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COURSE READER
Becoming an entrepreneur requires various skills and talents. First you must
understand who you are and what you want by identifying your skills and
knowing your passions. A successful entrepreneur matches his or her skills and
passions with the right opportunity. However, it takes more than passion to be
successful; it also takes hard work and preparation. Analyzing the industry and
the feasibility of your idea is critical to success. This course gets you started.
As you proceed through this course, you will be asked to refer to
chapters within this course reader. The content of each chapter in this reader
reinforces and expands on the key ideas that are presented in the course. You
are introduced to the history and foundations of entrepreneurship and given
tools for success. Throughout the chapters, you are presented with two cases
studies that describe two companies, Zed WiFi and Acme Brewery. The case
studies are used to illustrate important concepts using real-world examples.
There are many steps along the path to creating a successful
entrepreneurship. Each chapter gives you the background and the basics you
need to understand the first steps to creating the idea. You must
1. Identify an opportunity (Chapter 2)
2. Conduct feasibility analysis (Chapters 36)
3. Develop the concept (Chapter 7)
Once
you
have
completed
these
steps, you
will
be
ready
for
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Table of Contents
Chapter 1: Introduction to Entrepreneurship
10
14
18
24
30
37
41
43
Sources
45
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INTRODUCTION TO ENTREPRENEURSHIP
Entrepreneurship has much to offer to anyone who has the passion and
drive to start a venture and follow it through. To be a successful
entrepreneur, you need to be aware of your own passions, motivations,
skills, and objectives, and you must know what areas you may need to
improve on or develop. Then, ideally, you will be able to align your skills
and desires with your venture.
History of entrepreneurship
Our definition and understanding of entrepreneurship has evolved over the
years, and it continues to evolve in terms of focus and scope. In the broadest terms, we
define entrepreneurship as the pursuit of an opportunity without regard to the resources
that the entrepreneur currently controls. An entrepreneur is therefore a person who
identifies an opportunity, then acquires the resources needed to pursue that opportunity
as a venture.
This is how we think about entrepreneurship today. However, the concept has
taken quite a journey from its roots over 500 years ago. The word entrepreneur comes
from the word enterprise, which has roots in the Latin language in the 15th century
from the words entre, meaning between, and prehendere, meaning to grasp or take
hold. Then the word enterprise made its way into French and become entreprendre,
which means to undertake. From there, the word evolved and became entrepreneur.
In 1755, the French economist Richard Cantillon (in Essay on the Nature of Trade
in General) was one of the first individuals to define an entrepreneur in a business sense
as someone who uses business judgment to take on a difficult commercial enterprise.
Key to Cantillons definition were the ideas that this commercial enterprise had
uncertain outcomes and that the business person was motivated by personal gain. Both
of these features have carried down to our modern thinking about entrepreneurship.
Adam Smith, the Scottish philosopher and economist, added to Cantillons definition by
incorporating the idea that an entrepreneur is someone who accumulates capital and is
an agent of progress.
By the mid-19th century, the word entrepreneur was firmly part of the English
language of business. Around this time, the German mathematician Hans von Mangoldt
expanded the idea to include an element of risk; in his mind, risk was essential to the
concept. Then in the early 20th century, Joseph A. Schumpeter, an Austrian economist,
suggested that key elements of entrepreneurship are innovation, vision, and creativity.
Scholars and practitioners further refined the concept, and by the early 20th
century, an entrepreneur was someone who used business judgment in commercial
enterprises with uncertain outcomes, accumulated capital, took risks, and was
innovative and creative. Some people believe that to be truly entrepreneurial, a person
has to create something disruptive, such as a new product, industry, or market, or
identify and serve needs that are not currently being met.
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Founders
Industry
Location
URL
Description
Feed Project
Lauren
Bush and
Ellen
Gustafson
Food
New York,
NY, United
States
www.feedprojects.com
Naya Javeen
Asher
Hasan
Health
insurance
Karachi,
Pakistan
www.njfk.org
Restorando.com
Frank
Martin and
Franco
Restaurant
booking
service
Sao Paulo,
Argentina
www.restorando.com
Founded in
2007.
Nonprofit
business
that sells
specially
designed
products
and donates
the proceeds
to provide
school meals
for children
around the
world.
Founded in
2007.
Not-forprofit
venture that
provides
micro health
insurance
for lowincome
people
throughout
the world.
Founded in
2010.
Commercial
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Silvetti
Spotify
Daniel Ek
Music
software
Stockholm,
Sweden
www.spotify.com
WebEngage
Avlesh
Singh,
Manish
Kashyap,
Vikas
Sinhas
Online
survey
tool
Mumbai,
India
www.webengage.com
business
that runs an
online
restaurant
booking
service in
South
America.
Founded in
2009.
Commercial
business
that provides
music
software to
stream
music on a
computer.
Founded in
October
2010.
Commercial
business
that makes
software for
businesses
to collect
online
feedback
and conduct
surveys.
Chapter 1
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operate within a structure that enables them to attract funding from people who believe
in the mission.
Intrapreneurs are individuals who seek to create new products or services from
within an existing organization (see Table 1-2). These individuals usually work with the
support of the organization, and their objective is to generate a profit for the larger
company.
Hybrid entrepreneurs are individuals who seek to create organizations that have
both nonfinancial and financial goals, such as providing a service to a community and
creating financial value for the owners and investors (see Table 1-2).
Social
Intrapreneurship
Hybrid
Goals
Business creation
Innovation
Wealth
Social mission
Social engagement
Innovation
Business creation within
existing organization
Profit
Business creation
Social mission
Wealth
1. Identify an opportunity. Use creative techniques to come up with a new idea, seek
inspiration from existing sources to find an opportunity, or create one of your own
(see Chapter 2).
