial
Attractiveness of the
Proposed Venture

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 Total Start-Up Cash Needed

• Total Start-Up Cash Needed

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

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 Financial Performance of Similar
Businesses
• Financial Performance of Similar Businesses
– Estimate the proposed start-up’s financial performance by
comparing it to similar, already established businesses.
– There are several ways to doing this, all of which involve a
little ethical detective work.
• First, there are many reports available, some for free and some that
require a fee, offering detailed industry trend analysis and reports
on thousands of individual firms.
• Second, simple observational research may be needed. For
example, the owners of New Venture Fitness Drinks could estimate
their sales by tracking the number of people who patronize similar
restaurants and estimating the average amount each customer
spends.
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 Overall Financial Attractiveness of the
Proposed Venture
1 of 2

• Overall Financial Attractiveness of the Proposed

Investment
– A number of other financial factors are associated with
promising business start-ups.
– In the feasibility analysis stage, the extent to which a
business opportunity is positive relative to each factor is
based on an estimate rather than actual performance.
– The table on the next slide lists the factors that pertain to
the overall attractiveness of the financial feasibility of the
business idea.

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 Overall Financial Attractiveness of the
Proposed Venture
2 of 2

Financial Factors Associated With Promising Business

Opportunities
• Steady and rapid growth in sales during the first 5 to 7 years in a clearly
defined market niche
• High percentage of recurring revenue—meaning that once a firm wins a
client, the client will provide recurring sources of revenue
• Ability to forecast income and expenses with a reasonable degree of
certainty
• Internally generated funds to finance and sustain growth
• Availability of an exit opportunity for investors to convert equity to cash

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 First Screen

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

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-101

 All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise,
without the prior written permission of the publisher. Printed in the
United States of America.

Copyright ©2012 Pearson Education, Inc.

publishing as Prentice Hall

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-102

 Chapter 4

Writing a Business
Plan
Bruce R. Barringer
R. Duane Ireland

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-103

 Chapter Objectives
1 of 3

1. Explain the purpose of a business plan.

2. Describe the two primary reasons for writing a
business plan.
3. Describe who reads a business plan and what
they’re looking for.
4. Explain the difference between a summary business
plan, a full business plan, and an operational
business plan.
5. Explain why the executive summary may be the
most important section of a business plan.
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 Chapter Objectives
2 of 3

6. Describe a milestone and how milestones are used

in business plans.
7. Explain why it’s important to include separate
sections on a firm’s industry and its target market in
a business plan.
8. Explain why the “Management Team and Company
Structure” section of a business plan is particularly
important.
9. Describe the purposes of a “sources and uses of
funds” statement and an “assumptions sheet.”
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 Chapter Objectives
3 of 3

10. Detail the parts of an oral presentation of a business

plan.

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 What Is a Business Plan?

• Business Plan
– A business plan is a written narrative, typically 25 to 35
pages long, that describes what a new business plans to
accomplish.
• Dual-Use Document
– For most new ventures, the business plan is a dual-purpose
document used both inside and outside the firm.

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Who Reads the Business Plan—And What
Are They Looking For?
There are two primary audiences for a firm’s business plan

Audience What They are Looking For

A Firm’s A clearly written business plan helps the

Employees employees of a firm operate in sync and move
forward in a consistent and purposeful manner.

Investors and A firm’s business plan must make the case that the
other external firm is a good use of an investor’s funds or the
stakeholders attention of others.

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 Guidelines for Writing a Business Plan
1 of 5

• Structure of the Business Plan

– 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, departing from the basic structure of the
conventional business plan is usually a mistake.
– Typically, investors are busy people and want a plan where
they can easily find critical information.

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 Guidelines for Writing a Business Plan
2 of 5

• Structure of the Business Plan (continued)

– Software Packages
• There are many software packages available that employ an
interactive, menu-driven approach to assist in the writing of a
business plan.
• Some of these programs are very helpful. However, entrepreneurs
should avoid a boilerplate plan that looks as though it came from a
“canned” source.
– Sense of Excitement
• Along with facts and figures, a business plan needs to project a
sense of anticipation and excitement about the possibilities that
surround a new venture.

