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Chapters 1-6 from B's book.
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1-1
Chapter 1
Introduction to
Entrepreneurship
Bruce R. Barringer
R. Duane Ireland
©2010 Prentice Hall 2-2
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.
©2010 Prentice Hall 2-3
Chapter Objectives 2 of 2
6. Explain how entrepreneurial firms differ from
salary-substitute and lifestyle firms.
7. Discuss the changing demographics of
entrepreneurs.
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.
©2010 Prentice Hall 1-4
Introduction to Entrepreneurship
There is tremendous interest in entrepreneurship
around the world.
Books Amazon.com lists over 33,000 books dealing with entrepreneurship and over 60,000 focused on small business.
College Courses More and more business schools from Romania have courses dealing with entrepreneurship and small business.
©2010 Prentice Hall 1-5
Introduction to Entrepreneurship
General Entrepreneurship Monitor
One important indicator: TEA (early-stage entrepreneurial activity)
Romania:
•Low perceived opportunities or capabilities
•Fear of failure quite high
•Quite high perceived status
•Low media attention
©2010 Prentice Hall 1-6
What is Entrepreneurship?
• Academic Definitions – Entrepreneurship is the process by which individuals pursue opportunities
without regard to resources they currently control. (Stevenson & Jarillo)
– Entrepreneurship has also been described as a process that involves inputs: an opportunity; one or more proactive individuals; an organizational context; risk; innovation; and resources. It can produce the following outcomes: a new venture or enterprise; value; new products or processes; profit or personal benefit; and growth. (Peggy A. Lambing and Charles R. Kuehl)
• 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—needed to transform an invention or an idea into a viable business.
©2010 Prentice Hall 1-7
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.
©2010 Prentice Hall 1-8
Corporate Entrepreneurship 2 of 2
Entrepreneurial Firms Conservative Firms
• Proactive
• Innovative
• Risk taking
• Take a more “wait and see” posture
• Less innovative
• Risk adverse
©2010 Prentice Hall 1-9
Why Become an Entrepreneur?
The three primary reasons that people become
entrepreneurs and start their own firms
Desire to be their own boss
Financial rewards
Desire to pursue their
own ideas
©2010 Prentice Hall 1-10
Characteristics of Successful Entrepreneurs 1 of 3
Four Primary Characteristics
©2010 Prentice Hall 1-11
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.
©2010 Prentice Hall 1-12
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.
©2010 Prentice Hall 1-13
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 the environment, life experiences, and
personal choices.
©2010 Prentice Hall 1-14
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
• Achievement motivated
• Alert to opportunities
• Creative
• Decisive
• Energetic
• Has a strong work ethic
• Is a moderate risk taker
• Is a networker
• Lengthy attention span
• Optimistic disposition
• Persuasive
• Promoter
• Resource assembler/leverager
• Self-confident
• Self-starter
• Tenacious
• Tolerant of ambiguity
• Visionary
©2010 Prentice Hall 1-15
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.
©2010 Prentice Hall 1-16
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.
©2010 Prentice Hall 1-17
Common Myths About Entrepreneurs 5 of 5
• Myth 4: Entrepreneurs Should Be Young and
Energetic.
– The most active age for business ownership is 35 to 45
years old.
– 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.
©2010 Prentice Hall 1-18
Types of Start-Up Firms
©2010 Prentice Hall 1-19
Changing Demographics of Entrepreneurs 1 of 3
Women Entrepreneurs
In Romania, recent findings
reveal that such gender
stereotype of women as main
householder is still strong.
Nevertheless the
businesswomen phenomenon is
rising continuously
Source: Mariana Dragusin
National and Regional Women
Entrepreneurs’ Networks
©2010 Prentice Hall 1-20
Changing Demographics of Entrepreneurs 2 of 3
•almost 40% of the total active SMEs were lead by
women entrepreneurs in 2005.
•There are important regional differences as far as
the weight of their enterprises in the total: higher in
the North-West Region (42, 0%)
The South Region has the lowest weight (29%) of
enterprises run by women.
©2010 Prentice Hall 3-21
Changing Demographics of Entrepreneurs 3 of 3
Young Entrepreneurs
• Interest among young people in entrepreneurial careers is
growing.
• college courses
•Associations to support young entrepreneurs
•Governmental initiatives
©2010 Prentice Hall 1-22
Economic Impact of Entrepreneurial Firms
• Innovation
– Is the process of creating something new, which is central
to the entrepreneurial process.
– Small firms are twice as innovative per employee as large
firms.
• 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.
©2010 Prentice Hall 1-23
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.
©2010 Prentice Hall 1-24
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.
©2010 Prentice Hall 1-25
Steps in the Entrepreneurial Process 1 of 2
Step 1 Step 2
Developing Successful Business Ideas
©2010 Prentice Hall 1-26
Steps in the Entrepreneurial Process 2 of 2
Step 3 Step 4
©2010 Prentice Hall 2-27
Chapter 2
Recognizing
Opportunities and
Generating Ideas
Bruce R. Barringer
R. Duane Ireland
©2010 Prentice Hall 3-28
Chapter Objectives 1 of 3
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.
©2010 Prentice Hall 2-29
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.
©2010 Prentice Hall 2-30
What is An Opportunity? 1 of 2
Opportunity Defined An opportunity is a favorable
set of circumstances that
creates a need for a new
product, service or business.
©2010 Prentice Hall 2-31
What is an Opportunity? 2 of 2
An opportunity has four essential qualities
©2010 Prentice Hall 2-32
Three Ways to Identify an Opportunity
©2010 Prentice Hall 2-33
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.
©2010 Prentice Hall 2-34
First Approach: Observing Trends 2 of 2
Environmental Trends Suggesting Business
or Product Opportunity Gaps
©2010 Prentice Hall 2-35
Trend 1: Economic Forces
Economic trends help
determine areas that are
ripe for new startups and
areas that startups should
avoid.