3. Develop the concept. Create a strategy and a business model, and write a venture
plan (see Chapter 7).
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4. Determine the resources needed. Use the feasibility studies to understand what
resources are required to conduct the venture.
5. Acquire the resources. Engage in activities such as hiring employees, renting space,
buying materials, and acquiring supplies.
6. Implement and manage the venture. Run the venture, and adapt to changing
conditions as necessary.
7. Harvest/exit the venture. Close, sell, or transform the venture into something new.
Types of entrepreneurs
In addition to the types of ventures they seek to create (such as social or
commercial), entrepreneurs can be categorized by their different ideas for growth of the
venture.
Lifestyle. These entrepreneurs build a business in a way that is integrated into their
lifestyle. For some lifestyle entrepreneurs, profit (beyond what is needed to sustain
their lifestyle) is not the motive; they plan to keep the venture small. Other lifestyle
entrepreneurs may grow businesses with many employees and significant revenues.
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interested in creating. These two factors give certain people the drive and dedication to
create a new venture and be successful at it. However, many aspects of entrepreneurship require basic business skills that can be learned by anyone who is interested in
doing so.
Adaptability
Creativity
Drive to achieve
Initiative
Leadership skills
Motivation
Perseverance
Tolerance of ambiguity
Tolerance of risk
Vision
One thing that most successful entrepreneurs have is either a mentor or a strong
network of friends, colleagues, and supporters. Although in some cases an entrepreneur
may work alone, for the most part starting a venture requires teamwork and the input
and advice of several individuals. Entrepreneurs who work with a mentor can tap into
the expert guidance of someone in the same industry or someone who has experience
with entrepreneurship or general business. A broad network of colleagues and friends
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provides access to resources, ideas, and support that are critical to success in the
entrepreneurial world.
CASE STUDY
Company: Zed WiFi
Business: Provider of free WiFi. The company partners with broadband
Internet service providers and router manufacturers to provide the
service.
Key attributes of founder:
Self-assessment
Creating an entrepreneurial venture from the ground up is an arduous process.
An individual who is interested in doing so needs to understand himself or herself to
know whether this type of lifestyle is suitable.
As you consider starting a new venture, it is helpful to understand your strengths
and weaknesses, what you are able to contribute to the venture, and in what areas you
will need to partner with someone to be successful. Because of the nature of
entrepreneurship and how it differs from being an employee at a company, it is also
very helpful to understand your feelings about and capacity for hard work, how you deal
with insecurities and adversity, and your capacity for working toward a goal.
As you think about your skills and attributes, it is also important to understand
your life goalspersonal, professional, and financial. Where does a venture fit into those
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goals? How will starting a new venture help you to meet the goals you have set for your
future?
Entrepreneurial
Am I willing and able to work without pay for some amount of time?
Personal
Am I creative?
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entrepreneurs are born with many of the attributes needed to be successful. But it is
also possible to develop some of the skills necessary to create a successful venture. The
important thing to understand is that if you are interested in an entrepreneurial life, it is
attainable.
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OPPORTUNITY IDENTIFICATION
Identifying opportunities is the first critical step of an entrepreneurial
venture. Opportunities can present themselves in a variety of ways. An
opportunity may appear as a problem that needs to be solved or as a
good idea that can be made better. The key to finding the right
opportunity for you is creativity. Creativity is an important attribute for an
entrepreneur. It is what enables entrepreneurs to stand out from the
crowd, create businesses that are different from others in the market,
and solve unique and challenging problems. Creativity is also the basis
for innovation, discovery, and finding new ideas; these are key elements
to success in any entrepreneurial venture.
Technique
This is the process of identifying as many ideas as
possible and choosing potential solutions from the
ideas that are generated.
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Use these terms to create a list of
questions about the problem you are trying to
solve, for example: What is the best way to make
high-quality shoesby machine or by hand?
New opportunities
Where do entrepreneurs find ideas for new opportunities? In addition to using
creative problem-solving techniques for inspiration, there are many other ways to find
ideas for new business ventures. While inspiration can come from anywhere, there are
several key sources that are useful for generating ideas and sparking innovation.
Demography. Use statistical data about the population (such as gender, age, race,
employment status) to learn about various segments of the population and become
aware of changing demographic shifts. If there is growth in a certain area of the
population, this may spark ideas for products or services aimed at that demographic
group. For example, a growing population of elderly people may present
opportunities for new healthcare services and leisure activities.
Technology. Keep up to date with technology in your field and related fields,
equipment, techniques, current trends, and projections for future trends. For
example, new equipment and technology might offer opportunities for ventures that
process raw materials in more cost-efficient and environmentally safe ways.
Laws and regulations. Study existing and proposed laws and regulations to
understand how changes may affect the manufacture or sale of a product or service.
For example, a regulatory change may mean that you can start a venture importing
several types of cheese that were previously illegal to bring into the country and
selling them to restaurants and grocery chains.
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Hobbies. Determine whether something that you do for fun has a broader
application. For example, if you enjoy helping others learn how to read, that may
present an opportunity to create a nonprofit venture that works with teachers to
provide remedial reading help for adults in your community.
CASE STUDY
Company: Zed WiFi
Source of idea: The founder of Zed WiFi struggled with getting Internet
access while traveling in Europe. She realized that an increase in the
population of this age group in Europe will mean an increase in demand
for wireless Internet services. This gave her the idea to use new
technology to create a better wireless network server and sell the services
in underserved areas.
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TECHNICAL FEASIBILITY
Once you have identified an opportunity, the next stage of the
entrepreneurial process is to understand whether or not the idea for the
venture is feasible. Entrepreneurs need to know the strengths and the
weaknesses of an idea and whether or not it has the possibility of
success. Feasibility analysis helps you minimize the risk of a new venture
by developing an understanding of how easily something can be
accomplished.
