1. The Winning Hand of Entrepreneurship
part 1
Entrepreneurship and Small Business 1
The Winning Hand of Entrepreneurship
PowerPoint Presentation by Charlie Cook
12e
Copyright © 2003 South-Western College Publishing.
All rights reserved.

2. Looking Ahead After studying this chapter, you should be able to:
Discuss the availability of entrepreneurial opportunities and give examples of highly successful businesses started by entrepreneurs.
Explain the entrepreneurial challenges presented by e-commerce and global changes.
Explain the nature of entrepreneurship and how it is related to small business.
Identify three motivators or rewards of entrepreneurial careers.
Copyright © by South-Western College Publishing. All rights reserved.

3. Looking Ahead (cont’d)
Describe the various types of entrepreneurs and entrepreneurial ventures.
Identify ways to gain a potential competitive edge for small entrepreneurial firms.
Discuss factors related to readiness for entrepreneurship and getting started in an entrepreneurial career.
Copyright © by South-Western College Publishing. All rights reserved.

4. Entrepreneurial Opportunities
Entrepreneurial Opportunity
A value creating innovation with market potential
A desirable and timely innovation that creates value for interested buyers and end users.
Success stories
Marketplace Holdings
Auntie Anne’s
RotoZip® Tool Corporation
Copyright © by South-Western College Publishing. All rights reserved.

5. Who Are Entrepreneurs? Entrepreneurs are:
Persons who starts and/or operates a business.
Individuals who discover market needs and launch new firms to meet those needs.
Risk takers who provide an impetus for change, innovation, and progress.
All active owner-managers (founders and/or managers of small businesses).
Copyright © by South-Western College Publishing. All rights reserved.

6. Entrepreneurial Challenges
E-Commerce
An outgrowth and part of the Information Age that is producing the new economy.
Globalization
The trend toward a global economy creates new competition and opportunities.
Copyright © by South-Western College Publishing. All rights reserved.

7. What Is a Small Business?
Criteria for Defining Smallness in Business
Financing supplied by one person or small group
Localized business operations (except marketing)
Business’ size small relative to larger competitors
Fewer than 100 employees
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8. Entrepreneurial Incentives
Profit
Freedom from the limits
of standardized pay for
standardized work
Independence
Freedom from supervision
and rules of bureaucratic organizations
Escape from an oppressive culture
Personal Fulfillment
Freedom to achieve a
satisfying way of life
Escape from routine
and unchallenging work
Rewards of Entrepreneurship
Make Money
Be Your Own Boss
Enjoy a Satisfying Life
Fig. 1.2
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9. Entrepreneurial Refugees
Foreign refugee
Corporate refugee
Parental refugee
Feminist refugee
Housewife refugee
Society refugee
Educational refugee
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10. Varieties of Entrepreneurship
Founder (“Pure” Entrepreneur)
A person who brings a new firm into existence.
Administrative Entrepreneur
An entrepreneur who overseas the operations of a ongoing business
Franchisee
An entrepreneur whose power is limited by the contractual relationship with a franchising organization.
Entrepreneurial Team
Two or more people who work together as entrepreneurs.
Copyright © by South-Western College Publishing. All rights reserved.

11. Small Businesses, Growth, and Profits
High-Potential Venture (Gazelle)
A small firm that has great prospects for growth.
Attractive Small Firm
A small firm that provides substantial profits to its owner.
Microbusiness
A small firm that provides minimal profits to its owner.
Copyright © by South-Western College Publishing. All rights reserved.

12. Characteristics of Artisan Entrepreneurs
Technical training
Paternalistic approach
Reluctance to delegate
Narrow view of strategy
Personal sales effort
Short planning horizon
Simple record keeping
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13. Characteristics of Opportunistic Entrepreneurs
Broad-based education
Scientific approach to problems
Willing to delegate
Broad view of strategy
Diversified marketing approach
Longer planning horizon
Sophisticated accounting and financial control
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14. Women Entrepreneurs More Women Entrepreneurs
Women own 38% of all U.S. businesses.
Employment at female-owned firms has grown 108% since 1992.
Women are moving into nontraditional industries.
Problems Facing Female Entrepreneurs
Newness of entrepreneurial role
Lack of access to credit
Lack of personal networking connections in the established business community
Copyright © by South-Western College Publishing. All rights reserved.

15. Competitive Advantages of Entrepreneurial Firms
Customer Focus
Lack of bureaucracy
Quality Performance
Quality is not limited to large firms
Integrity and Responsibility
A solid reputation builds loyal customers
Innovation
Small firms are the leading source of innovation.
Low-Cost Production
Sound management can lead to lower operating costs.
Copyright © by South-Western College Publishing. All rights reserved.

16. Age Concerns in Starting a Business
Early Career Concerns
1. Getting an education
2. Gaining work experience
3. Acquiring financial resources
Late Career Concerns
1. Fulfilling family responsibilities
2. Attaining seniority in employment
3. Earning investment in a retirement program 25 35 45 20
Fig 1.3
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17. Characteristics of Successful Entrepreneurs
Strong commitment to the business (tenacity)
Strong internal locus of control (self-reliant)
Moderate risk takers (financial, career, psychic risks)
Copyright © by South-Western College Publishing. All rights reserved.

18. Types of Entrepreneurial Career Opportunities
Opportunity Level of Risk
Starting a business High risk
Buying a business Medium risk
Opening a franchised business Medium risk
Entering a family business Variable risk
Copyright © by South-Western College Publishing. All rights reserved.

19. Taking the Plunge Precipitating Event
An event, such as losing a job, that moves an individual to become an entrepreneur.
Copyright © by South-Western College Publishing. All rights reserved.

20. Strategies That Capture Opportunities
part 2
Entrepreneurial Strategy 2
Strategies That Capture Opportunities
PowerPoint Presentation by Charlie Cook
12e
Copyright © 2003 South-Western College Publishing.
All rights reserved.

21. Looking Ahead After studying this chapter, you should be able to:
Define competitive advantage.
Describe the factors that comprise external environments.
Describe the factors that comprise internal environments.
Identify and compare broad-based strategy options for the entrepreneurial venture.
Explain the focus strategy concept and its importance to small business.
Discuss the importance of the sustainability of competitive advantage.
Copyright © by South-Western College Publishing. All rights reserved.

22. The Path to Competitive Advantage
Strategy
A plan of action that coordinates the resources and commitments of an organization to achieve superior performance.
Competitive Advantage
A benefit that exists when a firm has a product or service that is seen by its target market as better than those of competitors.
Copyright © by South-Western College Publishing. All rights reserved.

23. The Path to Competitive Advantage
Identify Opportunities
Select Strategies That Capture Opportunities
Manage the
Outcomes from Exploiting Opportunities
Fig. 2.1
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24. Bases for Competitive Advantage
Unique Service
Features
Notable Product
Attributes
Customer
Experience
Convenience
Competitive
Advantage
Price/Value
Fig. 2.2
Copyright © by South-Western College Publishing. All rights reserved.

