Midterm topics on Entrepreneurship and Small Business Development

      

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Chapter 1       The Foundations of Entrepreneurship

Key words: Entrepreneur

Introduction                                                                                                                         

      We are in the era of the entrepreneur. Through the world, growing numbers of people are realizing their dreams of owning and operating their own business. Entrepreneurship is thriving. The past two decades have seen record numbers of entrepreneurs launching new businesses each year.

I.    The World of the Entrepreneur                                                                                   

A study by the Global Entrepreneurship Monitor (GEM) found 18.7 percent of the adult population in the United States is working to start a business. North America, South America, and Latin America lead the world in entrepreneurial activity. Eastern European countries, China, Vietnam, and other nations whose economies were state–controlled and centrally planned now hold potential for entrepreneurs.

II.  What is an Entrepreneur?                                                                                            

An entrepreneur is one who creates a new business in the face of risk and uncertainty for achieving profit and growth opportunities and assembles the necessary resources to capitalize on those opportunities.

While we may not be able to teach entrepreneurship, we can teach the skills of small business management. This is an important distinction to make to students.

Noted psychologist David McClelland characterized high achievers/entrepreneurs as possessing these traits:           

·         Desire for responsibility

·         Preference for moderate risk (risk eliminators)

·         Confidence in their ability to succeed

·         Desire for immediate feedback

·         High level of energy

·         Future orientation (serial entrepreneurs)

·         Skill in organization

·         Value of achievement over money

Other characteristics of entrepreneurs include:

·         High degree of commitment

·         Tolerance for ambiguity

·         Flexibility

·         Tenacity

III. The Benefits of Entrepreneurship                                                                                

The primary benefits entrepreneurs enjoy include the opportunity to:

·         Create their own destiny

·         Make a difference

·         Reach their full potential

·         Generate impressive profits

·         Contribute to society and be recognized for their efforts

·         Do what they enjoy and have fun at it!

IV. The Potential Drawbacks of Entrepreneurship                                                         

      With these potential rewards, entrepreneurship also presents risk and uncertainty. Entrepreneurs may experience:

·         Uncertainty of income: “The entrepreneur is the last one to be paid.”

·         Risk of losing their entire investment

·         Long hours and hard work

·         Lower quality of life until the business gets established

·         High levels of stress

·         Complete responsibility

·         Discouragement

V.  Behind the Boom: Feeding the Entrepreneurial Fire                                                

The rapid increase in entrepreneurs has been a result of:

·         Considering entrepreneurs as heroes

·         Entrepreneurial education

·         Demographic and economic factors

·         Shift to a service economy

·         Technological advancements

·         Independent lifestyles

·         Commerce and the Internet

·         Additional international opportunities

VI.  The Cultural Diversity in Entrepreneurship                                                            

      You will find entrepreneurs in virtually every walk of life including:

·         Young Entrepreneurs

·         Women Entrepreneurs

·         Minority Enterprises

·         Immigrant Entrepreneurs

·         Part–time Entrepreneurs

·         Home–Based Businesses

·         Family Businesses

·         Copreneurs

·         Corporate Castoffs

·         Corporate Dropouts

Entpreneurs are diverse in every way.

VII.          The Power of “Small” Business                                                                              

Because big business is more visible than small business, most people underestimate the role of the small firm in the U.S. economy.

The definition of a “Small Business” is:

1.   One which is independently owned and operated and not dominant in its field.

2.   Eligibility requirements are based on the specific industry.

·         Retailing – Annual sales/receipts not exceeding $3.5 to $13.5 million.

·         Services – Annual receipts not exceeding $2.5 to $14.5 million.

·         Wholesaling – Yearly sales must not be over $9.5 to $22 million.

·         Agriculture – Annual receipts not exceeding $1.0 to $3.5 million.

·         Construction – General construction with annual receipts not exceeding $17 million.

·         Special Trade Construction – Annual receipts not exceeding $7 million.

·         Manufacturing – Maximum number of employees may range from 500 to 1,500 depending on the industry.   

The most common measure of small business is the number of employees on a firm’s payroll. The White House Conference on Small Business definition for small business is: “A firm employing 500 people or fewer.”

The Committee for Economic Development states that a small business must meet at least two of the four stated criteria:

1.   Management is independent.

2.   Capital is supplied and ownership is held by an individual or a small group.

3.   Area of operation is mainly local; markets need not be local.

4.   Size is small when compared to the biggest unit in the field.

VIII.       The Ten Deadly Mistakes of Entrepreneurship                                                   

      The material in this section is in addition to the text    

      Studies have indicated that there are common reasons for new business ventures to fail. These causes of small business failure may include:

1.   Management mistakes

2.   Lack of experience

3.      Poor financial control

4.      Weak marketing efforts

5.   Failure to develop a strategic plan

6.   Uncontrolled growth

7.   Poor location

8.      Improper inventory control

9.      Incorrect pricing

            10. Inability to make the “entrepreneurial transition”

IX.   Putting Failure into Perspective                                                                                 

      Entrepreneurs don’t fail—the venture fails.