Technical feasibility, the first of four categories of feasibility
analysis, helps entrepreneurs understand if the opportunity is technically
viable: Can this physically be made or accomplished? At what cost? In the
planning stages, it is critical to thoroughly understand the product or
service you wish to offer, from its component parts to how it is physically
manufactured or performed.
That means understanding a variety of aspects of the product or
service, including the features and benefits, how the product or service is
different than what is currently available, and the product design and
development process. Determining technical feasibility includes analyzing
prototyping and design and intellectual property issues.
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CASE STUDY
Company: Acme Brewery
Product: New summer seasonal beer using a local fruit that the brewery
has never used before.
Prototype: The brewer decided to use his regular recipe for the beer and
add the fruit in the fermentation stage. After several rounds of testing, he
discovered that the type of hops he used overpowered the flavor of the
fruit. He tested new recipes using different types of hops until he found
one that did not overpower the flavor of the fruit. His taste testers
approved.
Intellectual property
The term intellectual property refers to creations of the mind such as inventions;
artistic and literary works; and symbols, names, images, and brands used in the world of
commerce. Often referred to as IP, these are the nonphysical assets of a company. There
are four types of intellectual property: patents, trademarks, copyrights, and trade
secrets.
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Trade secrets are various pieces of confidential information that may provide a
competitive advantage. Trade secrets may include formulas, ideas, processes, or
other information that is unique to a venture. In contrast to other types of
intellectual property, there are no laws that protect trade secrets. The only way to
protect them is to keep them confidential by limiting access and using contracts and
confidentiality agreements with the people who require access to the secrets.
For any venture, especially new ones, protecting intellectual property is critical.
Patents, trademarks, copyrights, and trade secrets are unique elements that enable
organizations to stand apart from their competitors. Governments offer intellectual
property protections specifically to provide businesses with exclusive rights to their own
assets in order to maintain a competitive advantage. Intellectual property rights are
complex and vary around the world. Some countries have treaties with each other to
make conducting business across borders easier.
The most important step you can take to protect your ventures intellectual and
creative assets is to work with a professional intellectual property attorney. Failure to
protect intellectual property can result in significant losses for the venture. For example,
unless you trademark your logo, others might copy it or use something similar, causing
confusion in the minds of consumers, a loss of market share, and reduced profitability.
Not only is it important to protect your own intellectual property, it is also
important to respect others intellectual property. A key part of planning a new venture
includes researching existing intellectual property. First, this helps you to determine
whether someone has already patented your idea or trademarked a similar name or logo
so that you can make sure you do not violate the rights of another entity. Second, it
helps to paint a picture of the market, your competition, and whether any similar
products or services exist.
CASE STUDY
Company: Zed WiFi
Patent: The founder of Zed WiFi created a new design for a wireless
network interface device that will cover a large area without requiring an
overlapping group of access points. She built a prototype on her own to
test. To protect the design and the new technology that she had
developed, she submitted a patent application on the device before
showing her design to manufacturers.
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MARKET FEASIBILITY
Just as you tested the technical feasibility of your product or service, it is
equally important to test the market feasibility. Market research is a
critical step in the entrepreneurial process for entrepreneurs pursuing
social or not-for-profit ventures as well as those pursuing commercial
business opportunities.
Market research is the process of gathering information about the
market and understanding the potential customer base. Entrepreneurs
need to spend significant time learning about the customer base for their
product or service. The primary goal of market feasibility analysis is to
gather information on customers so that you can ultimately segment the
market and choose a target segment for your product or service.
There are two types of market research: primary and secondary.
Primary research is the process of finding and analyzing information that
comes directly from potential customers. Secondary research is finding
and analyzing information that has already been collected by someone
else for another purpose. Table 4-1 describes the pros and cons of both
types of market research.
Primary
Advantages
Disadvantages
Timely data
Firsthand knowledge of
market
Unfiltered information
Ability to ask specific
questions and customize
research
Narrow view of the market
Broad overview
Aggregated data
Authority of source (i.e.,
research firm)
Readily available
Inexpensive
Wealth of sources
Information in the public
domain
Secondary
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Time consuming
Resource consuming
Identifying sources can be
difficult
Confidentiality issues may
prevent people from sharing
Data are not always easily
aggregated
Not always current
Filtered information
Need to verify authority of the
source
Potentially too much
information to review
No ability to customize
Some sources can be
expensive (e.g., analyst
reports)
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CASE STUDY
Company: Acme Brewery
Examples of secondary sources:
Articles in the general press about beer consumption and the craft
beer movement
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Conducting interviews
Here are some tips for conducting a successful interview.
1. Understand the objective of the interview. Choose carefully whom you will
interview, and know what kind of information you need to get during the interview.
2. Write the questions in advance. This includes doing research to create the
questions and being prepared with potential follow-up questions. Types of questions
include the following:
b. Broad and open-ended questions that are designed to let the interviewee
share his or her own thoughts and opinions, for example: What are your
feelings about donating money to a non-profit organization?
d. Follow-up and open-ended questions that are designed to elicit more details
and require the interviewee to really think about the answer, for example:
Why dont you own a bicycle?
3. Do not send the questions in advance. This often results in answers during the
interview that do not stray from established thinking. The follow-up questions are
where you will get a lot of the detail you need.
4. Choose a comfortable location. A neutral location, neither your office nor the
interviewees, helps both of you to feel comfortable.
5. Get to know the interviewee. Ask a couple of personal questions or have a brief
opening conversation before jumping in with the questions. This is the time to build
rapport.
6. Listen to the answers. This is why you are there. Really listening enables you to get
answers and be able to ask appropriate follow-up or clarifying questions.