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 Guidelines for Writing a Business Plan
3 of 5

• 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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 Guidelines for Writing a Business Plan
4 of 5

Types of Business Plans

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 Guidelines for Writing a Business Plan
5 of 5

• Recognizing the Elements of the Plan May Change

– It’s important to recognize that the plan will usually change
while written.
– New insights invariably emerge when an entrepreneur or a
team of entrepreneurs immerse themselves in writing the
plan and start getting feedback from others.

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 Outline of Business Plan

• Outline of Business Plan

– A suggested outline of a business plan is shown on the next
several slides.
– 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.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-114

 Section 1: Executive Summary
1 of 2

• Executive Summary
– The executive summary is a short overview of the entire
business plan
– It provides a busy reader with everything that needs to be
known about the new venture’s distinctive nature.
– An executive summary shouldn’t exceed two single-spaced
pages.

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 Section 1: Executive Summary
2 of 2

Key Insights
• In many instances an investor will
ask for a copy of a firm’s executive
Executive Summary summary and will ask for a copy of
the entire plan only if the executive
summary is sufficiently convincing.
• The executive summary, then, is
arguably the most important
section of a business plan.

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 Section 2: Industry Analysis
1 of 2

• Industry Analysis
– This section should begin by describing the industry the
business will enter in terms of its size, growth rate, and
sales projections.
– Items to include in this section:
• Industry size, growth rate, and sales projections
• Industry structure
• Nature of participants
• Key success factors
• Industry trends
• Long-term prospects

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 Section 2: Industry Analysis
2 of 2

Key Insights
• Before a business selects a target
market it should have a good grasp
Industry Analysis of its industry—including where its
promising areas are and where its
points of vulnerability are.
• The industry that a company
participates in largely defines the
playing field that a firm will
participate in.

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 Section 3: Company Description
1 of 2

• Company Description
– This section begins with a general description of the
company.
– Items to include in this section:
• Company description
• Company history
• Mission statement
• Products and services
• Current status
• Legal status and ownership
• Key partnerships (if any)

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 Section 3: Company Description
2 of 2

Key Insights
• While at first glance this section
may seem less important than the
Company Description others, it is extremely important.
• It demonstrates to your reader that
you know how to translate an idea
into a business.

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 Section 4: Market Analysis
1 of 2

• Market Analysis
– The market analysis breaks the industry into segments and
zeros in on the specific segment (or target market) to which
the firm will try to appeal.
– Items to include in this section:
• Market segmentation and target market selection
• Buyer behavior
• Competitor analysis

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 Section 4: Market Analysis
2 of 2

Key Insights
• Most start-ups do not service their
entire industry. Instead, they focus
Market Analysis on servicing a specific (target)
market within the industry.
• It’s important to include a section in
the market analysis that deals with
the behavior of the consumers in the
market. The more a start-up knows
about the consumers in its target
market, the more it can tailor its
products or services appropriately.
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 Section 5: The Economics of the Business
1 of 2

• The Economics of the Business

– This section addresses the basic logic of how profits are
earned in the business and how many units of a business’s
profits must be sold for the business to “break even” and
then start earning a profit.
– Items to include in this section:
• Revenue drivers and profit margins
• Fixed and variable costs
• Operating leverage and its implications
• Start-up costs
• Break-even chart and calculations

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 Section 5: The Economics of the Business
2 of 2

Key Insights
• Two companies in the same industry
may make profits in different ways.
The Economics of the One may be a high-margin, low
Business -volume business, while the other
may be a low-margin, high-volume
business. It’s important to check to
make sure the approach you select
is sound.
• Computing a break-even analysis
is an extremely useful exercise for
any proposed or existing business.
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 Section 6: Marketing Plan
1 of 2