·         There are no such things as failures, only results.

·         Always look to turn a negative situation into a positive opportunity.

·         Have no fear of failure and be sure to have a contingency plan.

·         The only people who never fail are those who never do anything or never attempt anything new.

The successful entrepreneur understands the meaning of these clichés and knows how to deal with adversity in a proactive and positive manner.

X.  How to Avoid the Pitfalls                                                                                              

      These same studies have indicated that entrepreneurs can increase their changes for success if they:

1.      Know their business in depth.

2.      Develop a solid business plan in writing.

3.      Manage financial resources.

4.      Understand financial statements.

5.      Learn to manage people effectively.

6.      Set your business apart from the competition.

7.      Maintain a positive attitude.

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Chapter 2       Inside the Entrepreneurial Mind:
From Ideas to Reality

Key words: Creativity, Innovation, and Entrepreneurship, Brainstorming, Mind–mapping, Patents, trademark, copyright, service mark

Introduction                                                                                                                          

One of the tenets of entrepreneurship is the ability to create new and useful ideas that solve the problems and challenges that people face every day. As Chapter 1 discussed, entrepreneurs can create value in a number of ways. For example, entrepreneurs invent new products and services, develop new technology, discover new knowledge, improve existing products or services, and find different way of providing more valuable goods and services with fewer resources.

I.       Creativity, Innovation, and Entrepreneurship                                                            

Creativity is the ability to develop new ideas and discover new ways of looking at problems and opportunities.

Innovation is the ability to apply creative solutions to problems and opportunities that enhance or enrich people’s lives.

One entrepreneur explains, “Creativity is only useful if it is channeled and directed.” Leadership expert Warren Bennis says, “Today’s successful companies live and die according to the quality of their ideas.” A small percentage of product ideas prove to be successful products. It is this creativity that is an important source of building a competitive advantage                                                                                             

      Entrepreneurship is the result of a disciplined, systematic process of applying creativity and innovation to needs and opportunities in the marketplace. Innovation must be a constant process because most ideas do not work and most innovations fail.

II.  Creativity – A Necessity for Survival                                                                            

      Creativity is an important source for building a competitive advantage and for survival.

      Making the inferential leap from what has worked in the past to what will work today (or in the future) requires entrepreneurs to cast off their limiting assumptions, beliefs, and behaviors and to develop new insights into the relationship among resources, needs, and values.

      A paradigm is a preconceived idea of what the world is, what it should be like, and how it should operate. These ideas become so deeply rooted in our minds that they become blocks to creative thinking, even though they may be outdated, obsolete, and no longer relevant.

      Can creativity be taught? Research shows that anyone can learn to be creative. Author Joyce Wycoff believes everyone can learn techniques and behaviors that generate ideas.

III. Creative Thinking

      Research into the operation of the human brain shows that each hemisphere of the brain processes information differently. One side of the brain tends to be dominant over the other.

The human brain develops asymmetrically, and each hemisphere tends to specialize in certain functions. The left–brain handles language, logic, and symbols. The right brain takes care of the body’s emotional, intuitive, and spatial functions.

Right–brained lateral thinking is somewhat unconventional, unsystematic, and relies on kaleidoscope/lateral thinking. This describes the process of considering a problem from all sides and jumping into it at different points.                                                                                   

Left–brained vertical thinking is narrowly focused and systematic, proceeding in a highly logical fashion from one point to the next. Left–brain thinking is guided by a linear, vertical thought process progressing from one logical conclusion to the next.

      Those who have learned to develop their right–brained thinking skills tend to:

·         Challenge custom, routine, and tradition

·         Realize there is more than one “right answer”

·         Have “helicopter skills” to rise above daily routine

·         Ask the question: “Is there a better way?”

      Entrepreneurs can learn to tap their innate creativity by breaking down the barriers to creativity that most of us have.

      Entrepreneurship requires both left– and right–brained thinking.

In addition to the text

TEST YOUR ENTREPRENEURIAL I.Q.

The Entrepreneurial I.Q. Test and the following responses can be used to stimulate classroom discussion on the entrepreneurial profile and related topics introduced in subsequent chapters of the text, or it can be given simply as a handout for self–study with the suggested answers attached.

Respond by circling True or False to the following statements.