7. Be open. You may not get the answers you were expecting, and it is important to be
open to learning what the interviewee really thinks about a topic, as the interviewee
has information that is potentially very important to your venture.
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a specific type of customer and determine the best choices for creating a marketing
message to that audience.
Segmenting
Segmenting customers is a process of using specific criteria to divide a larger
diverse group of customers into smaller groups that share similar characteristics. For
example, demographic segmentation is a way to divide customers into groups based on
demographic information such as age, gender, income, and occupation. This may be
combined with geographic segmentationdividing the market by the location where the
individuals live, work, or play.
Targeting
Once you have segmented the market, it is time to find your target market. That
is, you choose the segment that is most ideal for your venture, product, or service. You
can target a segment on the basis of many criteria: number of potential customers,
frequency of purchase, a segment that is currently underserved by the competition, or
the segment whose needs are best aligned with the features of your product or service.
Starting a new venture is an exciting experience, and many entrepreneurs see multiple
uses and many potential customers for their product or service. The real value in
segmenting and targeting a market is that you can focus your limited marketing
resources on reaching and acquiring the most profitable customers.
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CASE STUDY
Company: Zed WiFi
Market segmentation: The founder of Zed WiFi gathered information
about the types of people she believed were her primary market: young
professionals, male or female, age 21 to 30, in European cities with
populations between 500,000 and 3,000,000 (e.g., Turin, Italy;
Nottingham, UK; Bialystok, Poland), and who own a mobile phone and at
least one computer.
Positioning
Once you have segmented and targeted your market, it is time to position the
product or service in relation to the competition. Positioning is the process of creating
an identity or image for the brand, product, or service in the minds of the target
customers relative to the competitive offerings.
This is where you help your customers to understand why they want or need to
buy your product or service at this time. For example, if you sell fruit beer to
professional women in their thirties, you could position it as the beer of choice for
professional women because it is refreshing, low-calorie, and inexpensive.
Once you have completed the segmentation, targeting, and positioning, it is time
to start thinking about the marketing mix. The marketing mix is a tool that helps you to
identify the unique selling proposition of your product or service. It is a way to think
about your product in the marketwhat it is, where to sell it, how much it should cost,
and how you will promote it. The marketing mix is often called the four Ps: product,
place, price, promotion.
Product is what you are selling to the customer, such as fresh drinking water or
automobile supplies. Place is how you will distribute the product to your customers,
such as online or in retail outlets. Price is how much the customer will pay for the
product. Promotion is how you will communicate the value of your product or service to
your target market, such as with radio advertisements or with a direct sales force.
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INDUSTRY FEASIBILITY
Now that you have analyzed the technical feasibility and have examined
the potential market for your product or service, it is time to understand
the characteristics of the industry as a whole. An industry feasibility
analysis enables you to evaluate various factors to determine the
attractiveness and potential profitability of an industry. If the industry has
various factors that contribute to low profit margins, this is an
opportunity to learn that and possibly to reconsider entering this
industry.
Industry definition
Before examining how an industry operates, it is useful to understand what the
industry is and what its boundaries are. Industries can be defined in many ways and with
varying scope. For example, we might define the industry in which Acme Brewery
operates as beer, alcoholic beverages, or all beverages. Analyses based on these
different classifications will produce different results, so it is important to identity the
correct scope for the objectives of your analysis.
In general, it is best to use a narrow scope of your industry definition, but access
to information or industry structure may point you in one direction over another.
Additionally, you may consider analyzing various industry classifications. If a narrow
view of the industry seems unattractive, you could broaden the scope.
There are many publicly available resources to help define industries and their
characteristics. In North America, the industry classification system is known as the
North American Industry Classification System (NAICS). In the European Union, the
industry classification system is known as NACE (Nomenclature statistique des activitis
conomiques dans la Communaut europenne).
To fully understand how an industry operates, an entrepreneur must understand
things such as barriers to entry, what the existing competition is like, substitute
products, buyer power, and supplier power. Looking at this information helps an
entrepreneur to understand where the industry is heading, what opportunities there are
now or may be in the future, and whether the industry is attractive and is expected to
remain so.
Knowledge of how the industry works is critical to the success of any venture in
that industry. In conducting an industry feasibility analysis, you first analyze the
attractiveness of the industry to determine whether its structure is conducive to making
a reasonable profit. Then you use that information to determine whether you should
proceed with the venture. If the industry appears unattractive, you can choose to
abandon this opportunity, find ways to mitigate the negative factors, or look for
opportunities in another industry.
One way to analyze the attractiveness of an industry is to use a framework such
as Porters Five Forces Model. Michael Porter is a professor at Harvard Business School
and an expert on competitive strategy. Use the five elements discussed below to
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examine your industry and to understand how your new venture might fit within the
industry structure and competitive landscape.
Barriers to entry
Examine what is necessary to start a venture by understanding the obstacles that
may make it difficult to enter the industry. Low barriers to entry mean that it is relatively
easy for new companies to enter the industry. Numerous new entrants have the
tendency to expand the overall capacity of the industry, potentially beyond the existing
customer demand. This expanded capacity may force competitors to decrease price
points over time in an effort to maintain or expand their market share despite the
increase in industry supply. Competition for the same customers might also require an
increase in marketing and promotional expenses. All of these actions result in lower
levels of profitability for all companies operating in the industry. In contrast, high
barriers to entry make the industry more attractive or profitable because of the minimal
competition; however, high barriers to entry also usually present challenges for new
entrepreneurs who wish to enter the industry. Barriers to entry include economies of
scale (savings or cost advantages due to increased production), brand loyalty, cost for
the buyer to switch to another supplier, financial requirements, technology, access to
distribution channels, government regulations, and proprietary factors unique to the
industry.
