Part 2
Starting from Scratch or Joining an Existing Business
CHAPTER 3
Getting Started
Longenecker • Moore • Petty • Palich
© 2008 Cengage Learning.
All rights reserved.
PowerPoint Presentation by Charlie Cook
The University of West Alabama
Looking AHEAD
After you have read this chapter, you should be able to:
1.
Identify several factors that determine whether an idea for a
new venture is a good investment opportunity.
2.
Give several reasons for starting a new business from scratch
rather than buying a franchise or an existing business.
3.
Distinguish among the different types and sources of startup
ideas.
4.
Describe external and internal analyses that might shape new
venture opportunities.
5.
Explain broad-based strategy options and focus strategies.
© 2008 Cengage Learning. All rights reserved.
3–2
Identifying Startup Ideas
• Opportunity Recognition
 Identification of potential new products or services
that may lead to promising businesses
• Entrepreneurial Alertness
 Readiness to act on existing, but unnoticed, business
opportunities
• Good Investment Qualities
 Products that serve clear and important needs
 Products that customers know about
 Products that customers can afford
 A good idea is not the same as a good opportunity.
© 2008 Cengage Learning. All rights reserved.
3–3
Is an Idea a Good Investment Opportunity?
Market
Factors
Fatal
Flaws
Management
Capability
© 2008 Cengage Learning. All rights reserved.
Judging a
Business
Opportunity
Competitive
Advantage
Economics
3–4
Creating a New Business from Scratch
To tap into
unique
resources
that are
available
To develop a
commercial
market for new
product or
service.
Motivations
To Start
a Business
Wanting the
challenge of
succeeding (or
failing) on your
own
© 2008 Cengage Learning. All rights reserved.
To avoid
undesirable
features of
existing
companies
3–5
Basic Questions about Startups
• What other startup types might be considered?
• What are some sources for more new ideas?
• How to identify a genuine opportunity that
creates value, for both the company and the
company’s owners?
• How should the idea be refined?
• What can be done to increase the chances that
the business will be successful?
• What competitive advantage does the business
have over its rivals?
© 2008 Cengage Learning. All rights reserved.
3–6
3-1
Selected Evaluation Criteria for a Startup
ATTRACTIVENESS
Criterion
Favorable
Unfavorable
Need for the product
Well identified
Unfocused
Customers
Reachable; receptive
Unreachable; strong loyalty to competitor’s product or service
Value created for customers
Significant
Not significant
Market structure
Emerging industry; not highly
competitive
Mature or declining industry; highly concentrated competition
Market growth rate
Growing by at least 15% a year
Growing by less than 10% a year
Moderate to strong
Weak to nonexistent
Proprietary information or regulatory
protection
Have or can develop
Not possible
Response/lead time advantage
Competition slow, nonresponsive
Unable to gain an edge
Legal/contractual advantage
Proprietary or exclusive
Nonexistent
Well developed; accessible
Poorly developed; limited
Return on investment
25% or more; sustainable
Less than 15%; unpredictable
Investment requirements
Small to moderate; easily financed
Large; difficult to finance
Time required to break even or to reach
positive cash flows
Under 2 years
More than 4 years
Management Capability
Management team with diverse
skills and relevant experience
Solo entrepreneur with no related experience
Fatal flaws
None
One or more
Market Factors
Competitive Advantage
Control over prices, costs, and distribution
Barriers to entry:
Contacts and networks
Economics
Source: Adapted from Jeffrey A. Timmons and Stephen Spinelli, New Venture Creation: Entrepreneurship for the 21st Century (Boston: McGraw-Hill Irwin, 2007), pp. 128–129.
© 2008 Cengage Learning. All rights reserved.
3–7
Evaluation Criteria for a Startup
• Marketing Factors
Need for product
 Identified
or unfocused
Customers
 Reachable
or not, brand loyal
Value created for customer
 Significant
or insignificant
Life of product
 Recovery
of cost by customer
© 2008 Cengage Learning. All rights reserved.
3–8
Evaluation Criteria for a Startup
• Marketing Factors (cont’d)
Market structure
 Emerging
or mature
 Market
size (known or unknown?)
 Market
growth (how fast?)
• Competitive Advantage
Cost structure
 Control
over price, costs, channels of supply
 Barriers
to entry: regulatory protection, response/
lead-time advantage, legal, contacts and networks
© 2008 Cengage Learning. All rights reserved.
3–9
Evaluation Criteria for a Startup
• Economics
 Return on investment?
 Investment
 Break-even
requirements
point
• Management Capability
 Diverse skills or solo entrepreneur
with no related experience
• Fatal Flaws
© 2008 Cengage Learning. All rights reserved.
3–10
3-2
Types of Ideas That Develop into Startups
© 2008 Cengage Learning. All rights reserved.
3–11
Kinds of Startup Ideas
• Type A
Are centered around providing customers with an
existing product not available in their market.
• Type B
Involve new ideas, involve new technology, centered
around providing customers with a new product.
• Type C
Are centered around providing customers with an
improved product.
© 2008 Cengage Learning. All rights reserved.
3–12
3-3
Sources of Startup Ideas
Source: Data developed and provided by the National Federation of Independent
Business and sponsored by the American Express Travel Related Services Company, Inc.
© 2008 Cengage Learning. All rights reserved.
3–13
3-4
Change-Based Sources of Entrepreneurial Opportunities
Change Factor
Definition
Industry Factors
The unexpected
Unanticipated events lead to either enterprise success or
failure.
The incongruous
What is expected is out of line with what will work.
Process needs
Current technology is insufficient to address an
emerging challenge.
Structural change
Changes in technology, markets, etc., alter industry
dynamics.
Human and Economic
Factors
Demographics
Shifts in population size, age structure, ethnicity, and
income distribution impact product demand.
Changes in perception
Perceptual variations determine product demand.
New knowledge
Learning opens the door to new product opportunities
with commercial potential.
© 2008 Cengage Learning. All rights reserved.
3–14
Applying Innovative Thinking to Business Ideas
1. Borrow ideas from existing products and services or other
industries.
2. Combine two businesses into one to create a market opening.
3. Begin with a problem in mind.
4. Recognize a hot trend and ride the wave.
5. Explore ways to improve a product or service’s function.
6. Think of how to streamline a customer’s activities.
7. Adapt a product or service to meet customer needs in a different
way.
8. Imagine how the market for a product or service could be
expanded.
9. Keep an eye on new technologies.
© 2008 Cengage Learning. All rights reserved.
3–15
Evaluating Entrepreneurial Opportunities
• Outside-In Analysis
Studying the context of the venture to identify
business ideas and determine which ideas qualify as
opportunities.
 General Environment
– A broad environment, encompassing factors that influence most
businesses in a society.