1.       As a child, you looked for ways of making or earning money instead of
relying on an allowance.                                                                                True     False

2.       I am responsible for my own fate. People who rely on luck are irresponsible.     True     False

3.       Just because a product can be sold cheaply doesn’t mean everyone in that
market will buy it.                                                                                          True     False

4.       I can handle having incomplete information before venturing into a new
project.                                                                                                          True     False

5.       Statistics support the fact that entrepreneurs who have had family members
venture into successful small business ownership before them are more
likely to be successful.                                                                                   True     False

6.       When I am passionate about something, I can work on it for days on end,
sometimes sacrificing getting the proper rest.                                                   True     False

7.       Hard work and a successful financial backing will not ensure the success of
a small business.                                                                                            True     False

8.       You should advertise and focus the sale of your product or service to meet
the needs of as many people as possible.                                                          True     False

9.       When you have an idea you feel will be successful, you rarely let anyone
talk you out of it, even if they speak with the voice of reason.                            True     False

10.   I am not afraid of taking a calculated risk.                                                        True     False

SCORING

Score 1 point for each TRUE answer.  This number represents your entrepreneurial I.Q.

9–10    Very good – Keeping pace with successful small business strategies in the twenty–first century will be crucial to successful business survival.

7 – 8     Satisfactory – Today’s fast–paced small business environment won’t always let you get away with a few mistakes.

0 – 5     Questionable – You could lose the farm!

SUGGESTED ANSWERS TO THE ENTREPRENEURIAL I. Q. TEST

1.       TRUE – Innovation is essential to the entrepreneur and often starts at a very young age.

2.       TRUE – Most entrepreneurs are driven by what has been termed an internal locus of control, whereby they take responsibility for all their successes as well as disappointments. Good or bad, they prefer not to rely on luck or make excuses for their various circumstances. As such, they may view people who blame others as weak or unrealistic. These people are seen to have what has been termed as an external locus of control.

3.       TRUE – Successful entrepreneurs know that cutting prices is easily copied by a larger store or corporate chain. Establishing a creative competitive edge is what allows the small business owner to compete for loyal, repeat customers who don’t jump to competitors each time a price is lowered a few cents.

4.       TRUE – An ability to handle a little ambiguity is imperative to the entrepreneurial psyche. Operating in the real world where everything is not always under his/her control is a daily requirement.

5.       TRUE – Just as in most things, having a mentor or someone who understands your current challenges can act as a positive catalyst.

6.       TRUE – Successful entrepreneurs are driven with an internal excitement that motivates them when others might be overwhelmed.

7.       TRUE – Many hard working, motivated entrepreneurs have lost their shirts and Aunt Jenny’s nest egg by simply failing to clearly establish whether or not a justifiable need existed within the community for their product/service. Eventually start–up cash runs out and customers have to start buying.

8.       TRUE – Beating the competition these days requires attracting the right customer with that special innovative flair. Trying to satisfy everybody spreads expertise and advertising dollars too thin.

9.       TRUE – If every entrepreneur allowed someone to talk them out of something simply because it appeared the reasonable thing to do, most inventions would never reach maturity or distribution. Rumor has it that Bill Gates’s first Business Plan was not accepted as a feasible idea by his college instructor.

10.   TRUE – A strong trait in the innovative spirit of the American entrepreneur is his/her ability to take on risk.

IV.   Barriers to Creativity                                                                                                   

      There are many barriers to creativity—time pressures, unsupportive management, pessimistic coworkers, overly rigid company policies, and countless others.

      The most difficult hurdles to overcome are those that individuals impose upon themselves. In his book, A Whack on the Side of the Head, Roger von Oech identifies ten “mental blocks” that limit individual creativity. They are as follows:

1.      Searching for just one right answer

2.      Focusing on being logical

3.      Blindly following rules

4.      Constantly being practical

5.      Viewing play as frivolous

6.      Becoming overly specialized

7.      Avoiding ambiguity

8.      Fearing looking foolish

9.      Fearing mistakes and failure

10.  Believing that “I’m not creative”

      Questions to spur the imagination:                                                                                   

1.   Is there a new way to do it?

2.   Can you borrow or adapt it?

3.   Can you give it a new twist?

4.   Do you merely need more of the same?

5.   Do you need less of the same?

6.   Is there a substitute?

7.   Can you rearrange the parts?

8.   What if you do just the opposite?

9.   Can you combine ideas?

10.  Can you put it to other uses?

11.  What else could we make from this?

12.  Are there other markets for it?

13.  Can you reverse it?

14.  What idea seems impossible, but if executed, would revolutionize your business?

V.  How to Enhance Creativity                                                                                           

      New ideas are fragile creations, but the right organizational environment can encourage people to develop and cultivate them.