CASE STUDY
Company: Zed WiFi
Barriers to entry:
Costs. Current wireless network interface devices have limited range
and high power consumption. Because of this, equipment purchases
and leases for a large network can be expensive. This limits entry for
companies that do not have the necessary financial resources.
Government regulations. In the European Union, Zed WiFis primary
market, regulations stipulate the frequency band that is acceptable for
base and mobile terminal stations for wireless communications. This
limits entry for companies that do not meet the standards because of
technical considerations.
What it means: Zed WiFi created a new network interface device with low
power consumption and a long wireless range. Because the founder
designed the new product with the European regulations in mind, she has
a potential advantage.
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Substitutes
Substitutes are products or services that perform the same function or meet the
same need as products or services in the industry you are analyzing but are made with
different inputs. For example, tea is a substitute product for soft drinks. High levels of
substitutes generally mean that buyers have a lot of similar products to choose from.
This usually means the industry has lower profit margins and is less attractive because
competitors are forced to lower prices in order to compete.
Understanding the role that substitutes play in the industry includes researching
the price and quantity of alternatives to your product or service, what the customer will
perceive as a differentiation between products or service, the likelihood the customer
will use substitutes, and the cost for the customer to switch from their current vendor.
Buyer power
Before you start a venture in a specific industry, it is advisable to take the time to
understand the bargaining power of customers in that industry. Buyer power is the
effect that customers have on the price of a product or service. Industries with high
buyer power are often unattractive because buyers have a lot of leverage to negotiate,
forcing businesses to lower their prices to compete. It is critical to understand generally
what type of bargaining power customers have in your industry so that you can work to
create a business model with strategies that mitigate their power.
Customer bargaining power includes the volume of business customers do, price
sensitivity, access to information about the product or service, costs for them to switch,
and the availability of substitutes.
Supplier power
Learn about the bargaining power of suppliers to help you understand the
impact on the profitability of a specific industry. Businesses with limited options for the
purchase of raw materials rely on the dependability of those partners and suppliers.
Suppliers have bargaining power when it costs a lot to change to another
supplier, they have strong existing relationships with customers, and few substitute
supplies are available. High supplier power usually means that the industry is
unattractive or has lower profit margins because suppliers have negotiating leverage.
Rivalry
As you research an industry, it is helpful to understand the characteristics and
behavior of competitors that are already part of that industry. Understanding the
rivalries among existing firms includes learning about growth rate, number and size of
competitor firms, product or service differentiation, costs for customers to switch to
competitors, and exit barriers (the factors that may make it difficult to leave the
industry).
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As an entrepreneur, you need to look carefully at all five factors and determine
whether the industry is attractive and whether it will provide the kind of profitability you
need to meet the goals of your venture.
External factors
Industries are affected by that state of the world, not just by the behavior of the
industry itself. To assess industry feasibility, it is also critical to understand the business
environment or context in which the venture will be doing business. Depending on the
industry, that may require you to research and analyze how social, technological,
economic, environmental, political, and global forces could affect your venture.
CASE STUDY
Company: Acme Brewery
External and industry issues affecting the company:
After an initial downturn due to the global recession, beer
consumption is increasing in Latin America because of an increase in
disposable income but is decreasing in the United States because of a
decrease of disposable income.
Beer, especially niche or craft beer, is losing market share to wine in
the millennial generation in the United Sates as a result of health
concerns.
What this means: After reading the research, Acme Brewery decided to
investigate selling to the Latin America market, as beer consumption is
increasing there and the company sees a growing opportunity for its style
of beer. Because beer is losing market share to wine in the U.S. market,
Acme is also considering marketing its new fruit beer by focusing on the
differences in calories between wine and the fruit beer.
Competitive analysis
As part of your research into the industry, this is the time to look into your
competitors businesses as much a possible. Competitive analysis is the process of
learning about the key players in the industry and how well they meet the needs of the
market.
If you are starting a venture in an industry that has many public companies in it,
the job of conducting the initial analysis may be a little bit easier. Public companies
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typically have to file financial documents with an oversight agency (such as the
Securities and Exchange Commission in the United States or the Financial Services
Agency in Japan). These documents are publicly available and often contain very good
information about the product or service offering, operations, and financials of the
company.
For additional information on public companies and for information on
nonpublic companies, you can often find useful information in analyst reports, in
articles in the business press or trade magazines, and on the companies websites. For
small industries or those without analyst coverage, it may be very difficult to access
secondary sources with the kind of information that will be helpful.
In those cases, you may choose to use some of the primary market research
techniques, such as conducting surveys or interviewing people in the industry to get an
understanding of how it works. Primary sources are typically employees in a company in
the industry, suppliers or professionals who otherwise service companies in the
industry, analysts or reporters who regularly research and report on the industry, or
even customers. You can find sources by reviewing the business press or trade
magazines; by attending trade shows, conferences, and presentations; and by using
your personal network.
As you research your competitors, you will discover a few different kinds of
competitors. Direct competitors are current and potential competitors that already do
business in the market and sell the same product or service. Indirect competitors are
current or potential competitors that sell a substitute product or service, one that
customers may choose instead of yours.
No matter what industry your venture is in, not all the competitive information
that you want will be readily available. It is best to use actual data from authoritative
sources, but in some cases, you may be able to estimate the data from the information
you do find. These are examples of metrics and information you should be looking for:
Sales
Profit
Number of customers
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low-cost provider, or you can choose to differentiate by charging a higher price for a
premium product.