• Individual sectors of the
economy have a direct impact
on consumer buying patterns
(Ex. Banking industry-interests
loans)
•A week economy favors those
business that help people or
businesses save money (Ex.
Nistevo).
©2010 Prentice Hall 2-36
Trend 2: Social Forces
Social trends alter how
people and businesses
behave and set their
priorities. These trends
provide opportunities for
new businesses to
accommodate the
changes.
Examples of Social Trends
• Family and work patterns
• The increasing diversity of
the workplace.
• Increasing interest in health,
fitness, and wellness.
• Emphasis on alternative forms
of energy.
• New forms of music and other
types of entertainment.
©2010 Prentice Hall 2-37
Trend 3: Technological Advances 1 of 2
Advances in technology
frequently create business
opportunities.
They are usually
correlated with economic
and social changes.
Ex: Walkman, iPod, cell
phones
Examples of Entire Industries
that Have Been Created as the
Results of Technological
Advances
• Computer industry
• Internet
• Biotechnology
• Digital photography
©2010 Prentice Hall 2-38
Trend 3: Technological Advances 2 of 2
Once a technology is
created, products often
emerge to advance it
Or help users better use
it.
Example: H20Audio
An example is H20Audio, a
company started by four
former San Diego State
University students, that
makes waterproof housings
for the Apple iPod.
©2010 Prentice Hall 2-39
Trend 4: Political Action and Regulatory
Changes 1 of 2
Political action and
regulatory changes also
provide the basis for
opportunities.
General Example
Laws to protect the environment
have created opportunities for
entrepreneurs to start firms that
help other firms comply with
environmental laws and
regulations.
©2010 Prentice Hall 2-40
Trend 4: Political Action and Regulatory
Changes 2 of 2
Company created to help
other companies comply
with a specific law.
Specific Example
Consultancy companies
providing help to other
companies in order to
implement specific quality
management regulations (ISO,
HACCP etc.)
Or accessing European funds.
©2010 Prentice Hall 2-41
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 chance.
©2010 Prentice Hall 2-42
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 wind farm, are being
launched to solve this problem.
©2010 Prentice Hall
Solving a Problem
©2010 Prentice Hall 2-44
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.
©2010 Prentice Hall 2-45
Third Approach: Finding Gaps in the
Marketplace 2 of 2
Product gaps in the
marketplace represent
potentially viable
business opportunities.
Specific Example
•Opening case
•Gabriela Man
•Gary Cavin – Curves
International
©2010 Prentice Hall 2-46
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
©2010 Prentice Hall 2-47
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.
• Corridor principle
©2010 Prentice Hall 2-48
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.
©2010 Prentice Hall 2-49
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.
– In one survey of 65 start-ups, half the founders reported that they got their business idea through social contacts.
• Strong Tie Vs. Weak Tie Relationships – All of us have relationships with other people that are
called “ties.” (See next slide.)
©2010 Prentice Hall 2-50
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.)
©2010 Prentice Hall 2-51
Social Networks 3 of 3
Strong-Tie Relationships Weak-Tie Relationships
These relationships, which
typically form between like
minded individuals, tend to
reinforce insights and ideas
that people already have.
These relationships, which
form between casual
acquaintances, are not as
apt to be between like-
minded individuals, so one
person may say something
to another that sparks a
completely new idea.
Why weak-tie relationships lead to more new business ideas
than strong-tie relationships
©2010 Prentice Hall 2-52
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.
©2010 Prentice Hall 2-53
Full View of the Opportunity Recognition
Process
Depicts the connection between an awareness of emerging trends and the personal characteristics of the entrepreneur
©2010 Prentice Hall 2-54
Techniques For Generating Ideas
Brainstorming Focus Groups
Library and
Internet Research
©2010 Prentice Hall 2-55
Brainstorming
• Brainstorming
– Is a technique used to generate a large number of ideas and
solutions to problems quickly.
– A brainstorming “session” typically involves a group of people, and should be targeted to a specific topic.
– Rules for a brainstorming session:
• No criticism.
• Freewheeling is encouraged.
• The session should move quickly.
• Leap-frogging is encouraged.
©2010 Prentice Hall 2-56
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 they 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.
©2010 Prentice Hall 2-57
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.
©2010 Prentice Hall 2-58
Libraries and Internet Research 2 of 3
Large public and
university libraries
typically have access to
search engines and
industry reports that would
cost thousands of dollars
to access on your own.
Examples of Useful Search
Engines and Industry Reports
• Lexis-Nexis Academic
• ProQuest
• IBISWorld
• Mintel
• Standard & Poor’s Net Advantage
©2010 Prentice Hall 2-59
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 to links to a constant
stream of newspaper articles, blog posts, and news releases
about the topic.
– Targeted searches are also useful.
©2010 Prentice Hall 2-60
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.
©2010 Prentice Hall 3-61
Chapter 3
Feasibility Analysis
Bruce R. Barringer
R. Duane Ireland
©2010 Prentice Hall 3-62
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.
©2010 Prentice Hall 3-63
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.
©2010 Prentice Hall 3-64
Chapter Objectives 3 of 3
10. Explain the importance of financial feasibility
analysis and list the most critical issues to consider
in this area.
©2010 Prentice Hall 3-65
What Is Feasibility Analysis?
Feasibility Analysis
• Feasibility analysis is the
process of determining whether
a business idea is viable.
• It is the preliminary evaluation
of a business idea, conducted
for the purpose of determining
whether the idea is worth
pursuing.
©2010 Prentice Hall 3-66
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
– Primary research and secondary research
– Ex: Jim Clark (Silicon Graphics and Netscape).