      Ensuring that workers have the freedom and the incentives to be creative is one of the best ways to achieve creativity.

      Entrepreneurs can stimulate their own creativity and encourage it among workers by:

1.      Including creativity as a core company value

2.      Embracing diversity

3.      Expecting creativity

4.      Expecting and tolerating failure

5.      Creating an organizational structure that nourishes creativity

6.      Encouraging curiosity

7.      Create a change of scenery periodically

8.      Viewing problems as challenges

9.      Providing creativity training

10.  Providing support

11.  Developing a procedure for capturing ideas

12.  Talk and interact with customers

13.  Look for uses for your company’s products or services in other markets

14.  Rewarding creativity

15.  Modeling creative behavior

      You can enhance individual creativity by using the following techniques:
                                                                                                                                         

1.      Allow yourself to be creative

2.      Give your mind fresh input every day

3.      Observe the products and services of other companies, especially those in complete different markets

4.      Recognize the creative power of mistakes

5.      Notice what is missing

6.      Keep a journal handy to record your thoughts and ideas

7.      Listen to other people

8.      Listen to customers

9.      Talk to a child

10.  So something ordinary in an unusual way

11.  Keep a toy box in your office

12.  Read books on stimulating creativity or take a class on creativity

13.  Take some time off

14.  Be persistent

VI.  The Creative Process                                                                                                    

      Although new ideas may appear to strike like a bolt of lightning, they are actually the result of the creative process. The creative process involves seven steps:

1.      Preparation

2.      Investigation

3.      Transformation

4.      Incubation

5.      Illumination

6.      Verification

7.      Implementation

VII.   Techniques for Improving the Creative Process                                                      

      Brainstorming is a process in which a small group interacts with very little structure to produce a large quantity of novel and imaginative ideas. For a brainstorming session to be successful, an entrepreneur should follow these guidelines:

1.      Keep the group small—five to eight members

2.      Company rank and department affiliation are irrelevant

3.      Have a well–defined problem to address

4.      Limit the session to 40 to 60 minutes

5.      Appoint someone the job of recorder

6.      Use a seating pattern that encourages communication

7.      Encourage all ideas from the team, even wild and extreme ones

8.      Establish a goal of quantity of ideas rather than quality

9.      Forbid evaluation or criticism

10.  Encourage “idea hitch–hiking”

      Mind–mapping is an extension of brainstorming. Mind–mapping is a graphical technique that encourages thinking on both sides of the brain, visually displays the various relationships between ideas, and improves the ability to view the problem from many sides. It relates to the way the brain actually works. Rather than throwing out ideas in a linear fashion, the brain jumps from one idea to another. In many creative sessions, ideas are rushing out so fast that many are lost if a person attempts to shove them into a linear outline.       

      The mind–mapping process works this way:

1.      Sketch a picture symbolizing the problem

2.      Write down every idea that comes to your mind – use key words and symbols

3.      When idea flow starts to trickle, stop

4.      Allow your mind to rest a few minutes

      Force Field Analysis addresses the problem to solved, the driving forces, and the restraining forces. Refer to Figure 2.2 – Sample Force Field Analysis.                                                                       

      TRIZ is a systematic approach to solve any technical problem and relies on 40 principles and left–brain thinking to solve problems. Refer to Figure 2.3 – TRIZ Contradiction Matrix.                                        

      Rapid prototyping transforms ideas into actual models that point out flaws and lead to improvements. The three principles of rapid prototyping are “The Three R’s”: rough, rapid, and right.                                      

VIII.    Protecting Your Ideas

      Entrepreneurs must understand how to put patents, copyrights and trademarks to work for them.                                        

·         Patents – a grant from the federal government’s Patent and Trademark Office (PTO), to the inventor, giving the exclusive right to use or sell the invention in this country for 20 years from the date of the patent application.

·         Inventors who develop a new plant can obtain a plant patent (by grafting or cross–breeding, not planting seeds).

·         Most patents are granted for new product inventions, but design patents, which extend beyond the date the patent is issued, are given to inventors who make new original and ornamental changes in the designs of existing products that enhance their sales.

·         A device cannot be patented if it has been in print anywhere in the world.

·         Before beginning the lengthy process of applying for a patent, it is best to seek the advice of a patent agent or attorney.

      The patent process involves these six steps:                                                                     

1.      Establish the invention’s novelty

2.      Document the device

3.      Search existing patents

4.      Study search results

5.      Submit the patent application

6.      Prosecute the patent application

      A trademark is any distinctive word, phrase, symbol, design, name, logo, slogan, or trade dress that a company uses to identify the origin of a product or to distinguish it from other goods in the market. A service mark is the same as a trademark, except that it identifies and distinguishes the source of a service rather than a product. Refer to Figure 2.6 – Trademark Applications and Trademarks and Renewals Issued.
                                                                                                                                         

      A copyright is an exclusive right that protects the creators of original works of authorship such as literary, dramatic, musical, and artistic works. This includes motion pictures, software, choreography, books, and recordings.      