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FINANCIAL FEASIBILITY
Creating a venture plan requires a lot of work up front to understand all
aspects of the industry and the market. It also requires work up front to
understand the structure of the venture itself, including the financial
picture. Financial feasibility analysis is the process of learning whether
and how a venture will make a profit. It helps an entrepreneur to tell the
story of the venturewhat capital is needed to start and to operate the
venture and how long it will take to generate a profit.
The best way to analyze financial feasibility is with real revenue
and expense data. However, most new ventures do not have an operating
history or enough historical financial data to create a forecast of the
ventures profitability. So this process may require you to make revenue
and expense estimates that are based on the performance of competitive
companies, industry averages, or your own assumptions about the
projected revenue and costs of your entrepreneurial venture.
Income statements
Income statements are also called profit and loss statements (or P&Ls). A pro
forma or forward-looking income statement contains information about the projected
profit or loss for the venture for a stated period of time and includes estimates of both
expenses and revenues. Revenue is money received from transactions through normal
business operations. Expenses are the costs associated with running the venture. The
purpose of a pro forma income statement is to assess feasibility, conduct internal
budgeting, determine the types and amounts of resources needed, and communicate
this information to your investors and other stakeholders. The best place to begin a
financial feasibility analysis is with the expense forecasting.
Expense forecasting
Expense forecasting is the process of making financial assumptions on the costs
associated with starting and operating your venture. It is helpful to look at your
projected expenses over a set period of time, often three to five years.
Examples of common expenses include the following:
Raw materials
Direct labor
Overhead such as rent and utilities
Selling
o
o
Advertising
Marketing
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o
o
Commission
Retail store operations
To forecast expenses for your income statement, you will need information
about the costs to conduct business, including the initial start-up investment and the
ongoing costs associated with operating your venture.
If you are already operating your venture, you can use your expenses for the first
months or years of operations to estimate projected expenses for the next several years
of operationthings such as rent, Internet access, salaries and benefits, supplies,
marketing, and any known costs to produce and deliver the product or service. If the
venture is not yet operating and you do not have any historical data, then you may need
to use industry averages or other information gleaned from your competitive and
industry analysis as a starting point. (See the sample Pro Forma Statement on page 32.)
As you estimate expenses for your pro forma income statement, you will likely
make many assumptions, such as the projected cost of raw materials, expenses
associated with renting and renovating space, and the cost of hiring employees. You can
get some actual data by calling suppliers, looking at the average rent per square foot, or
making assumptions about labor costs based on the minimum wage.
When they are available, you can also use competitive data to help estimate your
projected expenses. For example, if on average, competitors in your industry spend 30%
of revenue on the cost of the raw materials and 15% of revenue on marketing, then you
might assume that your expenses will be comparable. You can then use these industry
averages to determine your projected cost of raw materials and marketing expenses by
multiplying these percentages by your projected revenue. Of course, the danger with
this logic is that your own expenses may vary significantly from the industry average for
any number of reasons. So if you use this method, you will want to account for any
significant differences between your venture and competitive offerings.
As part of forecasting expenses, it is important to understand the types of costs
you are dealing with: fixed, variable, or mixed. A fixed cost is one that stays constant in
terms of dollar amount regardless of sales volume or the number of units produced and
would be difficult to cut back on without a significant impact on the operations. Fixed
costs may include things such as office rent, purchase of equipment, and managerial
salaries.
A variable cost is one that changes in direct proportion to the level of
operations such as the number of units produced and sold. Examples include the cost of
fuel per passenger, packaging per unit, or raw materials per unit. A mixed cost is one
that has both a fixed component and a variable component, such as telephone costs
with a standard monthly fee and variable charges for long-distance calls.
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Revenue forecasting
Like expense forecasting, revenue forecasting is an important part of analyzing
financial feasibility and predicting when your venture will start to make a profit.
Explanation
Low-cost
Premium
Captive
Demand
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As you plan for sales and expenses, think about the best-case, worst-case, and
most-likely-case scenarios. When in doubt about what information to include in your
financial projections, remember that it is usually better to underestimate sales in your
planning than to overestimate sales and not meet the goals. The best-case scenario is a
goal, but you may need to be more conservative when budgeting and assessing risk.
There are two main techniques to forecasting revenue: top-down and bottom-up.
Bottom-up forecasting is what you do when you use existing financials or make realistic
estimates for things like revenue per unit and amount and timing of sales. For example,
you may be planning to be open six days a week, 50 weeks a year. You estimate that
you will get five paying customers each day and that each of them will spend $25. Using
these assumptions, you can calculate the projected revenue for next year.
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CASE STUDY
Acme Brewery
Pro Forma Income Statement
Avg. Price Point
Demand (units)
Year 1
$2.25
15,000
Year 2
$2.30
65,000
Year 3
$2.50
125,000
Revenue
COGS
Gross Income
$33,750
15,356
18,394
$149,500
68,023
81,478
$312,500
142,500
170,000
54.5%
54.5%
54.4%
Operating Expenses
Rent and equipment lease
Marketing
Labor and wages
General administrative
Total Operating Expenses
8,000
2,500
7,000
2,000
19,500
8,000
50,000
16,000
5,000
79,000
26,000
73,000
39,000
20,000
158,000
(1,106)
$2,478
$12,000
N.M.
1.7%
3.8%
Gross Margin
Breaking even
A critical reason for estimating revenues and expenses is to understand when
the venture will break even. The break-even point is the point at which revenues equal
expenses or the venture generates $0 in profit. After that point, the venture should start
generating a profit.
Evaluation of assumptions
After you have compiled your pro forma income statement, it is time to evaluate
your assumptions about the attractiveness and viability of the venture. There are several
metrics that you can evaluate as you prepare an income statement. Each of these
metrics will give you a picture of the future profitability and allow you to compare with
competitive or industry averages.