• Marketing Plan
– The marketing plan focuses on how the business will
market and sell its product or service.
– Items to include in this section:
• Overall marketing strategy
• Product, price, promotions, and distribution
• Sales process (or Cycle)
• Sales tactics

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 Section 6: Marketing Plan
2 of 2

Key Insights
• The best way to describe a start-up’s
marketing plan is to start by
Marketing Plan articulating its marketing strategy,
positioning, and points of
differentiation, and then talk about
how these overall aspects of the
plan will be supported by price,
promotional mix, and distribution
strategy.
• It’s also important to discuss the
company sales process.
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 Section 7: Design and Development Plan
1 of 2

• Design and Development Plan

– If you’re developing a completely new product or service,
you need to include a section in your business plan that
focuses on the status of your development efforts.
– Items to include in this section:
• Development status and tasks
• Challenges and risks
• Projected development costs
• Proprietary issues (patents, trademarks, copyrights, licenses, brand
names)

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 Section 7: Design and Development Plan
2 of 2

Key Insights
• Many seemingly promising start-ups
never get off the ground because
Design and Development their product development efforts
Plan stall or the actual development of
the product or service turns out to
be more difficult than thought.
• As a result, this is a very important
section for businesses developing a
completely new product or service.

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 Section 8: Operations Plan
1 of 2

• Operations Plan
– Outlines how your business will be run and how your
product or service will be produced.
– A useful way to illustrate how your business will be run is
to describe it in terms of “back stage” (unseen to the
customer) and “front stage” (seen by the customer)
activities.
– Items to include in this section:
• General approach to operations
• Business location
• Facilities and equipment

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 Section 8: Operations Plan
2 of 2

Key Insights
• Your have to strike a careful balance
between adequately describing this
Operations Plan topic and providing too much
detail.
• As a result, it is best to keep this
section short and crisp.

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Section 9: Management Team and Company
Structure
1 of 2

• Management Team and Company Structure

– The management team of a new venture typically consists
of the founder or founders and a handful of key
management personnel.
– Items to include in this section:
• Management team
• Board of directors
• Board of advisers
• Company structure

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 Section 9: Management Team and Company
Structure
2 of 2
Key Insights
• This is a critical section of a
business plan.
Management Team and • Many investors and others who
Company Structure read the business plan look first at
the executive summary and then go
directly to the management team
section to assess the strength of the
people starting the firm.

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 Section 10: Overall Schedule
1 of 2

• Overall Schedule
– A schedule should be prepared that shows the major events
required to launch the business.
– The schedule should be in the format of milestones critical
to the business’s success.
– Examples of milestones:
• Incorporating the venture
• Completion of prototypes
• Rental of facilities
• Obtaining critical financing
• Starting production
• Obtaining the first sale

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 Section 10: Overall Schedule
2 of 2

Key Insight
• An effectively prepared and
presented schedule can be
Overall Schedule extremely helpful in convincing
potential investors that the
management team is aware of
what needs to take place to launch
the venture and has a plan in
place to get there.

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 Section 11: Financial Projections
1 of 2

• Financial Projections
– The final section of a business plan presents a firm’s pro
forma (or projected) financial projections.
– Items to include in this section:
• Sources and uses of funds statement
• Assumptions sheet
• Pro forma income statements
• Pro forma balance sheets
• Pro forma cash flows
• Ratio analysis

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 Section 11: Financial Projections
2 of 2

Key Insights
• Having completed the earlier
sections of the plan, its easy to see
Financial Projections why the financial projections come
last.
• They take the plans you’ve
developed and express them in
financial terms.

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 Presenting the Business Plan to Investors
1 of 2

• The Oral Presentation

– The first rule in making an oral presentation is to follow
directions. If you’re told you have 15 minutes, don’t talk
for more than the allotted time.
– The presentation should be smooth and well-rehearsed.
– The slides should be sharp and not cluttered.
• Questions and Feedback to Expect from Investors
– The smart entrepreneur has a good idea of the questions
that will be asked, and will be prepared for those queries.