25. Identifying Entrepreneurial Opportunities
Types of Evaluation
External Analysis
Understanding the nature of the external environment by studying the general trends and dynamics of competition (what business potentials exist)
Internal Analysis
Identifying the firm’s competitive capabilities and strengths (what the firm can do)
Copyright © by South-Western College Publishing. All rights reserved.

26. A Model of Competitive Advantage
Fig. 2.3
Strategies •
Cost-Based Strategies
Differentiation-Based Strategies
Foundations
Environmental Assessment
Organizational Assessment
Profits
Market Share
Customer Satisfaction
Survival
Results
Reinvestment
Fig. 2.3
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27. Assessing The External Environment
The 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
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28. Segments of the General Environment
Sociocultural
Macroeconomic
Ecological
Political/Legal
Technological
Global
Fig. 2.4
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29. Major Factors Offsetting Market Attractive-ness
Threat of New
Competitors
Threat of Substitute
Products or Services
Attractiveness and
Intensity of Rivalry
Profitability of a
Among Existing Products
Target Market
Bargaining Power
of Suppliers
Bargaining Power
of Buyers
Fig. 2.5
Copyright © by South-Western College Publishing. All rights reserved.
Fig 2.5

30. 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?
Copyright © by South-Western College Publishing. All rights reserved.

31. Market Attractiveness
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32. Response to Change as an Opportunity
Innovation
is “the means by which the entrepreneur either creates new wealth-producing resources or endows existing resources with enhanced potential for creating wealth.” (Drucker)
Paradox of Attraction
The concept that an attractive industry opportunity is likely to draw multiple new entrants, diminishing its attractiveness.
Copyright © by South-Western College Publishing. All rights reserved.

33. Change-based Sources of Entrepreneurial Opportunities
Table 2.1a
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34. Change-based Sources of Entrepreneurial Opportunities
Table 2.1b
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35. Organizational Assessment
Organizational Resources and Capabilities
Basic inputs that a firm uses to conduct its business
Tangible and intangible resources
Organizational capabilities
Core Competencies
Those resources and capabilities that provide a firm with a competitive advantage over its rivals.
Copyright © by South-Western College Publishing. All rights reserved.

36. Examples of SWOT Factors
Internal
Strengths
Core Competencies
Financial strength
Well-planned strategy
Skilled management
Weaknesses
Production inefficiencies
Inadequate financial resources
Poor management
Poorly planned strategy
External
Opportunities
Untapped market potential
Favorable shift in market
Emerging technologies
New product
Threats
New competition
Rising demand
Increased government regulations
Copyright © by South-Western College Publishing. All rights reserved.

37. Strategies that Capture Opportunities
Broad-Based Strategy Options
Seek an advantage in cost or competition.
Cost-Based Strategy and Options
Requires the firm to be the lowest-cost producer.
Differentiation-Based Strategy
Emphasizing the uniqueness of the firm’s product or service
Focus strategy
Targeting a specific market segment (niche)
Copyright © by South-Western College Publishing. All rights reserved.

38. Implementation of Focus Strategies
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.
Copyright © by South-Western College Publishing. All rights reserved.

39. Segmented Markets 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.
Copyright © by South-Western College Publishing. All rights reserved.

40. Strategic Terms Strategic Decision Sustainable competitive advantage
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.
Copyright © by South-Western College Publishing. All rights reserved.

41. The Competitive Advantage Life Cycle
Develop
Deploy
Decline
Stage 1
Stage 2
Stage 3
Time
Copyright © by South-Western College Publishing. All rights reserved.
Fig. 2.6

42. Sustaining Competitive Advantage#1 #2 #3 #4
Time
Copyright © by South-Western College Publishing. All rights reserved.
Fig. 2.7

43. E-Commerce Opportunities
part 2
Entrepreneurial Strategy 3
E-Commerce Opportunities
PowerPoint Presentation by Charlie Cook
12e
Copyright © 2003 South-Western College Publishing.
All rights reserved.

44. Looking Ahead After studying this chapter, you should be able to:
Explain how the Internet developed and how it supports e-commerce activity.
Understand the benefits of e-commerce to small firms.
Describe the different business models followed by e-commerce firms.
Identify the initial considerations in launching a dot.com business.
Discuss criminal and ethical issues related to e-commerce.
Copyright © by South-Western College Publishing. All rights reserved.

45. The Internet and E-Commerce
A huge, loosely connected computer network that links smaller networks all over the world.
World Wide Web (WWW)
A system of Internet servers accessible with browsers, which navigate via hypertext links.
Copyright © by South-Western College Publishing. All rights reserved.

46. E-Business Growth and Projections
Source: Brad Alan Kleindl, Strategic Electronic Marketing, Managing E-Business (Cincinnati, OH: South-Western 2001), p. 9.
Table 3.1
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47. Myths About E-Commerce
The technical nature of E-commerce makes it too expensive for small firms.
E-commerce is nothing more than a new way of taking orders.
Being first in e-commerce is the only way to be successful.
Copyright © by South-Western College Publishing. All rights reserved.

48. Benefits of E-Commerce to Small Firms
Provides the opportunity to compete with larger firms in larger markets.
Helps with cash flow problems by compressing the sales cycle.
Build better customer relationships through better service (eCRM).
Copyright © by South-Western College Publishing. All rights reserved.

49. E-Commerce Business Models
A group of shared characteristics, behaviors, and goals that a firm follows in a particular business situation.
Copyright © by South-Western College Publishing. All rights reserved.

50. E-Commerce Business Models
Business-to-Business (B2B)
Auction Sites
Content/Information-Based
Transaction-Based
Expense-Based
Revenue-Based
Growth-Based
Business-to-Consumer (B2C)
Degree of Online Presence
Approach to Profitability
Type of Customers Served
Fig. 3-1
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51. Why Consumers Didn’t Buy Online?
Source: “The Second Annual Ernst & Young Internet Shopping Study,” sponsored by the National Retail Federation, 1991, p. 11.
Table 3.2
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52. Preparing to Launch a Dot.Com Business
Create and Register a Site Name
Create unique and descriptive domain name
Check for domain name availability
Register name with domain registrar
yournameavaiable.com?
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53. Preparing to Launch a Dot.Com Business: Build a User-Friendly Web Site
Make It Easy to Buy
Make a Strong First Impression
Minimize Distractions: Advertising Isn’t Always Necessary
Make It Personal
Source: Nadja Vol Ochs, “Easy-to-Buy E-commerce Site Design Tips,” February 15, 1999.
Copyright © by South-Western College Publishing. All rights reserved.

54. Preparing to Launch a Dot
Preparing to Launch a Dot.Com Business: Build a User-Friendly Web Site (cont’d)
Provide Visual Clues
Show Off Products
Encourage Spontaneous Purchases
Alternate Background Colors in Long Lists
Allow Users to Collect Items
Source: Nadja Vol Ochs, “Easy-to-Buy E-commerce Site Design Tips,” February 15, 1999.
Copyright © by South-Western College Publishing. All rights reserved.

