Chapter 1: Introduction to entrepreneurship

Why Become an Entrepreneur

 Desire to be your own boss
 Desire to pursue your own ideas
 Financial rewards

Characteristics of Successful Entrepreneurs

1. Passion for the business: belief that the business will positively influence peoples
lives
2. Tenacity despite failures
3. Product/consumer focus
4. Execution intelligence : ability to turn a business idea into a viable business

Common Myths About Entrepreneurs

1. Entrepreneurs are made not born
2. Entrepreneurs are young and energetic
3. Entrepreneurs are motivated primarily by money
4. Entrepreneurs are gamblers (they are risk takers)

Types of Start-Up Firm

 Salary-substitutes: small level of income
 Lifestyle: income that gives them the opportunity to pursue a particular lifestyle
 Entrepreneurial: new products and services to the market

Economic Impact of Entrepreneurial Firms

 Innovation
 Job Creation

Social Impact of Entrepreneurial Firms

 Society: new products and services that make our day to day lives easier, enhance
productivity, improve our health
 Impact on larger firms: help larger firms become more efficient and effective

The Entrepreneurial Process

1. Decide to become an entrepreneur
2. Develop a successful business idea
3. Moving from an idea to an entrepreneurial firm
4. Managing and growing the entrepreneurial firm
 Chapter 2: Recognizing Opportunities and Generating Ideas

Opportunity: favorable set of circumstances that creates a need for a new product,
service or business.
1. Attractive
2. Timely
3. Durable
4. Anchored in a product, service or business that creates or adds value for its
buyer

Three ways to identify an opportunity:

 Observing trends
 Economic
 Social
 Technological
 Political and regulatory change
 Solving a problem
 Finding gaps in the market place

Personal Characteristics of the Entrepreneur (better to recognize opportunity)

 Prior experience
 Cognitive factors (ability to notice things without engaging in deliberate
search)
 Social networks (bigger networks, exposed to more opportunities and ideas)
 Creativity
1. Preparation
2. Incubation
3. Insight
4. Evaluation
5. Elaboration

Techniques for Generating Ideas

 Brain storming
 Focus groups
 Library and internet research

Encouraging New Ideas

 Establishing a Focal Point for Ideas
 Encouraging creativity at the firm level

Protecting Ideas from Being Lost or Stolen

1. Tangible form
2. Secured
3. Avoid disclosing idea
Chapter 3: Feasibility Analysis
Process of determining whether a business idea is viable, preliminary evaluation of a
business idea that is conducted for the purpose of determining whether a business idea is
worth pursuing.

Forms of Feasibility Analysis

 Product/Service Feasibility (assessment of the overall appeal of the product or
service being proposed, make sure that its what prospective customers want)
 Desirability (concept test)
 Demand (buying intentions survey, conduct library, internet and gumshoe
research)

 Industry/Target Market Feasibility

 Industry Attractiveness (young rather than old, early in life cycle,
growing)
 Target Market Attractiveness (large enough for proposed business but
small enough to avoid attracting larger competitors)

 Organizational Feasibility
 Management Prowess (passion of the entrepreneur)
 Resource Sufficiency (sufficient resources to launch the business, key
management employees, obtain intellectual property protection)

 Financial Feasibility
 Start-up cash
 Financial performance of similar business
 Overall financial attractiveness of the proposed venture

First Screen: tool that can be used in the initial pass at determining the feasibility of a
business idea, the next step is to complete a business plan.
Chapter 5: Industry and Competitor Analysis

Industry: group of firms producing similar product or service

Industry Analysis: business research that focuses on the potential of an industry

Factors that affect performance

 Firm-Level Factors: firms asset, products, culture, teamwork, reputation
 Industry-Level Factors: threat of new entrants, rivalry among existing firms,
bargaining power of buyers

Assessing Industry Attractiveness

 Study environmental and business trends
 Environmental trends: economic, social, technological, political
 Business trends: profit margins, innovation, input costs