©2010 Prentice Hall
• The reason so few companies are a success in that most people do not have a lot of common sense about what will sell and what won’t. You need to be very pragmatic about whether people will pay for a product based on your great idea. “This should be great and I am sure the world will beat a path to my door. “ Once you have an idea for a product or service, you need to test the market. Talk to potential customers about what they want. And don’t try to make the product do everything for everyone. Engineers often make mistakes. It’s the Swiss Army knife mentality. They want to put everything in. Don’t. Go out and talk to customers as quickly as you can and put a copy of the product in front of them to get their feedback. When we went out to sell our first product at Silicon Graphics people came back and said. “We don’t want to do this”. We (after making adjustments) sold them what they wanted.
» JIM CLARK
3-67
©2010 Prentice Hall 3-68
Feasibility Analysis
Role of feasibility analysis in developing business ideas.
©2010 Prentice Hall 3-69
Forms of Feasibility Analysis
Product/Service Feasibility
Organizational Feasibility
Industry/Target Market
Feasibility
Financial Feasibility
©2010 Prentice Hall 3-70
Outline for a Comprehensive Feasibility
Analysis
©2010 Prentice Hall 3-71
Product/Service Feasibility Analysis 1 of 2
Product/Service
Feasibility Analysis
Purpose
• Is an assessment of the overall
appeal of the product or service
being proposed.
• Before a prospective firm rushes
a new product or service into
development, it should be sure
that the product or service is what
prospective customers want.
©2010 Prentice Hall 3-72
Product/Service Feasibility Analysis 2 of 2
Components of product/service
feasibility analysis
Product/Service
Desirability
Product/Service
Demand
©2010 Prentice Hall 15-73
Product/Service Desirability 1 of 3
• 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?
First, ask the following questions to determine the basic
appeal of the product or service.
©2010 Prentice Hall 3-74
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 or the product or service idea.
• Suggestions for how the idea can be strengthened or “tweaked” before proceeding further.
©2010 Prentice Hall 3-75
Product/Service Desirability 3 of 3
New Venture
Fitness Drink’s Concept Statement
©2010 Prentice Hall 3-76
Product/Service Demand 1 of 6
• Product/Service Demand
– Their are two steps to assessing product/service demand.
– Step 1: Administer a Buying Intentions Survey
– Step 2: Conduct library, Internet, and Gumshoe research
©2010 Prentice Hall 3-77
• 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.
Product/Service Demand 2 of 6
©2010 Prentice Hall 3-78
Product/Service Demand 3 of 6
©2010 Prentice Hall 3-79
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 towards resources
to help you investigate a business idea, such as industry-
specific trade journal and industry reports.
– Internet searches can often yield important information
about the potentially viability of a product or service idea.
©2010 Prentice Hall 3-80
Product/Service Demand 5 of 6
Gumshoe Research
Explanation
• A gumshoe is a detective or an
investigator that scrounges around
for information or clues wherever
they can be found.
• Be a gumshoe. Ask people
what they think about your product
or service idea. If your idea is to
sell educational toys, spend a week
volunteering at a day care center
and watch how children interact
with toys.
©2010 Prentice Hall 3-81
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.
• This potential entrepreneur
is administering a survey
about a new product idea.
©2010 Prentice Hall 3-82
Industry/Target Market Feasibility Analysis 1 of 2
Industry/Target Market
Feasibility Analysis
Purpose
• Is an assessment of the overall
appeal of the industry and the
target market for the proposed
business.
• An industry is a group of firms
producing a similar product or
service.
• A firm’s target market is the limited portion of the industry it
plans to go after.
©2010 Prentice Hall 3-83
Industry/Target Market Feasibility Analysis 2 of 2
Components of industry/target market
feasibility analysis
Industry Attractiveness Target Market
Attractiveness
©2010 Prentice Hall 3-84
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 .
©2010 Prentice Hall 3-85
Industry Attractiveness 2 of 2
©2010 Prentice Hall 3-86
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, considerably ingenuity must be employed to finding
information to assess the attractiveness of a specific target
market.
©2010 Prentice Hall 3-87
Organizational Feasibility Analysis 1 of 2
Organizational Feasibility
Analysis
Purpose
• Is conducted to determine
whether a proposed business has
sufficient management expertise,
organizational competence, and
resources to successfully launch
a business.
• Focuses on non-financial resources.
©2010 Prentice Hall 3-88
Organizational Feasibility Analysis 2 of 2
Components of organizational
feasibility analysis
Management Prowess Resource Sufficiency
©2010 Prentice Hall 3-89
Management Prowess 1 of 2
• Management Prowess – A firm 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 solo entrepreneur or the founding team has for
the business idea.
• The extent to which sole entrepreneur or the founding team understands the markets in which the firm will participate.
©2010 Prentice Hall 3-90
Management Prowess 2 of 2
• An indication of passion
is the willingness of a
new venture team to
complete a comprehensive
feasibility analysis.
©2010 Prentice Hall 3-91
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.
©2010 Prentice Hall 3-92
Resource Sufficiency 2 of 2
Examples of nonfinancial resources that may be critical
to the successful launch of a new business
• Availability of affordable office or lab space.
• Likelihood of local and state government support of the business.
• Quality of the labor pool available.
• Proximity to key suppliers and customers.
• Willingness of high quality employees to join the firm.
• Likelihood of establishing favorable strategic partnerships.
• Proximity to similar firms for the purpose of sharing knowledge.
• Possibility of obtaining intellectual property protection in key areas.
©2010 Prentice Hall 3-93
Financial Feasibility Analysis 1 of 2
Financial Feasibility
Analysis
Purpose
• Is the final component of a
comprehensive feasibility analysis.
• A preliminary financial assessment
is sufficient.
©2010 Prentice Hall 3-94
Financial Feasibility Analysis 2 of 2
Components of financial
feasibility analysis
Total Start-Up Cash
Needed
Financial Performance of
Similar Businesses
Overall Financial
Attractiveness of the
Proposed Venture
©2010 Prentice Hall 3-95
Total Start-Up Cash Needed
• Total Start-Up Cash Needed
– The first issues refers to the 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.