55. Promoting the Web Site
Include the URL in all print media, stationery, and packaging.
Use direct mail and radio advertising.
Place banner ads on other sites.
Include keywords in site’s pages to help search engines access the site
Submit site to search engines
Free submission services
Manual entry on each search engine
Paid submission services
Search engine submission software
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56. Criminal and Ethical Issues in E-Commerce
Cybercrime
Hacking—illegal entry into computer systems
Scamming—deception to gain other’s assets
Violation of intellectual property rights
Questionable E-commerce Business Practices
“Cookies” and personal privacy issues
Copyright © by South-Western College Publishing. All rights reserved.

57. Entrepreneurial Strategy
part 2
Entrepreneurial Strategy 4
Global Opportunities
PowerPoint Presentation by Charlie Cook
12e
Copyright © 2003 South-Western College Publishing.
All rights reserved.

58. Looking Ahead After studying this chapter, you should be able to:
Describe the potential of small firms as global enterprises.
Identify the basic forces prompting small firms to engage in global expansion.
Identify an compare strategy options for global businesses.
Explain the challenges that global enterprises face.
Recognize the source of assistance available to support international business efforts.
Copyright © by South-Western College Publishing. All rights reserved.

59. Small Businesses as Global Enterprises
Globalization
The expansion of international business, promoted by converging market preferences, falling trade barriers, and the integration of national economies.
Size does not limit a firm’s international activity, and small companies often become global competitors to take advantage of their unique resources.
Copyright © by South-Western College Publishing. All rights reserved.

60. Questions to Consider Before Going Global
What are management’s objectives?
reasons, commitment, expected payoff
How prepared is management to go global?
in-house expertise, responsibility for and time allocated to international operations, organizational structure.
Is there sufficient production capacity?
Present capacity, effect of international operations on local production
Is there enough financial capacity
Copyright © by South-Western College Publishing. All rights reserved.

61. Before Going Global Decide if firm is up to the task of globalization.
Study the different cultural, political and business practices in foreign markets.
Be prepared to modify products to meet design specifications that may vary from county to country.
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62. Forces Driving Global Enterprises
Global Expansion
Expanding Markets
Traditional motivation: Extend the product life cycle.
EMERGING MOTIVATION: FIND BUYERS FOR HIGHLY SPECIALIZED PRODUCTS.
Cutting Costs
Traditional motivation: Reduce labor and transportation costs.
EMERGING MOTIVATION: OBTAIN TARIFF REDUCTIONS.
Gaining Access to Resources
Traditional motivation: Find raw materials.
EMERGING MOTIVATION: OBTAIN HUMAN RESOURCES.
Capitalizing on Special Features of the Location
Traditional motivation: Profit from unique local features, such as Italian artisans' flair for design.
EMERGING MOTIVATION: FOLLOW LARGE CLIENT FIRMS THAT LOCATE ABROAD.
Fig. 4.2
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63. Expanding the Market: Making the Most of Experience
Experience Curve Efficiencies
Per-unit savings gained from the repeated production of the same good.
Learning Effects
Insights gained from experience, that lead to improved work performance.
Economies of Scale
Efficiencies that result from the expansion of production.
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64. Big Emerging Markets
Source: World Bank, “Selected World Development Indicators,” World Development Report 2000/2001, pp. 274–275.
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65. Strategy Options for Global Enterprises
International Strategic Alliances
Importing
International Financing
Exporting
Establishing an International Presence
Global
Strategy
Options
Foreign Licensing
Fig. 4.3
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66. Strategy Options for Global Firms
Exporting
Selling products in the home country to customers in another country
Trade mission
A trip organized to help small business owners make direct contact with potential buyers abroad
Importing
Selling goods produced in another country to buyers in the home country
Copyright © by South-Western College Publishing. All rights reserved.

67. Strategy Options for Global Firms (cont’d)
Foreign Licensing
Allowing a company in another country to purchase the right to manufacture and sell a company’s products in international markets
Licensee
The company buying the licensing rights
Licensor
The company selling the licensing rights
Royalties
Fees paid by the licensee to the licensor for each unit produced under a licensing contract
Copyright © by South-Western College Publishing. All rights reserved.

68. Strategy Options for Global Firms (cont’d)
International Franchising
Selling a standard package of products, systems, and management services to a company in another country
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69. Strategy Options for Global Firms (cont’d)
International Strategic Alliances
A combination of efforts and/or assets of companies in different countries for the sake of pooling resources and sharing the risks of an enterprise
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70. Strategy Options for Global Firms (cont’d)
Establishing an International Presence
Cross-border acquisition
Purchase by a business in one country of a company located in another country
Greenfield venture
A wholly owned subsidiary formed “from scratch” in another country
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71. “Country Risk Rankings”
Least Risky
Moderately Risky
Most Risky
Fig. 4.4
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72. Challenges to Global Business
Political Risk
The potential for political forces in a country to negatively affect the performance of businessess operating within
Economic Risk
The probability that a government will mismanage its economy and thereby change the business environment in ways that hinder the performance of firms operating there.
Exchange rates—the value of one country’s currency relative to that of another country.
Copyright © by South-Western College Publishing. All rights reserved.

73. Challenges to Global Business (cont’d)
Managerial Limitations
Product planning
Marketing
Finance
Management
Accounting
Legal issues
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74. Assistance for Global Enterprises
Analyzing Markets and Planning Strategies
Small Business Administration resources
Office of International Trade
U.S. Export Assistance Centers (USEACs)
Publications
Opportunities in Exporting
SBA Guide to Exporting
Department of Commerce
International Trade Administration
Visit the foreign country
Copyright © by South-Western College Publishing. All rights reserved.

75. Assistance for Global Enterprises (cont’d)
Connections With International Customers
Trade Leads
Trade Missions
Trade Intermediaries
Export management companies
Export trading companies
Export agents, merchants, or remarketers
Piggyback marketers
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76. Assistance for Global Enterprises (cont’d)
Financing
Private banks
Letters of credit—an agreement issued by a bank to honor a draft or other demand for payment when specified conditions are met.
Bill of lading—a document indicating that a product has been shipped and the title to that product has been transferred
Copyright © by South-Western College Publishing. All rights reserved.

77. Pursuing New Venture Opportunities
part 3
Pursuing New Venture Opportunities 5
Startups and Buyouts
PowerPoint Presentation by Charlie Cook
12e
Copyright © 2003South-Western College Publishing.
All rights reserved.

78. Looking Ahead After studying this chapter, you should be able to:
Identify five factors that determine whether an idea is a good investment opportunity.
Give three reasons for starting a new business rather than buying an existing firm or acquiring a franchise.
Distinguish among the different types and sources of startup ideas.
List some reasons for buying an existing business.
Summarize four basic approaches for determining a fair value for a business.
Describe the characteristics of highly successful startups.
Copyright © by South-Western College Publishing. All rights reserved.

79. Identifying and Evaluating Investment Opportunities
“Startups with products that do not serve clear and important needs cannot expect to be ‘discovered’ by enough customers to make a difference.”—Amar Bhide
Infatuation with an idea may lead to an underestimation of the difficulty of developing market receptivity and building a firm to capture the opportunity.
Copyright © by South-Western College Publishing. All rights reserved.