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$33,750 (Revenue)
15,356 (COGS)
= 18,394 (Gross income or profit)
18,394 (Gross income)/33,750 (Revenue) = 54.5% (Gross margin)
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Risk assessment
After you have conducted feasibility analysis and calculated projected financial
information for the venture, it is time to take a step back and look at the big picture.
This is the time to consider the assumptions that you made during your initial planning
and determine whether they hold true.
As you pull together all this information, you should have a reasonably accurate
picture of your venture: your industry; your market; your customers; your product or
service; how you will create, market, and distribute your product; how much it will cost
to make and sell; and how much profit the venture is expected to make. But you are not
done yet.
At this stage, you must challenge those assumptions and the results of the
research and your hard work in planning. What if you based profitability of your product
on the cost for raw materials, but because of a natural disaster in the place where the
materials are mined, the cost doubled? How would that affect your venture and
profitability?
At this point, it is helpful to create scenarios like those above. Using what you
know about your industry and market, consider best-case, worst-case, and most-likelycase scenarios, and play around with how they could affect your business model, your
strategy, and your bottom line. This is the kind of information that you will need to have
when you seek financing for your venture.
It is possible that after doing all the research and assessing the financial
feasibility, you will find that the projected profit is insufficient to support the venture
and/or the entrepreneur with the proposed business model. In that case, it is time to
decide whether or not to continue with the plan. To continue, you may have to change
the business model or some other key element of the strategy to make the venture
profitable. If that is not an option, it is better to find out during the planning process
that the venture is not financially viable before investing a lot of time and resources.
This is also the time to evaluate your venture on the basis of your personal goals
and expectations. At this point, you have a reasonable understanding of how the
venture will operate and what your role in it will be. As you look back on why you got
involved in this venture and what you hoped to achieve, does the model as it exists now
look like the right one? Does it fit with your lifestyle and your goals? Can you support
yourself and your desired lifestyle with the projected profitability?
If after all this work, the venture does indeed look like the right one at the right
time, it is time to formulate a strategy, write a venture plan, look for funding, and
launch your venture.
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Business models
A business model is the description of how the business will operate, including
details such as the purpose of the business, what it will sell and how, strategy,
operational policies, and organizational structure. You compiled all the information you
need to create a business model during the feasibility analysis. At this stage in the
process, it is just a matter of finding fit and alignment among these nine factors:
Customers. Defining and describing your customer is a critical step that enables you
to define what product or service you will offer and the value that you will create.
Value proposition. This is the reason a customer will buy your product or service.
Distribution channels. This is how you will get your product to the customer. Retail
distribution means that you will sell directly to the consumer or end user. Wholesale
means that you will sell to retailers or other distributors. Online means that you will
sell directly to customers, retailers, and/or intermediaries via the Internet.
Pricing. This is what customers are willing to pay for the value they receive.
Expenses. These are the costs of running your business, such as production,
marketing, distribution, salaries, and overhead. Expenses can be fixed, variable, or
mixed.
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Activities. These are the most important actions your venture must take to be
successful, such as design, production, marketing, and sales.
Resources required. These are the resources and assets that you need to create the
product or service and conduct business operations. These resources can be
physical such as raw materials, financial such as a line of credit, intellectual such as
a patent, or human such as sales staff.
Partnerships. These are strategic partners, suppliers, distributors, and others with
whom you create alliances to conduct your business operations.
CASE STUDY
Company: Zed WiFi
Business model: Because Zed WiFi desires to work in a variety of markets
across the European Union, the founder decided to create a franchise
model. She will provide equipment, training, documentation, marketing,
and the service model to individuals in defined territories in specific
countries. The individuals who purchase a franchise will provide local
expertise and labor to spread Zed WiFis wireless access more quickly
than she could do on her own.
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these plans, and it is a good bet that they read a lot of poorly researched or presented
plans. Make yours stand out from the crowd in a positive way.
As much as possible, customize the plan for each audience. It is important that
you know what kind of ventures they invest in and why. While all potential partners want
to see that the venture will be profitable, banks, investors, and strategic partners are
looking for different information. Investors, for example, are typically looking for
returns on their investments. Lenders, on the other hand, are looking for cash flow,
liquidity, and collateral.
When it comes to formatting your venture plan, there are about as many ways to
do it as there are people who can fund your venture. Some investors and banks have
specific formats that they want applicants to use. Some prefer to read only a one- or
two-page executive summary. Others want to see only presentation slides. Still others
may be interested in reading a full document with a lot of detail about the industry,
market, and financials. If you know your audience, you will know which format they
prefer.
As you prepare your venture plan, it is important to consider your audience and
then tell them what you can do for them. This is a challenge for many entrepreneurs.
Think of it as an elevator pitch: What if you found yourself in an elevator with an
investor and you had only a 20-floor ride to get her interested in your venture. What
would you tell her?
Most people get more time than that, but not much. Ideally, you should be able
to tell the story of your venture in less than 15 minutes or, if you are using slides, with
fewer than 10 slides.
Other elements that are often included in venture plans, depending on the length
and intended audience, are topics such as detailed financials, management team
experience, overview of industry and results of market research, marketing plans and
sales projections, contingency plans, timelines, and appendices with supporting data.
Following is a list of sections in a typical venture plan and questions that should
be addressed in each.
1. Executive summary: What type of venture is this and why is it unique? What are the
main points from each section of the venture plan that are important to this
audience?
2. Venture: What are the ventures goals or mission? What is the organizational type
and structure? Who are the key executives and management team? How does this
company fit into the industry?
4. Market: What are the buying habits of your customers? What is your target market
and how big is it? How is it segmented?
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5. Competitors: Who are the nearest and largest competitors? What is the state of their
business: growing, steady, or declining? How is your venture similar to or different
from the competition?