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 Presenting the Business Plan to Investors
2 of 2

Twelve PowerPoint Slides to Include in an Investor Presentation

1. Title Slide 7. Marketing and sales

2. Problem 8. Management team
3. Solution 9. Financial projections
4. Opportunity and target market 10. Current status
5. Technology 11. Financing sought
6. Competition 12. Summary

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-138

 All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise,
without the prior written permission of the publisher. Printed in the
United States of America.

Copyright ©2012 Pearson Education, Inc.

publishing as Prentice Hall

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-139

 Chapter 05
The Financial Plan
Hisrich
Peters

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Shepherd
 The Financial Plan
• It provides the entrepreneur with a
complete picture of:
– The amount funds and when they are coming
into the organization.
– Where funds are going and how much cash is
available.
– The projected financial position of the firm.
• The plan explains how the entrepreneur
intends to meet financial obligations and
maintain the venture’s liquidity.
 Operating and Capital Budgets
• These are developed before developing the
pro forma income statement.
• Sales budget – An estimate of the expected
volume of sales by month.
– Cost of sales can be determined from the sales
forecasts.
– In manufacturing ventures, costs of internal
production and subcontracting are compared.
– Includes estimated ending inventory required
as a buffer.
Table 10.1 - A Sample Manufacturing
Budget for First Three Months
Operating and Capital Budgets

• Operating costs:
– Includes fixed expenses incurred regardless of
sales volume.
– Variable expenses must be linked to strategy in
the business plan.
• Capital budgets provide a basis for
evaluating expenditures that will impact the
business for more than one year.
Table 10.2 - A Sample Operating Budget for
First Three Months ($000s)
 Pro Forma Income Statements
• Pro forma income - Projected net profit
calculated from projected revenue minus
projected costs and expenses.
– Sales by month is calculated first.
• Basis of the figures - Marketing research, industry
sales, trial experience, forecasting, and financial
data on similar start-ups.
– Projections of all operating expenses for each
of the months during the first year should be
made.
Pro Forma Income Statements (cont.)

– Increasing selling expenses as sales increase

should be taken into account.
– Changes in expenses during the first year can
necessitate month-by-month illustration.
– Increase in individual expenses need to be
reflected in the first year’s pro forma income
statement.
– Projections should be made for years 2 and 3
as well; consider expenses that are likely to
remain stable over time.
Table 10.3 - MPP Plastics Inc., Pro Forma Income
Statement, First Year by Month ($000s)
 Pro Forma Cash Flow
• Projected cash available calculated from
projected cash accumulations minus
projected cash disbursements.
– It is not the same as profit.
– Sales may not be regarded as cash.
– Use of profit as a measure of success may be
deceiving if there is significant negative cash
flow.
– Cash flow can be projected using the indirect or
direct method.
Table 10.5 - Statement of Cash
Flows: The Indirect Method
Pro Forma Cash Flow (cont.)

