CHAPTER # 1 Introduction to Entrepreneurship, 8e Donald F

CHAPTER # 1 Introduction to Entrepreneurship, 8e Donald F
CHAPTER # 1 Introduction to Entrepreneurship, 8e Donald F. Kuratko The Revolutionary Impact of Entrepreneurship

Chapter Objectives To examine the historical development of entrepreneurship To explore and debunk the myths of entrepreneurship To define and explore the major schools of entrepreneurial thought To explain the process approaches to the study of entrepreneurship To set forth a comprehensive definition of entrepreneurship To examine the Entrepreneurial Revolution taking place today To illustrate today’s entrepreneurial environment

Entrepreneurs—Challenging the Unknown
Recognize opportunities where others see chaos or confusion Are aggressive catalysts for change within the marketplace Challenge the unknown and continuously create the future

Entrepreneurs versus Small Business Owners: A Distinction
Small Businesses Owners Manage their businesses by expecting stable sales, profits, and growth Entrepreneurs Focus their efforts on innovation, profitability and sustainable growth

Entrepreneurship: A Mindset
Entrepreneurship is more than the mere creation of business: Seeking opportunities Taking risks beyond security Having the tenacity to push an idea through to reality Entrepreneurship is an integrated concept that permeates an individual’s business in an innovative manner.

The Evolution of Entrepreneurship
Entrepreneur is derived from the French entreprendre, meaning “to undertake.” The entrepreneur is one who undertakes to organize, manage, and assume the risks of a business. Although no single definition of entrepreneur exists and no one profile can represent today’s entrepreneur, research is providing an increasingly sharper focus on the subject.

A Summary Description of Entrepreneurship
Entrepreneurship (Robert C. Ronstadt) The dynamic process of creating incremental wealth. This wealth is created by individuals who assume major risks in terms of equity, time, and/or career commitment of providing value for a product or service. The product or service itself may or may not be new or unique but the entrepreneur must somehow infuse value by securing and allocating the necessary skills and resources.

An Integrated Definition
Entrepreneurship A dynamic process of vision, change, and creation. Requires an application of energy and passion towards the creation and implementation of new ideas and creative solutions. Essential ingredients include: The willingness to take calculated risks—in terms of time, equity, or career. The ability to formulate an effective venture team; the creative skill to marshal needed resources. The fundamental skills of building a solid business plan. The vision to recognize opportunity where others see chaos, contradiction, and confusion.

The Myths of Entrepreneurship
Myth 1: Entrepreneurs Are Doers, Not Thinkers Myth 2: Entrepreneurs Are Born, Not Made Myth 3: Entrepreneurs Are Always Inventors Myth 4: Entrepreneurs Are Academic and Social Misfits Myth 5: Entrepreneurs Must Fit the “Profile” Myth 6: All Entrepreneurs Need Is Money Myth 7: All Entrepreneurs Need Is Luck Myth 8: Ignorance Is Bliss For Entrepreneurs Myth 9: Entrepreneurs Seek Success But Experience High Failure Rates Myth 10: Entrepreneurs Are Extreme Risk Takers (Gamblers)

Figure 1.1 Entrepreneurial Schools-of-Thought Approach

Macro View: External Locus of Control
The Environmental School of Thought Considers the external factors that affect a potential entrepreneur’s lifestyle. The Financial/Capital School of Thought Based on the capital-seeking process—the search for seed and growth capital. The Displacement School of Thought Alienation drives entrepreneurial pursuits Political displacement (laws, policies, and regulations) Cultural displacement (preclusion of social groups) Economic displacement (economic variations)

Table 1.1 Financial Analysis Emphasis
Venture Stage Financial Consideration Decision Start-up or acquisition Seed capital Venture capital sources Proceed or abandon Ongoing Cash management Investments Financial analysis and evaluation Maintain, increase, or reduce size Decline or succession Profit question Corporate buyout Succession question Sell, retire, or dissolve operations

Micro View: Internal Locus of Control (cont’d)
The Entrepreneurial Trait School of Thought Focuses on identifying traits common to successful entrepreneurs. Achievement, creativity, determination, and technical knowledge The Venture Opportunity School of Thought Focuses on the opportunity aspect of venture development—the search for idea sources, the development of concepts, and the implementation of venture opportunities. Corridor principle: New pathways or opportunities will arise that lead entrepreneurs in different directions.

Table 1.2 Definitions And Criteria Of One Approach To The Micro View
Entrepreneurial Model Definition Measures Questions “Great Person” “Extraordinary Achievers” Personal principles Personal histories Experiences What principles do you have? What are your achievements? Psychological Characteristics Founder Control over the means of production Locus of control Tolerance of ambiguity Need for achievement What are your values? Classical People who make innovations bearing risk and uncertainty “Creative destruction” Decision making Ability to see opportunities Creativity What are the opportunities? What is your vision? How do you respond? Management Creating value through the recognition of business opportunity, the management of risk taking through the communicative and management skills to mobilize . . . Expertise Technical knowledge Technical plans What are your plans? What are your capabilities? What are your credentials? Leadership “Social architect” Promotion and protection of values Attitudes, styles Management of people How do you manage people? Intrapreneurship Those who pull together to promote innovation How do you change and adapt? Source: Adapted from J. Barton Cunningham and Joe Lischeron, “Defining Entrepreneurship,” Journal of Small Business Management (January 1991): 56.

Micro View… (cont’d) The Strategic Formulation School of Thought
Emphasizes the planning process in successful venture development. Ronstadt’s View Strategic formulation is a leveraging of unique elements: Unique Markets—mountain gap strategies Unique People—great chef strategies Unique Products—better widget strategies Unique Resources—water well strategies

Process Approaches to Entrepreneurship
Integrative Approach Built around the concepts of inputs to the entrepreneurial process and outcomes from the entrepreneurial process. Focuses on the entrepreneurial process itself and identifies five key elements that contribute to the process. Provides a comprehensive picture regarding the nature of entrepreneurship that can be applied at different levels.

Figure 1.2 An Integrative Model of Entrepreneurial Inputs and Outcomes
Source: Michael H. Morris, P. Lewis, and Donald L. Sexton, “Reconceptualizing Entrepreneurship: An Input-Output Perspective,” SAM Advanced Management Journal 59, no.1 (Winter 1994): 21–31.

Process Approaches… (cont’d)
Entrepreneurial Assessment Approach Stresses making assessments qualitatively, quantitatively, strategically, and ethically in regard to the entrepreneur, the venture, and the environment Multidimensional Approach Views entrepreneurship as a complex, multidimensional framework that emphasizes the individual, the environment, the organization, and the venture process.

Figure 1.3 Entrepreneurial Assessment Approach
Source: Robert C. Ronstadt, Entrepreneurship (Dover, MA: Lord Publishing Co., 1984), 39.

Our Entrepreneurial Economy— The Environment for Entrepreneurship
Entrepreneurship is the symbol of business tenacity and achievement. Entrepreneurs are the pioneers of today’s business successes. Two perspectives on entrepreneurship: Statistical: numbers that emphasize the importance of entrepreneurs to the economy. Academic: trends in entrepreneurial research and education.

Predominance of New Ventures in the Economy
Entrepreneurial Activity: Growth in Small Businesses New business incorporations average 600,000 per year over the past decade. There are over 25 million small businesses; the number continues to grow 2% annually. One of every 150 adults participates in the founding of a new firm each year. Approximately 600,000 to 800,000 are added each year.

Effects of Entrepreneurship
The Global Entrepreneurship Monitor (GEM) Provides an annual assessment of the entrepreneurial environment of 42 countries. Latest GEM study: the U.S. outranks the rest of the world in important entrepreneurial support. Entrepreneurs lead to growth by: Entering and expanding existing markets. Creating entirely new markets by offering innovative products. Increasing diversity and fostering minority participation in the economy.

Entrepreneurs in the United States
Reasons for the exceptional entrepreneurial activity in the U.S. include: A national culture that supports risk taking and seeking opportunities. Americans’ alertness to unexploited economic opportunity and a low fear of failure. U.S. leadership in entrepreneurship education at both the undergraduate and graduate level. A high percentage of individuals with professional, technological or business degrees who are likely to become entrepreneurs.

The Age of Gazelles A “Gazelle” Gazelles as leaders in innovation:
A business establishment with at least 20% sales growth in each year for five years, starting with a base of at least $100,000 in annual sales. Gazelles as leaders in innovation: Produce twice as many product innovations per employee as do larger firms. Have been responsible for 55% of the innovations in 362 different industries and 95% of all radical innovations. Obtain more patents per sales dollar than do larger firms.

Table 1.3 Mythology Associated with Gazelles
Gazelles are the goal of all entrepreneurs. Gazelles receive venture capital. Gazelles were never mice. Gazelles are high-tech. Gazelles are global. Source: NFIB Small Business Policy Guide (Washington, D.C., November 2000), 31.

Survival of Gazelles How many gazelles survive?
The simple answer is “none.” Sooner or later, all companies wither and die. The Common Myth of Failure: 85% of all firms fail in the first year—in actuality, about half of all start-ups last between 5 and 7 years.

Entrepreneurial Firms’ Impact
Entrepreneurial components of the U.S. Economy: Large firms have increased profitability by returning to their “core competencies through restructuring and downsizing. New entrepreneurial companies have been blossoming in new technologies and new markets. Thousands of smaller firms established by women, minorities, and immigrants have strengthened the economy.

Entrepreneurial Firms’ Impact Cont’d)
Entrepreneurial firms make two indispensable contributions to an economy: They are an integral part of the renewal process that pervades and defines market economies. They are the essential mechanism by which millions enter the economic and social mainstream of society.

21st Century Trends in Entrepreneurship Research
Venture Financing Social Entrepreneurship Corporate Entrepreneurship Trends in Entrepreneurship Research Entrepreneurial Cognition Global Entrepreneurial Movement Family Businesses Women and Minority Entrepreneurs Entrepreneurial Education

21st Century Trends in Entrepreneurship Research
Major Research Themes: Venture Financing: venture capital and angel capital financing and other financing techniques strengthened in the 1990s. Corporate Entrepreneurship and the need for entrepreneurial cultures has drawn increased attention. Social Entrepreneurship has unprecedented strength within the new generation of entrepreneurs. Entrepreneurial Cognition is providing new insights into the psychological aspects of the entrepreneurial process. Women and Minority Entrepreneurs appear to face obstacles and difficulties different from those that other entrepreneurs face. The Global Entrepreneurial Movement is increasing.

21st Century Trends… (cont’d)
Major Research Themes (cont’d): Family Businesses have become a stronger focus of research. Entrepreneurial Education has become one of the hottest topics in business and engineering schools throughout the world.

Key Concepts Entrepreneurship Entrepreneur
A process of innovation and new-venture creation through four major dimensions—individual, organizational, environmental, process—that is aided by collaborative networks in government, education, and institutions. Entrepreneur A catalyst for economic change who uses purposeful searching, careful planning, and sound judgment when carrying out the entrepreneurial process.

Key Concepts Entrepreneurial Management
The discipline of entrepreneurial management: Entrepreneurship is based upon the same principles. It matters not who or what that the entrepreneur is—an existing large institution or an individual, for-profit business or a public-service organization, a governmental or non-governmental institution. The rules are much the same: things that work and those that don’t are much the same, and so are innovations and where to look for them.

Key Terms and Concepts better widget strategies corridor principle
displacement school of thought entrepreneur entrepreneurial assessment approach entrepreneurial management Entrepreneurial Revolution entrepreneurial trait school of thought entrepreneurship environmental school of thought external locus of control financial/capital school of thought gazelle great chef strategies internal locus of control macro view of entrepreneurship micro view of entrepreneurship mountain gap strategies strategic formulation school of thought venture opportunity school of thought water well strategies

CHAPTER # 2 Introduction to Entrepreneurship, 8e Donald F. Kuratko The Individual Entrepreneurial Mind-Set

Chapter Objectives To describe the entrepreneurial mind-set.
To present the major sources of information useful in profiling the entrepreneurial mind-set To identify and discuss the most commonly cited characteristics found in successful entrepreneurs To discuss the “dark side” of entrepreneurship To identify and describe the different types of risk entrepreneurs face as well as the major causes of stress for these individuals and the ways they can handle stress To examine entrepreneurial motivation

The Entrepreneurial Mindset
Describes the most common characteristics associated with successful entrepreneurs as well as the elements associated with the “dark side” of entrepreneurship. Who Are Entrepreneurs? Independent individuals, intensely committed and determined to persevere, who work very hard. They are confident optimists who strive for integrity. They burn with the competitive desire to excel and use failure as a learning tool.

Sources of Research on Entrepreneurs
The Entrepreneurial Mindset Speeches, Seminars and Presentations Direct Observation Research and Popular Publications

Sources of Research on Entrepreneurs (cont’d)
Publications Technical and professional journals Textbooks on entrepreneurship Books about entrepreneurship Biographies or autobiographies of entrepreneurs Compendiums about entrepreneurs News periodicals Venture periodicals Newsletters Proceedings of conferences The Internet Direct Observation of Practicing Entrepreneurs Interviews Surveys Case studies Speeches, Seminars, and Presentations by Practicing Entrepreneurs

Common Characteristics of Entrepreneurs
Commitment, determination, and perseverance Drive to achieve Opportunity orientation Initiative and responsibility Persistent problem solving Seeking feedback Internal locus of control Tolerance for ambiguity Calculated risk taking Tolerance for failure High energy level Creativity and Innovativeness Vision Self-confidence and optimism Independence Team building

Outline of the Entrepreneurial Organization
Imagination Flexibility Acceptance of Risks 8

Table 2.1 Characteristics Often Attributed to Entrepreneurs
Confidence Perseverance, determination Energy, diligence Resourcefulness Ability to take calculated risks Dynamism, leadership Optimism Need to achieve Versatility; knowledge of product, market, machinery, technology Creativity Ability to influence others Ability to get along well with people Initiative Flexibility Intelligence Orientation to clear goals Positive response to challenges Independence Responsiveness to suggestions and criticism Time competence, efficiency Ability to make decisions quickly Responsibility Foresight Accuracy, thoroughness Cooperativeness Profit orientation Ability to learn from mistakes Sense of power Pleasant personality Egotism Courage Imagination Perceptiveness Toleration of ambiguity Aggressiveness Capacity for enjoyment Efficacy Commitment Ability to trust workers Sensitivity to others Honesty, integrity Maturity, balance Source: John A. Hornaday, “Research about Living Entrepreneurs,” in Encyclopedia of Entrepreneurship, ed. Calvin Kent, Donald Sexton, and Karl Vesper, © 1982, 26–27. Adapted by permission of Prentice-Hall, Englewood Cliffs, NJ.

Entrepreneurship Theory
Entrepreneurs cause entrepreneurship. Entrepreneurship is a function of the entrepreneur: Entrepreneurship is the interaction of skills related to inner control, planning and goal setting, risk taking, innovation, reality perception, use of feedback, decision making, human relations, and independence.

The Entrepreneurial Journey
Entrepreneurs Create ventures much as an artist creates a painting. Are formed by the lived experience of venture creation. Experiential Nature of Creating a Sustainable Enterprise Emergence of the opportunity Emergence of the venture End emergence of the entrepreneur

The Dark Side of Entrepreneurship
The Entrepreneur’s Confrontation with Risk Financial risk versus profit (return) motive varies in entrepreneurs’ desire for wealth. Career risk—loss of employment security Family and social risk—competing commitments of work and family Psychic risk—psychological impact of failure on the well-being of entrepreneurs

Figure 2.1 Typology of Entrepreneurial Styles
Source: Thomas Monroy and Robert Folger, “A Typology of Entrepreneurial Styles: Beyond Economic Rationality,” Journal of Private Enterprise IX(2) (1993): 71.

Stress and the Entrepreneur
Entrepreneurial Stress The extent to which entrepreneurs’ work demands and expectations exceed their abilities to perform as venture initiators, they are likely to experience stress. Causes of Entrepreneurial Stress Loneliness Immersion in business People problems Need to achieve

Entrepreneurs: Type A Personalities
Chronic and severe sense of time urgency. Constant involvement in multiple projects subject to deadlines. Neglect of all aspects of life except work. A tendency to take on excessive responsibility, combined with the feeling that “Only I am capable of taking care of this matter.” Explosiveness of speech and a tendency to speak faster than most people.