 The five competitive forces model (framework to understand the structure of the
industry)
 Threat of substitutes
o Few substitutes equals higher prices
o Close substitutes for a product reduces prices

 Threat of new entrants

o Highly profitable industry attracts new entrants
o Increase in new entrants reduces industry profitability
o Try to keep entry low by putting barrier to entry
- Economies of scale
- Product differentiation (soft drink industry difficult to break
into)
- Capital requirements (need large amounts of money to gain
entrance)
- Cost advantages independent of size: existing firms purchased
land years ago when it was less expensive
- Access to distribution channels: hard to crack especially in
convenience stores
- Government and legal barriers: license, patent..

 Rivalry among existing firms

o Number and balance of competitors (the more competitors there
are, they will try to gain customers by cutting prices)
o Degree of difference between products (degree to which products
differ from one product to another affects industry rivalry)
o Growth rate of an industry (competition is stronger in a slow-
growth industry)
o Level of fixed costs (high fixed cost must sell a higher volume to
reach the break-even point)
  Bargaining power of suppliers
o Supplier concentration (few suppliers, the supplier has an
advantage)
o Switching costs (fixed costs that buyers encounter when switching
suppliers)
o Attractiveness of substitutes (supplier has advantage if there are no
attractive substitutes)
o Threat of forward integration (supplier has advantage if there is a
possibility that he will enter the buyer’s industry)

 Bargaining power of buyers

o Buyer group concentration (many suppliers, buyer has an
advantage)
o Buyer’s costs
o Degree of standardization of supplier’s products
o Threat of backward integration (buyer has an advantage if there is
a possibility that they enter the supplier’s industry)

Industry Types and Opportunities they offer

 Emerging Industries: standard operating procedures have yet to be developed
Opportunity: first-mover advantage

 Fragmented Industries: large amount of firms approximately equal size

Opportunity: Consolidation

 Mature Industries: experiencing slow or no increase in demand

Opportunities: process innovation or after-sale service innovation

 Declining Industries: experiencing reduction in demand

Opportunities: leadership, niche market, pursuing cost reduction strategy

 Global Industries: experiencing significant international sales

Opportunities: Multi domestic and global strategies

Competitor Analysis: detailed analysis of a firm’s competition

Types of competitors
 Direct Competitors: offering identical or similar products
 Indirect Competitors: offering close substitute products
 Future Competitors: could be indirect or direct competitors at any time
Sources of Competitive Intelligence
- Collecting Competitive Intelligence: understand the strategies and behaviors of
its competitors , collects competitive intelligence in a professional and ethical
manner
- Ethical ways to obtain info: conferences and trade shows, purchase competitors
products, talk to customers

Chapter 6: Developing an effective business model

Business Model: Plan or diagram that indicates how a firm competes, uses its resources,
structures its relationships, interfaces with customers and creates value

Importance of business model:

- Extension of feasibility analysis
- How all the elements of a business fit together
- Company’s core logic to all stakeholders

How Business Models Emerge

 Value Chain
o From raw materials through manufacturing and distribution to end user
o Pinpoint where the value chain can be more effective or to spot where
to add value
o Primary activities (inbound logistics, operations, outbound logistics,
marketing and sales, service)
o Support Activities (firm infrastructure, human resources, technology
development, resources procurement)

Components of a Business model

 Core strategy: business mission, product/market scope, basis for differentiation
 Strategic Resources:
o Core competencies: resource or capability that serves as a firm’s
competitive advantage
o Strategic assets: assets that are rare and valuable that a firm owns
(equipment, location, brand, patents, staff, customer data)
 Partnership Network: suppliers, partners, other key relationships
 Customer Interface (how it interacts with its customer)
o Target customer: group or individuals that it goes after or tries to appeal
to
o Fulfillment and support: how a firm’s product or service reaches its
customer, which channel it uses and what level of customer support
o Pricing structure: pricing model varies depending on firm’s target
market
Chapter 9: Building a New-Venture Team