80. Is an Idea a Good Investment Opportunity?
Is there a clearly defined market need for the product or service, and is the timing right?
Can the proposed business achieve a durable or sustainable competitive advantage?
Is the venture financially rewarding, and does it have significant profit and growth potential?
Is there a good fit between the entrepreneur and the opportunity?
Is there a fatal flaw in the venture that could make the business unsuccessful?
Copyright © by South-Western College Publishing. All rights reserved.

81. Two Paths to Entrepreneurship
Startup Creating a new business from scratch
Buyout Purchasing an existing business
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82. Reasons for Starting a New Business
Developing a commercial market for a recently invented or newly developed product or service.
Taking advantage of available resources, ideal location, advances in equipment, employees, suppliers, and bankers
Avoiding precedents, policies, procedures, and legal commitments of existing firms
Copyright © by South-Western College Publishing. All rights reserved.

83. 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
Copyright © by South-Western College Publishing. All rights reserved.

84. 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
Degree of control over: price, costs, channels of supply
Barriers to entry: regulatory protection, response/lead-time advantage, legal, contacts and networks
Copyright © by South-Western College Publishing. All rights reserved.

85. 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
Copyright © by South-Western College Publishing. All rights reserved.

86. Basic Questions about Startups
What are the different types of startups you might consider?
What are some sources for new ideas?
How can you identify a genuine opportunity that creates value, for both the company and the company’s owners?
How should you refine your idea?
What might you do to increase your chances that the business will be successful?
Copyright © by South-Western College Publishing. All rights reserved.

87. Kinds of Startup Ideas Type A Type B Type C
Startup ideas centered around providing customers with an existing product not available in their market
Type B
Startup ideas, involving new ideas, involving new technology, centered around providing customers with a new product
Type C
Startup ideas centered around providing customers with an improved product
Copyright © by South-Western College Publishing. All rights reserved.

88. Types of Ideas that Develop into Startups
Example: Targeting the "New Age" beverage market by selling soft drinks with nutritional value
New Market
Type A Ideas
Example:
Using high-tech computers to develop a simulated helicopter ride
Type B Ideas
New Technology
Example:
Developing a personal misting device to keep workers cool
Type C Ideas
New Benefit
Copyright © by South-Western College Publishing. All rights reserved.
Fig. 5.1

89. Sources of Startup Ideas
Family Business 6%
Friends/Relatives 5%
Personal Interest/Hobby
16%
Suggestion 7%
Education/Courses
Chance Happening
11%
Other 4%
Prior Work
Experience
45%
Source: Data developed and provided by the National Federation of Independent Business Foundation and sponsored by American Express Travel Related Services Company, Inc.
Copyright © by South-Western College Publishing. All rights reserved.
Fig. 5-2

90. Reasons for Buying an Existing Business
To reduce some of the uncertainties and unknowns that must be faced in starting a business from the ground up.
To acquire a business with ongoing operations and established relationships with customers and suppliers.
To obtain an established business at a price below what it would cost to start a new business.
Copyright © by South-Western College Publishing. All rights reserved.

91. Pros and Cons of Buying an Existing Business
High chance of success
Less planning
Existing customers/ suppliers
Necessary equipment
Bargain price
Experienced employees
Existing business records
Cons
Existing problems
Poor quality of current employees
Poor business image
Modernization required
Purchase price based on inaccurate data
Poor business location
Copyright © by South-Western College Publishing. All rights reserved.

92. Investigating and Evaluating Available Businesses
Due Diligence
The exercise of prudence, such as would be expected of a reasonable person, in the careful evaluation of a business opportunity
Relying on Professionals
Accountants
Attorneys
Other experienced business owners
Copyright © by South-Western College Publishing. All rights reserved.

93. Finding Out Why the Business Is For Sale
Owner’s reasons for selling the business
Old age or illness
Desire to relocate in a different section of the country
Decision to accept a position with another company
Unprofitability of the business
Discontinuance of an exclusive sales franchise
Maturation of the industry and lack of growth potential
Copyright © by South-Western College Publishing. All rights reserved.

94. Examining the Financial Data
Review financial statements and tax returns for the past five years.
Recognize that financial data can be misleading.
Assets overvalued
Expenses overstated/understated
Income underreported
Unrecorded debts
Prepare adjusted adjusted statements to reflect the true state of the business.
Copyright © by South-Western College Publishing. All rights reserved.

95. Income Statement as Adjusted by Prospective Buyer
Copyright © by South-Western College Publishing. All rights reserved.
Fig. 5-3

96. Valuing the Business Asset-Based Valuation Market-Comparable Valuation
Estimates the value of the firm’s assets; does not reflect the value of the firm as a going concern.
Market-Comparable Valuation
Considers the sale prices of comparable firms; difficulty is in finding comparable firms.
Cash-Flow-based Valuation
Compares the expected and required rates of return on the amount of capital to be invested in the business.
Copyright © by South-Western College Publishing. All rights reserved.

97. Asset-Based Valuation
Modified Book Value Technique
Historical value of firm’s assets is adjusted to reflect current market values.
Replacement Value Technique
Value of firm’s assets is adjusted to reflect current costs to replace the assets.
Liquidation Value Technique
Value of firm’s assets is adjusted to reflect their value if the firm ceased operations and disposed of the assets.
Copyright © by South-Western College Publishing. All rights reserved.

98. Market-Comparable Valuation
Earnings Multiple (Value-to-Earnings) Ratio
Ratio is determined by dividing the firm’s value by its earnings.
Firm’s ratio is compared to representative ratios of recently-sold similar firms.
Copyright © by South-Western College Publishing. All rights reserved.

99. Suggested Risk Premium Categories1
Established businesses with a strong trade position that are well
financed, have depth in management, have stable past earnings, and
whose future is highly predictable.
6 10% 2
Established businesses in a more competitive industry that are well
financed
, have depth in management, have stable past earnings, and
whose future is fairly predictable.
11 15% 3
Businesses in a highly competitive industry that require little capital to
enter, have no management depth, and have a high element of risk,
although past record may be good.
16 20% 4
Small businesses that depend on the special skill of one or two people
or large established businesses that are highly cyclical in nature. In
both cases, future earnings may be expected to deviate widely from
projections.
21 25% 5
Small “one-person” business of a personal services nature, where the
transferability of the income stream is in question.
26 30%
Risk Premium
Description
Category
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100. Determinants of a Firm’s Earnings Multiple
Risk
High
Low
Earnings Multiple
Low Firm Value
High Firm Value
Growth
Fig. 5.4
Copyright © by South-Western College Publishing. All rights reserved.

101. Cash Flow-Based Valuation
Estimate the firm’s expected cash flows.
Compute the firm’s cost of capital—the investors’/owners’ required rate of return on investments in the firm.
Using the cost of capital, calculate the present value of the firm’s expected cash flows—the value of the firm.
Copyright © by South-Western College Publishing. All rights reserved.