Dealing with Stress Networking Getting away from it all
Communicating with employees Finding satisfaction outside the company Delegating Exercising Rigorously

The Entrepreneurial Ego
Self-Destructive Characteristics Overbearing need for control Sense of distrust Overriding desire for success Unrealistic optimism Entrepreneurial Motivation The quest for new-venture creation as well as the willingness to sustain that venture. Personal characteristics, personal environment, business environment, personal goal set (expectations), and the existence of a viable business idea.

Figure 2.2 A Model of Entrepreneurial Motivation
Source: Douglas W. Naffziger, Jeffrey S. Hornsby, and Donald F. Kuratko, “A Proposed Research Model of Entrepreneurial Motivation,” Entrepreneurship Theory and Practice (spring 1994): 33.

Key Terms and Concepts calculated risk taking career risk
dark side of entrepreneurship delegating drive to achieve entrepreneurial behavior entrepreneurial mind-set entrepreneurial motivation external optimism family and social risk financial risk immersion in business loneliness need for control networking opportunity orientation psychic risk risk stress tolerance for ambiguity tolerance for failure vision

CHAPTER # 3 Introduction to Entrepreneurship, 8e Donald F. Kuratko Corporate Entrepreneurial Mind-Set

Chapter Objectives To understand the entrepreneurial mindset in organizations To illustrate the need for entrepreneurial thinking in organizations To define the term “corporate entrepreneurship” To describe the corporate obstacles preventing innovation within corporations To highlight the considerations involved in reengineering corporate thinking To describe the specific elements of a corporate entrepreneurial strategy To examine the methods of developing managers for corporate entrepreneurship To illustrate the interactive process of corporate entrepreneurship

The Entrepreneurial Mindset in Organizations
Factors in the emergence of the entrepreneurial economy: The rapid evolution of knowledge and technology promoted high-tech entrepreneurial start-ups. Demographic trends adding fuel to the proliferation of newly developing ventures. The venture capital market became an effective funding mechanism. American industry began to learn how to manage entrepreneurship.

Reengineering Corporate Thinking
Steps that will help innovative people to develop an entrepreneurial mindset: Set explicit goals. Create a system of feedback and positive reinforcement. Emphasize individual responsibility. Give rewards based on results. Do not punish failures.

Assessing Support for Innovation
Does the firm encourage entrepreneurial thinking? Does the firm provide ways for innovators to stay with their ideas? Are people permitted to do the job in their own way, or are they constantly stopping to explain their actions and ask for permission? Has the firm evolved quick and informal ways to access the resources to try new ideas? Has the firm developed ways to manage many small and experimental innovations?

Assessing Support for Innovation (cont’d)
Is the system set up to encourage risk taking and to tolerate mistakes? Are people in your company more concerned with new ideas or with defending their turf? How easy is it to form functionally complete, autonomous teams in the firm’s corporate environment?

Table 3.1 Rules for an Innovative Environment
Encourage action. Use informal meetings whenever possible. Tolerate failure and use it as a learning experience. Persist in getting an idea to market. Reward innovation for innovation’s sake. Plan the physical layout of the enterprise to encourage informal communication. Expect clever bootlegging of ideas—secretly working on new ideas on company time as well as personal time. Put people on small teams for future-oriented projects. Encourage personnel to circumvent rigid procedures and bureaucratic red tape. Reward and promote innovative personnel. Source: Reprinted by permission of the publisher from “Corporate Venturing Obstacles: Sources and Solutions,” by Hollister B. Sykes and Zenas Block, Journal of Business Venturing (winter 1989): 161. Copyright © 1989 by Elsevier Science Publishing Co., Inc.

Encouraging an Intrapreneurial Environment
Steps to help restructure corporate thinking and encourage an intrapreneurial environment: Early identification of potential intrapreneurs Top management sponsorship of intrapreneurial projects Creation of both diversity and order in strategic activities Promotion of intrapreneurship through experimentation Development of collaboration between intrapreneurial participants and the organization at large

Benefits of an Entrepreneurial Philosophy
Leads to the development of new products and services and helps the organization expand and grow. Creates a work force that can help the enterprise maintain its competitive posture. Promotes a climate conducive to high achievers and helps the enterprise motivate and keep its best people.

The Corporate Entrepreneurship Process
Corporate Venturing Innovation Strategic Renewal

The Nature of Corporate Entrepreneurship
Defining The Concept Corporate Entrepreneurship Activities that receive organizational sanction and resource commitments for the purpose of innovative results. A process whereby an individual or a group of individuals, in association with an existing organization, creates a new organization or instigates renewal or innovation within the organization. A process that can facilitate firms’ efforts to innovate constantly and cope effectively with the competitive realities that companies encounter when competing in international markets.

Figure 3.1 Defining Corporate Entrepreneurship
Source: Michael H. Morris, Donald F. Kuratko, and Jeffrey G. Covin, Corporate Entrepreneurship & Innovation (Mason, OH, Thomson), 2008, p. 81.

The Need for Corporate Entrepreneuring
Rapid growth in the number of new and sophisticated competitors Sense of distrust in the traditional methods of corporate management An exodus of some of the best and brightest people from corporations to become small business entrepreneurs International competition Downsizing of major corporations An overall desire to improve efficiency and productivity

Table 3.2 Sources of and Solutions to Obstacles in Corporate Venturing
Traditional Management Practices Adverse Effects Recommended Actions Enforce standard procedures to avoid mistakes Innovative solutions blocked, funds misspent Make ground rules specific to each situation Manage resources for efficiency and ROI Competitive lead lost, low market penetration Focus effort on critical issues (e.g., market share) Control against plan Facts ignored that should replace assumptions Change plan to reflect new learning Plan for the long term Nonviable goals locked in, high failure costs Envision a goal, then set interim milestones, reassess after each Manage functionally Entrepreneur failure and/or venture failure Support entrepreneur with managerial and multidiscipline skills Avoid moves that risk the base business Missed opportunities Take small steps, build out from strengths Protect the base business at all costs Venturing dumped when base business is threatened Make venturing mainstream, take affordable risks Judge new steps from prior experience Wrong decisions about competition and markets Use learning strategies, test assumptions Compensate uniformly Low motivation and inefficient operations Balance risk and reward, employ special compensation Promote compatible individuals Loss of innovators Accommodate “boat rockers” and “doers” Source: Reprinted by permission of the publisher from “Corporate Venturing Obstacles: Sources and Solutions,” by Hollister B. Sykes and Zenas Block, Journal of Business Venturing (winter 1989): 161. Copyright © 1989 by Elsevier Science Publishing Co., Inc.

Successful Innovative Companies
Factors in large corporations that are successful innovators: Atmosphere and vision Orientation to the market Small, flat organizations Multiple approaches Interactive learning Skunkworks

Conceptualizing Corporate Entrepreneurship Strategy
A vision-directed, organization-wide reliance on entrepreneurial behavior that purposefully and continuously rejuvenates the organization and shapes the scope of its operations through the recognition and exploitation of entrepreneurial opportunity. It requires the creation of congruence between the entrepreneurial vision of the organization’s leaders and the entrepreneurial actions of those throughout the organization.

Model of the Corporate Entrepreneurship Strategy Process
Corporate entrepreneurship strategy is manifested through the presence of three elements: An entrepreneurial strategic vision A proentrepreneurship organizational architecture Entrepreneurial processes and behavior as exhibited across the organizational hierarchy.

Model of the Corporate Entrepreneurship Strategy Process (cont’d)
Linkages in the model: Individual entrepreneurial cognitions of the organization’s members External environmental conditions that invite entrepreneurial activity Top management’s entrepreneurial strategic vision for the firm Organizational architectures that encourage entrepreneurial processes and behavior The entrepreneurial processes that are reflected in entrepreneurial behavior Organizational outcomes resulting from entrepreneurial actions.

Figure 3.2 An Integrative Model of Corporate Entrepreneurship Strategy
Source: Duane Ireland, Jeffery G. Covin, and Donald F. Kuratko, “Conceptualizing Corporate Entrepreneurship Strategy,” Entrepreneurship Theory and Practice 33, no. 1 forthcoming.

Conceptualizing a Corporate Entrepreneurial Strategy (cont’d)
Critical steps of a corporate entrepreneurial strategy: Developing the vision Encouraging innovation Structuring for an intrapreneurial climate Developing individual managers for corporate entrepreneurship Developing venture teams.

Figure 3.3 Shared Vision Source: Jon Arild Johannessen, “A Systematic Approach to the Problem of Rooting a Vision in the Basic Components of an Organization,” Entrepreneurship, Innovation, and Change (March 1994): 47. Reprinted with permission from Plenum Publishing Corporation.

Types of Innovation Radical Innovation Incremental Innovation
The launching of inaugural breakthroughs. These innovations take experimentation and determined vision, which are not necessarily managed but must be recognized and nurtured. Incremental Innovation The systematic evolution of a product or service into newer or larger markets. Many times the incremental innovation will take over after a radical innovation introduces a breakthrough.

Table 3.3 Objectives and Programs for Venture Development
Make sure that current systems, structures, and practices do not present insurmountable roadblocks to the flexibility and fast action needed for innovation. Reduce unnecessary bureaucracy, and encourage communication across departments and functions. Provide the incentives and tools for intrapreneurial projects. Use internal “venture capital” and special project budgets. (This money has been termed intracapital to signify a special fund for intrapreneurial projects.) Allow discretionary time for projects (sometimes referred to as “bootlegging” time). Seek synergies across business areas so new opportunities are discovered in new combinations. Encourage joint projects and ventures among divisions, departments, and companies. Allow and encourage employees to discuss and brainstorm new ideas. Source: Adapted by permission of the publisher from “Supporting Innovation and Venture Development in Established Companies,” by Rosabeth Moss Kanter, Journal of Business Venturing (winter 1985): 56–59. Copyright © 1985 by Elsevier Science Publishing Co., Inc.

Table 3.4 Developing and Supporting Radical and Incremental Innovation
Stimulate through challenges and puzzles. Set systematic goals and deadlines. Remove budgetary and deadline constraints when possible. Stimulate through competitive pressures. Encourage technical education and exposure to customers. Encourage technical education and exposure to customers. Allow technical sharing and brainstorming sessions. Hold weekly meetings that include key management and marketing staff. Give personal attention—develop relationships of trust. Delegate more responsibility. Encourage praise from outside parties. Set clear financial rewards for meeting goals and deadlines. Have flexible funds for opportunities that arise. Reward with freedom and capital for new projects and interests. Source: Adapted from Harry S. Dent, Jr., “Growth through New Product Development,” Small Business Reports (November 1990): 36.

3M’s Innovation Rules Don’t kill a project Tolerate failure
Keep divisions small Motivate the champions Stay close to the customer Share the wealth

Structuring for a Corporate Entrepreneurial Environment
Reestablishing the drive to innovate: Invest heavily in entrepreneurial activities that allow new ideas to flourish in an innovative environment. Provide nurturing and information-sharing activities. Employee perception of an innovative environment is critical. Corporate Venturing Institutionalizing the process of embracing the goal of growth through development of innovative products, processes, and technologies with an emphasis on long- term prosperity.

Figure 3.4 Intrapreneurial Development: Joint Function of Individual and Organizational Factors
Source: Deborah V. Brazeal, “Organizing for Internally Developed Corporate Ventures,” Journal of Business Venturing (January 1993): 80.

Preparing for Failure “Learning from Failure”
Recognizing the importance of managing the grief process that occurs from project failure. Understanding how organizational routines and rituals are likely to influence the grief recovery. Ensuring that the organization’s social support system can encourage greater learning, foster motivational outcomes, and increase coping self-efficacy in affected individuals.

Developing Individual Managers for Corporate Entrepreneurship
Corporate Entrepreneurship Training Program (Corporate Breakthrough Training) The Breakthrough Experience Breakthrough Thinking Idea Acceleration Process Barriers and Facilitators to Innovative Thinking Sustaining Breakthrough Teams The Breakthrough Plan

Corporate Entrepreneurship Assessment Instrument (CEAI)
Key Internal Climate Factors in an Organization’s Readiness for Entrepreneurial Activity Management support Autonomy/work discretion Rewards/reinforcement Time availability Internal organizational boundaries

Facilitating Corporate Entrepreneurial Behavior
Organizations foster entrepreneurial behavior by: Encouraging—not mandating—innovative activity Human resource policies for “selected rotation” Committing to projects long enough for momentum to occur. Bet on people, not on analysis. Rewarding Entrepreneuring: Allow inventor to take charge of the new venture Grant discretionary time to work on future projects Make intracapital available for future research ideas

Table 3.5 Corporate Innovator’s Commandments
Come to work each day willing to give up your job for the innovation. Circumvent any bureaucratic orders aimed at stopping your innovation. Ignore your job description, do any job needed to make your innovation work. Build a spirited innovation team that has the “fire” to make it happen. Keep your innovation “underground” until it is prepared for demonstration to the corporate management. Find a key upper level manager who believes in you and your ideas and will serve as a sponsor to your innovation. Permission is rarely granted in organizations, thus always seek forgiveness for the “ignorance” of the rules that you will display. Always be realistic about the ways to achieve the innovation goals. Share the glory of the accomplishments with everyone on the team. Convey the innovation’s vision through a strong venture plan.

Sustaining Corporate Entrepreneurship
Sustained Corporate Entrepreneurship Model Based on theoretical foundations from previous strategy and entrepreneurship research. Considers the comparisons made at the individual and organizational level on organizational outcomes, both perceived and real, that influence the continuation of the entrepreneurial activity. Transformational trigger Something external or internal to the company that initiates the need for strategic adaptation or change.

Developing Innovative (I) Teams
A semi-autonomous self-directing, self-managing, high-performing group of two or more people who formally create and share the ownership of a new organization. The leader is called a “product champion” or an “corporate entrepreneur.” Collective Entrepreneurship Individual skills are integrated into a group; this collective capacity to innovate becomes something greater than the sum of its parts.

Figure 3.5 A Model of Sustained Corporate Entrepreneurship
Source: Donald F. Kuratko, Jeffrey S. Hornsby, and Michael G. Goldsby, “Sustaining Corporate Entrepreneurship: Modeling Perceived Implementation and Outcome Comparisons at Organizational and Individual Levels,” International Journal of Entrepreneurship and Innovation 5(2) (May 2004): 79.

Corporate Entrepreneurship at IBM
Emerging Business Opportunity (EBO) Program’s Key Rules: Think big really big. Bring in the A-team. Start small. Establish unique measurement techniques.

Key Terms and Concepts bootlegging champion
collective entrepreneurship corporate entrepreneurship Corporate Entrepreneurship Assessment Instrument (CEAI) corporate venturing entrepreneurial economy incremental innovation innovation (I) team interactive learning intracapital intrapreneurship radical innovation skunkworks top management support

CHAPTER # 4 Introduction to Entrepreneurship, 8e Donald F. Kuratko The Social and Ethical Perspectives of Entrepreneurship

Chapter Objectives To examine the concept of “social entrepreneurship”
To introduce the challenges of social enterprise To discuss the importance of ethics for entrepreneurs To define the term “ethics” To study ethics in a conceptual framework for a dynamic environment To review the constant dilemma of law versus ethics To present strategies for establishing ethical responsibility To emphasize the importance of entrepreneurial ethical leadership

The Social Entrepreneurship Movement
A new form of entrepreneurship applys to social problem solving traditional, private-sector entrepreneurship’s focus on innovation, risk-taking, and large scale transformation. Social Entrepreneurship Process Recognition of a perceived social opportunity Translation of the social opportunity into an enterprise concept Identification and acquisition of resources required to execute the enterprise’s goals.

Social Entrepreneurs Social Entrepreneur
A person or small group of individuals who founds and/or leads an organization or initiative engaged in social entrepreneurship. Also referred to as “public entrepreneurs,” “civic entrepreneurs,” or “social innovators.

Social Entrepreneurs (cont’d)
Characteristics of Social Entrepreneurs as Change Agents Adoption of a mission to create and sustain social value (beyond personal value) Recognition and relentless pursuit of opportunities for social value Engagement in continuous innovation and learning Action beyond the limited resources at hand Heightened sense of accountability

The Social Enterprise Challenge
Social Obligation Firms that simply react to social issues through obedience to the laws. Social Responsibility Firm that respond more actively to social issues; accepting responsibility for various programs. Social Responsiveness Firms that are highly proactive and are even willing to be evaluated by the public for various activities.