©2010 Prentice Hall 3-96
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.
©2010 Prentice Hall 3-97
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 startups.
– 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.
©2010 Prentice Hall 3-98
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.
©2010 Prentice Hall 3-99
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.
©2010 Prentice Hall 4-100
Chapter 4
Writing a Business
Plan
Bruce R. Barringer
R. Duane Ireland
©2010 Prentice Hall 6-101
Chapter Objectives 1 of 2
1. Explain the purpose of a business plan.
2. Discuss 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.
©2010 Prentice Hall 4-102
Chapter Objectives 2 of 2
6. Describe a milestone and how milestones are used
in business plans.
7. Explain why its 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.”
©2010 Prentice Hall 3-103
Chapter Objectives 3 of 3
10. Detail the parts of an oral presentation of a business
plan.
©2010 Prentice Hall 4-104
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.
©2010 Prentice Hall 4-105
Why Reads the Business Plan—And What
Are They Looking For?
There are two primary audience for a firm’s business plan
Audience What They are Looking For
A Firm’s Employees
Investors and
other external
stakeholders
A clearly written business plan helps the
employees of a firm operate in sync and move
forward in a consistent and purposeful manner.
A firm’s business plan must make the case that the firm is a good use of an investor’s funds or the
attention of others.
©2010 Prentice Hall 4-106
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.
©2010 Prentice Hall 4-107
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.
©2010 Prentice Hall 4-108
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.
©2010 Prentice Hall 4-109
Guidelines for Writing a Business Plan 4 of 5
Types of Business Plans
©2010 Prentice Hall 4-110
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.
©2010 Prentice Hall 4-111
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 decided which elements to include
in his or her plan.
©2010 Prentice Hall 4-112
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-space pages.
©2010 Prentice Hall 4-113
Executive Summary
Key Insights
• In many instances an investor will
ask for a copy of a firm’s executive
summary and will ask for a copy of
the entire plan only if the executive
summary is sufficiently convincing.
• The executive summary, then, is
arguably the most important
section of a business plan.
Section 1: Executive Summary 2 of 2
©2010 Prentice Hall 4-114
Section 2: Company Description 1 of 2
• Company Description – The main body of the business plan beings 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).
©2010 Prentice Hall 4-115
Company Description
Key Insights
• While at first glance this section
may seem less important than the
others, it is extremely important.
• It demonstrates to your reader that
you know how to translate an idea
into a business.
Section 2: Company Description 2 of 2
©2010 Prentice Hall 4-116
Section 3: Industry Analysis 1 of 2
• Industry Analysis – This section should being 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.
©2010 Prentice Hall 4-117
Industry Analysis
Key Insights
• Before a business selects a target
market it should have a good grasp
of its industry—including where its
promising areas are and where its
points of vulnerability are.
• The industry that a company
participates in largely defines the
playing field that a firm will
participate in.
Section 3: Industry Analysis 2 of 2
©2010 Prentice Hall 4-118
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.
©2010 Prentice Hall 4-119
Market Analysis
Key Insights
• Most startups do not service their
entire industry. Instead, they focus
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 startup knows
about the consumers in its target
market, the more it can tailor its
products or service appropriately.
Section 3: Market Analysis 2 of 2
©2010 Prentice Hall 4-120
Section 4: 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.
©2010 Prentice Hall 4-121
Marketing Plan
Key Insights
• The best way to describe a startup’s
marketing plan is to start by
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.
Section 4: Marketing Plan 2 of 2
©2010 Prentice Hall 4-122
Section 5: 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.
©2010 Prentice Hall 4-123
Section 5: Management Team and Company
Structure 2 of 2
Management Team and
Company Structure
Key Insights
• This is a critical section of a
business plan.
• Many investors and others who
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.
©2010 Prentice Hall 4-124
Section 6: 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.
©2010 Prentice Hall 4-125
Section 6: Operations Plan 2 of 2
Operations Plan
Key Insights
• Your have to strike a careful balance
between adequately describing this
topic and providing too much
detail.
• As a result, it is best to keep this
section short and crisp.
©2010 Prentice Hall 4-126
Section 7: Product (or Service) Design and
Development Plan 1 of 2
• Product (or Service) Design and Development Plan – If you’re developing a completely new product or service,
you need to include a section that focuses on the status of your development efforts.
– Items to include in this section: • Development status and tasks.
• Challenges and risks.
• Intellectual property.
©2010 Prentice Hall 4-127
Product (or Service)
Design and Development
Plan
Key Insights
• Many seemingly promising startups
never get off the ground because
their product development efforts
stall or turn out to be more difficult
than expected.
• Its important to convince the reader
of your plan that this won’t happen
to you.
Section 7: Product (or Service) Design and
Development Plan 2 of 2
©2010 Prentice Hall 4-128
Section 8: 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.
©2010 Prentice Hall 4-129
Section 8: Financial Projections 2 of 2
Financial Projections
Key Insights
• Having completed the earlier
sections of the plan, its easy to see
why the financial projections come
last.
• They take the plans you’ve developed and express them in
financial terms.
©2010 Prentice Hall 4-130
Presenting the Business Plan to Investors 1 of 3
• 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.
©2010 Prentice Hall 4-131
Presenting the Business Plan to Investors 2 of 3
Twelve PowerPoint Slides to Include in an Investor Presentation
1. Title Slide
2. Problem
3. Solution
4. Opportunity and target market
5. Technology
6. Competition
7. Marketing and sales
8. Management team
9. Financial projections
10. Current status
11. Financing sought
12. Summary
©2010 Prentice Hall 4-132
Presenting the Business Plan to Investors 3 of 3
• It’s also important to look sharp when
presenting a business
plan.