102. Nonquantitative Factors in Valuing a Business
Competition
Market
Future Community Development
Legal Commitments
Union Contracts
Buildings
Product Prices
Copyright © by South-Western College Publishing. All rights reserved.

103. Negotiating and Closing the Deal
Terms of Purchase
Assets purchase or total entity
Indemnification clause
Payment in full or partial payments over time
Closing the sale
Best handled by a third party
Bill of sale
Tax certifications
Payment-to-seller agreements and guarantees
Copyright © by South-Western College Publishing. All rights reserved.

104. Characteristics of Successful High-Growth Startups
Begin as a team effort
Are in service and manufacturing industries
Have competent founders who:
have related experience.
have started other businesses.
share in ownership of business.
Are somewhat better financed
Do not limit themselves to local markets
Copyright © by South-Western College Publishing. All rights reserved.

105. Franchising Opportunities
part 3
Pursuing New Venture Opportunities 6
Franchising Opportunities
PowerPoint Presentation by Charlie Cook
12e
Copyright © 2003 South-Western College Publishing.
All rights reserved.

106. Looking Ahead After studying this chapter, you should be able to:
Explain franchising terms and the structure of the industry.
Identify the major pros and cons of franchising
Describe the process for evaluating a franchise opportunity.
Discuss certain legal considerations in franchising.
Copyright © by South-Western College Publishing. All rights reserved.

107. Franchising Terms Franchising Franchise contract Franchise
A marketing system revolving around a two-party agreement, whereby the franchisee conducts business according to the terms specified by the franchisor
Franchise contract
The legal agreement between franchisor and franchisee
Franchise
The privileges conveyed in the franchise contract
Copyright © by South-Western College Publishing. All rights reserved.

108. Franchising Terms (cont’d)
Franchisee
An entrepreneur whose power is limited by a contractual agreement with a franchisor
Franchisor
The party in the franchise contract that specifies the methods to be followed and the terms to be met by the other party
Copyright © by South-Western College Publishing. All rights reserved.

109. Types of Franchises Product and Trade Name Franchise
Grants the right to use a widely recognized product or name
Business Format Franchise
Provides an entire marketing system and ongoing guidance from the franchisor
Piggyback Franchising
The operation of a retail franchise within the physical facilities of a host store
Copyright © by South-Western College Publishing. All rights reserved.

110. Types of Franchises (cont’d)
Master Licensee
An independent firm or individual acting as a sales agent with the responsibility for finding new franchises within a specified territory
Multiple-Unit Ownership
Holding by a single franchisee of more than one franchise from the same company
Area Developers
Individuals or firms that obtain the legal right to open several franchised outlets in a given area
Copyright © by South-Western College Publishing. All rights reserved.

111. The Structure of Franchising
Franchisee- Owned Operating Units
Franchisor
Company- Owned Stores
Franchise Parties
Master Licensee/ Area Developers
Industry Associations (example: IFA)
Business/Consulting Firms (example: Franchise Connections)
Federal/State Agencies (example: FTC)
Franchise Facilitators
Fig. 6-1
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112. The Pros and Cons of Franchising
Advantages
Probability of success
Proven line of business
Pre-qualification of franchisee
Training
Franchisor-provided
Financial assistance
Franchisor assistance
Operating benefits
Franchisor-aided
Limitations
Franchise costs
Initial franchise fee
Investment costs
Royalty payments
Advertising costs
Restrictions on Business Operations
Loss of independence
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113. Franchisor Controls on Franchisees
Restricting of sales territory
Requiring site approval and imposing requirement on the outlet’s appearance
Restricting the goods/ services that can be sold
Requiring specific operating hours
Controlling advertising
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114. The Pros and Cons of Franchising
Pluses
Minuses
Formalized training
Financial assistance
Proven marketing methods
Managerial assistance
Quicker startup time
Overall lower failure rates
Franchise fees
Royalties
Restrictions on growth
Less independence in operations
Franchisor may be sole supplier of some supplies
Termination/renewal clauses
Fig. 6-2
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115. Evaluating Franchise Opportunities
Locating a Franchise Opportunity
Investigating the Potential Franchise
Information sources
Independent, third-party sources
Franchisors themselves
Existing and previous franchisees
Copyright © by South-Western College Publishing. All rights reserved.

116. The Nation’s Top Fifteen New Franchises
Curves for Women
Ace America’s Cash Express
Home Instead Senior Care
Cash Converters Int’l Franchise Group
The Mad Science Group
Mister Money—USA Inc.
House Doctors
Atlanta Bread Company
Bennigan’s Grill & Tavern
Wetzel’s Pretzels
Sport Clips
Dealer Specialties
Tilden for Brakes Car Care Centers
MilliCare Environmental Services
Talking Book World
Source: By permission of Entrepreneur magazine, 2445 McCabe Way, Irvine, California For subscription information call #8788 Reprinted by Reprint Management Services, (717) ,
Copyright © by South-Western College Publishing. All rights reserved.

117. Franchising from the Franchisor’s Perspective
Benefits
Reduction of capital requirements
Increase in management motivation
Speed of expansion
Drawbacks
Reduction in control
Sharing of profits
Increase in operational support costs
Copyright © by South-Western College Publishing. All rights reserved.

118. Legal Considerations in Franchising
The Franchising Contract
Signed with legal counsel present
Contains a termination and transfer provision
Contains statement of rights to renew contract
Copyright © by South-Western College Publishing. All rights reserved.

119. Franchise Disclosure Requirements
Basic Requirement: Franchisors must furnish potential franchisees with written disclosures providing important information about the franchisor, the franchised business and the franchise relationship, and give them at least ten business days to review it before investing.
Disclosure Option: Franchisors may make the required disclosures by following either the Rule’s disclosure format or the Uniform Franchise Offering Circular Guidelines prepared by state franchise law officials.
Coverage: The Rule primarily covers business-format franchises, product franchises, and vending machine or display rack business opportunity ventures.
No Filing: The Rule requires disclosure only. Unlike state disclosure laws, no registration, filing, review or approval of any disclosures, advertising or agreements by the FTC is required.
Remedies:The Rule is a trade regulation rule with the full force and effect of federal law. The courts have held it may only be enforced by the FTC, not private parties. The FTC may seek injunctions, civil penalties and consumer redress for violations.
Fig. 6-3
Copyright © by South-Western College Publishing. All rights reserved.

120. Items Covered in the Uniform Franchise Offering Circular (UFOC)
The franchisor, its predecessors and affiliates
Business experience
Litigation
Bankruptcy
Initial franchise fee
Other fees
Initial investment
Restrictions on sources of products and services
Franchisee’s obligations
Financing
Franchisor’s obligations
Territory
Trademarks
Patents, copyrights, and proprietary information
Obligation to participate in the actual operation of the franchise
Restrictions on what the franchisee may sell
Renewal, termination, transfer, and dispute resolution
Public figures
Earnings claims
List of outlets
Financial statements
Contracts
Receipt
Fig. 6-2
Copyright © by South-Western College Publishing. All rights reserved.