Table 4.1 What Is the Nature of Social Enterprise?
Environment Pollution control Restoration or protection of environment Conservation of natural resources Recycling efforts Energy Conservation of energy in production and marketing operations Efforts to increase the energy efficiency of products Other energy-saving programs (for example, company-sponsored car pools) Fair Business Practices Employment and advancement of women and minorities Employment and advancement of disadvantaged individuals (disabled, Vietnam veterans, ex-offenders, former drug addicts, mentally retarded, and hardcore unemployed) Support for minority-owned businesses Human Resources Promotion of employee health and safety Employee training and development Remedial education programs for disadvantaged employees Alcohol and drug counseling programs Career counseling Child day-care facilities for working parents Employee physical fitness and stress management programs Community Involvement Donations of cash, products, services, or employee time Sponsorship of public health projects Support of education and the arts Support of community recreation programs Cooperation in community projects (recycling centers, disaster assistance, and urban renewal) Products Enhancement of product safety Sponsorship of product safety education programs Reduction of polluting potential of products Improvement in nutritional value of products Improvement in packaging and labeling Source: Richard M. Hodgetts and Donald F. Kuratko, Management, 3rd ed. (San Diego, CA: Harcourt Brace Jovanovich, 1991), 670

Table 4.2 Classifying Social Enterprise Behavior
DIMENSION OF BEHAVIOR STAGE ONE: SOCIAL OBLIGATION STAGE TWO: SOCIAL RESPONSIBILITY STAGE THREE: SOCIAL RESPONSIVENESS Response to social pressures Maintains low public profile, but if attacked, uses PR methods to upgrade its public image; denies any deficiencies; blames public dissatisfaction on ignorance or failure to understand corporate functions; discloses information only where legally required Accepts responsibility for solving current problems; will admit deficiencies in former practices and attempt to persuade public that its current practices meet social norms; attitude toward critics conciliatory; freer information disclosures than stage one Willingly discusses activities with outside groups; makes information freely available to the public; accepts formal and informal inputs from outside groups in decision making; is willing to be publicly evaluated for its various activities Philanthropy Contributes only when direct benefit to it clearly shown; otherwise, views contributions as responsibility of individual employees Contributes to noncontroversial and established causes; matches employee contributions Activities of stage two, plus support and contributions to new, controversial groups whose needs it sees as unfulfilled and increasingly important Source: Excerpted from S. Prakash Sethi, “A Conceptual Framework for Environmental Analysis of Social Issues and Evaluation of Business Patterns,” Academy of Management Journal (January 1979): 68. Copyright 1979 by the Academy of Management. Reproduced with permission of the Academy of Management

Environmental Awareness
Ecovision A leadership style that encourages open and flexible structures that encompass the employees, the organization, and the environment, with attention to evolving social demands.

Environmental Awareness
Key Steps in an Environmental Strategy Eliminate the concept of waste. Restore accountability. Make prices reflect costs. Promote diversity. Make conservation profitable. Insist on accountability of nations.

The Ethical Side of Entrepreneurship
Why are ethics important? What exactly represents right or wrong conduct? How do we develop our own codes of conduct? What impact does integrity and ethical conduct have on creating a successful venture?

Defining Ethics Ethics Reasons for Ethical Conflicts
A set of principles prescribing a behavioral code that explains what is good and right or bad and wrong; ethics may outline moral duty and obligations. Provide the basic rules or parameters for conducting any activity in an “acceptable” manner. Reasons for Ethical Conflicts The many interests that confront business enterprises both inside and outside the organization Changes in values, mores, and societal norms Reliance on fixed ethical principles rather than an ethical process

Figure 4.1 Classifying Decisions Using a Conceptual Framework
Source: Verne E. Henderson, “The Ethical Side of Enterprise,” Sloan Management Review (spring 1982): 42.

Ethics and Laws Managerial Rationalizations
Justifications in defense of unethical acts are believing that an activity: Is not “really” illegal or immoral. Is in the individual’s or the corporation’s best interest. Will never be found out. That helps the company will be condoned by the company.

Table 4.3 Types of Morally Questionable Acts
Direct Effect Examples Nonrole Against the firm Expense account cheating Embezzlement Stealing supplies Role failure Superficial performance appraisal Not confronting expense account cheating Palming off a poor performer with inflated praise Role distortion For the firm Bribery Price fixing Manipulating suppliers Role assertion Investing in South Africa Using nuclear technology for energy generation Not withdrawing product line in face of initial allegations of inadequate safety Source: James A. Waters and Frederick Bird, “Attending to Ethics in Management,” Journal of Business Ethics 5 (1989): 494.

The Matter of Morality Ethical conduct may reach beyond the limits of the law. The requirements of law may overlap at times but do not duplicate the moral standards of society. Legal requirements tend to be negative (forbidding acts), whereas morality tends to be positive (encouraging acts). Legal requirements usually lag behind the acceptable moral standards of society. Inherent problems arise when people believe laws represent morality.

Figure 4.2 Overlap between Moral Standards and Legal Requirements

Economic Trade-Offs Innovation, risk taking, and venture creation are the backbone of the free enterprise system which fosters individualism and competition. We cannot blame single individuals for the ethical problems of free enterprise. Rather, we must understand the total, systematic impact that free enterprise has on the common good.

Reasons for Unethical Behavior
Greed Distinctions between activities at work and activities at home A lack of a foundation in ethics Survival (bottom-line thinking) Reliance on other social institutions to convey and reinforce ethics.

Avoiding Another Enron Disaster
Bring hidden liabilities back onto the balance sheet. Highlight the things that matter. List the risks and assumptions built into the numbers. Standardize operating income Provide aid in figuring free-cash flow

Establishing a Strategy for Ethical Enterprise
Ethical Practices and Codes of Conduct A code of conduct is a statement of ethical practices or guidelines to which an enterprise adheres. Codes of conduct are becoming more prevalent in industry. Recent codes are proving to be: More meaningful in terms of external legal and social development More comprehensive in terms of their coverage, and easier to implement in terms of the administrative procedures used to enforce them.

Table 4.4 Approaches to Managerial Ethics
Organizational Characteristics Immoral Management Amoral Moral Ethical norms Managerial decisions, actions, and behavior imply a positive and active opposition to what is moral (ethical). Decisions are discordant with accepted ethical principles. An active negation of what is moral is implied. Management is neither moral nor immoral, but decisions lie outside the sphere to which moral judgments apply. Managerial activity is outside or beyond the moral order of a particular code. A lack of ethical perception and moral awareness may be implied. Managerial activity conforms to a standard of ethical, or right, behavior. Managers conform to accepted professional standards of conduct. Ethical leadership is commonplace on the part of management. Motives Selfish: Management cares only about its or the company’s gains. Well-intentioned but selfish: The impact on others is not considered. Good: Management wants to succeed but only within the confines of sound ethical precepts (fairness, justice, due process). Goals Profitability and organizational success at any price. Profitability; other goals not considered. Profitability within the confines of legal obedience and ethical standards. Orientation toward law Legal standards are barriers management must overcome to accomplish what it wants. Law is the ethical guide, preferably the letter of the law. The central question is what managers can do legally. Obedience is toward the letter and spirit of the law. Law is a minimal ethical behavior. Managers prefer to operate well above what the law mandates. Strategy Exploit opportunities for corporate gain. Cut corners when it appears useful. Give managers free rein. Personal ethics may apply but only if managers choose. Respond to legal mandates if caught and required to do so. Live by sound ethical standards. Assume leadership position when ethical dilemmas arise. Enlightened self-interest prevails. Source: Archie B. Carroll, “In Search of the Moral Manager,” Business Horizons (March/April 1987): 12. Copyright © 1987 by the Foundation for the School of Business at Indiana University. Reprinted by permission.

A Holistic Approach Principle 1: Hire the right people
Principle 2: Set standards more than rules Principle 3: Don’t let yourself get isolated Principle 4: The most important principle is to let your ethical example at all times be absolutely impeccable

Shaping an Ethical Strategy
The entrepreneur’s guiding values and commitments must make sense and be clearly communicated. Entrepreneurs must be personally committed, credible, and willing to take action on the values they espouse. The espoused values must be integrated into the normal channels of the organization’s critical activities. The venture’s systems and structures must support and reinforce its values. Employees throughout the company must have the decision-making skills, knowledge, and competencies needed to make ethically sound decisions every day. Source: Adapted from Lynn Sharp Paine, “Managing for Organizational Integrity,” Harvard Business Review (March/April 1994): 106–117.

Ethical Responsibility
Ethical Consciousness Ethical Process and Structure Ethical Responsibility Institutionalization

Ethics and Business Decisions
Complexity of Ethical Decisions: Ethical decisions have extended consequences Business decisions involving ethical questions have multiple alternatives. Ethical business often have mixed outcomes. Most business decisions have uncertain ethical consequences. Most ethical business decisions have personal implications.

Figure 4.3 Four Main Themes of Ethical Dilemmas for Entrepreneurs
Source: Shailendra Vyakarnam, Andy Bailey, Andrew Myers, and Donna Burnett, “Towards an Understanding of Ethical Behavior in Small Firms,” Journal of Business Ethics 16(15) (1997):

Questioning the Ethics of Business Decisions
Have you defined the problem accurately? How would you define the problem if you stood on the other side of the fence? How did this situation occur in the first place? To whom and to what is your loyalty as a person and as a corporation member? What is your intention in making this decision? How does this intention compare with the probable results? Whom could your decision or action injure? Can you discuss the problem with the affected parties before making your decision? Are you confident your position will be as valid over the long-term as it seems now? Could you disclose without qualms your decision or action to your boss, your CEO, the board of directors, your family, and society as a whole? What is the symbolic potential of your action if understood? If misunderstood? Under what conditions would you allow exceptions to your stand?

Ethical Considerations in Corporate Entrepreneurship
Are managers or employees who do not follow the status quo of their co-workers. Are depicted as visionaries who dream of taking the company in new directions. Often walk a fine line between clever resourcefulness and outright rule breaking.

Figure 4.4 Ethical Considerations in Corporate Entrepreneurship
Source: Donald F. Kuratko and Michael G. Goldsby, “Corporate Entrepreneurs or Rogue Middle Managers? A Framework for Ethical Corporate Entrepreneurship,” Journal of Business Ethics 55 (2004): 18

Effective Corporate Entrepreneurship
Corporate Entrepreneurship requires: Establishing the needed flexibility, innovation, and support of employee initiative and risk taking. Removing the barriers that the entrepreneurial middle manager may face to more closely align personal and organizational initiatives and reduce the need to behave unethically. Including an ethical component to corporate training that will provide guidelines for instituting compliance and values components into state-of- the-art corporate entrepreneurship programs.

Effective Corporate Entrepreneurship
Providing flexibility, innovation, and support Removing organizational barriers Effective Corporate Entrepreneurship Including an ethical component to corporate training

Ethical Leadership by Entrepreneurs
The Opportunity for Ethical Leadership by Entrepreneurs An owner has the unique opportunity to display honesty, integrity, and ethics in all key decisions. The owner’s actions serve as a model for other employees to follow. An owner’s value system is a critical component of the ethical considerations that surround a business decision

Table 4.5 Issues Viewed by Entrepreneur/Owners
Demands Strong Ethical Stance Greater Tolerance Regarding Ethical Position Faulty investment advice Padded expense account Favoritism in promotion Tax evasion Acquiescing in dangerous design flaw Collusion in bidding Misleading financial reporting Insider trading Misleading advertising Discrimination against women Defending healthfulness of cigarette smoking Copying computer software Source: Justin G. Longenecker, Joseph A. McKinney, and Carlos W. Moore, “Ethics in Small Business,” Journal of Small Business Management (January 1989): 30.

The Ethics of Caring Caring
A feminine alternative to the more traditional and masculine ethics that are based on rules and regulations. Following laws may not lead to building as strong of relationships as one could. Entrepreneurs must realize that their personal integrity and ethical example will be the key to their employees’ ethical performance.

Key Terms and Concepts amoral management code of conduct ecovision
environmental awareness ethics immoral management moral management nonrole rationalizations role assertion role distortion role failure social entrepreneurship social obligation social responsibility social responsiveness

CHAPTER # 5 Introduction to Entrepreneurship, 8e Donald F. Kuratko Creativity and Innovation

Chapter Objectives To explore the opportunity identification process
To define and illustrate the sources of innovative ideas for entrepreneurs To examine the role of creativity and to review the major components of the creative process: knowledge accumulation, incubation process, idea experience, evaluation, and implementation To present ways of developing personal creativity: recognize relationships, develop a functional perspective, use your “brains,” and eliminate muddling mind-sets

Chapter Objectives (cont’d)
To introduce the four major types of innovation: invention, extension, duplication, and synthesis To review some of the major myths associated with innovation and to define the ten principles of innovation

Opportunity Identification: The Search for New Ideas
Opportunity identification is central to entrepreneurship and involves: The creative pursuit of ideas The innovation process The first step for any entrepreneur is the identification of a “good idea.” The search for good ideas is never easy. Opportunity recognition can lead to both personal and societal wealth.

Entrepreneurial Imagination and Creativity
How entrepreneurs do what they do: Creative thinking + systematic analysis = success Seek out unique opportunities to fill needs and wants Turn problems into opportunities Recognize that problems are to solutions what demand is to supply

Table 5.1 Sources of Innovation Ideas
Examples Unexpected occurrences Unexpected success: Apple Computer (microcomputers) Unexpected tragedy: 9-11 terrorist attack Incongruities Overnight package delivery Process needs Sugar-free products Caffeine-free coffee Microwave ovens Industry and market changes Health care industry: changing to home health care Demographic changes Rest homes or retirement centers for older people Perceptual changes Exercise (aerobics) and the growing concern for fitness Knowledge-based concepts Mobile (Cell phone) technology; pharmaceutical industry; robotics

The Role of Creative Thinking
Creativity The generation of ideas that result in the improved efficiency or effectiveness of a system. Two important aspects of creativity exist: Process The process is goal oriented; it is designed to attain a solution to a problem. People The resources that determine the solution.

Table 5.2 Two Approaches to Creative Problem Solving
Adaptor Innovator Employs a disciplined, precise, methodical approach Approaches tasks from unusual angles Is concerned with solving, rather than finding, problems Discovers problems and avenues of solutions Attempts to refine current practices Questions basic assumptions related to current practices Tends to be means oriented Has little regard for means; is more interested in ends Is capable of extended detail work Has little tolerance for routine work Is sensitive to group cohesion and cooperation Has little or no need for consensus; often is insensitive to others Source: Michael Kirton, “Adaptors and Innovators: A Description and Measure,” Journal of Applied Psychology (October 1976): 623. Copyright © 1976 by The American Psychological Association.

The Nature of the Creative Process
Creativity is a process that can be developed and improved. Some individuals have a greater aptitude for creativity than others. Typical Creative Process Phase 1: Background or knowledge accumulation Phase 2: The incubation process Phase 3: The idea experience Phase 4: Evaluation and implementation

Table 5.3 The Most Common Idea “Killers”
1. “Naah.” 2. “Can’t” (said with a shake of the head and an air of finality). 3. “That’s the dumbest thing I’ve ever heard.” 4. “Yeah, but if you did that . . .” (poses an extreme or unlikely disaster case). 5. “We already tried that—years ago.” 6. “I don’t see anything wrong with the way we’re doing it now.” 7. “We’ve never done anything like that before.” 8. “We’ve got deadlines to meet—we don’t have time to consider that.” 9. “It’s not in the budget.” 10. “Where do you get these weird ideas?” Source: Adapted from The Creative Process, ed. Angelo M. Biondi (Hadley, MA: The Creative Education Foundation, 1986).

Figure 5.1 The Critical Thinking Process

Developing Your Creativity
Recognizing Relationships Looking for different or unorthodox relationships among the elements and people around you. Developing a Functional Perspective Viewing things and people in terms of how they can satisfy his or her needs and help complete a project. Using Your Brains The right brain helps us understand analogies, imagine things, and synthesize information. The left brain helps us analyze, verbalize, and use rational approaches to problem solving.

A Creative Exercise Think of and write down all of the functions you can imagine for the following items (spend five minutes on each item): An egotistical staff member A large pebble A fallen tree branch A chair A computer “whiz kid” An obsessively organized employee The office “gossip” An old hubcap A new secretary An empty roll of masking tape A yardstick An old coat hanger The office “tightwad” This exercise

Table 5.4 Processes Associated with the Two Brain Hemispheres
Left Hemisphere Right Hemisphere Verbal Nonverbal Analytical Synthesizing Abstract Seeing analogies Rational Nonrational Logical Spatial Linear Intuitive Imaginative Source: Betty Edwards, Drawing on the Right Side of the Brain (Los Angeles: Tarcher, 1979).