      Protecting intellectual property is imperative. Unfortunately, not every businessperson respects the rights of ownership to products, processes, names, and works. The dynamics of the global market makes protecting intellectual property even more challenging. The primary weapon is efficient use of the legal system. Before bringing a lawsuit, an entrepreneur must consider the following issues:                          

1.      Can the opponent afford to pay if you win?

2.      Will you get enough from the suit to cover the costs of hiring an attorney?

3        Can you afford the loss of time and privacy from the ensuing lawsuit?

IX. Conclusion                                                                                                                     

The creative process is a tenant of the entrepreneurial experience. Success, and even survival itself, requires entrepreneurs to tap their creativity. The seven steps of the creative process allow the entrepreneur to transform an idea into a business reality.

1.      Preparation

2.      Investigation

3.      Transformation

4.      Incubation

5.      Illumination

6.      Verification

7.      Implementation

Creativity results in value and value provides a competitive advantage. Entrepreneurs should protect their creative ideas through patents, trademarks, servicemarks, and copyrights to sustain a competitive edge.

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Chapter 3       Designing a Competitive Business Model and Building a Solid Strategic Plan

Key words: Cost leadership, Differentiation, Focus, competitive advantage, mission statement

Introduction                                                                                                                          

      Developing a strategic plan allows a company to create a competitive advantage—an aggregation of factors that sets a company apart from its competitors and gives it a unique position in the market. No business can be everything to everyone. Creating a strategic plan prevents a small business from failing to differentiate itself from its competitors.

      Another avenue for a entrepreneurs seeking a competitive advantage is through customer intimacy, focusing on the goods and services that customers want and value. When it comes to developing a strategic plan, small companies have a variety of natural advantages over their larger competitors: fewer product lines, a better–defined customer base, a specific geographical area, and closer customer contact.

I.    Building a Competitive Advantage                                                                               

      There has been an evolution from financial capital to intellectual capital. Human, structural and customer resources have been affected by this shift.

      The goal of developing a strategic plan is to create a competitive advantage for the small business—the aggregation of factors that sets the small business apart from its competitors and gives it a unique position in the market. Strategic management includes developing a game plan to guide a company as it strives to accomplish its vision, goals, and objectives and to keep it on course. Products, services, pricing and the way these are sold are all aspects of how a small company can build and sustain a strategic advantage.                    

      Strategic planning should include:

·         Both a short– and long–term planning horizon

·         Company goals and objectives

·         Complete industry and other relevant information

·         Customer and employee input

·         Customer focus

      Strategic planning can position a business to build a sustainable competitive advantage.                                    

II.  The Strategic Management Process                                                                              

      Strategic planning is a continuous process that consists of nine steps:

·         Step 1: Develop a clear vision and translate it into a meaningful mission statement.                              

      A vision is the entrepreneur’s dream of something that does not yet exist. It provides direction, a basis for decision making and a source of motivation. A company’s vision statement incorporates the values of its owner and is about more than just making money. A clearly defined vision leads to a company’s mission statement that includes a description of the business, its products, its markets and customers, its competitive distinction, and its effects on the community at large.

COMPANY MISSION STATEMENT EXERCISE

Use this exercise as an in–class group discussion exercise or as a take–home self–study handout with suggested examples.  (Refer to Table 3.1, “Tips for Writing a Powerful Mission Statement” on pages 76–77.)

1.       Individual students or small groups should begin by selecting a particular business or industry type. For example: An individual or group could develop two different mission statements for firms in the infant and toddler day care industry. One would focus on an innovative day care center in an upscale neighborhood, while the other could focus on a community day care center in an inner city neighborhood. The idea is to search for the correct words that provide an image or vision, and make each business distinctly different. This could also be done for other industries such as lawn care and maintenance (one could use only environmentally friendly products), espresso stands (one on a college campus compared to one at the airport) or retail outlets, etc.

2.       Students should use words that convey a sustainable image or vision that accurately reflects the firm’s competitive advantage. Read aloud, without identifying the specific firm or industry, it should still provide a clear idea of what business the firm is in, who its customers are, and its purpose.