121. Pursuing New Venture Opportunities
part 3
Pursuing New Venture Opportunities 7
The Family Business
PowerPoint Presentation by Charlie Cook
12e
Copyright © 2003 South-Western College Publishing.
All rights reserved.

122. Looking Ahead After studying this chapter, you should be able to:
Discuss the factors that make a family business unique.
Explain the cultural context of a family business.
Outline the complex roles and relationships involved in a family business.
Identify management practices that enable a family business to function effectively.
Describe the process of managerial succession in a family business.
Copyright © by South-Western College Publishing. All rights reserved.

123. What Is a Family Business?
A company in whose ownership and/or functioning two or more members of the same family are directly involved.
A firm whose ownership passes from one generation of a family to another
Smith Family Hardware Est. 1935
Welcome
Copyright © by South-Western College Publishing. All rights reserved.

124. The Three-Circle Model of Family Business1 6 3 7 5 2
Business
Ownership 4
Source: Three-Circle Model developed by Renato Tagiuri and John A. Davis. Found in “Bivalent Attributes of the Family Firm,” Working paper, Harvard Business School, Cambridge, MA. Reprinted 1996, Family Business Review, Vol. IX, No. 2, pp. 199–208.
Copyright © by South-Western College Publishing. All rights reserved.
Fig. 7-1

125. Family and Business Overlap
Family Concerns
Care and nurturing of family members
Employment and advancement in the firm
Loyalty to the family
Business Concerns
Production and distribution of goods and/or services
Need for professional management
Effective and efficient operation of the firm
Copyright © by South-Western College Publishing. All rights reserved.

126. Advantages of a Family Business
Strength of family relationships during challenging periods of business change
Financial sacrifices that family members make for the good of the firm
Operation as a family business distinguishes the firm from its competitors.
Higher levels of concern for its community and non-family employees
Capability to plan and prepare for the long haul
Emphasis on quality and value
Copyright © by South-Western College Publishing. All rights reserved.

127. Advantages of a Family Business
Family Business Advantages
Emphasis on Quality
Products and Services
Use of Family Theme
in Advertising
Emphasis on Humanity
in the Workplace
Focus on
Long-Run Aspects
Strong Motivation
of Family Members
Copyright © by South-Western College Publishing. All rights reserved.
Fig. 7.2

128. The Culture of a Family Business
Organizational Culture
Patterns of behaviors and beliefs that characterized a particular firm
Cultural Configuration
The total culture of a family firm, consisting of the firm’s business, family, and governance patterns
Copyright © by South-Western College Publishing. All rights reserved.

129. Cultural Configuration of a Family Firm
Business Pattern
Paternalistic
Laissez-faire
Participative
Professional
Cultural
Configuration
of the
Family Firm
Governance Pattern
Paper Board
Rubber-Stamp Board
Advisory Board
Overseer Board
Family Pattern
Patriarchal
Collaborative
Conflicted
Source: Adapted from W. Gibb Dyer, Jr., Cultural Change in Family Firms (San Francisco: Jossey-Bass, 1986), p. 22.
Copyright © by South-Western College Publishing. All rights reserved.
Fig. 7.3

130. Family Roles and Relationships
Parental Concerns in Passing the Business On:
Does my child possess the temperament and ability necessary for business leadership?
How can I motivate my child to take an interest in the business?
What type of education and expertise will be most helpful in preparing my child for leadership?
What timetable should I follow in employing and promoting my child?
How can I avoid favoritism in managing and developing my child?
How can I prevent the business relationship from damaging/destroying the parent–child relationship?
Copyright © by South-Western College Publishing. All rights reserved.

131. Family Roles and Relationships (cont’d)
Husband–Wife Teams
Opportunity to share more in each other’s lives
Business differences interfere with family life
Work doesn’t leave time for family life
Sharing family responsibilities eases the load
Sons and Daughters
Personal preferences different from the business
Personal qualifications insufficient to assume role in business
Desire for personal freedom to choose another career
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132. Family Roles and Relationships (cont’d)
Sibling Cooperation, Sibling Rivalry
Best case: siblings work as a team
Worst case: siblings compete as rivals
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133. Family Roles and Relationships (cont’d)
In-laws In and Out of the Business
Disagreements about how to treat and reward in-laws and family members/children
The Entrepreneur’s Spouse
Communication between entrepreneur and spouse is critical for them to perform as an effective team for both the business and the family.
Copyright © by South-Western College Publishing. All rights reserved.

134. Family Business Relationships
Welcoming New In-Laws into the Family Business:
Introduce them to the family business.
Give them an overview, and send them to a family business seminar.
Act as an ambassador and show empathy with the newcomer.
Emphasize strengths and achievements of sons- and daughters-in-law.
Give newlyweds emotional space; allow them to develop their own traditions.
Source: Sharon Nelton, “Marrying into a Family Business,” Nation’s Business, April 1989, p. 48.
Copyright © by South-Western College Publishing. All rights reserved.

135. Professional Management of the Family Firm
“Best Practices” (John L. Ward)
Stimulate new thinking and fresh strategic insights.
Attract and retain excellent managers.
Create a flexible, creative organization.
Create and conserve capital.
Prepare successors for leadership.
Exploit the unique advantages of family ownership.
Copyright © by South-Western College Publishing. All rights reserved.

136. Professional Management of the Family Firm (cont’d)
Nonfamily Employees in a Family Firm
Hazards:
Competition with family members for advancement
Getting caught in the crossfire and politics of family competition within the firm
Solution:
Identify family-only reserved positions in advance.
Treat both family and nonfamily employees fairly in matters of reward and promotion.
Copyright © by South-Western College Publishing. All rights reserved.

137. Professional Management of the Family Firm (cont’d)
Family Retreats
A gathering of family members, usually at a remote location, to discuss family business matters.
Use of an outside facilitator may be necessary.
Family Councils
An organized group of family members who gather periodically to discuss family-related business issues.
Copyright © by South-Western College Publishing. All rights reserved.

138. The Process of Leadership Succession
Available Family Talent
Mentoring
Guiding and supporting the work and development of a new or less- experienced organization member.
Allowing only qualified competent family members to assume leadership roles in the firm increases the value of the firm for all who have an ownership interest in it.
Copyright © by South-Western College Publishing. All rights reserved.

139. A Model of Succession in a Family Business
Stage I Pre-Business
Stage II Introductory
Entry of Successor
Child becomes aware of facets of firm and/or industry. Orientation of child by family member is informal.
Child is exposed to business jargon, employees, and the business environment.
Stage III Introductory Functional
Child works as part-time employee. Work becomes more difficult. Includes education and work for other firms.
Stage IV Functional
Potential successor begins work as full-time employee. Includes all nonmanagerial positions. .
Stage V Advanced Functional
Potential successor assumes managerial position. Includes all management positions prior to becoming president.
Transfer of Leadership
Successor assumes presidency.
Includes period in which the successor becomes dejure head of company.
Stage VII Mature Succession
Successor becomes defacto head of company.
Stage VI
Early Succession
A Model of Succession in a Family Business
Source: Adapted from Justin G. Longenecker and John E. Schoen, “Management Succession in the Family Business,” Journal of Small Business Management, Vol. 16 (July 1978), pp. 1–6.
Copyright © by South-Western College Publishing. All rights reserved.
Fig. 7.4

140. Conditions Favoring Successful Leadership Succession in a Family Firm
A sound, profitable business
Stable, healthy family relationships
Advance planning for leadership succession
Positive family leadership and a team-oriented management structure
Presentation of career opportunities without pressure
Open communication on family business issues
Copyright © by South-Western College Publishing. All rights reserved.