Table 5.5 Ways to Develop Left- and Right-Hemisphere Skills
Left-Hemisphere Skills Right-Hemisphere Skills Step-by-step planning of your work and life activities Reading ancient, medieval, and scholastic philosophy, legal cases, and books on logic Establishing timetables for all of your activities Using and working with a computer program Detailed fantasizing and visualizing things and situations in the future Drawing faces, caricatures, and landscapes Using metaphors and analogies to describe things and people in your conversations and writing Taking off your watch when you are not working Suspending your initial judgment of ideas, new acquaintances, movies, TV programs, and so on Recording your hunches, feelings, and intuitions and calculating their accuracy

Impediments to Creativity
Eliminating Muddling Mind-Sets Either/or thinking (concern for certainty) Security hunting (concern for risk) Stereotyping (abstracting reality) Probability thinking (seeking predictable results)

Arenas in Which People are Creative
Idea Creativity Spontaneous Creativity Material Creativity Types of Creativity Inner Creativity Organization Creativity Event Creativity Relationship Creativity

The Creative Climate Characteristics of a creative climate:
A trustful management that does not overcontrol the personnel Open channels of communication among all business members Considerable contact and communication with outsiders A large variety of personality types A willingness to accept change An enjoyment in experimenting with new ideas Little fear of negative consequences for making a mistake The selection and promotion of employees on the basis of merit The use of techniques that encourage ideas, including suggestion systems and brainstorming Sufficient financial, managerial, human, and time resources for accomplishing goals

Innovation and the Entrepreneur
Is the process by which entrepreneurs convert opportunities into marketable ideas. Is a combination of the vision to create a good idea and the perseverance and dedication to remain with the concept through implementation. Is a key function in the entrepreneurial process. Is the specific function of entrepreneurship.

The Innovation Process
Types of Innovation Invention Extension Duplication Synthesis Sources of Innovation Unexpected occurrences Incongruities Process needs Industry and market changes Demographic changes Perceptual changes Knowledge-based concepts

Table 5.6 Innovation in Action
Type Description Examples Invention Totally new product, service, or process Wright brothers—airplane Thomas Edison—light bulb Alexander Graham Bell—telephone Extension New use or different application of an already existing product, service, or process Ray Kroc—McDonald’s Mark Zuckerberg—Facebook Barry Sternlicht—Starwood Hotels & Resorts Duplication Creative replication of an existing concept Wal-Mart—department stores Gateway—personal computers Pizza Hut—pizza parlor Synthesis Combination of existing concepts and factors into a new formulation or use Fred Smith—Fed Ex Howard Schultz—Starbucks

Major Innovation Myths
Myth 1: Innovation is planned and predictable Myth 2: Technical specifications should be thoroughly prepared Myth 3: Creativity relies on dreams and blue- sky ideas Myth 4: Big projects will develop better innovations than smaller ones Myth 5: Technology is the driving force of innovation success

Principles of Innovation
Be action oriented. Make the product, process, or service simple and understandable. Make the product, process, or service customer-based. Start small. Aim high. Try/test/revise. Learn from failures Follow a milestone schedule. Reward heroic activity. Work, work, work.

Key Terms and Concepts appositional relationship creative process
creativity duplication extension functional perspective incongruities innovation invention left brain muddling mind-sets opportunity identification probability thinking right brain stereotyping synthesis

CHAPTER # 6 Introduction to Entrepreneurship, 8e Donald F. Kuratko Methods to Initiate Ventures

Chapter Objectives To describe the major pathways and structures for entrepreneurial ventures. To present the factors involved in creating a new venture To identify and discuss the elements involved in acquiring an established venture To outline ten key questions to ask when buying an ongoing venture To define a franchise and outline its structure

To examine the benefits and drawbacks of franchising To present the UFOC (Uniform Franchise Offering Circular) as a key item in franchises

The Pathways to New Ventures for Entrepreneurs
Acquiring an Existing Venture Creating the New Venture Obtaining a Franchise Pathways to New Ventures

Approaches to Creating a New Venture
Creating New Ventures Approaches to Creating a New Venture New-New Approach New-Old Approach

Table 6.1 Trends Creating Business Opportunities
Emerging Opportunities Green Products Organic foods Organic fibers/textiles Alternative Energy Solar Biofuel Fuel cells Energy conservation Health Care Healthy food School and govt.-sponsored programs Exercise Yoga Niche gyms Children Nonmedical Pre-assisted living Assisted living transition services Niche Consumables Wine Chocolate Burgers Coffee houses Exotic salads Home Automation and Media Storage Lighting control Security systems Energy management Comfort management Entertainment systems Networked kitchen appliances Emerging Internet Opportunities Emerging Technology Opportunities Mobile Advertising Cell phones PDAs Concierge Services Niche Social Networks Seniors Music fans Groups of local users Pet owners Dating groups Virtual Economies Online auctions Educational Tutoring Human Resources Services Matchmaking Virtual HR Online Staffing Nanotechnology Wireless Technology Source: Steve Cooper, Amanda C. Kooser, Kristin Ohlson, Karen E. Spaeder, Nichole L. Torres, and Sara Wilson, “2007 Hot List,” Entrepreneur (December 2006): 80–93.

Figure 6.1 Sources of New Business Ideas Among Men and Women
Source: William J. Dennis, A Small Business Primer (Washington, DC: National Federation of Independent Business, 1993) 27. Reprinted with permission.

Examination of the Financial Picture
Upside gain and downside loss expectations The profits the business can make and the losses it can suffer. How much money will the enterprise take in if all goes well? How much will it gross if operations run as expected? How much will it lose if operations do not work out well? Risk vs. reward analysis Points out the importance of getting an adequate return on the amount of money risked.

Table 6.2 Checklist for Estimating Start-Up Expenses
Source: U.S. Small Business Administration, “Management Aids” MA (Washington, DC: U.S. Government Printing Office.)

Table 6.2 Checklist for Estimating Start-Up Expenses (cont’d)
Source: U.S. Small Business Administration, “Management Aids” MA (Washington, DC: U.S. Government Printing Office.)

Acquisition of a Business Venture
Acquiring a Business Venture Asking Key Questions Examination of Opportunities Evaluation of the Venture Personal Preferences

Advantages of Acquiring an Ongoing Venture
Buying an Ongoing Venture Purchasing at a Good Price Reduced Time and Effort Less Fear about Successful Future Operation

Evaluation of the Selected Venture
Factors Affecting Sale of the Venture Assets of the Venture Profits, Sales, and Operating Ratios The Business Environment

Key Questions to Ask Why is this business being sold?
What is the physical condition of the business? What is the condition of the inventory? What is the state of the firm’s other assets? How many employees will remain? What type of competition does the business face? What does the firm’s financial picture look like?

Factors Affecting Negotiations
Negotiating the Deal Factors Affecting Negotiations Alternatives Time Pressure Information

Table 6.3 “Do’s and Don’ts of Buying a Business”
Have a seller retain a minority interest in the business. Never rely on oral statements. Have an accountant examine the books and check the cash flow. Investigate, investigate, investigate! Interview the employees. Find out the real reason the company is for sale. Source: Adapted from Bruce J. Blechman, “Good Buy,” Entrepreneur (Feb. 1994): Reprinted with permission from Entrepreneur magazine, February 1994.

Franchising: The Hybrid
Any arrangement in which the owner of a trademark, trade name, or copyright has licensed others to use it in selling goods or services. Franchisee A purchaser of a franchise Franchisor The seller of the franchise

How a Franchise Works Franchisee Obligations:
Make a financial investment in the operation. Obtain and maintain a standardized inventory and/or equipment package usually purchased from the franchisor. Maintain a specified quality of performance. Follow a franchise fee as well as a percentage of the gross revenues. Engage in a continuing business relationship.

How a Franchise Works (cont’d)
Franchisor Provides: The company name that provides drawing power. Identifying symbols, logos, designs, and facilities. Professional management training for each independent unit’s staff. Sale of merchandise necessary for the unit’s operation, equipment to run the operation, and the food or materials needed for the final product. Financial assistance, if needed. Continuing aid and guidance to ensure that everything is done in accordance with the contract.

Franchising Advantages Disadvantages Training and guidance
Brand-name appeal A proven track record Financial assistance Disadvantages Franchise fees Franchisor control Unfulfilled promises of franchisor

Table 6.4 The Cost of Franchising
The basic franchising fee Insurance Opening product inventory Remodeling and leasehold improvements. Utility charges Payroll Debt service Bookkeeping and accounting fees Legal and professional fees State and local licenses, permits, and certificates Source: Donald F. Kuratko, “Achieving the American Dream as a Franchise,” Small Business Network (July 1987): 2. updated by author, April, 2008

Franchise Law The Uniform Franchise Offering Circular (UFOC)
Is divided into 23 items that provide different segments of information for prospective franchisees. Was developed to provide guidance in complying with the Franchise Disclosure Rule that requires franchisors to make full presale disclosure about their franchises.

Figure 6.2 The Decision to Purchase a Franchise: Process Model
- Source: Patrick J. Kaufmann, “Franchising and the Choice of Self Employment,” Journal of Business Venturing, 14(4): 1999: 348.

Table 6.5 World Wide Web Franchise Sites
Sites for franchising

Table 6.5 World Wide Web Franchise Sites (cont’d)
American Bar Association Forum on Franchising U.S. Small Business Administration Statistics – USA Entrepreneur Magazine Minority Business Entrepreneur Magazine Franchise Times Franchise Update Restaurant Business Magazine Source Book Publications Federal Trade Commission Franchise.com World Franchising Franchise Solution Franchise Opportunities Franchise Trade The Franchise Magazine Franchise Info Mall Franchise Advantage US Franchise News

Evaluating the Franchise Opportunity
Seeking Professional Help Investigating the Franchisor Finding Reliable Information The Franchise Opportunity Decision

Key Terms and Concepts business broker franchise franchisee
franchise fee franchisor franchisor control goodwill legal restraint of trade new-new approach new-old approach non-compete clause profit trend risk vs. reward Uniform Franchise Offering Circular (UFOC) unscrupulous practices upside gain and downside loss

CHAPTER # 7 Introduction to Entrepreneurship, 8e Donald F. Kuratko Legal Challenges to Entrepreneurial Ventures

Chapter Objectives To introduce the importance of legal issues to entrepreneurs To examine patent protection, including definitions and preparation To review copyrights and their relevance to entrepreneurs To study trademarks and their impact on new ventures To examine the legal forms of organization—sole proprietorship, partnership, and corporation To illustrate the advantages and disadvantages of each of these three legal forms

To explain the nature of the limited partnership and limited liability partnerships (LLPs) To examine how an S corporation works To define the additional classifications of corporations, including limited liability companies (LLCs) To present the major segments of the bankruptcy law that apply to entrepreneurs

Legal Challenges for the Entrepreneurial Venture
Growth and Continuity of the Venture Legal Concepts Inception of the Venture The Ongoing Venture

Major Legal Concepts and Entrepreneurial Ventures
I. Inception of an Entrepreneurial Venture A. Laws governing intellectual property 1. Patents 2. Copyrights 3. Trademarks B. Forms of business organization 1. Sole proprietorship 2. Partnership 3. Corporation 4. Franchise C. Tax considerations D. Capital formation E. Liability questions

II. Ongoing Venture: Business Development and Transactions A. Personnel Law 1. Hiring and firing policies 2. Equal Employment Opportunity Commission 3. Collective bargaining B. Contract Law 1. Legal contracts 2. Sales contracts 3. Leases

III. Growth and Continuity of an Entrepreneurial Venture A. Tax considerations 1. Federal, state, and local 2. Payroll 3. Incentives B. Governmental regulations 1. Zoning (property) 2. Administrative agencies (regulatory) 3. Consumer law C. Continuity of ownership rights 1. Property laws and ownership 2. Wills, trusts, and ownership 3. Bankruptcy

Intellectual Property Protection: Patents
Provides the owner with exclusive rights to hold, transfer, and license the production and sale of the product or process as an intellectual property right. Design patents last for 14 years; all others last for 20 years. What Items Qualify for Patent Protection? Processes, machines, products, plants, compositions of elements (chemical compounds), and improvements on already existing items.

Securing a Patent Rule 1: Pursue patents that are broad, are commercially significant, and offer a strong position. Rule 2: Prepare a patent plan in detail. Rule 3: Have your actions relate to your original patent plan. Rule 4: Establish an infringement budget. Rule 5: Evaluate the patent plan strategically.

Intellectual Property Protection: Patents
Patent Application Specification: the text of a patent and may include any accompanying illustrations. An introduction explaining why the invention will be useful. A description of prior art considered similar to the invention. A summary of the essence of the technology/invention, its differences from prior art and requisite features. A description of the invention, including anything remotely relevant, reference to variations, and number bounds. Examples and/or experimental results, in full detail. Claims: a series of short paragraphs, each of which identifies a particular feature or combination of features that is protected by the patent.

Figure 7.1 The Patent Process: From Application to Allowance and Issue
Continued on following slide Source: United States Patent Office, 2005.

Figure 7.1 The Patent Process: From Application to Allowance and Issue (cont’d)
Continued on following slide Source: United States Patent Office, 2005.

Figure 7.1 The Patent Process: From Application to Allowance and Issue (cont’d)
Source: United States Patent Office, 2005.

Intellectual Property Protection: Copyrights
Provides exclusive rights to creative individuals for the protection of their literary or artistic productions. Duration: life of the author plus 70 years. The copyright owner has the rights to: Reproduce the work Prepare derivative works based on it Distribute copies of the work by sale or otherwise Perform the work publicly Display the work publicly Sell or transfer individual rights

Intellectual Property Protection: Copyrights
Copyright Protection The material must be in a tangible form so it can be communicated or reproduced. It also must be the author’s own work and thus the product of his or her skill or judgment. Formal registration of a copyright is with the Copyright Office of the Library of Congress.

Copyrights (cont’d) Fair Use Doctrine Protected Ideas?
Reproduction of a copyright work for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research is not an infringement of copyright. Protected Ideas? The Copyright Act specifically excludes copyright protection for any “idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied.”

Intellectual Property Protection: Trademarks
A distinctive name, mark, symbol, or motto identified with a company’s product(s) and registered at the Patent and Trademark Office Advantages of Trademark Registration Nationwide constructive notice of the owner’s right to use the mark Bureau of Customs protection against importers using the mark Incontestability of the mark after five years

Intellectual Property Protection: Trademarks
Trademark Duration Current registrations are good for 10 years with the possibility for continuous renewal every 10 years. A trademark may be invalidated in four specific ways: Cancellation proceedings Cleaning-out procedure Abandonment Generic meaning

Trademarks (cont’d) Avoiding the Trademark Pitfalls
Rule 1: Never select a corporate name or a mark without first doing a trademark search. Rule 2: If your attorney says you have a potential problem with a mark, trust his or her judgment. Rule 3: Seek a coined or a fanciful name or mark before you settle for a descriptive or a highly suggestive one. Rule 4: Whenever marketing or other considerations dictate the use of a name or a mark that is highly suggestive of the product, select a distinctive logotype for the descriptive or suggestive words. Rule 5: Avoid abbreviations and acronyms wherever possible, and when no alternative is acceptable, select a distinctive logotype in which the abbreviation or acronym appears.

Trade Secrets Trade Secret Information Is Considered a Trade Secret:
Business processes and information that cannot be patented, copyrighted, or trademarked but makes an individual company unique and has value to a competitor could be a trade secret. Information Is Considered a Trade Secret: If it is not known by the competition. If the business would lose its advantage if the competition were to obtain it. If the owner has taken reasonable steps to protect the secret from disclosure.

Trade Secrets Examples of Trade Secrets: Customer lists
Strategic plans Research and development Pricing information Marketing techniques Production techniques

Trademark Protection on the Internet
Cyberlaw The emerging body of law governing cyberspace. Domain Names (Internet Addresses) The principles of trademark law apply to domain names (Cybersquatters). Unauthorized use of another’s mark in a domain name may constitute trademark infringement.

Identifying Legal Structures
A legal structure that will best suits the demands of the venture addresses: Changing tax laws Liability situations The availability of capital The complexity of business formation. Three primary legal forms of organization Sole proprietorship Partnership Corporation

Sole Proprietorships Sole Proprietorship
A business that is owned and operated by one person. The enterprise has no existence apart from its owner. To establish a sole proprietorship, a person merely needs to obtain whatever local and state licenses are necessary to begin operations.

