Transcript Chapter 1:The Foundations of Entrepreneurship

CHAPTER
Copyright
© 2011 Pearson Education
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Entrepreneurs do not lack creative ideas,
but …
Is a particular idea a viable foundation for
creating a successful business?
Feasibility study addresses the question:
“Should we proceed with this business
idea?”
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Feasibility Analysis
A feasibility study:
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Is not the same as a business plan.
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.
Is an investigative tool.
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Industry and
Market Feasibility
Product or Service
Feasibility
Financial
Feasibility
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Two areas of focus:
1. Determining how attractive an
industry is overall as a “home” for a
new business.
2. Identifying possible niches a small
business can occupy profitably.
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Five forces interact with one another to
determine the setting in which companies
compete and, hence, the attractiveness of
the industry:
1. Rivalry among companies in the industry
2. Bargaining power of suppliers
3. Bargaining power of buyers
4. Threat of new entrants
5. Threat of substitute products or services
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Potential
Entrants
Threat of
New Entrants
Bargaining Power
of Suppliers
Industry
Competitors
Suppliers
Bargaining Power
of Buyers
Buyers
Rivalry among
existing firms
Threat of Substitute
Products or Services
Substitutes
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Strongest of the five forces
Industry is more attractive when:
◦ Number of competitors is large, or, at the other
extreme, quite small
◦ Competitors are not similar in size or capacity
◦ Industry is growing fast
◦ Opportunity to sell a differentiated product or
service exists
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The greater the leverage of suppliers,
the less attractive the industry.
Industry is more attractive when:
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Many suppliers sell a commodity product
Substitutes are available
Switching costs are low
Items account for a small portion of the cost
of finished products
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Buyers’ influence is high when number of
customers is small and cost of switching to
a competitor’s product is low.
Industry is more attractive when:
Customers’ switching costs are high
Number of buyers is large
Customers want differentiated products
Customers find it difficult to collect
information for comparing suppliers
◦ Items account for a small portion of
customers’ finished products
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The larger the pool of potential new entrants,
the less attractive an industry is.
Industry is more attractive to new entrants
when:
◦ Advantages of economies of scale are absent.
◦ Capital requirements to enter are low
◦ Cost advantages are not related to company size
◦ Buyers are not loyal to existing brands
◦ Government does not restrict the entrance of new
companies
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Substitute products or services can
turn an industry on its head.
Industry is more attractive to new
entrants when:
◦ Quality substitutes are not readily available
◦ Prices of substitute products are not
significantly lower than those of the
industry’s products
◦ Buyers’ switching costs are high
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Entrepreneurs test their business models on
a small scale before committing serious
resources to launch a business that might
not work.
Recognizes that a business idea is a
hypothesis that needs to be tested before
taking it full scale.
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Determines the degree to which a product or
service idea appeals to potential customers
and identifies the resourced necessary to
produce it.
Two questions:
1. Are customers willing to purchase
our product or service?
2. Can we provide the product or
service to customers at a profit?
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Primary research: Collect data firsthand
and analyze it.
◦ Customer surveys and questionnaires
◦ Focus groups
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Secondary research: Gather data that
already has been compiled and analyze it.
Prototypes
In-home trials
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Capital requirements –an estimate of
how much start-up capital is required
to launch the business.
Estimated earnings – forecasted
income statements
Return on investment – Combining
the previous two estimates to
determine how much investors can
expect their investments to return.
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A written summary of:
◦ An entrepreneur’s proposed business venture
◦ The operational and financial details
◦ The marketing opportunities and strategy
◦ The managers’ skills and abilities.
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A business plan is the best insurance against
launching a business destined to fail or
mismanaging a potentially successful
company.
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1. Guiding the company by
charting its future course
and defining its strategy
for following it.
2. Attracting lenders and
investors who will provide
needed capital.
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1. The Reality Test – proving that :
◦ A market really does exist for your product or
service.
◦ You can actually build or provide it for the cost
estimates in the plan.
2. The Competitive Test – evaluates:
◦ A company’s position relative to its competitors.
◦ Management’s ability to create a company that
will gain an edge over its rivals.
3. The Value Test – proving that:
◦ A venture offers investors or lenders an attractive
rate of return or a high probability of repayment.
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Although building a plan does not
guarantee success, it does increase your
chances of succeeding in business.
A plan is like a road map that serves as a
guide on a journey through unfamiliar,
harsh, and dangerous territory. Don’t
attempt the trip without a map!
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Title Page and Table of Contents
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Executive Summary
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Vision and Mission Statement
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Company History
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Business and Industry Profile
Our
Business
Plan
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FIGURE 4.3
Mission, Goals
and Objectives
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Title Page and Table of Contents
Executive Summary
Mission Statement
Company History
Business and Industry Profile
Business Strategy
Description of Products/Services
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Feature – a descriptive fact about a
product or service:
“an ergonomically designed,
more comfortable handle”
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Benefit – what a customer gains from
the product or service feature:
“fewer problems with carpal
tunnel syndrome and
increased productivity”
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(continued)
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Marketing Strategy
◦ Document market claims
◦ Show customer interest
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Competitor Analysis
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Description of Management Team
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Plan of Operation
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Projected Financial Statements
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Loan or Investment Proposal
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Remember: No one can create your plan for
you.
Potential lenders want to see financial
projections, but they are more interested in the
strategies for reaching those projections.
Show how you plan to set your business apart
from competitors; don’t fall into the “me too”
trap.
Identify your target market and offer evidence
that customers for your product or service
exist.
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Make sure your plan has an attractive
cover. (First impressions are crucial.)
Rid your plan of all spelling and
grammatical errors.
Make your plan visually appealing.
Include a table of contents to allow
readers to navigate your plan easily.
Make it interesting.
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(continued)
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Your plan must prove that the business
will make money (not necessarily
immediately, but eventually).
Use spreadsheets to generate financial
forecasts.
Always include cash flow projections.
Keep your plan “crisp” – between 25 and
40 pages long.
Tell the truth – always.
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Capital
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Capacity
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Collateral
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Character
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Conditions
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Demonstrate enthusiasm, but don’t be
overemotional.
Know your audience thoroughly.
“Hook” investors quickly with an upfront explanation of the venture, its
opportunities, and its benefits to them.
Hit the highlights; focus on
the details later.
Keep your presentation
simple – 2 or 3 major points.
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(continued)
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Avoid overloading your audience with
technological jargon.
Use visual aids.
Close by reinforcing the nature of the
opportunity.
Be prepared (with details) for potential
investors’ questions.
Follow up with every investor to whom
you make your presentation.
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There are no guarantees for success.
Creating a business plan will be valuable
primarily because of the process itself.
The business planning process may
provide insight to increase the chances
for success.
The business plan: Entrepreneurs
benefit; lenders and investors demand
it!
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