Elements of a New-Venture Team

 Founders or Founder
o Advantages of starting as a team: more talent, resources, ideas
o Disadvantages: may not get along, conflict can arise need to establish a
formal structure
o Preferred attributes: higher education, prior experience, relevant industry
experience, broad social and professional network

 Key Employees
o Skills profile chart: most important skills needed where skills gaps exist in
a new firm

 Board of directors
o Corporations: legally required to have a board of directors
o Elected by a corporation’s shareholders to oversee the management firm
o Inside directors: person also an officer of the firm
o Outside director: not employed by the firm
o Responsibilities: appoint officers of the firm, declare dividends, oversee
affairs of the corporation
o Meet three to four times a year and are paid in company stock or cash
honorarium
o Important function: provide guidance, lend legitimacy (bring credibility)

 Other professionals
o Attorneys, accountants and business consultants
 Lenders and investors
o Provide financial oversight
o Provide insight into the markets that they plan to enter
o Help identify and recruit key management personnel
o Helps with business model
o Additional sources of capital
o Recruit customers

 Board of advisers
o Panel of experts who are asked by a firm’s managers to provide counsel
and advice on an ongoing basis
o No legal responsibility for the firm

 Management team
Chapter 10: Getting Funding or Financing

Why most new ventures need financing or funding

 Cash Flow Challenges: inventory must be purchased, employees must be trained
and paid, advertising
 Capital Investments: real estate, building, facilities, equipment
 Lengthy Product Development Cycles: up-front costs often exceed a firm’s ability
to fund these activities on its own
Alternatives:
 Personal funds
 Equity capital: exchanging partial ownership in a firm, usually stock
 Debt financing: getting a loan
Step 1: determine how much money is needed
Step 2: type of financing that is most appropriate (debt or equity)
Step 3: develop a strategy for engaging potential investors or bankers
 Creative sources

Elevator Speech: statement that outline the merits of a business opportunity, 45 seconds
to 2 minutes long
1. Opportunity or problem that needs to be solved
2. How your product meets the opportunity or solves the problem
3. Your qualifications
4. Describe your market

Sources of Equity Funding

 Venture Capital
o Limited partnerships of money managers who raise money in funds to
invest in start-ups and growing firms
o They fund few entrepreneurial firms compared to business angels
 Business Angels
o Individuals who invest their personal capital directly in start-ups
 Initial Public Offerings
o Company’s first sale of stock to the public
Reason 1: way to raise equity to fund current operations
Reason 2: raises a firm’s public profile, attracts high-quality customers
and business partners
Reason 3: liquidity event, company’s invest can recuperate their
investments
Reason 4: creates a form of currency that can be used to grow a business
via acquisitions
Sources of Debt Financing
 Commercial Banks
o Risk averse and start-up financing is risky
 SBA Guaranteed Loans
o Operates through private-sector lenders who provide loans guaranteed by
the SBA
o For small businesses that are not able to obtain credit elsewhere

Creative Sources of Financing or Funding

 Leasing
 SBIR and STTR grant programs
o Important sources of early-stage funding for technological firms
 Strategic Partners

Chapter 12: The Importance of Intellectual Property

Intellectual Property: Any product of human intellect that is intangible but has value in
the marketplace

Determining what intellectual property to protect

1. Determining whether it is directly related to the firm’s competitive advantage
2. If it has value in the marketplace

Common mistakes firms make

 Not properly identifying all of their intellectual property
 Not fully recognizing the value of their intellectual property
 Not legally protecting the intellectual property that needs protecting
 Not using their intellectual property as part of their overall plan for success