Sole Proprietorships (cont’d)
Advantages Ease of formation Sole ownership of profits Decision making and control vested in one owner Flexibility Relative freedom from governmental control Freedom from corporate business taxes Disadvantages Unlimited liability Lack of continuity Less available capital Relative difficulty obtaining long-term financing Relatively limited viewpoint and experience

Partnerships Partnership Articles of Partnership
An association of two or more persons acting as co-owners of a business for profit. The Revised Uniform Partnership Act (RUPA) acts the guide for legal requirements in forming partnerships. Articles of Partnership Clearly outline the financial and managerial contributions of the partners and carefully delineate the roles in the partnership relationship.

Articles of Partnership Items
Name, purpose, domicile Duration of agreement Character of partners (general or limited, active or silent) Contributions by partners (at inception, at later date) Division of profits and losses Draws or salaries Rights of continuing partner(s) Death of a partner (dissolution and windup) Release of debts Business expenses (method of handling) Separate debts Authority (individual partner’s authority on business conduct) Books, records, and method of accounting Sale of partnership interest Arbitration Settlement of disputes Additions, alterations, or modifications of partnership Required and prohibited acts Absence and disability Employee management

Partnerships (cont’d)
Advantages Ease of formation Direct rewards Growth and performance facilitated Flexibility Relative freedom from governmental control and regulation Possible tax advantage Disadvantages Unlimited liability of at least one partner Lack of continuity Relative difficulty obtaining large sums of capital Bound by the acts of just one partner Difficulty of disposing of partnership interest

Corporations Corporation Forming a Corporation
“An artificial being, invisible, intangible, and existing only in contemplation of the law”. –Supreme Court Justice John Marshall As such, a corporation is a separate legal entity apart from the individuals who own it. Forming a Corporation Subscriptions for capital stock must be taken and a tentative organization created. Approval (a charter) must be obtained from the secretary of state in the state in which the corporation is to be formed.

Corporations (cont’d)
Advantages Limited liability Transfer of ownership Unlimited life Relative ease of securing capital in large amounts Increased ability and expertise Disadvantages Activity restrictions Lack of representation Regulation Organizing expenses Double taxation

Table 7.3 General Characteristics of Forms of Business
Sole Proprietorship Partnership Limited Liability Partnership Limited Partnership Limited Liability Limited Partnership Corporation S Corporation Limited Liability Company Formation When one person owns a business without forming a corporation or LLC By agreement of owners or by default when two or more owners conduct business together without forming a limited partnership, an LLC or a corporation By agreement of owners; must comply with limited liability partnership statute By agreement of owners; must comply with limited partnership statute By agreement of owners; must comply with limited liability limited partnership statute By agreement of owners; must comply with corporation statute By agreement of owners; must comply with corporation state; must elect S Corporation status under Subchapter S of Internal Revenue Code By agreement of owners; must comply with limited liability company statute Duration Terminates on death or withdrawal of sole proprietor Usually unaffected by death or withdrawal of partner Unaffected by death or withdrawal of partner Unaffected by death or withdrawal of partner, unless sole general partner dissociates Unaffected by death or withdrawal of shareholder Usually unaffected by death or withdrawal of member Management By sole proprietor By partners By general partners By board of directors By managers or members Owner Liability Unlimited Mostly limited to capital contribution Unlimited for general partners; limited to capital contribution for limited partners Limited to capital contribution Transferability of Owners’ Interest None None, unless agreed otherwise Freely transferable, although shareholders may agree otherwise Freely transferable, although shareholders usually agree otherwise Source: Jane P. Mallor, A. James Barnes, Thomas Bowers, and Arlen W. Langvardt, Business Law: The Ethical, Global, and E-Commerce Environment, 13 ed., McGraw Hill Irwin, 2007, p. 897.

Table 7.3 General Characteristics of Forms of Business
Sole Proprietorship Partnership Limited Liability Partnership Limited Partnership Limited Liability Limited Partnership Corporation S Corporation Limited Liability Company Federal Income Taxation Only sole proprietor taxed Only partners taxed Usually only partners taxed; may elect to be taxed like a corporation Corporation taxed; shareholders taxed on dividends (double tax) Only shareholders taxed Usually only members taxed; may elect to be taxed like a corporation Source: Jane P. Mallor, A. James Barnes, Thomas Bowers, and Arlen W. Langvardt, Business Law: The Ethical, Global, and E-Commerce Environment, 13 ed., McGraw Hill Irwin, 2007, p. 897.

Specific Forms of Partnerships and Corporations (cont’d)
S Corporation Takes its name from Subchapter S of the Internal Revenue Code. Is commonly known as a “tax option corporation”—it is taxed similarly to a partnership. Avoids the imposition of income taxes at the corporate level yet retain the benefits of a corporate form (especially the limited liability).

Guidelines for S Corporations
The corporation must be a domestic corporation. The corporation must not be a member of an affiliated group of corporations. The shareholders of the corporation must be individuals, estates, or certain trusts. Corporations, partnerships, and nonqualifying trusts cannot be shareholders. The corporation must have 100 or fewer shareholders. Only one class of stock, although not all shareholders may have the same voting rights. No shareholder may be a nonresident alien.

Specific Forms of Partnerships and Corporations
Limited Partnerships Have two or more partners without responsibility for management and without liability for losses beyond their investment with the right to share in the profits. Formed under The Uniform Limited Partnership Act (ULPA). Limited Liability Partnership (LLP) Allows professionals the tax benefits of a partnership while avoiding personal liability for the malpractice of other partners.

Specific Forms of Partnerships and Corporations (cont’d)
Limited Liability Limited Partnership (LLLP) has elected limited liability status for all of its partners, including general partners. Limited Liability Company (LLC) A hybrid form of business enterprise that offers the limited liability of a corporation but the tax advantages of a partnership. Disadvantage is that LLC statutes differ from state to state, and thus any firm engaged in multi-state operations may face difficulties.

Table 7.4 Principal Characteristics of Limited Partnerships and LLLPs
A limited partnership or LLLP may be created only in accordance with a statute. A limited partnership or LLLP has two types of partners: general partners and limited partners. It must have one or more of each type. All partners, limited and general, share the profits of the business. Each limited partner has liability limited to his capital contribution to the business. Each general partner of a limited partnership has unlimited liability for the obligations of the business. A general partner in an LLLP, however, has liability limited to his capital contribution. Each general partner has a right to manage the business, and she is an agent of the limited partnership or LLLP. A limited partner has no right to manage the business or to act as its agent, but he does have the right to vote on fundamental matters. A limited partner they manage the business, yet retain limited liability for partnership obligations. General partners, as agents, are fiduciaries of the business. Limited partners are not fiduciaries. A partner’s rights in a limited partnership or LLLP are not freely transferable. A transferee of a general or limited partnership interest in not a partner, but is entitled only to the transferring partner’s share of capital and profits. The death or other withdrawal of a partner does not dissolve a limited partnership or LLLP, unless there is no surviving general partner. Usually, a limited partnership or LLLP is taxed like a partnership. Source: Jane P. Mallor, A. James Barnes, Thomas Bowers, and Arlen W. Langvardt, Business Law: The Ethical, Global, and E-Commerce Environment, 13 ed., McGraw Hill Irwin, 2007, p. 953.

Understanding Bankruptcy
When a venture’s financial obligations are greater than its assets and it is unable to meet its obligations. The Bankruptcy Act A federal law that provides for specific procedures for handling insolvent debtors—those who are unable to pay debts as they become due. Ensures that the property of the debtor is distributed fairly to the creditors. Protects creditors from having debtors unreasonably diminish their assets. Protects debtors from extreme demands by creditors.

Bankruptcy (cont’d) Chapter 7: Straight Bankruptcy
Sometimes referred to as “liquidation.” Requires the debtor to surrender all property to a trustee appointed by the court. Chapter 11: Reorganization The most common form of bankruptcy. Under this format, a debtor attempts to formulate a plan to pay a portion of the debts, have the remaining sum discharged, and continue to stay in operation.

Bankruptcy (cont’d) Chapter 13: Adjustment of Debts
Individuals or sole proprietors with unsecured debts of less than $100,000 or secured debts of less than $350,000 are eligible to file under a Chapter 13 procedure. In the petition the debtor declares an inability to pay his or her debts and requests some form of extension through future earnings (a longer period of time to pay) or a composition of debt (a reduction in the amount owed).

Table 7.5 Bankruptcy: A Comparison of Chapters 7, 11, and 13
PURPOSE Liquidation Reorganization Adjustment WHO CAN PETITION Debtor (voluntary) or creditors (involuntary) Debtor (voluntary) only WHO CAN BE A DEBTOR Any “person” (including partnerships and corporations) except railroads, insurance companies, banks, savings and loan institutions, and credit unions. Farmers and charitable institutions cannot be involuntarily petitioned. Any debtor eligible for Chapter 7 relief; railroads are also eligible. Any individual (not partnerships or corporations) with regular income who owes fixed unsecured debt of less than $290,525 or secured debt of less than $871,550. PROCEDURE LEADING TO DISCHARGE Nonexempt property is sold with proceeds to be distributed (in order) to priority groups. Dischargeable debts are terminated. A plan is submitted and, if it is approved and followed, debts are discharged. A plan is submitted (must be approved if debtor turns over disposable income for three year period) and, if it is approved and followed, debts are discharged. ADVANTAGES On liquidation and distribution, most debts are discharged, and the debtor has an opportunity for a fresh start. The debtor continues in business. Creditors can accept the plan, or it can be “crammed down” on them. The plan allows for a reorganization and liquidation of debts over the plan period. The debtor continues in business or keeps possession of assets. If the plan is approved, most debts are discharged after a three year period. Source: Roger LeRoy Miller and Gaylord A. Jentz, Fundamentals of Business Law, 6th ed. (Mason, OH: South-Western, a division of Thomson Learning: © 2005), 438. Reprinted with permission.

Keeping Legal Expenses Down
Establish the fee structure with an attorney beforehand. Establish clear written agreements on all critical matters that affect business operations. Always attempt to settle any dispute rather than litigate. Have your attorney share forms in electronic format. Use a less expensive attorney for small collections. Suggest cost-savings to your attorney for business matters. Always check with your attorney during normal business hours. Consult with your lawyer on several matters at one time. Keep abreast of legal developments in your field. Handle some matters yourself. Involve attorneys early when it is feasible

Key Terms and Concepts limited liability partnership (LLP)
abandonment bankruptcy Bankruptcy Act cancellation proceedings claims cleaning-out procedure copyright corporation debtor-in-possession fair use doctrine generic meaning infringement budget intellectual property right limited liability company (LLC) limited liability limited partnership (LLLP) limited liability partnership (LLP) limited partnership liquidation partnership patent Patent and Trademark Office Revised Uniform Limited Partnership Act (RULPA) S corporation sole proprietorship specification trademark trade secrets unlimited liability

CHAPTER # 8 Introduction to Entrepreneurship, 8e Donald F. Kuratko The Search for Entrepreneurial Ventures

Chapter Objectives To differentiate between debt and equity as methods of financing To examine commercial loans and public stock offerings as sources of capital To discuss private placements as an opportunity for equity capital To study the market for venture capital and to review venture capitalists’ evaluation criteria for new ventures To discuss the importance of evaluating venture capitalists for a proper selection To examine the existing informal risk-capital market (“angel capital”)

Figure 8.1 Who Is Funding Entrepreneurial Start-Up Companies?
Source: “Successful Angel Investing,” Indiana Venture Center, March 2008.

Debt Versus Equity Debt Financing Equity Financing
Secured financing of a new venture that involves a payback of the funds plus a fee (interest for the use of the money). Equity Financing Involves the sale (exchange) of some of the ownership interest in the venture in return for an unsecured investment in the firm.

Debt Financing Commercial Banks
Make 1-5 year intermediate-term loans secured by collateral (receivables, inventories, or other assets). Questions in securing a loan: What do you plan to do with the money? How much do you need? When do you need it? How long will you need it? How will you repay the loan?

Debt Financing (cont’d)
Advantages No relinquishment of ownership is required. More borrowing allows for potentially greater return on equity. During periods of low interest rates, the opportunity cost is justified since the cost of borrowing is low. Disadvantages Regular (monthly) interest payments are required. Continual cash-flow problems can be intensified because of payback responsibility. Heavy use of debt can inhibit growth and development.

Table 8.1 Common Debt Sources
Business Type Financed Financing Term Debt Source Start-Up Firm Existing Firm Short Term Intermediate Term Long Term Trade credit Yes No Commercial banks Sometimes, but only if strong capital or collateral exists Frequently Sometimes Seldom Finance companies Most frequent Factors Leasing companies Occasionally Mutual savings banks and savings-and-loan associations Real estate ventures only Insurance companies Rarely Source: PricewaterhouseCoopers/National Venture Capital Association, MoneyTree™ Report, 2007.

Other Debt Financing Sources
Trade Credit Credit given by suppliers who sell goods on account. Accounts Receivable Financing Short-term financing that involves either the pledge of receivables as collateral for a loan or the sale of receivables at a discounted value (factoring). Finance Companies Asset-based lenders that lend money against assets such as receivables, inventory, and equipment.

Other Debt Financing Sources (cont’d)
Equity Instruments Give investors a share of the ownership. Loan with warrants provide the investor with the right to buy stock at a fixed price at some future date. Convertible debentures are unsecured loans that can be converted into stock. Preferred stock is equity that gives investors a preferred place among the creditors in the event the venture is dissolved. Common stock is the most basic form of ownership and is often are sold through public or private offerings.

Equity Financing Equity Financing Public Offering
Money invested in the venture with no legal obligation for entrepreneurs to repay the principal amount or pay interest on it. Funding sources: public offering and private placement Public Offering “Going public” refers to a corporation’s raising capital through the sale of securities on the stock markets. Initial Public Offerings (IPOs): new issues of common stock

Public Offerings Advantages Disadvantages Size of capital amount
Liquidity Value Image Disadvantages Costs Disclosure Requirements Shareholder pressure

Private Placements Regulation D
Securities and Exchange Commission (SEC) regulations for reports and statements required when selling stock to private parties—friends, employees, customers, relatives, and professionals. Defines four separate exemptions, which are based on the amount of money being raised: Rule 504a: placements of less than $500,000 Rule 504: placements up to $1,000,000 Rule 505: placements of up to $5 million Rule 506: placements in excess of $5 million

Private Placements (cont’d)
Accredited Purchaser Regulation D uses the term “accredited purchaser.” Included in this category are the following: Institutional investors such as banks, insurance companies, venture capital firms. Any person who buys at least $150,000 of the offered security and whose net worth, including that of his or her spouse, is at least 5 times the purchase price. Any person who, together with his or her spouse, has a net worth in excess of $1 million at the time of purchase.

Investors “Sophisticated” Investors
Wealthy individuals who invest regularly in new and early- and late-stage ventures and are knowledgeable about the technical and commercial opportunities and risks of the business in which they invest.

The Venture Capital Market
Venture Capitalists Are valuable and powerful source of equity funding for new ventures that provide: Capital for start-ups and expansion Market research and strategy Management-consulting, audits and evaluation Contacts—customers, suppliers, and businesspeople Assistance in negotiating technical agreements Help in establishing management and accounting controls Help in employee recruitment and employee agreements Help in risk management and with insurance programs Counseling and guidance in complying with government regulations

Table 8.2 Venture Capital Investments Comparison by Stages
Amount Deals Expansion $10.8 billion 1,235 Later Stage $12.2 billion 1,168 Early Stage $5.2 billion 995 Start up/ Seed $1.2 billion 415 **data from 2007

Recent Developments in Venture Capital
More-Experienced Venture Investors Emergence of Feeder Funds Decrease in Small Start-up Investments More Sophisticated Legal Environment More-Specialized Venture Funds

Investment Agreement Provisions
Choice of securities Preferred stock, common stock, convertible debt, and so forth Control issues Who maintains voting power Evaluation issues and financial covenants Ability to proceed with mergers and acquisitions Remedies for breach of contract Rescission of the contract or monetary damages

Dispelling Venture Capital Myths
Myth 1: Venture capital firms want to own control of your company and tell you how to run the business. Myth 2: Venture capitalists are satisfied with a reasonable return on investment. Myth 3: Venture capitalists are quick to invest. Myth 4: Venture capitalists are interested in backing new ideas or high-technology inventions— management is a secondary consideration. Myth 5: Venture capitalists need only basic summary information before they make an investment.