3.       Once the students have completed their mission statements read them aloud without mentioning the industry or company name. An accurate mission statement will provide a clear idea of the type of business and its purpose. It should not, however, be a complete business description.

continued—

SUGGESTED EXAMPLES AND COMMENTS

Correct Upscale Day Care Center ExampleThe mission of the Hollywood Day Care Center is to provide an innovative, creative, learning environment for infants and toddlers in a secured environment away from home. Our staff is highly qualified and focused on meeting your child’s every need.
Correct Inner City Day Care Example The mission of the Neighborhood Day Care Center is to provide a friendly, warm environment for infants and toddlers. Our multicultural staff prides itself on meeting the needs of the community’s working parents while providing an affordable secure environment for the community’s precious children.
Incorrect Upscale Day Care Center – Example 1The mission of the Hollywood Day Care Center is to care for infants and toddlers in a very special environment with a choice of different language classes, artistic expressions, and anything else you want to pay for. Our hours are from 5:30 AM to midnight Monday through Friday and from 6 to 9 PM on Saturday and Sunday. We also have a nurse and special sick rooms for those times when your child is ill. At any time, you can tune in to your child’s day by signing onto the Internet with your special parent’s password.
Incorrect Upscale Day Care Center – Example 2Our mission is to provide an innovative environment with a number of different choices to meet your every need. Our high–tech computers will provide you with a sense of security when your loved ones are away from home. Your every need will be met.

Note: Some mission statements are brief. For example, the mission statement “to make a profit” has worked for famous companies like Coca–Cola because quality and attention to customer preferences are implied. This type of mission statement is not normally enough to provide vision and direction for most entrepreneurial ventures.

·         Step 2: Assess the company’s strengths and weaknesses.                                    

      Strengths are positive internal factors that a company can use to accomplish its mission. Weaknesses are potentially negative factors that could inhibit those efforts. This on–paper analysis allows the entrepreneur to have a better perspective of the overall venture, to establish a foundation to build on (strengths), and to meet and remove the challenges and obstacles standing in the way of success (weaknesses).

·         Step 3: Scan the environment for significant opportunities and threats facing the business.                          

      With the internal inventory complete, the firm now searches for external opportunities such as specific market niches that match up well with internal resources. The key to success is to take action and to stay a step ahead of the competition. External threats may come from competitors, government agencies, rising interest rates, and so on. The firm must have a plan for shielding itself from those threats.

·         Step 4: Identify the key factors for success in the business.                                 

      Every business has a certain degree of control over key variables such as production capabilities, market opportunities, its labor force, access to raw materials, inventory, and so on. Success comes from the ability to recognize and to capitalize on those opportunities, and to maximize revenues and/or minimize costs accordingly.

·      Step 5: Analyze the competition.                                                                         

      Analyzing all forms of competition must be a never–ending process for all companies. Markets and competitors come and go very quickly. Reaction time is often relatively slow, so the entrepreneur must have the ability to anticipate changes in the marketplace. (Refer to Figure 3.3 – How Small Businesses Compete.) There is an abundance of information available through many sources (public information, Web sites, and market researchers). Knowledge management is the process of collecting information, analyzing it, and taking action in an effective manner. The Competitive Profile Matrix (Table 3.2) quantifies the value of key success factors comparing one business to its competitors.

·         Step 6: Create company goals and objectives.                                                     

      A company (or person for that matter) with no goals may wander aimlessly into the future. Setting goals provides focus and direction for a company and its people. Objectives are the specific targets of performance required to achieve goals, such as production, marketing, financing, and profit standards. Goals and objectives should be measurable, reachable, and stated in writing.

·         Step 7: Formulate strategic options and select the appropriate strategies.                        

      A strategy is a road map of the actions an entrepreneur draws up to fulfill a company’s mission, goals, and objectives. A strategy is the master plan that incorporates all of the parts (marketing, finance, personnel, and operations) to make up the whole. Three basic strategies, as illustrated in Figure 3.4 – Three Strategic Options,  include:

1.      Cost leadership

2.      Differentiation

3.      Focus

Each of the three strategies offers a competitive advantage.

1.      Cost leadership: By containing costs, lower prices will net sufficient profit margins.
      Examples: Anytime Fitness, Wal–Mart

2.      Differentiation: Positioning one’s product or service apart from the competition builds loyal customers that are not easily pulled away by the competition.
      Examples: Vosges–Haut Chocolate, Ice Hotel, Indigenous Designs, Mercedes
      Benz, Cadillac

3.      Focus: Select one (or more) segments(s); identify customers' special needs, wants, and interests; and approach them with a good or service specifically designed to excel in meeting those needs, wants, and interests.
      Examples: American Plume, Fancy Feather, exercise equipment, tall men’s
      clothing and television networks such as Black Entertainment (BET).

·         Step 8: Translate strategic plans into action plans.                                               

      Entrepreneurs must convert strategic plans into operating (tactical) plans that guide their companies on a daily basis. Involving and empowering employees throughout the entire process is often a key to successful outcomes. If an organization’s people have a vision for the future direction and goals of a company, and if they are given a stake in the company, they are more likely to work in unison to achieve those goals.