6. Market strategy: How will you sell your product or service? How will you market or
advertise it? What is your pricing strategy? What is your distribution strategy?
7. Operations: Who and where are your supply sources? What are your facilities like?
8. Risks and threats: What are inherent risks in your industry and with your venture?
What are potential problems? How can you avoid or manage them?
9. Financial data: What are your start-up and development costs? What are your
projected revenues, expenses, and margins? How do your financials compare to
others in the industry? What is the potential return on investment for investors?
What is your exit strategy?
As you create your venture plan and prepare to approach investors, take some
time to remember why you started down the entrepreneurial path. Think about your
personal and business goals and how you created this opportunity for yourself. At this
point in the process, you have done a lot of research and analysis, and your head is
probably filled with numbers and facts so that you can answer any questions a potential
investor or partner asks.
Good work! You are right where you need to be in the process. But do not forget
the enthusiasm and excitement that you had at the beginning of the process and the
drive that kept you going through late nights at the computer, and long days doing
research. Do not forget your belief that this is a good idea for a venture, maybe the best
ever. So when you are in the room with an investor or potential partner, remember that.
This idea started with you and your passion. Dont be afraid to show it.
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Epilogue
PERSONAL REFLECTION
Entrepreneurship starts with you. You might desire to start a small family
business that allows you the freedom to be your own boss. Or you might
plan to start a venture to solve a problem in your community. Or you
might want to be the founder of a global venture that disrupts the
business world. If your goal is to create value through a venture, you are
an entrepreneur.
There is no single reason that people choose to become entrepreneurs. Some
people see a need and want to solve it. Others have an idea and then find a way to
create a venture from that seed. Whichever type of entrepreneur or intrapreneur you
may be, one of the first steps to take before you get too far along in the process is selfreflection. Assessing who you are and what you want from life, both personally and
professionally, helps you to understand how your venture fits your goals. Being an
entrepreneur is hard work, so you want to know that you will be ready and able to
devote the time and energy necessary to be successful.
The entrepreneurial process is easy to define It may be harder to understand
what it means in your life. Where are you in the process right now, and what is your next
step?
Once again, here are the steps to beginning your entrepreneurial venture.
1. Identify an opportunity. This is your chance to use your knowledge of the industry
or the world to find an opportunity or create one of your own. This is the time to
question the status quo, to innovate, to find your niche in the world of
entrepreneurship.
2. Conduct a feasibility analysis. This is the time to learn about the industry and
market and discover the attractiveness and profit potential. This stage involves a lot
of work, but it is critical to the future success of any venture.
3. Develop the concept. This is the stage at which you start to create a model of your
new venture and plan for some of the details. This is also when you set the stage for
funding the venture and its future.
4. Determine the resources needed. Now that the venture is almost real, it is time to
identify what you need to launch and operate your venture.
5. Acquire the resources. This is the phase at which you hire people, rent space, buy
materials, and acquire other supplies. It is also a good time to take a moment to
reflect on how far you have come from your original idea and where you are
heading.
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6. Implement and manage the venture. This is it, the time when your vision is a
reality. This is an exciting time, but it can also be a frightening time, especially if
you have employees to pay or you are working without a salary for a while. For many
ventures, it takes time for the venture to start working smoothly. As long as you
planned for that when you designed the business model, you should take that in
stride.
7. Harvest/exit the venture. This is your opportunity to reflect on the value you
created. Whatever the future of your ventureyou may be ending it, selling it, or
transforming it into something newtake time to remember both the positive and
the more challenging aspects of the experience. Then get ready for the next chapter
in your life.
Each entrepreneur takes his or her own journey from the original idea all the way
to the day when the entrepreneur leaves the venture. You can follow the process and
plan your steps, but every entrepreneur experiences some detours and surprises along
the way. The best way to be ready for them is to start by knowing yourself and your
goals and understanding the entrepreneurial process.
Are you ready?
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Epilogue
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Venture Ideation
Key Terms
Page 43
Income Statement
Net Operating Margin
Pricing Strategy
Revenue Forecasting
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Key Terms
Page 44
SOURCES
Books
Allen, K. (2009). Launching new ventures (5th ed.). Boston, MA: Houghton
Mifflin.
Spinelli, S., & Adams, R. (2012). New venture creation. Entrepreneurship for the
21st century (9th ed.). New York, NY: McGraw-Hill/Irwin.
Chapters in books
Abrams, R., & LaPlante, A. (2008). Passion to profits: Business success for new
entrepreneurs. Palo Alto, CA: The Planning Shop. Chapter 14.
Bamford, C., & West, G. (2010) Strategic management: Value creation,
sustainability, and performance. Mason, OH: South-Western, Cengage Learning.
Chapter 4.
Cornwall, J. (2004). Entrepreneurial financial management: An
approach. Upper Saddle River, NJ: Prentice Hall. Chapters 4, 5, and 6.
applied
Megginson, L., Byrd, M., & Megginson, W. (2006) Small business management:
An entrepreneurs guidebook. Toronto: McGraw-Hill/Irwin. Chapter 13.
Mullins, J. The new business road test (2nd Ed.). London: Prentice Hall/Financial
Times. Chapters 11 and 12.
Articles
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Ernst & Young LLP. (1997) Outline for a business plan. New York, NY: Author.
Hill, R., & Gatewood, E. (Ed.). Business planning guide. Fresno, CA: Author.
Kenny, M., & Mujtaba, B. (2007). Understanding corporate entrepreneurship and
development: A practitioner view of organizational intrapreneurship. Journal of
Applied Management and Entrepreneurship 12(3), 73-88.
Nagarajan, K. V. [Review of the book A history of entrepreneurship by R. F.
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Venture Ideation
Sources
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