• This new venture team
is going over its
PowerPoint slides one
last time before an
investor presentation.
©2010 Prentice Hall 5-133
Chapter 5
Industry and
Competitor Analysis
Bruce R. Barringer
R. Duane Ireland
©2010 Prentice Hall 5-134
Chapter Objectives 1 of 2
1. Explain the purpose of an industry analysis.
2. Identify the five competitive forces that determine
industry profitability.
3. Explain the role of “barriers to entry” in creating disincentives for firms to enter an industry.
4. Identify the nontraditional barriers to entry that are
especially associated with entrepreneurial firms.
5. List the four industry-related questions to ask
before pursuing the idea for a firm.
©2010 Prentice Hall 5-135
Chapter Objectives 2 of 2
6. Identify the five primary industry types and the
opportunities they offer.
7. Explain the purpose of a competitor analysis.
8. Identify the three groups of competitors a new firm
will face.
9. Describe ways a firm can ethically obtain
information about its competitors.
10. Describe the reasons for completing a competitive
analysis grid.
©2010 Prentice Hall 5-136
What is Industry Analysis?
• Industry
– An industry is a group of firms producing a similar product
or service, such as airlines, fitness drinks, furniture, or
electronic games.
• Industry Analysis
– Is business research that focuses on the potential of an
industry.
©2010 Prentice Hall 5-137
What is Industry Analysis Important?
Industry Analysis
Importance
• Once it is determined that a new
venture is feasible in regard to the
industry and market in which it
will compete, a more in-depth
analysis is needed to learn the ins
and outs of the industry.
• The analysis helps a firm determine
if the niche market it identified
during feasibility analysis is
favorable for a new firm.
©2010 Prentice Hall 5-138
Three Key Questions
When studying an industry, an entrepreneur must answer
three questions before pursuing the idea of starting a firm.
Is the industry
accessible—in other
words, is it is realistic
place for a new
venture to enter?
Are there positions in
the industry that avoid
some of the negative
attributes of the
industry as a whole?
Does the industry
contain markets that
are ripe for innovation
or are underserved?
Question 1 Question 3 Question 2
©2010 Prentice Hall 5-139
How Industry and Firm-Level Factors
Affect Performance
• Firm Level Factors
– Include a firm’s assets, products, culture, teamwork among its employees, reputation, and other resources.
• Industry Level Factors
– Include threat of new entrants, rivalry among existing
firms, bargaining power of buyers, and related factors.
• Conclusion
– In various studies, researchers have found that from 8% to
30% of the variation in firm profitability is directly
attributable to the industry in which a firm competes.
©2010 Prentice Hall 5-140
Techniques Available to Assess Industry
Attractiveness
Study Environmental
and Business Trends
The Five Competitive
Forces Model
Assessing Industry Attractiveness
©2010 Prentice Hall 5-141
Studying Industry Trends
• Environmental Trends
– Include economic trends, social trends, technological
advances, and political and regulatory changes.
– For example, industries that sell products to seniors are
benefiting by the aging of the population.
• Business Trends
– Other trends that impact an industry.
– For example, are profit margins in the industry increasing
or falling? Is innovation accelerating or waning? Are input
costs going up or down?
©2010 Prentice Hall 5-142
The Five Competitive Forces Model 1 of 3
• Explanation of the Five Forces Model
– The five competitive forces model is a framework for
understanding the structure of an industry.
– The model is composed of the forces that determine
industry profitability.
– They help determine the average rate of return for the firms
in an industry.
©2010 Prentice Hall 5-143
The Five Competitive Forces Model 2 of 3
• Explanation of the Five Forces Model (continued)
– Each of the five-forces impacts the average rate of return
for the firms in an industry by applying pressure on
industry profitability.
– Well managed firms try to position their firms in a way that
avoids or diminishes these forces—in an attempt to beat the
average rate of return of the industry.
©2010 Prentice Hall 5-144
The Five Competitive Forces Model 3 of 3
©2010 Prentice Hall 5-145
Threat of Substitutes 1 of 3
• Threat of Substitutes
– The price that consumers are willing to pay for a product
depends in part on the availability of substitute products.
– For example, there are few if any substitutes for
prescription medicines, which is one of the reasons the
pharmaceutical industry is so profitable.
– In contrast, when close substitutes for a product exist,
industry profitability is suppressed, because consumers will
opt out if the price gets too high.
©2010 Prentice Hall 5-146
Threat of Substitutes 2 of 3
• Threat of Substitutes (continued)
– The extent to which substitutes suppress the profitability of
an industry depends on the propensity for buyers to
substitute between alternatives.
– This is why firms in an industry often offer their customers
amenities to reduce the likelihood that they will switch to a
substitute product, even in light of a price increase.
©2010 Prentice Hall 5-147
Threat of Substitutes 3 of 3
• A customer could easily get
a cup of coffee cheaper at
one of Starbuck’s competitors. • To decrease the likelihood of
this, Starbucks offers high-
quality fresh coffee, good
service, and a pleasant
atmosphere.
• Starbucks has therefore
reduced the threat of
substitutes.
©2010 Prentice Hall 5-148
Threat of New Entrants 1 of 6
• Threat of New Entrants
– If the firms in an industry are highly profitable, the industry
becomes a magnet to new entrants.
– Unless something is done to stop this, the competition in
the industry will increase, and average industry profitability
will decline.
– Firms in an industry try to keep the number of new entrants
low by erecting barriers to entry.
• A barrier to entry is a condition that creates a disincentive for a new
firm to enter an industry.
©2010 Prentice Hall 5-149
Threat of New Entrants 2 of 6
Barrier to Entry Explanation
Economies of Scale
Product
differentiation
Capital
requirements
Barriers to Entry
Industries that are characterized by large economies
of scale are difficult for new firms to enter, unless they
are willing to accept a cost disadvantage.