Venture Capitalists and Business Plans
Proposal Size Investment Recovery Competitive Advantage Company Management Financial Projections

Factors in Successful Funding of Ventures
Success in Seeking Funding (Demand Side) Characteristics of the Enterprise Characteristics of the Request Sources of Advice Characteristics of the Entrepreneurs

Status of Product/Service
Figure 8.2 Venture Capitalist System of Evaluating Product/Service and Management Level 4 Fully developed product/service Established market Satisfied users 4/1 4/2 4/3 4/4 Level 3 Few users as of yet Market assumed 3/1 3/2 3/3 3/4 Level 2 Operable pilot or prototype Not yet developed for production 2/1 2/2 2/3 2/4 Level 1 Product/service idea Not yet operable 1/1 1/2 1/3 1/4 Individual founder/ entrepreneur Two founders Other personnel not yet identified Partial management team—members identified to join company when funding received Fully staffed, experienced management team Riskiest Status of Product/Service Riskiest Status of Management Source: Stanley Rich and David Gumpert, Business Plans That Win $$$ (New York: Harper & Row, 1985), 169. Reprinted by permission of Sterling Lord Literistic, Inc. Copyright © 1985 by Stanley Rich and David Gumpert.

Table 8.3 Returns on Investment Typically Sought by Venture Capitalists
Stage Of Business Expected Annual Return on Investment Expected Increase on Initial Investment Start-up business (idea stage) 60% + 10–15 × investment First-stage financing (new business) 40%–60% 6–12 × investment Second-stage financing (development stage) 30%–50% 4–8 × investment Third-stage financing (expansion stage) 25%–40% 3–6 × investment Turnaround situation 50% + 8–15 × investment Source: W. Keith Schilit, “How to Obtain Venture Capital,” Business Horizons (May/June 1987): 78. Copyright © 1987 by the Foundation for the School of Business at Indiana University. Reprinted by permission.

Table 8.4 Factors in Venture Capitalists’ Evaluation Process
Attribute Level Definition Timing of entry Pioneer Enters a new industry first Late follower Enters an industry late in the industry’s stage of development Key success factor stability High Requirements necessary for success will not change radically during industry development Low Requirements necessary for success will change radically during industry development Educational capability Considerable resources and skills available to overcome market ignorance through education Few resources or skills available to overcome market ignorance through education Lead time Long An extended period of monopoly for the first entrant prior to competitors entering the industry Short A minimal period of monopoly for the first entrant prior to competitors entering this industry Source: Dean A. Shepherd, “Venture Capitalists’ Introspection: A Comparison of ‘In Use’ and ‘Espoused’ Decision Policies,” Journal of Small Business Management (April 1999): 76–87; and “Venture Capitalists’ Assessment of New Venture Survival,” Management Science (May 1999): 621–632. Reprinted by permission. Copyright 1999, the Institute for Operation Research and the Management Sciences (INFORMS), 7240 Parkway Drive, Suite 310, Hanover MD USA.

Table 8.4 Factors in Venture Capitalists’ Evaluation Process (cont’d)
Attribute Level Definition Competitive rivalry High Intense competition among industry members during industry development Low Little competition among industry members during industry development Entry wedge mimicry Considerable imitation of the mechanisms used by other firms to enter this, or any other, industry—for example, a franchisee Minimal imitation of the mechanisms used by other firms to enter this, or any other, industry—for example, introducing a new product Scope Broad A firm that spreads its resources across a wide spectrum of the market—for example, many segments of the market Narrow A firm that concentrates on intensively exploiting a small segment of the market—for example, targeting a niche Industry-related competence Venturer has considerable experience and knowledge with the industry being entered or a related industry Venturer has minimal experience and knowledge with the industry being entered or related industry Source: Dean A. Shepherd, “Venture Capitalists’ Introspection: A Comparison of ‘In Use’ and ‘Espoused’ Decision Policies,” Journal of Small Business Management (April 1999): 76–87; and “Venture Capitalists’ Assessment of New Venture Survival,” Management Science (May 1999): 621–632. Reprinted by permission. Copyright 1999, the Institute for Operation Research and the Management Sciences (INFORMS), 7240 Parkway Drive, Suite 310, Hanover MD USA.

Criteria for Evaluating New-Venture Proposals
Major Categories of Venture Capitalist Screening Criteria: Entrepreneur’s personality Entrepreneur’s experience Product or service characteristics Market characteristics Financial considerations Nature of the venture team

Table 8.5 Ten Criteria Most Frequently Rated Essential in New-Venture
Criterion Percentage Capable of sustained intense effort 64 Thoroughly familiar with market 62 At least ten times return in five to ten years 50 Demonstrated leadership in past Evaluates and reacts to risk well 48 Investment can be made liquid 44 Significant market growth 43 Track record relevant to venture 37 Articulates venture well 31 Proprietary protection 29 Source: Reprinted by permission of the publisher from “Criteria Used by Venture Capitalists to Evaluate New Venture Proposals,” by Ian C. MacMillan, Robin Siegel, and P. N. Subba Narasimha, Journal of Business Venturing (winter 1985): 123. Copyright © 1985 by Elsevier Science Publishing Co., Inc.

Table 8.6 Venture Capitalists’ Screening Criteria
Venture Capital Firm Requirements Must fit within lending guidelines of venture firm for stage and size of investment Proposed business must be within geographic area of interest Prefer proposals recommended by someone known to venture capitalist Proposed industry must be kind of industry invested in by venture firm Nature of the Proposed Business Projected growth should be relatively large within five years of investment Economic Environment of Proposed Industry Industry must be capable of long-term growth and profitability Economic environment should be favorable to a new entrant Proposed Business Strategy Selection of distribution channel(s) must be feasible Product must demonstrate defendable competitive position Financial Information on the Proposed Business Financial projections should be realistic Proposal Characteristics Must have full information Should be a reasonable length, be easy to scan, have an executive summary, and be professionally presented Proposal must contain a balanced presentation Use graphics and large print to emphasize key points Entrepreneur/Team Characteristics Must have relevant experience Should have a balanced management team in place Management must be willing to work with venture partners Entrepreneur who has successfully started previous business given special consideration Source: John Hall and Charles W. Hofer, “Venture Capitalists’ Decision Criteria in New Venture Evaluation,” Journal of Business Venturing (January 1993): 37.

Venture Capitalist Evaluation Process
Stage 1: Initial Screening This is a quick review of the basic venture to see if it meets the venture capitalist’s particular interests. Stage 2: Evaluation of the Business Plan This is where a detailed reading of the plan is done in order to evaluate the factors mentioned earlier. Stage 3: Oral Presentation The entrepreneur verbally presents the plan to the venture capitalist. Stage 4: Final Evaluation After analyzing the plan and visiting with suppliers, customers, consultants, and others, the venture capitalist makes a final decision.

Table 8.7 Essential Elements for a Successful Presentation to a Venture Capitalist
TEAM MUST: Be able to adapt Know the competition Be able to manage rapid growth Be able to manage an industry leader Have relevant background and industry experience Show financial commitment to firm, not just sweat equity Be strong with a proven track record in the industry unless the company is a start-up or seed investment MARKET MUST: Have current customers and the potential for many more Grow rapidly (25% to 45% per year) Have a potential market size in excess of $250 million Show where and how you are competing in the marketplace Have potential to become a market leader Outline any barriers to entry PRODUCT MUST: Be real and work Be unique Be proprietary Meet a well-defined need in the marketplace Demonstrate potential for product expansion, to avoid being a one-product company Emphasize usability Solve a problem or improve a process significantly Be for mass production with potential for cost reduction BUSINESS PLAN MUST: Tell the full story, not just one chapter Promote a company, not just a product Be compelling Show the potential for rapid growth and knowledge of your industry, especially competition and market vision Include milestones for measuring performance Show how you plan to beat or exceed those milestones Address all of the key areas Detail projections and assumptions; be realistic Serve as a sales document Include a strong and well-written executive summary Show excitement and color Show superior rate of return (a minimum of 30% to 40% per year) with a clear exit strategy Source: Andrew J. Sherman, Raising Capital, 2nd ed. AMACOM Books, 2005; p.175.

Informal Risk Capital Business Angel Financing
Wealthy individuals in the United States are looking for investment opportunities. They are referred to as “business angels” or informal risk capitalists. Types of Angel Investors Corporate angels Entrepreneurial angels Enthusiast angles Micromanagement angels Professional angels

Table 8.8 Main Differences Between Business Angels and Venture Capitalists
Personal Entrepreneurs Investors Firms funded Small, early-stage Large, mature Due diligence done Minimal Extensive Location of investment Of concern Not important Contract used Simple Comprehensive Monitoring after investment Active, hands-on Strategic Exiting the firm Of lesser concern Highly important Rate of return Source: Mark Van Osnabrugge and Robert J. Robinson, Angel Investing (San Francisco: Jossey-Bass, 2000), 111. This material is used by permission of John Wiley & Sons, Inc.

Table 8.9 “Angel Stats” Typical deal size $250,000 Typical recipient
Start-up firms Cash-out time frame 5 to 7 years Expected return 35 to 50% a year Ownership stake Less than 50% Source: William E. Wetzel, University of New Hampshire’s Center for Venture Research, and the Indiana Venture Center, 2008.

Figure 8.3 The Pros and Cons of Business Angel Investments
Source: Mark Van Osnabrugge and Robert J. Robinson, Angel Investing (San Francisco: Jossey-Bass, 2000), 64. This material is used by permission of John Wiley & Sons, Inc.

Key Terms and Concepts accounts receivable financing
accredited purchaser angel capital business angel debt financing equity financing factoring finance companies informal risk capitalist initial public offering (IPO) private placement Regulation D sophisticated investor trade credit venture capitalist

CHAPTER # 9 Introduction to Entrepreneurship, 8e Donald F. Kuratko Assessment of Entrepreneurial Opportunities

Chapter Objectives To explain the challenge of new-venture start-ups
To review common pitfalls in the selection of new-venture ideas To present critical factors involved in new-venture development To examine why new ventures fail To study certain factors that underlie venture success To analyze the evaluation process methods: profile analysis, feasibility criteria approach, and comprehensive feasibility method To outline the specific activities involved in a comprehensive feasibility evaluation

The Challenge of New-Venture Start-Ups
New Venture Formation 600,000 new firms have emerged in the United States every year since the mid-1990s. Ideas for Potential New Businesses The U.S. Patent Office currently reviews more than 375,000 patent applications per year.

Components of New-Venture Motivation
The need for approval The need for independence The need for personal development Welfare (philanthropic) considerations Perception of wealth Tax reduction and indirect benefits Following role models

Reasons for Starting a Venture
Entrepreneurial Motivations The Venture The Environment Personal Characteristics

Figure 9.1 The Elements Affecting New-Venture Performance
Source: Arnold C. Cooper, “Challenges in Predicting New Firm Performance,” Journal of Business Venturing (May 1993): 243. Reprinted with permission.

Pitfalls in Selecting New Ventures
Lack of objective evaluation No real insight into the market Inadequate understanding of technical requirements Poor financial understanding Lack of venture uniqueness Ignorance of legal issues

Phases in New-Venture Start-ups
Prestart-up Phase Begins with an idea for the venture and ends when the doors are opened for business. Start-up Phase Commences with the initiation of sales activity and the delivery of products and services and ends when the business is firmly established and beyond short-term threats to survival. Poststart-up Phase Lasts until the venture is terminated or the surviving organizational entity is no longer controlled by an entrepreneur.

Critical Factors for New-Venture Development
Uniqueness of venture Investment size Expected sales growth Lifestyle ventures Small profitable ventures High-growth ventures Product availability Customer availability

Table 9.1 A New-Venture Idea Checklist
Basic Feasibility of the Venture 1. Can the product or service work? 2. Is it legal? Competitive Advantages of the Venture 1. What specific competitive advantages will the product or service offer? 2. What are the competitive advantages of the companies already in business? 3. How are the competitors likely to respond? 4. How will the initial competitive advantage be maintained? Buyer Decisions in the Venture 1. Who are the customers likely to be? 2. How much will each customer buy, and how many customers are there? 3. Where are these customers located, and how will they be serviced? Marketing of the Goods and Services 1. How much will be spent on advertising and selling? 2. What share of market will the company capture? By when? 3. Who will perform the selling functions? 4. How will prices be set? How will they compare with the competition’s prices? 5. How important is location, and how will it be determined? 6. What distribution channels will be used—wholesale, retail, agents, direct mail? 7. What are the sales targets? By when should they be met? 8. Can any orders be obtained before starting the business? How many? For what total amount? Source: Karl H. Vesper, New Venture Strategies, copyright © 1990, 172. Adapted by permission of Prentice-Hall, Inc., Englewood Cliffs, New Jersey.

Table 9.1 A New-Venture Idea Checklist (cont’d)
Production of the Goods and Services 1. Will the company make or buy what it sells? Or will it use a combination of these two strategies? 2. Are sources of supplies available at reasonable prices? 3. How long will delivery take? 4. Have adequate lease arrangements for premises been made? 5. Will the needed equipment be available on time? 6. Do any special problems with plant setup, clearances, or insurance exist? How will they be resolved? 7. How will quality be controlled? 8. How will returns and servicing be handled? 9. How will pilferage, waste, spoilage, and scrap be controlled? Staffing Decisions in the Venture 1. How will competence in each area of the business be ensured? 2. Who will have to be hired? By when? How will they be found and recruited? 3. Will a banker, lawyer, accountant, or other advisers be needed? 4. How will replacements be obtained if key people leave? 5. Will special benefit plans have to be arranged? Control of the Venture 1. What records will be needed? When? 2. Will any special controls be required? What are they? Who will be responsible for them? Source: Karl H. Vesper, New Venture Strategies, copyright © 1990, 172. Adapted by permission of Prentice-Hall, Inc., Englewood Cliffs, New Jersey.

Table 9.1 A New-Venture Idea Checklist (cont’d)
Financing the Venture 1. How much will be needed for development of the product or service? 2. How much will be needed for setting up operations? 3. How much will be needed for working capital? 4. Where will the money come from? What if more is needed? 5. Which assumptions in the financial forecasts are most uncertain? 6. What will be the return on equity, or sales, and how does it compare with the rest of the industry? 7. When and how will investors get their money back? 8. What will be needed from the bank, and what is the bank’s response? Source: Karl H. Vesper, New Venture Strategies, copyright © 1990, 172. Adapted by permission of Prentice-Hall, Inc., Englewood Cliffs, New Jersey.

Why New Ventures Fail Product/Market Problems Financial Difficulties
Managerial Problems

Causes for Failure Product/Market Problems Financial Difficulties
Poor timing Product design problems Inappropriate distribution strategy Unclear business definition Overreliance on one customer Financial Difficulties Initial undercapitalization Assuming debt too early Venture capital relationship problems Managerial Problems Concept of a team approach Human resource problems

Table 9.2 Types and Classes of First-Year Problems
Obtaining external financing Obtaining financing for growth Other or general financing problems Internal financial management Inadequate working capital Cash-flow problems Other or general financial management problems Sales/marketing Low sales Dependence on one or few clients/customers Marketing or distribution channels Promotion/public relations/advertising Other or general marketing problems Product development Developing products/services Other or general product development problems Production/operations management Establishing or maintaining quality control Raw materials/resources/supplies Other or general production/operations management problems General management Lack of management experience Only one person/no time Managing/controlling growth Administrative problems Other or general management problems Human resource management Recruitment/selection Turnover/retention Satisfaction/morale Employee development Other or general human resource management problems Economic environment Poor economy/recession Other or general economic environment problems Regulatory environment Insurance Source: David E. Terpstra and Philip D. Olson, “Entrepreneurial Start-up and Growth: A Classification of Problems,” Entrepreneurship Theory and Practice (spring 1993): 19.

Figure 9.2 Internal and External Problems Experienced by Entrepreneurs
Source: H. Robert Dodge, Sam Fullerton, and John E. Robbins, “Stage of Organization Life Cycle and Competition as Mediators of Problem Perception for Small Businesses,” Strategic Management Journal 15 (1994): 129. Reprinted by permission of John Wiley & Sons, Ltd.

Table 9.3 Determinants of New-Venture Failures
Entrepreneur Rank Venture Capitalist I—Lack of management skill 1 I—Poor management strategy 2 I—Lack of capitalization 3 I—Lack of vision 4 E—Poor external market conditions I—Poor product design 5 I—Key personnel incompetent 6 I—Poor product timing E = External factor I = Internal factor Source: Andrew L. Zacharakis, G. Dale Meyer, and Julio DeCastro, “Differing Perceptions of New Venture Failure: A Matched Exploratory Study of Venture Capitalists and Entrepreneurs,” Journal of Small Business Management (July 1999): 8.