141. The Role of the Business Plan
part 4
The New Venture Business Plan 8
The Role of the Business Plan
PowerPoint Presentation by Charlie Cook
12e
Copyright © 2003 South-Western College Publishing.
All rights reserved.

142. Looking Ahead After studying this chapter, you should be able to:
Answer the question “What is a business plan?”
Explain the need for a business plan from the perspectives of both internal and external users.
Describe what determines how much planning an entrepreneur and a management team are likely to do.
List practical suggestions to follow in writing a business plan and outline the key sections of a business plan.
Identify available sources of assistance in preparing a business plan.
Copyright © by South-Western College Publishing. All rights reserved.

143. What Is a Business Plan? Business Plan
A document that sets out the basic idea underlying a business and related startup considerations
Identifies the nature and context of the business opportunity
Presents the entrepreneur’s approach to exploiting the opportunity
Identifies factors affecting the venture’s success
Serves as the entrepreneur’s tool for raising capital
Copyright © by South-Western College Publishing. All rights reserved.

144. The Need for a Business Plan
Primary Functions
To provide a clearly articulated statement of goals and strategies for internal use
Imposes discipline on the entrepreneur and management team
To serve as a selling document to be shared with outsiders
Provides a credible overview for prospective customers, suppliers, and investors
Helps secure favorable credit terms from suppliers
Opens approaches to lenders and other sources of financing
Copyright © by South-Western College Publishing. All rights reserved.

145. Users of Business Plans
Customers
Suppliers
Investors
Employees
New Venture Management
Insiders
Outsiders
New Venture
Business Plan
Copyright © by South-Western College Publishing. All rights reserved.
Fig. 8.1

146. Features of Plans that Attract Investors
Plans that speak the investors’ language:
Are brief, not extremely long in written length.
Have an attractive overall appearance.
Are well-organized with a table of contents and numbered pages.
Are market-oriented in meeting customer needs; are not product-oriented.
Show evidence of customer acceptance of the proposed product or service.
Copyright © by South-Western College Publishing. All rights reserved.

147. Business Plans that Attract Investors (cont’d)
Recognize the investors’ needs for required rates of return on investments.
Demonstrate evidence of focus on a limited number of products or services
Have a proprietary market position through patents, copyrights, and/or trademarks
Copyright © by South-Western College Publishing. All rights reserved.

148. Features of Plans Unattractive to Investors
Plans that create unfavorable reactions:
Show an infatuation with the product or service and downplay market needs or acceptance.
Are based on financial projections at odds with accepted industry norms.
Have unrealistic growth projections.
Contain a need for custom or applications engineering, which makes substantial growth difficult.
Copyright © by South-Western College Publishing. All rights reserved.

149. How Much Business Planning is Needed?
Factors affecting the extent of a business plan:
Cost in time and money to prepare the plan
Management style and ability
Preferences of the management team
Complexity of the business
Competitive environment
Level of uncertainty
Copyright © by South-Western College Publishing. All rights reserved.

150. Preparing a Business Plan
Two issues critical in preparing a business plan:
The basic format and effectiveness of the written presentation.
Clear writing that effectively communicates
The content of the plan.
Factual support for the concept in the form of strong supporting evidence
Copyright © by South-Western College Publishing. All rights reserved.

151. Factors Affecting Business Plan Content
The People
Those involved in starting and running the venture
The Opportunity
The business’ profile—products, customers, expected growth, profitability, and anticipated challenges and problems
The Context
The big picture—the firm’s competitive environment
Risk and Reward
Assessment of potential problems and responses
Copyright © by South-Western College Publishing. All rights reserved.

152. Business Plan Outline Title Page Table of Contents Executive Summary
Synopsis
Narrative
Vision and Mission Statement
Company Overview
Products and/or Services Plan
Marketing Plan
Operating Plan
Financial Plan
Appendix of Supporting Documents
Copyright © by South-Western College Publishing. All rights reserved.

153. Specialized Plans within the Business Plan
Products and/or Services Plan
Describes the product and/or service to be provided and explains its merits
Marketing Plan
Describes the user benefits of the product or service and the type of market that exists
Management Plan
Describes the new firm’s organizational structure and the backgrounds of its key players
Copyright © by South-Western College Publishing. All rights reserved.

154. Specialized Plans within the Business Plan
Operating Plan
Offers information on how the product will be produced or a service provided, including descriptions of the new firm’s facilities, labor, raw materials, and processing requirements
Financial Plan
Provides an account of the new firm’s financial needs and sources of financing and a projection of its revenues, costs, and profits
Pro forma statements—Reports that project a firm’s financial condition
Copyright © by South-Western College Publishing. All rights reserved.

155. Resources for Business Plan Preparation
Computer-aided Planning
Word-processing
Spreadsheets
Specialized Business Plan Software Packages
Professional Assistance
Attorneys
Marketing specialists
Engineering and production experts
Accounting firms
Incubator organizations
Small business development agencies
Copyright © by South-Western College Publishing. All rights reserved.

156. Developing the Marketing Plan
part 4
The New Venture Business Plan 9
Developing the Marketing Plan
PowerPoint Presentation by Charlie Cook
12e
Copyright © 2003 South-Western College Publishing.
All rights reserved.

157. Looking Ahead After studying this chapter, you should be able to:
Describe small business marketing
Discuss the nature of the marketing research process.
Define market segmentation and its related strategies.
Explain the different methods of forecasting sales.
Identify the components of a formal marketing plan.
Copyright © by South-Western College Publishing. All rights reserved.

158. What is Small Business Marketing?
Activities directing the flow of goods and services from producer to consumer or user.
Small business marketing consists of those business activities that relate directly to:
Identifying a target market
Determining target market potential
Preparing, communicating, and delivering a bundle of satisfaction to the target market
Copyright © by South-Western College Publishing. All rights reserved.

159. Essential Marketing Activities
Market Analysis
An evaluation process that encompasses market segmentation, marketing research, and sales forecasting
Marketing Mix
The combination of product, pricing, promotion, and distribution activities.
Copyright © by South-Western College Publishing. All rights reserved.

160. Core Marketing Activities for Small Business
Market Analysis
Marketing Mix
Marketing Research
Market Segmentation
Sales Forecasting
Target Market
Entrepreneur
Distribution Promotion Pricing Product
Copyright © by South-Western College Publishing. All rights reserved.
Fig. 9-1

161. Marketing Philosophies Make a Difference
Production-Oriented
Emphasizes development of the product and production efficiencies over other activities
Sales-Oriented
Favors product sales over production efficiencies and customer preferences
Consumer-Oriented
All marketing efforts begin and end with the customer; focus is on the consumer’s needs— this philosophy is the most consistent with long-term success of the firm
Copyright © by South-Western College Publishing. All rights reserved.