Industries such as the soft drink industry that are
characterized by firms with strong brands are difficult
to break into without spending heavily on advertising.
The need to invest large amounts of money to gain
entrance to an industry is another barrier to entry.
©2010 Prentice Hall 5-150
Threat of New Entrants 3 of 6
Barrier to Entry Explanation
Cost advantages
independent of size
Access to distribution
channels
Government and
legal barriers
Barriers to Entry (continued)
Existing firm may have cost advantages not related to
size. For example, the existing firms in an industry
may have purchased land when it was less expensive
than it is today.
Distribution channels are often hard to crack. This is
particularly true in crowded markets, such as the
convenience store market.
Some industries, such as broadcasting, require the
granting of a license by a public authority to compete.
©2010 Prentice Hall 5-151
Threat of New Entrants 4 of 6
• Non Traditional Barriers to Entry
– It is difficult for start-ups to execute barriers to entry that
are expensive, such as economies of scale, because money
is usually tight.
– Start-ups have to rely on nontraditional barriers to entry to
discourage new entrants, such as assembling a world-class
management team that would be difficult for another
company to replicate.
©2010 Prentice Hall 5-152
Threat of New Entrants 5 of 6
Barrier to Entry Explanation
Nontraditional Barriers to Entry
Strength of
management team
If a start-up puts together a world-class management
team, it may give potential rivals pause in taking on
the start-up in its chosen industry.
First-mover
advantage
If a start-up pioneers an industry or a new concept
within an industry, the name recognition the start-up
establishes may create a barrier to entry.
Passion of the
management team
and employees
If the employees of a start-up are motivated by the
unique culture of a start-up, and anticipate large
financial reward, this is a combination that cannot be
replicated by larger firms.
©2010 Prentice Hall 5-153
Threat of New Entrants 6 of 6
Barrier to Entry Explanation
Nontraditional Barriers to Entry (continued)
Unique Business
Model
Inventing a new
approach to an
industry
If a start-up is able to construct a unique business
model and establish a network of relationships that
makes the business model work, this set of advantages
creates a barrier to entry.
If a start-up invents a new approach to an industry
and executes it in an exemplary fashion, these factors
create a barrier to entry for potential imitators.
Internet Domain
Name
Some Internet domain names are so “spot-on” that they give a start-up a meaningful leg up in terms of e-
commerce opportunities.
©2010 Prentice Hall 5-154
Rivalry Among Existing Firms 1 of 3
• Rivalry Among Existing Firms
– In most industries, the major determinant of industry
profitability is the level of competition among existing
firms.
– Some industries are fiercely competitive, to the point where
prices are pushed below the level of costs, and industry-
wide losses occur.
– In other industries, competition is much less intense and
price competition is subdued.
©2010 Prentice Hall 5-155
Rivalry Among Existing Firms 2 of 3
Factors that determine the intensity of the rivalry among
existing firms in an industry.
Number and
balance of
competitors
Degree of
difference
between products
The more competitors there are, the more likely it
is that one or more will try to gain customers by
cutting its price.
The degree to which products differ from one
product to another affects industry rivalry.
©2010 Prentice Hall 5-156
Rivalry Among Existing Firms 3 of 3
Factors that determine the intensity of the rivalry among existing
firms in an industry (continued)
Growth rate of an
industry
Level of fixed
costs
The competition among firms in a slow-growth
industry is stronger than among those in fast-
growth industries.
Firms that have high fixed costs must sell a higher
volume of their product to reach the break-even
point than firms with low fixed costs.
©2010 Prentice Hall 5-157
Bargaining Power of Suppliers 1 of 3
• Bargaining Power of Suppliers
– Suppliers can suppress the profitability of the industries to
which they sell by raising prices or reducing the quality of
the components they provide.
– If a supplier reduces the quality of the components it
supplies, the quality of the finished product will suffer, and
the manufacturer will eventually have to lower its price.
– If the suppliers are powerful relative to the firms in the
industry to which they sell, industry profitability can suffer.
©2010 Prentice Hall 5-158
Bargaining Power of Suppliers 2 of 3
Factors that have an impact on the ability of suppliers to
exert pressure on buyers
Supplier
concentration
Switching costs
Switching costs are the fixed costs that buyers
encounter when switching or changing from one
supplier to another. If switching costs are high, a
buyer will be less likely to switch suppliers.
When they are only a few suppliers that supply a
critical product to a large number of buyers, the
supplier has an advantage.
©2010 Prentice Hall 5-159
Bargaining Power of Suppliers 3 of 3
Factors that have an impact on the ability of suppliers to exert
pressure on buyers (continued)
Attractiveness of
substitutes
Threat of
forward
integration
The power of a supplier is enhanced if there is a
credible possibility that the supplier might enter
the buyer’s industry.
Supplier power is enhanced if there are no
attractive substitutes for the product or services
the supplier offers.
©2010 Prentice Hall 5-160
Bargaining Power of Buyers 1 of 3
• Bargaining Power of Buyers
– Buyers can suppress the profitability of the industries from
which they purchase by demanding price concessions or
increases in quality.
– For example, the automobile industry is dominated by a
handful of large companies that buy products from
thousands of suppliers in different industries. This allows
the automakers to suppress the profitability of the
industries from which they buy by demanding price
reductions.
©2010 Prentice Hall 5-161
Bargaining Power of Buyers 2 of 3
Factors that have an impact on the ability of suppliers to exert
pressure on buyers
Buyer group
concentration
Buyer’s costs The greater the importance of an item is to a
buyer, the more sensitive the buyer will be to the
price it pays.
If there are only a few large buyers, and they buy
from a large number of suppliers, they can
pressure the suppliers to lower costs and thus
affect the profitability of the industries from which
they buy.