New Venture Failure Prediction Model
Role of profitability and cash flows Role of debt Combination of both Role of initial size Role of velocity of capital Role of control

Table 9.4 The Failure Process of a Newly Founded Firm
Extremely high indebtedness (poor static solidity) and small size Too slow velocity of capital, too fast growth, too poor profitability (as compared to the budget), or some combination of these Unexpected lack of revenue financing (poor dynamic liquidity) Poor static liquidity and debt service ability (dynamic solidity) Source: Erkki K. Laitinen, “Prediction of Failure of a Newly Founded Firm,” Journal of Business Venturing (July 1992): 326–328. Reprinted with permission.

The Evaluation Process
Profile Analysis Involves identifying and investigating the financial, marketing, organizational, and human resource variables that influence the business’s potential before the new idea is put into practice. The Feasibility Criteria Approach Involves the use of a criteria selection list from which entrepreneurs can gain insights into the viability of their venture. Comprehensive Feasibility Approach Incorporates external factors in addition to those included in the criteria questions.

Feasibility Criteria Approach
Assessing the viability of a venture: Is it proprietary? Are the initial production costs realistic? Are the initial marketing costs realistic? Does the product have potential for very high margins? Is the time required to get to market and to reach the break-even point realistic? Is the potential market large? Is the product the first of a growing family? Does an initial customer exist? Are the development costs and calendar times realistic? Is this a growing industry? Can the product and the need for it be understood by the financial community?

Figure 9.3 Key Areas for Assessing the Feasibility of a New Venture

Table 9.5 Specific Activities of Feasibility Analyses
Technical Feasibility Analysis Market Feasibility Financial Feasibility Organizational Capabilities Analysis Competitive Crucial technical specifications Design Durability Reliability Product safety Standardization Engineering requirements Machines Tools Instruments Work flow Product development Blueprints Models Prototypes Product testing Lab testing Field testing Plant location Desirable characteristics of plant site (proximity to suppliers, customers), environmental regulations Market potential Identification of potential customers and their dominant characteristics (e.g., age, income level, buying habits) Potential market share (as affected by competitive situation) Potential sales volume Sales price projections Market testing Selection of test Actual market test Analysis of market Marketing planning issues Preferred channels of distribution, impact of promotional efforts, required distribution points (warehouses), packaging considerations, price differentiation Required financial resources Fixed assets Current assets Necessary working capital Available financial resources Required borrowing Potential sources for funds Costs of borrowing Repayment conditions Operation cost analysis Fixed costs Variable costs Projected profitability Personnel requirements Required skill levels and other personal characteristics of potential employees Managerial requirements Determination of individual responsibilities Determination of required organizational relationships Potential organizational development Competitive analysis Existing competitors Size, financial resources, market entrenchment Potential reaction of competitors to newcomer by means of price cutting, aggressive advertising, introduction of new products, and other actions Source: Hans Schollhammer and Arthur H. Kuriloff, Entrepreneurship and Small Business Management (New York: John Wiley & Sons, 1979): 56. Copyright © 1979 by John Wiley & Sons, Inc. Reprinted by permission of John Wiley & Sons, Inc.

Key Terms and Concepts comprehensive feasibility approach
critical factors customer availability external problems failure prediction model feasibility criteria approach growth of sales growth stage high-growth venture internal problems lifestyle venture marketability product availability small profitable venture start-up problems technical feasibility uniqueness

CHAPTER # 10 Introduction to Entrepreneurship, 8e Donald F. Kuratko The Marketing Aspects of New Ventures

Chapter Objectives To review the importance of marketing research for new ventures To identify the key elements of a proper survey To present factors that inhibit the use of marketing To present the emerging use of Internet marketing for entrepreneurial firms To examine the marketing concept: philosophy, segmentation, and consumer orientation To establish the areas vital to a marketing plan To discuss the key features of a pricing strategy To present a pricing strategy checklist

The Marketing Concept for Entrepreneurs
Pricing Strategy Approach Marketing Plan Market Research Market Knowledge

Table 10.1 Common Elements in the Marketing Skills of Great Entrepreneurs
They possess unique environmental insight, which they use to spot opportunities that others overlook or view as problems. They develop new marketing strategies that draw on their unique insights. They view the status quo and conventional wisdom as something to be challenged. They take risks that others, lacking their vision, consider foolish. They live in fear of being preempted in the market. They are fiercely competitive. They think through the implications of any proposed strategy, screening it against their knowledge of how the marketplace functions. They identify and solve problems that others do not even recognize. They are meticulous about details and are always in search of new competitive advantages in quality and cost reduction, however small. They lead from the front, executing their management strategies enthusiastically and autocratically. They maintain close information control when they delegate. They drive themselves and their subordinates. They are prepared to adapt their strategies quickly and to keep adapting them until they work. They persevere long after others have given up. They have clear visions of what they want to achieve next. They can see further down the road than the average manager can see.

Marketing Terms Market Marketing Research
A group of consumers (potential customers) who have purchasing power and unsatisfied needs. A new venture will survive only if a market exists for its product or service. Marketing Research The gathering of information about a particular market, followed by analysis of that information.

Defining the Research Purpose and Objectives
Where do potential customers go to purchase the good or service in question? Why do they choose to go there? What is the size of the market? How much of it can the business capture? How does the business compare with competitors? What impact does the business’s promotion have on customers? What types of products or services are desired by potential customers?

Gathering Information
Secondary Data Information that has already been compiled. Advantage: Less expensive and available Disadvantages: outdated, lacks specificity, questionable validity Sources: internal and/or external sources Primary Data Information that is gathered specifically for the research at hand. Surveys Experimentation

Table 10.2 Comparison of Major Survey Research Techniques
Criteria Direct/Cold Mailing Mail Panels Telephone Personal In- Home Mall Intercept Complexity and versatility Not much Substantial, but complex or lengthy scales difficult to use Highly flexible Most flexible Quantity of data Substantial Short, lasting typically between15 and 30 minutes Greatest quantity Limited,25 minutes or less Sample control Little Substantial, but representativeness may be a question Good, but nonlisted households can be a problem In theory, provides greatest control Can be problematic; sample representativeness may be questionable Quality of data Better for sensitive or embarrassing questions; however, no interviewer is present to clarify what is being asked Positive side, interview can clear up any ambiguities; negative side, may lead to socially accepted answers There is the chance of cheating Unnatural testing environment can lead to bias Response In general, low; as low as 10% 70–80% 60–80% Greater than 80% As high as 80% rates Speed Several weeks; completion time will increase with follow-up mailings Several weeks with no follow- up mailings, longer with follow-up mailings Large studies can be completed in 3 to 4 weeks Faster than mail but typically slower than telephone surveys Large studies can be completed in a few days Cost Inexpensive; as low as $2.50 per completed interview Lowest Not as low as mail; depends on incidence rate and length of questionnaire Can be relatively expensive, but considerable variability Less expensive than in-home, but higher than telephone; again, length and incidence rate will determine cost Uses Executive, industrial, medical, and readership studies All areas of marketing research, particularly useful in low-incidence categories Particularly effective in studies that require national samples Still prevalent in product testing and other studies that require visual cues or product Pervasive-concept tests, name tests, package tests, copy test prototypes Source: Peter R. Dickson, Marketing Management (Fort Worth, TX: The Dryden Press, 1994), 114. Reprinted with permission of South-Western, a division of Thomson Learning:

Developing an Information-Gathering Instrument
Make sure each question pertains to a specific objective in line with the purpose of the study. Place simple questions first and difficult-to-answer questions later in the questionnaire. Ask: “How could this question be misinterpreted?” Reword questions avoid misunderstanding. Avoid leading and biased questions. Give concise but not complete directions in the questionnaire. Use scaled questions rather than simple yes/no questions.

Interpreting and Reporting the Information
Data organized and interpreted is information. Tables, charts, graphs Descriptive statistics—mean, mode, median Market research subject areas: Sales Distribution Markets Advertising Products

Inhibitors to Market Research and Reporting
Mistaken beliefs that inhibit the use of marketing research: Cost: research is too expensive. Complexity: research techniques rely on overly complex sampling, surveying, and statistical analysis. Strategic Decisions: only major strategic decisions need to be supported through marketing research. Irrelevancy: research data will contain either information that merely supports what is already known or irrelevant information.

Internet Marketing The Internet:
Allows the firm to increase its presence and brand equity in the marketplace. Allows the company to cultivate new customers. Can improve customer service and lower costs by allowing customers to serve themselves. Provides a mechanism for information sharing and collection at a fraction of prior costs. Is a direct-sales distribution channel where the seller-buyer relationship is immediate, and the waiting period that follows a traditional marketing campaign is almost eliminated.

Marketing on the Internet
Step 1 : Co-Marketing and Banner Ads Step 2: Become a Popular Link Internet Marketing Step 3: Sponsor Contests, Specials, and Other Interactive Features

Table 10.3 Web Design Tips Things to Do Things to Avoid
Provide a description of the firm Scrolling Ensure fast loading times Large graphic files Create consistent navigation pathways Reliance on one browser Make the site interactive Broken links Register with search engines Excessive use of plug-ins Register the domain name Obscure URLs Use trademarks appropriately Copycatting other sites Market the site in other materials Allowing the website to grow stale Source: John H. Lindgren, Jr., “Marketing on the Internet,” Marketing Best Practices (Fort Worth, TX: Harcourt College Publishers, 2000), 559.

Developing the Marketing Concept
Marketing Philosophies Production-driven philosophy Sales-driven philosophy Consumer-driven philosophy Factors in Choosing a Marketing Philosophy Competitive pressure Entrepreneur’s background Short-term focus

Developing the Marketing Concept (cont’d)
Market Segmentation The process of identifying a specific set of characteristics that differentiate one group of consumers from the rest. Demographic variables Age, marital status, sex, occupation, income, location Benefit variables Convenience, cost, style, trends (depending on the nature of the particular new venture)

Table 10.4 Consumer Characteristics
Personal Characteristics Innovators (2–3%) Early Adopters (12–15%) Early Majority (33%) Late Majority (34%) Laggards (12–15%) 1. Social class Lower upper Upper middle Lower middle Upper lower Lower lower 2. Income High income (inherited) High income (earned from salary and investment) Above-average income (earned) Average income Below-average income 3. Occupation Highest professionals Merchants Financiers Middle management and owners of businesses medium-sized Owners of small businesses Nonmanagerial office and union managers Skilled labor Unskilled labor 4. Education Private schooling College High school Trade school Grammar school, some high school Very little—some grammar school 5. Housing Inherited property Fine mansions Large homes—good suburbs or best apartments Small houses Multiple-family dwellings Low-income housing in urban-renewal projects Slum apartments 6. Family influence Not family oriented Children in private school or grown Children’s social advancement important Education important Child centered and home centered Children taken for granted Children expected to raise themselves 7. Time orientation Present oriented, but worried about impact of time Future oriented Present oriented Present (security) oriented Tradition oriented, live in the past Source: Roy A. Lindberg and Theodore Cohn, The Marketing Book for Growing Companies That Want to Excel (New York: Van Nostrand Reinhold, 1986), 80–81. Reprinted with permission.

Table 10.4 Consumer Characteristics (cont’d)
Psychological Characteristics Innovators (2–3%) Early Adopters (12–15%) Early Majority (33%) Late Majority (34%) Laggards (12–15%) 1. Nature of needs Self-actualization needs (realization of potential) Esteem needs (for status and recognition by others) Belonging needs (with others and groups) Safety needs (freedom from fear) Survival needs (basic needs) 2. Perceptions Cosmopolitan in outlook Prestige Status conscious Aspire to upper class Local aspirations and local social acceptance Home and product centered Live from day to day 3. Self-concept Elite Social strivers, peer group leaders, venturesome Respectability from own reference groups and home Security, home centered, aggressive, apathetic, no hope Fatalistic, live from day to day 4. Aspiration groups British upper class Innovator class In own social strata, dissociated from upper lower Others in this classification and in early majority, dissociated from lower lower Don’t aspire 5. Reference groups Sports, social, and travel groups Dominate industry and community organizations Golf, college, and fraternity Social groups of this strata: chambers of commerce, labor unions, family, church, P.T.A., auxiliaries Family, labor unions Ethnic group oriented Source: Roy A. Lindberg and Theodore Cohn, The Marketing Book for Growing Companies That Want to Excel (New York: Van Nostrand Reinhold, 1986), 80–81. Reprinted with permission.

Consumer Behavior Consumer Behavior Major Consumer Classifications:
The types and patterns of consumer characteristics. Personal characteristics Psychological characteristics Major Consumer Classifications: Convenience goods Shopping goods Specialty goods Unsought goods New products

Table 10.5 Changing Priorities and Purchases in the Family Life Cycle
Stage Priorities Major Purchases Fledgling: teens and early 20s Self; socializing; education Appearance products, clothing, automobiles, recreation, hobbies, travel Courting: 20s Self and other; pair bonding; career Furniture and furnishings, entertainment and entertaining, savings Nest building: 20s early 30s Babies and career Home, garden, do-it-yourself and items, baby-care products, insurance Full nest: 30–50s Children and others; career; midlife crisis Children’s food, clothing, education, transportation, orthodontics; career and life counseling Empty nest: 50–75 Self and others; relaxation Furniture and furnishings, entertainment, travel, hobbies, luxury automobiles, boats, investments Sole survivor: 70–90 Self; health; loneliness Health care services, diet, security and comfort products, TV and books, long-distance telephone services Source: Peter R. Dickson, Marketing Management (Fort Worth, TX: The Dryden Press, 1994), 91. Reprinted with permission of South-Western, a division of Thomson Learning:

Developing a Marketing Plan
Marketing Planning The process of determining a clear, comprehensive approach to the creation of customers. Elements of Marketing Planning Current marketing research Current sales analysis Marketing information system Sales forecasting Evaluation

Marketing Planning (cont’d)
Current Marketing Research The purpose of marketing research is to identify customers—target markets— and to fulfill their desires. Areas of Market Research The company’s major strengths and weaknesses Market profile Current and best customers Potential customers Competition Outside factors Legal changes

Current Sales Analysis
Sales Research Questions: Do salespeople call on their most qualified prospects on a proper priority and time-allocation basis? Does the sales force contact decision makers? Are territories aligned according to sales potential and salespeople’s abilities? Are sales calls coordinated with other selling efforts, such as trade publication advertising, trade shows, and direct mail? Do salespeople ask the right questions on sales calls? Do sales reports contain appropriate information? Does the sales force understand potential customers’ needs? How does the growth or decline of a customer’s or a prospect’s business affect the company’s own sales?

Marketing Information System
Compiles and organizes data relating to cost, revenue, and profit from the customer base for monitoring the strategies, decisions, and programs concerned with marketing. Factors affecting the value of a system: Data reliability Data usefulness or understandability Reporting system timeliness Data relevancy System cost

Market Planning Sales Forecasting Evaluation
The process of projecting future sales through historical sales figures and the application of statistical techniques. Evaluation Evaluating marketing plan performance is important so that flexibility and adjustment can be incorporated into marketing planning.

The Market Plan: A Structured Approach
Appraise marketing strengths and weaknesses, emphasizing “competitive edge” factors. Develop marketing objectives, along with short- and intermediate-range sales goals. Develop product/service strategies. Develop marketing strategies to achieve intermediate- and long-range sales goals and long-term marketing objectives. Determine a pricing structure.

Pricing Strategies Factors affecting the pricing decision:
The degree of competitive pressure The availability of sufficient supply Seasonal or cyclical changes in demand Distribution costs The product’s life-cycle stage Changes in production costs Prevailing economic conditions Customer services provided by the seller The amount of promotion The market’s buying power

Pricing Strategies (cont’d)
Psychological factors affecting the pricing decision: The quality of a product is interpreted by customers according to the level of the item’s price. Customer groups shy away from purchasing a product where no printed price schedule is available. Emphasis on the monthly cost of purchasing an expensive item results in greater sales than an emphasis on total selling price. Buyers expect to pay even-numbered prices for prestigious items and odd-numbered prices for commonly available goods. The greater the number of customer benefits the seller can convey about a product, the less will be the price resistance.