·         Step 9: Establish accurate controls.                                                                     

      With a vision, mission statement, strategic and tactical plan now in place, managers must constantly measure and assess the actual production, sales, costs, and other performances of their departments and people, and effect any changes necessary to stay on schedule and on budget.

Balanced Scorecard                                                                                                       

Once the entrepreneur identifies and tracks key performance indicators and takes corrective action, a balanced scorecard is a set of measurements unique to a company that includes both financial and operational measures and gives a manager a quick yet comprehensive picture of the company’s total performance in these five areas:

1.      Customer

2.      Internal business

3.      Innovation and learning

4.      Financial

5.      Corporate citizenship

This gives managers a snapshot of a company’s overall performance in each of these key performance areas. The complexity of managing a business demands that an entrepreneur is able to see performance measures in several areas simultaneously.  Refer to Figure 3.5 – The Balanced Scorecard Links Performance Measures.

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Chapter 4       Conducting a Feasibility Analysis and
Crafting a Winning Business Plan

Key words: feasibility analysis, business plan, financial feasibility

Introduction                                                                                                                          

An entrepreneur needs a well-conceived and factually based business plan to increase the likelihood of success. Research has documented that companies that perform business planning outperform those that do not. Conducting a feasibility analysis is the first step in developing an effective business plan.

I.    Conducting a Feasibility Analysis

For many entrepreneurs, coming up with an idea for a new business concept or approach is easy. A feasibility analysis is the process of determining if the idea is a viable foundation for creating a successful business. If the idea meets the necessary criteria, the entrepreneur’s next step is to build a solid business plan for capitalizing on the idea. If the idea fails, the entrepreneur abandons it and moves on to the next opportunity. It is about learning, being efficient, and increasing the chances for success before investing resources. Conducting a feasibility study reduces the likelihood that entrepreneurs will pursue fruitless business ventures.                        

A feasibility study is not the same as a business plan.                                                    

A feasibility study is an investigative tool to answer the question, “Should we proceed with this business idea?” It serves as a filter, screening out ideas that lack the potential for building a successful business, before an entrepreneur commits the necessary resources to building a business plan.

A business plan is a planning tool for transforming an idea into reality.

Feasibility studies are particularly useful when entrepreneurs have generated multiple ideas for business concepts and must winnow their options down to the “best choice.” 

A feasibility analysis consists of three interrelated components:                                    

1.      An industry and market feasibility analysis,

2.      A product or service feasibility analysis, and

3.      A financial feasibility analysis.

Addressing these questions helps entrepreneurs determine whether the potential for sufficient demand for their products and services exists. We will first explore techniques to assess the “Industry and Market Feasibility” aspect of the Feasibility Analysis.                                                                                                                     

When evaluating the feasibility of a business idea, entrepreneurs find a basic analysis of the industry and targeted market segments a good starting point. The focus in this phase is two-fold:                                                                                              

1)   To determine how attractive an industry is overall as a “home” for a new business, and

2)   To identify possible niches a small business can occupy profitably.

Porter’s five forces model evaluates five key forces that determine the setting in which companies compete. Hence, the attractiveness of the industry based upon these five considerations:                                                                                          

1)   The rivalry among the companies competing in the industry,

2)   The bargaining power of suppliers to the industry,

3)   The bargaining power of buyers,

4)   The threat of new entrants to the industry, and

5)   The threat of substitute products or services.

Rivalry among companies competing in the industry – The strongest of the five forces in most industries is the rivalry that exists among the businesses competing in a particular market. This force makes markets a dynamic and highly competitive place. An industry is generally more attractive when:                                                   

·         The number of competitors is large, or, at the other extreme, fewer than five.

·         Competitors are not similar in size or capability.

·         The industry is growing at a fast pace.

·         The opportunity to sell a differentiated product or service is present.

Bargaining power of suppliers – The greater the advantage that suppliers of key raw materials or components have, the less attractive is the industry. An industry is generally more attractive when:                                                         

·         Many suppliers sell a commodity product to the companies in it.

·         Substitute products are available for the items suppliers provide.

·         Companies find it easy to switch suppliers or to substitute products.

·         When the items suppliers provide the industry account for a relatively small portion of the cost of the industry’s finished products.

Bargaining power of buyers – Buyers have the potential to exert significant power over businesses. When the number of customers is small and the cost of switching to a competitor’s product is low, buyers have a high level of influence. An industry is generally more attractive when:                                                                  

·         Industry customers’ “switching costs” are high

·         The number of buyers is large

·         Customers demand differentiated products

·         Customers find it difficult to gain access to information about buyers

·         The products companies sell account for a small portion of the cost of their customers’ finished goods.