©2010 Prentice Hall 5-162
Bargaining Power of Buyers 3 of 3
Factors that have an impact on the ability of buyers to exert
pressure on suppliers (continued)
Degree of
standardization
of supplier’s products
Threat of
backward
integration
The power of buyers is enhanced if there is a
credible threat that the buyer might enter the
supplier’s industry.
The degree to which a supplier’s product differs from its competitors affect the buyer’s
bargaining power.
©2010 Prentice Hall 5-163
First Application of the Five Forces Model 1 of 2
• 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.
– If a firm fills out the form shown on the next slide and
several of the threats to industry profitability are high, the
firm may want to reconsider entering the industry or think
carefully about the position it would occupy.
©2010 Prentice Hall 5-164
First Application of the Five Forced Model 2 of 2
Assessing Industry Attractiveness Using the Five Forces Model
©2010 Prentice Hall 5-165
Second Application of the Five Forces Model 1 of 2
• Second Application of the Model
– The second way a new firm can apply the five forces model
to help determine whether it should enter an industry is by
using the model to answer several key questions.
– The questions are shown in the figure on the next slide, and
help a firm project the potential success of a new venture in
a particular industry.
©2010 Prentice Hall 5-166
Second Application of the Five Forced Model 2 of 2
Using the Five Forces Model to Pose Questions to Determine the Potential Success of a New Venture in an Industry
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• Emerging Industries
– Industries in which standard operating procedures have yet
to be developed.
• Opportunity: First-mover advantage.
• Fragmented Industries
– Industries that are characterized by a large number of firms
of approximately equal size.
• Opportunity: Consolidation.
Industry Types and the Opportunities
They Offer 1 of 3
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• Mature Industries
– Industries that are experiencing slow or no increase in
demand.
• Opportunities: Process innovation and after-sale service innovation.
• Declining Industries
– Industries that are experiencing a reduction in demand.
• Opportunities: Leadership, establishing a niche market, and
pursuing a cost reduction strategy.
Industry Types and the Opportunities
They Offer 2 of 3
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• Global Industries
– Industries that are experiencing significant international
sales.
• Opportunities: Multidomestic and global strategies.
Industry Types and the Opportunities
They Offer 3 of 3
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Competitor Analysis
• What is a Competitor Analysis?
– A competitor analysis is a detailed analysis of a firm’s competition.
– It helps a firm understand the positions of its major
competitors and the opportunities that are available.
– A competitive analysis grid is a tool for organizing the
information a firm collects about its competitors.
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Identifying Competitors
Types of Competitors New Ventures Face
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Sources of Competitive Intelligence 1 of 3
• Collecting Competitive Intelligence
– To complete a competitive analysis grid, a firm must first
understand the strategies and behaviors of its competitors.
– The information that is gathered by a firm to learn about its
competitors is referred to as competitive intelligence.
– A new venture should take care that it collects competitive
intelligence in a professional and ethical manner.
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Sources of Competitive Intelligence 2 of 3
Ethical ways to obtain information about competitors
• Attend conferences and trade shows.
• Purchase competitor’s products. • Study competitors’ Web sites. • Set up Google and Yahoo! e-mail alerts.
• Read industry-related books, magazines, and Web sites.
• Talk to customers about what motivated them to buy your
product as opposed to your competitor’s product.
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Sources of Competitive Intelligence 3 of 3
• Many companies attend
trade shows to not only
display their products,
but to see what their
competitors are up to.
• This is a photo of the
the 2008 Consumer
Electronics Trade Show
in Las Vegas.
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Completing a Competitive Analysis Grid
• Competitive Analysis Grid
– A tool for organizing the information a firm collects about
its competitors
– A competitive analysis grid can help a firm see how it
stakes up against its competitors, provide ideas for markets
to pursue, and identify its primary sources of competitive
advantage.
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Competitive a Analysis Grid for Expresso
Fitness
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Chapter 6
Developing an
Effective Business
Model
Bruce R. Barringer
R. Duane Ireland
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Chapter Objectives 1 of 2
1. Describe a business model.
2. Explain business model innovation.
3. Discuss the importance of having a clearly
articulated business model.
4. Discuss the concept of the value chain.
5. Identify a business model’s two potential fatal flaws.
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Chapter Objectives 2 of 2
6. Identify a business model’s four major components. 7. Explain the meaning of the term business concept
blind spot.
8. Define the term core competency and describe its
importance.
9. Explain the concept of supply chain management.
10. Explain the concept of fulfillment and support.
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What is a Business Model?
• Model
– A model is a plan or diagram that’s used to make or describe something.
• Business Model
– A firm’s business model is its plan or diagram for how it competes, uses its resources, structures its relationships,
interfaces with customers, and creates value to sustain itself
on the basis of the profits it generates.
– The term “business model” is used to include all the activities that define how a firm competes in the
marketplace.
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Dell’s Business Model 1 of 2
• 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
possible.
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Dell’s Business Model 2 of 2
Dell’s Approach to Selling PCs versus Traditional Manufacturers
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The Importance of Business Models
Having a clearly articulated business model is important
because it does the following:
• Serves as an ongoing extension of feasibility analysis. A business
model continually asks the question, “Does this business make
sense?”
• Focuses attention on how all the elements of a business fit
together and constitute a working whole.
• Describes why the network of participants needed to make a
business idea viable are willing to work together.
• Articulates a company’s core logic to all stakeholders, including
all employees.
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Diversity of Business Models
Diversity or Variety in
Business Models
• There is no standard business
model for an industry or for
a target market within an
industry.
• However, over time, the most
successful business models
in an industry predominate.
• There are always opportunities
for business model innovation.
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Business Model Innovation
Netflix is an example of
a business model
innovator.