162. Why Firms Fail to Adopt a Consumer Orientation
The State of Competition
With no competition or high demand, firms focus on production.
Production Focus of Small Business Managers
Small business managers tend to have strong production skills and weak marketing skills.
Focus on the Present
Small business managers tend to focus on current success which is the result of an overemphasis on selling.
Copyright © by South-Western College Publishing. All rights reserved.

163. The Nature of Marketing Research
The gathering, processing, reporting, and interpreting of market information
Secondary Data
Market information that has been previously compiled by others
Primary Data
New market information that is gathered by the firm conducting the research
Copyright © by South-Western College Publishing. All rights reserved.

164. The Nature of Marketing Research
Steps In the Marketing Research Process
Identifying the informational need
Why do we need to know this?
Searching for secondary data
Who has researched this topic already?
Collecting primary data
Who do we ask and what do we ask them?
Interpreting the data
Got the information, now what does it mean?
Copyright © by South-Western College Publishing. All rights reserved.

165. Methods for Collecting Primary Data
Observational Methods
Human
Mechanical
Questioning Methods
Surveys
Mail
Telephone
Personal interviews
Experiments
Copyright © by South-Western College Publishing. All rights reserved.

166. Understanding Potential Target Markets
A group of customers or potential customers who have purchasing power and unsatisfied needs
Focus strategy
A type of competitive strategy in which cost and marketing strategies are achieved within narrow market segments
Market Segmentation
The division of a market into several smaller groups with similar needs.
Copyright © by South-Western College Publishing. All rights reserved.

167. Ingredients of a Market
Ingredient 1 Customers: People or businesses
Ingredient 2 Purchasing power: Money/credit
Ingredient 3 Unsatisfied needs
Copyright © by South-Western College Publishing. All rights reserved.

168. Market Segmentation Variables
The parameters used to distinguish one form of market behavior from another for the purpose of market segmentation
Benefit Variables
Specific characteristics that distinguish market segments according to the benefit sought
Demographic Variables
Specific characteristics that describe customers and their purchasing power
Copyright © by South-Western College Publishing. All rights reserved.

169. Types of Market Segmentation Strategies
Unsegmented Strategy (Mass Marketing)
A strategy that defines the total market as the target market
Multisegmented Strategy
A strategy that recognizes different preferences of individual market segments and develops a unique marketing mix for each
Single-Segmentation Strategy
A strategy that recognizes the existence of several distinct segments but focuses on only the most profitable segment
Copyright © by South-Western College Publishing. All rights reserved.

170. Market All Potential Users of a Writing Instrument
Marketing Mix 1
Product:
Lead Pencil
Price:
$0.79
Promotion:
Television
Distribution:
Extensive
Small Business
(Community Writing Company)
Market All Potential Users of a Writing Instrument
An Unsegmented Market
Copyright © by South-Western College Publishing. All rights reserved.
Fig. 9.3

171. A Multisegmentation Market Strategy
Marketing Mix 2
Product:
Felt-Tip Pen
Price:
$1.00
Promotion:
Professional Magazines
Distribution:
Direct from Factory
Marketing Mix 3
Gold Fountain Pen
$50.00
Personal Selling
Department Stores
Marketing Mix 1
$0.49
Campus Newspapers
Bookstores
Small Business
(Community Writing Company)
Market
Segment A
Students
Segment C
Executives
Segment B
Professors
A Multisegmentation Market Strategy
Copyright © by South-Western College Publishing. All rights reserved.
Fig. 9.4

172. A Single-Segmentation Market Strategy
Marketing Mix 1
Product:
Felt-Tip Pen
Price:
$0.49
Promotion:
Campus Newspapers
Distribution:
Bookstores
Small Business
(Community Writing Company)
Market
Segment A
Students
Segment C
Executives
Segment B
Professors
A Single-Segmentation Market Strategy
Copyright © by South-Western College Publishing. All rights reserved.
Fig. 9.5

173. Estimating Market Potential
The Sales Forecast
A prediction of how much (in units and/or dollars) of a product or service will be purchased within a market during a specified period of time
An essential component of a business plan that:
Assesses the new venture’s feasibility.
Assists in planning for product scheduling, setting inventory levels, and personnel decisions
Copyright © by South-Western College Publishing. All rights reserved.

174. Dimensions of Forecasting Difficulty
Limited Entrepreneurial/
Managerial Experience
New Venture
Poor Understanding of
Forecasting Techniques
Established Business
Conditions That Make
Forecasting Easier
Forecasting More Difficult
Experienced
Entrepreneur/Manager
Entrepreneur Familiar with
Forecast
Copyright © by South-Western College Publishing. All rights reserved.
Fig. 9.6

175. The Forecasting Process: Two Dimensions of Forecasting
The Starting Point
Breakdown process (chain-ratio method)
Forecasting begins with macro-level variable and works down to the sales forecast (top-down).
Buildup process
All potential buyers in various submarkets are identified and then the estimated demand is added up (bottom-up).
Copyright © by South-Western College Publishing. All rights reserved.

176. The Forecasting Process: Two Dimensions of Forecasting (cont’d)
The Predicting Variable
Direct forecasting
The use of sales as the predicting variable
Indirect forecasting
Variables related to sales are used as proxies to project future sales
Copyright © by South-Western College Publishing. All rights reserved.

177. Sales Forecasting with the Breakdown Method
Estimating Market
Linking Variable Source Value Potential*
1. Idaho state U.S. census of 100% 1,000, population population
2. State population in Sales & Marketing 12% 120,000
target age Management
category Survey of Buying Power
3. Target age enrolled in colleges Idaho Department 30% ,000
and universities of Education
4. Target age college students Student survey in a preferring convenience over price marketing research class 50% 18,000
5. Convenience-oriented students Personal telephone
likely to purchase new felt-tip pen interview by
within next month entrepreneur 75% ,500
6. People who say they are likely to Article in Journal
purchase who actually buy of Consumer Research 35% ,725
7. Average number of pens bought Personal experience of
per year entrepreneur ,900
SALES FORECAST FOR IDAHO
*Figures in this column, for variables 2-7, are derived by multiplying the percentage or number in the Estimating Value column times the amount on the previous line of the Market Potential column.
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178. The Formal Marketing Plan
Market Analysis
Customer profile
A description of potential customers in a target market
Sales forecasts
“most likely,” “pessimistic,” and “optimistic
The Competition
Profile of key management personnel
Overall strengths and weaknesses
Related products being marketed or tested
Likelihood of competitors’ entry into target market
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179. The Formal Marketing Plan (cont’d)
Marketing Strategy
Total product and/or service plan
Decisions affecting the total product
Distribution plan
Decisions regarding product delivery to customers
Pricing plan
Setting an acceptable value on the product
Promotional plan
Communicating information to the target market
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