Industry Environment
– The combined forces that directly impact a given firm and its
competitors.

Competitive Environment
– The environment that focuses on the strength, position, and likely
moves and countermoves of competitors in an industry.
© 2008 Cengage Learning. All rights reserved.
3–16
3-5
Segments of the General Environment
© 2008 Cengage Learning. All rights reserved.
3–17
3-6
Major Factors Offsetting Market Attractiveness
Threat of New
Competitors
Threat of Substitute
Products or Services
Intensity of Rivalry Among
Existing Competitors
Attractiveness and
Profitability of a
Target Market
Bargaining Power
of Suppliers
Bargaining Power
of Buyers
© 2008 Cengage Learning. All rights reserved.
3–18
Competitor Analysis
• Who are the new venture’s current competitors?
• What resources do they control?
• What are their strengths and weaknesses?
• How will they respond to the new venture’s decision to
enter the industry?
• How can the new venture respond?
• Who else might be able to observe and exploit the same
opportunity?
• Are there ways to co-opt potential or actual competitors
by forming alliances?
© 2008 Cengage Learning. All rights reserved.
3–19
Evaluating Opportunities… (cont’d)
• Inside-Out Analysis
Assessing the firm’s internal competitive potential
• Resources
Basic inputs that a firm uses to conduct its business
Tangible resources: visible and easy to measure.
 Intangible resources: invisible, difficult to quantify

• Capabilities
Integration of various organizational resources that
are deployed together to the firm’s advantage.
• Core Competencies
Resources and capabilities that provide a firm with a
competitive advantage over its rivals.
© 2008 Cengage Learning. All rights reserved.
3–20
Integrating Internal and External Analyses
• Strengths, Weaknesses, Opportunities, and
Threats (SWOT) Analysis
 A type of assessment that provides a concise
overview of a firm’s strategic situation.
 Helps identify opportunities that match the venture.
• Seeking Competitive Insight
 Will the opportunity lead to others in the future?
 Will the opportunity build skills that open the door to
new opportunities in the future?
 Will pursuit of the opportunity be likely to lead to
competitive response by potential rivals?
© 2008 Cengage Learning. All rights reserved.
3–21
3-7
Examples of SWOT Factors
© 2008 Cengage Learning. All rights reserved.
3–22
3-8
The Opportunity “Sweet Spot”
© 2008 Cengage Learning. All rights reserved.
3–23
Important Strategic Terms
• Strategy
A plan of action that coordinates the resources and
commitments of an organization to achieve superior
performance.
• Strategic Decision
A decision regarding the direction a firm will take in
relating to its customers and competitors.
• Sustainable Competitive Advantage
A value-creating industry position that is likely to
endure over time.
© 2008 Cengage Learning. All rights reserved.
3–24
3-9
Setting a Direction for the Startup
© 2008 Cengage Learning. All rights reserved.
3–25
Selecting Strategies That Capture Opportunities
Cost-Based
Strategy
Broad-Based
Strategy
Strategies That
Capture
Opportunities
DifferentiationBased Strategy
© 2008 Cengage Learning. All rights reserved.
Focus
Strategy
3–26
Focus Strategies
• Focus Strategy Implementation
Restricting focus to a single subset of customers.
Emphasizing a single product or service.
Limiting the market to a single geographical region.
Concentrating on superiority of product or service.
© 2008 Cengage Learning. All rights reserved.
3–27
Focus Strategies (cont’d)
•
Advantages
 Niche market shields from direct competition.
 Allow development of unique expertise
•
Disadvantages
 Focus markets can quickly erode if:
1. The focus strategy is imitated.
2. The target segment is structurally unattractive.
3. The target segment’s differences from other
segments narrow.
4. New firms subsegment the industry.
© 2008 Cengage Learning. All rights reserved.
3–28
Key TERMS
•
•
•
•
•
•
•
•
•
•
•
opportunity recognition
entrepreneurial alertness
competitive advantage
Type A ideas
Type B ideas
Type C ideas
serendipity
general environment
industry environment
competitive environment
resources
© 2008 Cengage Learning. All rights reserved.
•
•
•
•
•
•
•
•
tangible resources
intangible resources
capabilities
core competencies
SWOT analysis
strategy
cost-based strategy
differentiation-based
strategy
• focus strategy
• strategic decision
3–29