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Business model Innovators Solar Energy seems like an ideal alternative to fossil fuels. However,
the reality is that purchasing and installing a solar energy system is simply too expensive given the potential cost savings in most instances. Installing a solar energy system also requires a consumer or business to make a substantial capital outlay for future cost savings. Although there are obvious environmental benefits to consider, how would you like to pay your next five years of electric bills in advance? There’s also the issue of maintenance. Once you buy a solar energy system you own it and are responsible for upkeep and repairs. So how can solar energy be affordable alternative business model, pioneered by Sun Edison, is to make solar energy a service rather than a product. The company, which was started by Jigar Shah, a former British Petroleum executive, purchases, installs, and maintains the solar panels placed on its customers’s roofs in exchange for service contracts that provide SunEdison a steady stream of revenue to fund its operators.
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Business Model Innovators In 1991, a student at the University of Helsinki named Linus Torvarlds
posted his Linux operating system on the Internet to compete with the Microsoft Windows operating system. Torvalds, a believer in free software, invited other programmers to try to improve it-for free. The only caveat is that if an individual or company downloads the source code and improved upon it, they must then make the upgraded version freely available to everyone else.
Linux quickly developed a global following among programmers and business. Many companies, like Google or Amazon.com use Linux rather than a system from Microsoft to cut their technology costs.
The problem with Linux is that even though is free, it takes some expertise to download and properly implement it. To solve this problem, Red Hat introduced an innovative business model to complement Linux software. RedHat didn’t sell Linux, that is not allowed. But it started supporting and customizing Linux for clients and developed applications to make Linux run smoother.
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How Business Models Emerge 1 of 3
• The Value Chain
– The value chain is the string of activities that moves a
product from the raw material stage, through
manufacturing and distribution, and ultimately to the end
user.
– By studying a product’s or service’s value chain, an organization can identify ways to create additional value
and assess whether it has the means to do so.
– Value chain analysis is also helpful in identifying
opportunities for new businesses and in understanding how
business models emerge.
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How Business Models Emerge 2 of 3
The Value Chain
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How Business Models Emerge 3 of 3
• 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
• Fatal Flaws
– Two fatal flaws can render a business model untenable
from the beginning:
• A complete misread of the customer.
• Utterly unsound economics.
Pets.com sported an unsound
business model, and failed.
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Components of a Business Model
Four Components of a Business Model
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Core Strategy 1 of 3
• Core Strategy
– The first component of a business model is the core
strategy, which describes how a firm competes relative to
its competitors.
• Primary Elements of Core Strategy
– Mission statement.
– Product/market scope.
– Basis for differentiation.
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Core Strategy 2 of 3
Primary Elements of Core Strategy
Mission
Statement
Product/Market
Scope
A company’s product/market scope defines the products and markets on which it will
concentrate.
A firm’s mission, or mission statement, describes why it exists and what its business
model is suppose to accomplish.
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Core Strategy 3 of 3
Primary Elements of Core Strategy
Basis of
Differentiation
It is important that a new venture
differentiate itself from its competitors in
some way that is important to its customers.
If a new firm’s products or services aren’t different from those of its competitors, why
should anyone try them?
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Strategic Resources 1 of 3
• Strategic Resources
– A firm is not able to implement a strategy without
resources, so the resources a firm has affects its business
model substantially.
• For a new venture, its strategic resources may initially be limited to
the competencies of its founders, the opportunity they have
identified, and the unique way they plan to serve their market.
– The two most important strategic resources are:
• A firm’s core competencies. • Strategic assets.
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Strategic Resources 2 of 3
Primary Elements of Strategic Resources
Core
Competencies
Strategic
Assets
A core competency is a resource or capability that
serves as a source of a firm’s competitive advantage. Examples include Sony’s competence in
miniaturization and Dell’s competence in supply chain management.
Strategic assets are anything rare and valuable that a
firm owns. They include plant and equipment,
location, brands, patents, customer data, a highly
qualified staff, and distinctive partnerships.
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Strategic Resources 3 of 3
• Importance of Strategic Resources
– New ventures ultimately try to combine their core
competencies and strategic assets to create a sustainable
competitive advantage.
– This factor is one that investors pay close attention when
evaluating a business.
– A sustainable competitive advantage is achieved by
implementing a value-creating strategy that is unique and
not easy to imitate.
– This type of advantage is achievable when a firm has
strategic resources and the ability to use them.
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Partnership Network 1 of 2
• Partnership Network
– A firm’s partnership network is the third component of a business model. New ventures, in particular, typically do
not have the resources to perform key roles.
– In most cases, a business does not want to do everything
itself because the majority of tasks needed to build a
product or deliver a service are not core to a company’s competitive advantage.
– A firm’s partnership network includes: • Suppliers.
• Other key relationships.
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Partnership Network 2 of 2
Primary Elements of Partnership Network
Suppliers
Other Key
Relationships
A supplier is a company that provides parts or
services to another company. Intel is Dell’s primary suppler for computer chips, for example.
Firms partner with other companies to make their
business models work. An entrepreneur’s ability to launch a firm that achieves a competitive
advantage may hinge as much on the skills of the
partners as on the skills within the firm itself.
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Customer Interface 1 of 3
• Customer Interface
– The way a firm interacts with its customer hinges on how it
chooses to compete.
• For example, Amazon.com 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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Customer Interface 2 of 3
Primary Elements of Customer Interface
Target
Market
Fulfillment
and Support
A firm’s target market is the limited group of individuals or businesses that it goes after or tries to
appeal to.
Fulfillment and support describes the way a firm’s product or service reaches it customers. It also refers
to the channels a company uses and what level of
customer support it provides.
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Customer Interface 3 of 3
Primary Elements of Customer Interface
Pricing
Structure
The third element of a company’s customer interface is its pricing structure. Pricing models
vary, depending on a firm’s target market and its pricing philosophy.
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Recap: The Importance of Business Models
• Business Models
– 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.