• Entrepreneurs must make monthly

projections of cash.
– If disbursements are greater than receipts -
entrepreneur must either borrow funds or have
cash in a bank.
– Large positive cash flows need to be invested
or deposited in a bank for periods when
disbursements are greater than receipts.
– Determining the exact monthly receipts and
disbursements is difficult.
• Pro forma cash flow is based on best
estimates.
Table 10.6 - MPP Plastics Inc., Pro Forma
Cash Flow, First Year by Month ($000s)
 Pro Forma Balance Sheet
• Summarizes the projected assets, liabilities,
and net worth of the new venture.
– It is a picture of the business at a certain
moment in time and does not cover a period of
time.
– Consists of:
• Assets - Items that are owned or available to be
used in the venture operations; can be current or
fixed.
• Liabilities - Money that is owed to creditors; can be
current or long-term debt.
• Owner’s equity - Amount owners have invested
Table 10.7 - MPP Plastics Inc., Pro Forma
Balance Sheet, End of First Year ($000s)
 Break-Even Analysis
• Breakeven - Volume of sales where the
venture neither makes a profit nor incurs a
loss.
• The break-even formula:
B/E(Q) = __________TFC______________
SP-VC/unit (marginal contribution)
• Major weakness in calculating the
breakeven lies in determining if a cost is a
fixed or variable.
Figure 10.1 - Graphic Illustration
of Breakeven
 Pro Forma Sources
and Applications of Funds
• Sources:
– Operations.
– New investments.
– Long-term borrowing.
– Sale of assets.
• Uses/ Applications:
– Increase assets.
– Retire long-term liabilities.
– Reduce owner or stockholders’ equity.
– Pay dividends.
 Software Packages
• A spreadsheet program (Microsoft Excel) is
most suitable for completing pro forma
statements.
– Helps present different scenarios and assess
their impact on the pro forma statements.
• A simple and easy to use software is useful
in the start-up stage.
• Software packages vary in price and
complexity.
 Chapter 06

Preparing for and

Evaluating the
Challenges of Growth
Bruce R. Barringer
R. Duane Ireland
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 13-159
 Chapter Objectives
1 of 2

1. Explain the term sustained growth.

2. Describe how firms can properly prepare for growth.
3. Discuss the six most common reasons firms pursue
growth.
4. Explain the importance of knowing the stages of
growth.
5. Describe the most important factors for firms to
focus on during each stage of growth.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 13-160

 Chapter Objectives
2 of 2

6. Describe the managerial capacity problem and how

it inhibits firm growth.
7. Discuss the challenges for firm growth imposed by
adverse selection and moral hazard.
8. Discuss the day-to-day challenges of growing a
firm.
9. Explain why “cash flow management” is a
challenge for growing a firm.
10. Explain how “quality control” can become a
challenge for growing a firm.
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 Three Things a Business Can Do to Prepare
for Growth
1 of 3

Important Realities
• Not all businesses have the
potential to be aggressive
Appreciate the growth firms.
Nature of Business • A business can grow too
Growth fast.
• Business success doesn’t
always scale.

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 Three Things a Business Can Do to Prepare
for Growth
2 of 3

• It is important that a business

not lose sight of its core
strategy as it prepares to
Stay Committed to a grow.
Core Strategy • If a business becomes
distracted or starts pursuing
every opportunity for growth
that it’s presented, it can
easily stray into areas where
it’s at a disadvantage.
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Three Things a Business Can Do to Prepare
for Growth
3 of 3

• A firm should establish

growth-related plans.
• Writing a business plan
Plan for Growth greatly assists in preparing
growth plans.
• It’s also important for a firm
to determine, as soon as
possible, what its growth
strategies will be.

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 10 Warning Signs That a Business is
Growing Too Fast

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 Reasons for Growth
1 of 3

Reason for Growth Explanation

Economies of Occur when increasing production lowers

scale the average cost of each unit produced.

Economies of Occur when the scope (or range) of a firm’s

scope operations creates efficiencies.

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 Reasons for Growth
2 of 3

Reason for Growth Explanation

Occurs when a firm holds the number one or

Market
Leadership the number two position in an industry or
niche market in terms of sales volume.

Influence, Larger businesses usually have more

Power, and influence and power than smaller firms.
Survivability

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 Reasons for Growth
3 of 3

Reason for Growth Explanation

Accommodate Sometimes firms are compelled to grow to

the Growth of accommodate the growth of a key customer.
Key Customers

Attract and Growth is a firm’s primary mechanism to

Retain Talented
generate promotional opportunities for
Employees employees.

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 Managing Growth

It’s important for a business owner to know the stages of growth, along
with the unique opportunities and challenges that each stage entails.

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 Stages of Growth
1 of 5

• Introduction
– Start-up phase where a business determines what its core
strengths and capabilities are.
– The main challenge is to make sure the initial product or
service is right.
– It’s important to document what works and what doesn’t
work during this stage.