Four key forms of intellectual property

 Patents
o Rights to exclude others from making, selling or using invention for the
term of the patent
o Requirements to obtain a patent: must be useful, different, not obvious to a
person of ordinary skill in the field
o Process of obtaining a patent
1. Invention in practical
2. Document when invention was made
3. Hire a patent attorney
4. Conduct patent search
5. File a patent application
6. Obtain decision from U.S patent and trademark office
  Trademarks
o Word, name, symbol or device used to identify the source of origin of
products or services
o Types of trademarks
1. Trademark: name, symbol or device
2. Service mark: identify the services or intangible activities
(amazon.com)
3. Collective mark: trademarks or service marks used by members of
a cooperative
4. Certification mark: marks, words, names, symbols used by a
person other than the owner to certify a particular quality (100%
napa valley)
o What is protected: words, numbers and letters, design and logos, sounds
o Process of obtaining a trademark
1. Select an appropriate mark
2. Perform a trademark search
3. Create rights in the trademarks

 Copyrights
o Grants the owner of a work of authorship the legal right to determine how
the work is used and to obtain the economic benefits from work
o What is protected:
 Literary works
 Musical compositions
 Computer software
 Dramatic works
 Pantomimes and choreographic works
 Pictorial, graphic and sculptural works

 Trade secrets
o Formula, pattern, physical device, idea, process or other information that
provides the owner of the information with a competitive advantage in the
marketplace
o Physical measures for protecting trade secrets
 Restricting access
 Labeling documents
 Password protecting confidential computer files
 Maintaining logbooks for visitors
 Overall security measures

Intellectual Property Audit: determines the intellectual property a firm owns

o Determine whether its intellectual property is being properly protected
o Remain prepared to justify its valuation in the event of a merger or acquisition
 Chapter 13: Preparing for and evaluating the challenges of growth

Three things a business can do to prepare for growth

 Appreciate the nature of business growth
o Not all businesses have the potential to be aggressive growth firms
o A business can grow too fast
o Business success doesn’t always scale
 Stay committed to a core strategy
o When they become distracted it can easily stray into areas where its at
a disadvantage
 Plan for Growth
o Establish growth-related plans (business plan)
o Establish growth strategies

Reasons for Growth

1. Economies of scale: increasing production lowers the average cost of each unit
produced
2. Economies of scope: range of a firm’s operations creates efficiencies
3. Market Leadership: when a firm holds number one position in an industry or
niche market in terms of sales volume
4. Influence, Power and survivability: larger business usually have more influence
and power than smaller firms
5. Accommodate the Growth of Key Customers: Sometimes firms are compelled to
grow to accommodate the growth of a key customer
6. Attract and retain talented employees: growth is a firm’s primary mechanism to
generate promotional opportunities for employees

Stages of growth
1. Introduction
o Start-up phase, a business determines what its core strengths and
capabilities are, make sure the initial product is right

2. Early growth
o Increasing sales and heightened complexity
o Founder must start working on the business rather than in the business
o Increased formalization, developing policies and procedures

3. Continuous growth
o Need for structure and formalization increase
o Developing related products and services
o Toughest decisions take place in this stage (whether the owner and
management team have the experience and ability to take the business
further)
 4. Maturity
o Growth stalls
o Focused on managing efficiently than developing new products
o Look for partnering opportunities or acquisitions deals to breathe new life
into the firm
o If new growth cannot be achieved through a firm’s existing product mix,
the next generation of products should be developed.

5. Decline
o A business’s ability to avoid decline hinges on the strength of its
leadership and its ability to adapt over time

Challenges of growth
 Managerial capacity problem
o Limited managerial capacity
o Expensive to hire new employees, takes time for them to socialize into the
culture of the firm and to acquire firm-specific skills as well as
establishing trusting relationships with other members of the firm
o Adverse selection: difficult to find the right employees and place them in
appropriate positions
o Moral hazard: new hires do not have the same ownership incentives as the
original founders

 Day-to-day challenges of growing a firm

o Cash Flow Management: A firm requires an increasing amount of cash as
it grows
o Price stability: if growth comes at the expense of a competitor’s market
share, a price war could ensue
o Quality control: an increase in firm activity can result in quality control
issues if a firm is not able to increase its resources to handle the extra
work
o Capital Constraints: Capital constraints are an ever-present problem for
growing firms
Chapter 14: Strategies for Firm Growth

Internal Growth Strategies: efforts taken within the firm itself, new product development,
other product-related strategies, international expansion.