Threat of new entrants – The larger the pool of potential new entrants to an industry, the greater is the threat to existing companies in it. This is particularly true in industries where the barriers to entry, such as capital requirements, specialized knowledge, access to distribution channels, and others are low. An industry is generally more attractive to new entrants when these factors exist:

·         Economies of scale are absent

·         Capital requirements to enter are low

·         Cost advantages are not related to company size

·         Buyers are not brand-loyal

·         Governments do not restrict new companies from entering the industry

Threat of substitute products or services – Substitute products or services can turn an entire industry on its head. An industry is generally more attractive when:
                                                                                                                                         

·         Quality substitutes are not readily available

·         Prices of substitute products are not significantly lower that those of the industry’s products

·         Buyer’s switching costs are high

After surveying the power these five forces exert on an industry, entrepreneurs can evaluate the potential for their companies to generate reasonable sales and profits in a particular industry to answer the question, “Is this industry a good one for my business?” Note that the lower the score for an industry, the more attractive it is.

Business prototyping enables entrepreneurs to test their business models on a small scale. Business prototyping recognizes that every business idea is a hypothesis that needs to be tested. If the test supports the hypothesis and its accompanying assumptions, it is time to launch a company. If the prototype fails, the entrepreneur scraps the business idea with only minimal losses and turns to the next idea.     
                                                                                                                                         

A product or service feasibility analysis determines the degree to which a product or service idea appeals to potential customers and identifies the resources necessary to produce the product or provide the service. This portion of the feasibility analysis addresses two important questions:                                                             

1.      Are customers willing to purchase our goods and services?

2.      Can we provide the product or service to customers at a profit?

Getting that feedback might involve using engaging in primary research such as customer surveys and focus groups, gathering secondary customer research, building prototypes, and conducting in-home trials can help answer these questions. Information gained through primary or secondary research may also prove invaluable.

The financial feasibility of a venture is the final component of the feasibility analysis. This involves these three elements:     

1.      Capital requirements

2.      Estimated earnings

3.      Return on investment

II.  Why Develop a Business Plan?                                                                                      

The plan serves as an entrepreneur’s road map to building a successful business. It describes the direction the company is taking, what its goals are, where it wants to be, and how it plans to get there. The business plan serves three essential functions:

1.      The business plan provides an operational guide for action and success;

2.      The business plan attracts lenders, and;

3.      The business plan is a reflection of its creator.

      A viable business plan is capable of passing three “tests” including:                               

1.      The reality test

2.      The competitive test

3.      The value test

A business plan can increase your chances for success and serve as a guide through uncertain and new experiences.    

VII.           The Elements of a Business Plan                                                                             

Every business plan is unique. There are many resources available to use as a guide. The seemingly overwhelming task of building a business plan is easily broken down into workable parts that any student or entrepreneur can undertake. Plans may include the following:

·         Executive Summary

·         Mission Statement

·         Company History

·         Business and Industry Profile

·         Objectives

·         Business Strategy

·         Description of Firm’s Product/Service

·         Marketing Strategy

·         Documenting Market Claims

·         Competitor Analysis

·         Description of the Management Team

·         Plan of Operation

·         Forecasted or Pro-Forma Financial Statements

·         The Loan or Investment Proposal

In addition, there are ten tips on preparing your business plan that can save time and help to create a more cohesive and impressive overall plan.                                                                              

1.      Have a cover

2.      Check for spelling and grammar

3.      Create a visual appeal

4.      Include a table of contents

5.      Make it interesting and compelling

6.      Demonstrate its profit potential

7.      Use spreadsheets

8.      Include cash flow projections

9.      Keep it concise and “crisp”

10.  Tell the truth – always!

IV. What Lenders and Investors Look for in a Business Plan                                          

Bankers and other lenders include the “five Cs” of credit as a part of their evaluation of the credit-worthiness of loan applications. The higher a business scores on the evaluation, the greater its chance will be of receiving a loan based on these five criteria:

1.      Capital

2.      Capacity

3.      Collateral

4.      Character

5.      Conditions

V.  Making the Business Plan Presentation                                                                        

Keys to making an effective business plan presentation include the following:

·         Demonstrate enthusiasm, but don’t be too emotional.

·         Know your audience.

·         “Hook” investors quickly with an up-front explanation of the new venture, its opportunities, and the benefits to them.

·         Keep it simple and to the point.

·         Avoid the use of technological terms.

·         Use visual aids.

·         Close by reinforcing the nature of the opportunity and the related benefits to investors.

·         Be prepared for questions.

·         Follow up with every investor to whom you make a presentation.