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 Stages of Growth
2 of 5

• Early Growth
– Generally characterized by increasing sales and heightened
complexity.
– Two important things must happen for a business to be
successful in this stage.
• The founder must start working “on the business” rather than “in
the business.”
• Increased formalization must take
place, and the business has to start
developing policies and procedures.

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 Stages of Growth
3 of 5

• Continuous Growth
– The need for structure and formalization increases.
– Often the business will start developing related products
and services.
– The toughest decisions take place in this stage.
– One tough decision is whether the owner of the business
and the current management
team have the experience and
the ability to take the business
further.

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 Stages of Growth
4 of 5

• Maturity
– A business enters the maturity stage when its growth stalls.
– At this point, a firm is typically more intently focused on
managing efficiently than developing new products.
– Well-managed firms often look for partnering opportunities
or opportunities for acquisitions or licensing deals to
breathe new life into the firm.
– If new growth cannot be achieved
through a firm’s existing product
mix, the “next generation” of
products should be developed.
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 Stages of Growth
5 of 5

• Decline
– It is not inevitable that a business enter the decline stage.
– Many American businesses have long histories and have
adapted and survived over time.
– A business’s ability to avoid decline hinges on the strength
of its leadership and its ability to adapt over time.

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 Challenges of Growth

• Managerial Capacity Problem

• Day-to-Day Challenges of
Two categories of
Growing a Firm
challenges for firm
growth

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 Managerial Capacity Problem
1 of 6

• Managerial Capacity
– Firms are collections of productive resources that are
organized in an administrative framework.
– As a firm goes about its routine activities, it recognizes
opportunities to grow.
– The problem with this scenario is that firms are not always
prepared or able to grow, because of limited “managerial
capacity.”

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 Managerial Capacity Problem
2 of 6

• A Firm’s Administrative Framework

– A firm’s administrative framework consists of two kinds of
services that are important to firm growth.
• Entrepreneurial services generate new market, product, and service
ideas, while managerial services administer the routine functions of
the firm and facilitate the profitable execution of new opportunities.
• New product and service ideas require substantial managerial
services (or managerial capacity) to be successfully implemented.
• This is a complex problem because if a firm has insufficient
managerial services to properly implement its new product and
service ideas, it can’t grow.

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 Managerial Capacity Problem
3 of 6

• A Firm’s Administrative Framework (continued)

– Continuation From Previous Slide
• The reason a firm can’t quickly increase its managerial services (to
take advantage of new product or service ideas) is that it is
expensive to hire new employees, it takes time for new hires to be
socialized into the culture of a firm, and it takes time for new
employees to acquire firm-specific skills and establish trusting
relationships with other members of the firm.
• When a firm’s managerial resources are insufficient to take
advantage of its new product and service opportunities, the
subsequent bottleneck is referred to as the managerial capacity
problem.

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 Managerial Capacity Problem
4 of 6

• 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
5 of 6

Basic Model of Firm Growth

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 Managerial Capacity Problem
6 of 6

Impact of the Managerial Capacity Problem

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Day-to-Day Challenges of Growing a Firm
1 of 3

Challenge Explanation

Cash Flow A firm requires an increasing amount of cash

Management as it grows.

If growth comes at the expense of a

Price Stability competitor’s market share, a price war could
ensue.

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Day-to-Day Challenges of Growing a Firm
2 of 3

Challenge Explanation

An increase in firm activity can result in

Quality
Control quality control issues if a firm is not able to
increase its resources to handle the extra work

Capital Capital constraints are an ever-present

Constraints problem for growing firms

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 Day-to-Day Challenges of Growing a Firm
3 of 3

• These two female

entrepreneurs just
launched a casual
dining restaurant.
• Their ability to grow
the business successfully
will hinge largely on
how they manage the
day-to-day challenges
of growing a firm.

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means, electronic, mechanical, photocopying, recording, or otherwise,
without the prior written permission of the publisher. Printed in the
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publishing as Prentice Hall

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