Advantages of internal growth:

o Incremental, even-paced growth
o Provides maximum control
o Preserves organizational culture
o Encourages internal entrepreneurship
o Allows firms to promote from within

Disadvantages of internal growth:

o Slow form of growth
o Need to develop new resources
o Investment in failed internal growth strategy
o Adds to industry capacity

 New product development

o Creation and sale of new products (competitive necessity)
o Keys to effective new product and service development
- Find a niche and fill it
- Develop products that add value
- Get quality right and pricing right
- Focus on a specific target market
- Conduct ongoing feasibility analysis

 Internal expansion
o Sell products or services in multiple countries
o Foreign-market entry strategies
- Exporting: producing at home and shipping to foreign market
- Licensing: granting permission to another firm to manufacture
that product for specified royalties or other payments
- Joint ventures: establishment of a firm that is jointly owned by
two or more independent firm
- Franchising
- Turnkey Project: contractor from one country builds a facility
in another country, trains the personnel that will operate the
facility and turns over the keys to the project when it is
completed and ready to operate
 - Wholly owned subsidiary: Company that has made the decision
to manufacture a product in a foreign country and establish a
permanent presence

 Other product-related strategies

o Improving an existing product or service
o Increasing market penetration
o Extending product lines: additional variations of a product so it will appeal
to a broader range of clientele
o Geographic expansion: Growth via expanding to additional geographic
locations
o Geographic expansion: growth via expanding to additional geographic
locations

External Growth Strategies: establishing relationships with third parties, mergers,

acquisitions, strategic alliances, joint ventures, licensing and franchising.

Advantages external growth:

o Reducing competition
o Gaining access to proprietary products or services
o Gaining access to new products and markets
o Obtaining access to technical expertise
o Gaining access to an establish name
o Economies of scale
o Diversification of business risk

Disadvantages external growth:

o Incompatibility of top management
o Clash of corporate cultures
o Operational problems
o Increased business complexity
o Loss of organizational flexibility
o Antitrust implications

 Mergers and acquisitions

o Outright purchase of one firm by another
o Purpose: expanding its product line, gaining access to distribution
channels, economies of scale
o Process:
1. Meet with the target firm’s top management team
2. Assess the mood of the acquisition target
3. Identify sources of financing for the transaction
 4. Continue negotiations
5. Make an offer to purchase if acceptable terms are available
6. Negotiate a non compete agreement with the target firm’s key
employees who are to be retained
7. Retain an attorney to prepare documents for closing
8. Meet as soon as possible with all affected employees
9. Implement the plan for the acquired firm

 Licensing
o Granting permission by one company to another company to use a specific
form of its intellectual property under clearly defined conditions
o Technology licensing: utility patent
o Merchandise and character licensing: trademark or brand controls through
a trademark or copyright

 Strategic alliances
o Partnership between two or more firms developed to achieve a specific
goal, do not involve the creation of a new entity
o Technological alliances: feature cooperation in R&D, engineering and
manufacturing
o Marketing alliances: match a company with excess distribution capacity
with a company that has a product to sell
 Joint ventures
o When two or more firms pool a portion of their resources to create a
separate, jointly owned organization
o Scale joint venture: partners collaborate at a single point in the value chain
to gain economies of scale in production or distribution
o Link join venture: positions of the partners are not symmetrical, and the
partners help each other access adjacent links in the value chain
o Advantages:
- Gain access to a specific resource
- Economies of scale
- Risk and cost sharing
- Gain access to a foreign market
- Learning
- Speed to market
- Neutralizing or blocking competitors
o Disadvantages:
- Loss of proprietary information
- Management complexities
- Financial and organizational risks
- Risk becoming dependent on a partner
- Partner’s cultures may clash

 Franchising