CHAPTER 3 Getting Started Part 2 Starting from Scratch or Joining an Existing Business CHAPTER 3 Getting Started © 2008 Cengage Learning. All rights reserved.

Looking AHEAD After you have read this chapter, you should be able to: Identify several factors that determine whether an idea for a new venture is a good investment opportunity. Give several reasons for starting a new business from scratch rather than buying a franchise or an existing business. Distinguish among the different types and sources of startup ideas. Describe external and internal analyses that might shape new venture opportunities. Explain broad-based strategy options and focus strategies. © 2008 Cengage Learning. All rights reserved.

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.

Is an Idea a Good Investment Opportunity? Market Factors Fatal Flaws Judging a Business Opportunity Competitive Advantage Management Capability Economics © 2008 Cengage Learning. All rights reserved.

Creating a New Business from Scratch To develop a commercial market for new product or service. To tap into unique resources that are available Motivations To Start a Business Wanting the challenge of succeeding (or failing) on your own To avoid undesirable features of existing companies © 2008 Cengage Learning. All rights reserved.

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.

Selected Evaluation Criteria for a Startup 3-1 Selected Evaluation Criteria for a Startup ATTRACTIVENESS Criterion Favorable Unfavorable Market Factors 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 Competitive Advantage Control over prices, costs, and distribution Moderate to strong Weak to nonexistent Barriers to entry: 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 Contacts and networks Well developed; accessible Poorly developed; limited Economics 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 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.

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.

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.

Evaluation Criteria for a Startup Economics Return on investment? Investment requirements Break-even point Management Capability Diverse skills or solo entrepreneur with no related experience Fatal Flaws © 2008 Cengage Learning. All rights reserved.

Types of Ideas That Develop into Startups 3-2 Types of Ideas That Develop into Startups © 2008 Cengage Learning. All rights reserved.

Kinds of Startup Ideas Type A Type B Type C 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.

Sources of Startup Ideas 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.

Change-Based Sources of Entrepreneurial Opportunities 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.

Applying Innovative Thinking to Business Ideas Borrow ideas from existing products and services or other industries. Combine two businesses into one to create a market opening. Begin with a problem in mind. Recognize a hot trend and ride the wave. Explore ways to improve a product or service’s function. Think of how to streamline a customer’s activities. Adapt a product or service to meet customer needs in a different way. Imagine how the market for a product or service could be expanded. Keep an eye on new technologies. © 2008 Cengage Learning. All rights reserved.

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.

Segments of the General Environment 3-5 Segments of the General Environment © 2008 Cengage Learning. All rights reserved.

Major Factors Offsetting Market Attractiveness 3-6 Major Factors Offsetting Market Attractiveness Threat of New Competitors Threat of Substitute Products or Services Attractiveness and Profitability of a Target Market Intensity of Rivalry Among Existing Competitors Bargaining Power of Suppliers Bargaining Power of Buyers © 2008 Cengage Learning. All rights reserved.

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.

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.

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.

Examples of SWOT Factors 3-7 Examples of SWOT Factors © 2008 Cengage Learning. All rights reserved.

The Opportunity “Sweet Spot” 3-8 The Opportunity “Sweet Spot” © 2008 Cengage Learning. All rights reserved.

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.

Setting a Direction for the Startup 3-9 Setting a Direction for the Startup © 2008 Cengage Learning. All rights reserved.

Selecting Strategies That Capture Opportunities Cost-Based Strategy Focus Strategy Broad-Based Strategy Differentiation-Based Strategy Strategies That Capture Opportunities © 2008 Cengage Learning. All rights reserved.

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.

Focus Strategies (cont’d) Advantages Niche market shields from direct competition. Allow development of unique expertise Disadvantages Focus markets can quickly erode if: The focus strategy is imitated. The target segment is structurally unattractive. The target segment’s differences from other segments narrow. New firms subsegment the industry. © 2008 Cengage Learning. All rights reserved.

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 tangible resources intangible resources capabilities core competencies SWOT analysis strategy cost-based strategy differentiation-based strategy focus strategy strategic decision © 2008 Cengage Learning. All rights reserved.