Table 10.6 Pricing for the Product Life Cycle
Product Life Cycle Stage Pricing Strategy Reasons/Effects Introductory Stage Unique product Skimming—deliberately setting a high price to maximize short-term profits Initial price set high to establish a quality image, to provide capital to offset development costs, and to allow for future price reductions to handle competition Nonunique product Penetration—setting prices at such a low level that products are sold at a loss Allows quick gains in market share by setting a price below competitors’ prices Growth Stage Consumer pricing—combining penetration and competitive pricing to gain market share; depends on consumer’s perceived value of product Depends on the number of potential competitors, size of total market, and distribution of that market Maturity Stage Demand-oriented pricing—following a flexible strategy that bases pricing decisions on the level of consumer demand Sales growth declines; customers are very price-sensitive demand level for the product Decline Stage Loss leader pricing—pricing the product below cost in an attempt to attract customers to other products Product possesses little or no attraction to customers; the idea is to have low prices bring customers to newer product lines Source: Adapted from Colleen Green, “Strategic Pricing,” Small Business Reports (August 1989): 27–33.

Table 10.7 Pricing Strategy Checklist
Source: Roy A. Lindberg and Theodore Cohn, The Marketing Book for Growing Companies That Want to Excel (New York: Van Nostrand Reinhold, 1986), 116–117. Reprinted with permission.

Table 10.7 Pricing Strategy Checklist (cont’d)
Source: Roy A. Lindberg and Theodore Cohn, The Marketing Book for Growing Companies That Want to Excel (New York: Van Nostrand Reinhold, 1986), 116–117. Reprinted with permission.

Key Terms and Concepts consumer-driven philosophy consumer pricing
demand-oriented pricing experimentation Internet marketing loss leader pricing market marketing research market segmentation penetration primary data production-driven philosophy sales-driven philosophy secondary data skimming surveys

CHAPTER # 11 Introduction to Entrepreneurship, 8e Donald F. Kuratko Financial Statements in New Ventures

Chapter Objectives To explain the principal financial statements needed for any entrepreneurial venture: the balance sheet, income statement, and cash-flow statement To outline the process of preparing an operating budget To discuss the nature of cash flow and to explain how to draw up such a document To describe how pro forma statements are prepared To explain how capital budgeting can be used in the decision-making process

Chapter Objectives To illustrate how to use break-even analysis
To describe ratio analysis and illustrate the use of some of the important measures and their meanings

The Importance of Financial Information for Entrepreneurs
Significant Information for Financial Management The importance of ratio analysis in planning Techniques and uses of projected financial statements Techniques and approaches for designing a cash-flow schedule Techniques and approaches for evaluating the capital budget

Understanding the Key Financial Statements
Balance Sheet Represents the financial condition of a company at a certain date. It details the items the company owns (assets) and the amount the company owes (liabilities). It also shows the net worth of the company and its liquidity. Assets = Liabilities + Owners’ Equity An asset is something of value the business owns. Current and fixed assets Liabilities are the claims creditors have against the company. Short- and long-term debt Owners’ equity is the residual interest of the firm’s owners in the company.

Table 11.2 Kendon Corporation Balance Sheet for the Year Ended December 31, 2010

Understanding the Key Financial Statements (cont’d)
Income Statement Commonly referred to as the P&L (profit and loss) statement from activities of the firm. Provides the results of the firm’s operations. Income Statement Categories Revenues: gross sales for the period Expenses: Costs of producing goods or services Net Income: The excess (deficit) of revenues over expenses (profit or loss)

Table 11.3 Kendon Corporation Income Statement for the Year Ended December 31, 2010

Understanding the Key Financial Statements (cont’d)
Statement of Cash Flow An analysis of the cash availability and cash needs of the business that shows the effects of a company’s operating, investing, and financing activities on its cash balance. How much cash did the firm generate from operations? How did the firm finance fixed capital expenditures? How much new debt did the firm add? Was cash from operations sufficient to finance fixed asset purchases? The use of a cash budget may be the best approach for an entrepreneur starting up a venture.

Table 11.4 Format of Statement of Cash Flows

Preparing Financial Budgets
One of the most powerful tools the entrepreneur can use in planning financial operations. Operating Budget A statement of estimated income and expenses over a specified period of time. Cash Budget A statement of estimated cash receipts and expenditures over a specified period of time. Capital Budget The plan for expenditures on assets with returns expected to last beyond one year.

The Operating Budget Sales Forecasting Forecasting
Creating an operating budget through preparation of the sales forecast. Forecasting Linear regression: a statistical forecasting technique. Y = a + bx Y is a dependent variable—its value is dependent on the values of a, b, and x. x is an independent variable that is not dependent on any of the other variables a is a constant. b is the slope of the line of correlation (the change in Y divided by the change in x).

Figure 11.1 Regression Analysis

Table 11.5 North Central Scientific: Sales Forecast for 2010

Table 11.6 North Central Scientific: Purchase Requirements Budget for 2010

Table 11.7 Dynamic Manufacturing: Production Budget Worksheet for 2010

The Cash-Flow Budget Cash-Flow Budget
Provides an overview of the cash inflows and outflows during the period. By pinpointing cash problems in advance, management can make the necessary financing arrangements. Preparation of the cash-flow budget Identification and timing of three cash inflows: Cash sales Cash payments received on account Loan proceeds Minimum cash balance

Table 11.8 North Central Scientific: Expense and Operating Budgets
In order to identify the behavior of the different expense accounts, John Wheatman decided to analyze the past five years’ income statements. Following are the results of his analysis: Rent is a constant expense and is expected to remain the same during the next year. Payroll expense changes in proportion to sales, because the more sales the store has, the more people it must hire to meet increased consumer demands. Utilities are expected to remain relatively constant during the budget period. Taxes are based primarily on sales and payroll and are therefore considered a variable expense. Supplies will vary in proportion to sales. This is because most of the supplies will be used to support sales. Repairs are relatively stable and are a fixed expense. John has maintenance contracts on the equipment in the store, and the cost is not scheduled to rise during the budget period.

Table 11.8 North Central Scientific: Expense and Operating Budgets (cont’d)

Table 11.9 North Central Scientific: Cash-Flow Budget

Pro Forma Statements Pro Forma Statements
Are projections of a firm’s financial position over a future period (pro forma income statement) or on a future date (pro forma balance sheet). Using beginning balance sheet balances, they depict projected changes on the operating and cash-flow budgets which are added to create projected balance sheet totals.

Table 11.10 North Central Scientific: Pro Forma Statements

Table 11.10 North Central Scientific: Pro Forma Statements (cont’d)

Capital Budgeting The Capital Budgeting Process
Identification of cash inflows or returns and their timing The inflows are equal to net operating income before deduction of payments to financing sources but after deduction of applicable taxes and with depreciation added back, as represented by the following formula: Expected Returns = X(1 – T) + Depreciation X is equal to the net operating income T is defined as the appropriate tax rate Capital Budgeting Objectives Which of several mutually exclusive projects should be selected? How many projects, in total, should be selected?

Table 11.11 North Central Scientific: Expected Return Worksheet

Capital Budgeting (cont’d)
Payback Method Considers the length of time required to “pay back” (recapture) the original investment. Any project that requires a longer period than the maximum time frame will be rejected, and projects that fall within the time frame will be accepted. One of the problems with the payback method is that it ignores cash flows beyond the payback period. Why it is used? Very simple to use compared to other methods. Projects with a faster payback period normally have more favorable short-term effects on earnings. If a firm is short on cash, it may prefer to use the payback method because it provides a faster return of funds.

Capital Budgeting (cont’d)
Net Present Value (NPV) Method The premise that a dollar today is worth more than a dollar in the future. The cost of capital is the rate used to adjust future cash flows to determine their value in present period terms. This procedure is referred to as discounting the future cash flows—cash value is determined by the present value of the cash flow. Internal Rate of Return (IRR method) Similar to the net present value method, but future cash flows are discounted a rate that makes the net present value of the project equal to zero.

Break-Even Analysis Contribution Margin Approach
Uses the difference between the selling price and the variable cost per unit— the amount per unit that is contributed to covering all other costs. Fixed cost assumption: 0 = (SP–VC )S – FC – QC Break-even point: 0 = [SP – VC – (QC/U )]S – FC where: SP = Unit selling price VC = Variable cost per unit S = Sales in units FC = Total fixed costs

Break-Even Analysis (cont’d)
Graphic Approach Graphing total revenue and total costs. The intersection of these two lines (that is, where total revenues are equal to the total costs) is the firm’s break-even point. Two additional costs—variable costs and fixed costs—also may be plotted. Handling Questionable Costs Certain costs can behave as either fixed or variable costs at different levels of output: 0=(SP-VC)S-FC-QC or 0=[SP-VC-(QC/U)]S-FC

Figure 11.2 Dynamic Manufacturing: Fixed-Cost Assumption

Figure 11.3 Dynamic Manufacturing: Variable-Cost Assumption

Ratio Analysis Ratios are useful for: Vertical Analysis
Anticipating conditions and as a starting point for planning actions. Showing relationships among financial statement accounts. Vertical Analysis The application of ratio analysis to identify financial strengths and weaknesses. Horizontal Analysis Looks at financial statements and ratios over time for positive and negative trends.

Table 11.12 Financial Ratios
Source: Kenneth M. Macur and Lyal Gustafson, “Financial Statements as a Management Tool,” Small Business Forum (Fall 1992): 24.

Table 11.12 Financial Ratios (cont’d)
Source: Kenneth M. Macur and Lyal Gustafson, “Financial Statements as a Management Tool,” Small Business Forum (Fall 1992): 24.

Key Terms and Concepts accounts payable accounts receivable
administrative expenses balance sheet break-even analysis budget capital budgeting cash cash-flow budget cash-flow statement contribution margin approach expenses financial expense fixed assets fixed cost horizontal analysis income statement internal rate of return (IRR) method inventory liabilities loan payable long-term liabilities

Key Terms and Concepts (cont’d)
mixed cost net income net present value (NPV) method notes payable operating budget operating expenses owners’ equity payback method prepaid expenses pro forma statement ratios retained earnings revenues sales forecast short-term liabilities (current liabilities) simple linear regression taxes payable variable cost vertical analysis

CHAPTER # 12 Introduction to Entrepreneurship, 8e Donald F. Kuratko Business Plan Preparation for New Ventures

Chapter Objectives To define a business plan and demonstrate its value
To explore the planning pitfalls that plague many new ventures To describe the benefits of a business plan To set forth the viewpoints of those who read a business plan To emphasize the importance of coordinating the business plan segments To review key recommendations by venture capital experts regarding a plan

To present a complete outline of an effective business plan To present some helpful hints for writing an effective business plan To highlight points to remember in the presentation of a business plan

The Importance of Planning
Planning is essential to the success of any undertaking. Critical factors that must be addressed when planning are: Realistic goals. These must be specific, measurable, and set within time parameters. Commitment. The venture must be supported by all involved—family, partners, employees, team members. Milestones. Subgoals must be set for continual and timely evaluation of progress. Flexibility. Obstacles must be anticipated, and alternative strategies must be formulated.

Pitfalls to Avoid in Planning
Pitfall 1: No Realistic Goals Pitfall 2: Failure to Anticipate Roadblocks Pitfall 3: No Commitment or Dedication Pitfall 4: Lack of Demonstrated Experience (Business or Technical) Pitfall 5: No Market Niche (Segment)

What is a Business Plan? A written document that details the proposed venture: Describes the current status, expected needs, and projected results of the new business. Covers the project, marketing, research and development, manufacturing, management, critical risks, financing, and milestones or a timetable. Demonstrates a clear picture of what that venture is, where it is projected to go, and how the entrepreneur proposes it will get there—a roadmap for a successful enterprise.

Benefits of a Business Plan
For the Entrepreneur: The time, effort, research, and discipline required to create a formal business plan forces the entrepreneur to view operating strategies and expected results critically and objectively. For Outside Evaluators: The business plan provides a tool for use in communications with outside financial sources.

Benefits of the Business Plan (cont’d)
Specifically for the Financial Sources: Details the market potential and plans for securing a share of that market. Shows how the venture’s intends to service debt or provide an adequate return on equity. Identifies critical risks and crucial events with a discussion of contingency plans. Contains the necessary information for a thorough business and financial evaluation.

Developing a Well-Conceived Business Plan
The Five-Minute Reading Determine the characteristics of the venture and its industry. Determine the financial structure of the plan (amount of debt or equity investment required). Read the latest balance sheet (to determine liquidity, net worth, and debt/equity). Determine the quality of entrepreneurs in the venture (sometimes the most important step). Establish the unique feature in this venture (find out what is different). Read the entire plan over lightly (this is when the entire package is paged through for a casual look at graphs, charts, exhibits, and other plan components).

Putting the Package Together
Appearance Length The cover and title page The executive summary The table of contents

Guidelines to Remember
Keep the plan respectably short Organize and package the plan appropriately Orient the plan toward the future Avoid exaggeration Highlight critical risks Give evidence of an effective entrepreneurial team Do not over-diversify Identify the target market Keep the plan written in the third person Capture the reader’s interest

Questions to Be Answered
Is your plan organized so key facts leap out at the reader? Is your product/service and business mission clear and simple? Are you focused on the right things? Who is your customer? Why will customers buy? How much better is your product/service? Do you have a competitive advantage? Do you have a favorable cost structure? Can the management team build a business? How much money do you need? How does your investor get a cash return?

Table 12.1 Common Business Plan Phrases: Statement versus Reality
We conservatively project . . . We read a book that said we had to be a $50 million company in five years, and we reverse-engineered the numbers. We took our best guess and divided by 2. We accidentally divided by 0.5. We project a 10 percent margin. We did not modify any of the assumptions in the business plan template that we downloaded from the Internet. The project is 98 percent complete. To complete the remaining 2 percent will take as long as it took to create the initial 98 percent but will cost twice as much. Our business model is proven . . . . . . if you take the evidence from the past week for the best of our 50 locations and extrapolate it for all the others. We have a six-month lead. We tried not to find out how many other people have a six-month lead. We need only a 10 percent market share. So do the other 50 entrants getting funded. Customers are clamoring for our product. We have not yet asked them to pay for it. Also, all of our current customers are relatives. We are the low-cost producer. We have not produced anything yet, but we are confident that we will be able to. We have no competition. Only IBM, Microsoft, Netscape, and Sun have announced plans to enter the business. Our management team has a great deal of experience . . . . . . consuming the product or service. A select group of investors is considering the plan. We mailed a copy of the plan to everyone in Pratt’s Guide. We seek a value-added investor. We are looking for a passive, dumb-as-rocks investor. If you invest on our terms, you will earn a 68 percent internal rate of return. If everything that could ever conceivably go right does go right, you might get your money back. Source: Reprinted by permission of Harvard Business Review. Adapted from William A. Sahlman, “How to Write a Great Business Plan,” (July–August 1997): 106. Copyright © 1997 by the Harvard Business School Publishing Corporation; all rights reserved.

Elements of a Business Plan
Section I: Executive Summary Section II: Business Description General description of business Industry background Goals and potential of the business and milestones (if any) Uniqueness of product or service Section III: Marketing Research and analysis Target market (customers) identified Market size and trends Competition Estimated market share Source: Donald F. Kuratko and Robert C. McDonald, The Entrepreneurial Planning Guide (Bloomington: Kelley School of Business, Indiana University, 2007).

Elements of a Business Plan (cont’d)
Section III: Marketing (cont’d) Marketing plan Market strategy—sales and distribution Pricing policy Advertising and promotions plans Section IV: Operations Identify location Advantages Zoning Taxes Proximity to suppliers Access to transportation Source: Donald F. Kuratko and Robert C. McDonald, The Entrepreneurial Planning Guide (Bloomington: Kelley School of Business, Indiana University, 2007).

Section V: Management Management team—key personnel Legal structure—stock and employment agreements, and ownership Board of directors, advisors, and consultants Section VI: Financial Financial forecast (pro forma financial statements) Profit and loss Cash flow Break-even analysis Cost controls Budgeting plans Source: Donald F. Kuratko and Robert C. McDonald, The Entrepreneurial Planning Guide (Bloomington: Kelley School of Business, Indiana University, 2007).

Section VII: Critical Risks Potential problems Obstacles and risks Alternative courses of action Section VIII: Harvest Strategy Transfer of asset Continuity of business strategy Identity of successor Section IX: Milestone Schedule Timing and objectives Deadlines and milestones Relationship of events Section X: Appendix or Bibliography Source: Donald F. Kuratko and Robert C. McDonald, The Entrepreneurial Planning Guide (Bloomington: Kelley School of Business, Indiana University, 2007).

Updating the Business Plan
Financial Changes Changes in the Market Additional Financing Launch of a New Product or Service New Management Team Reflect the New Reality Reasons to Update the Plan

Presentation of the Business Plan: The Pitch
Know the outline thoroughly. Use key words that help recall examples, visual aids, or other details. Rehearse the presentation to get the feel of its length. Be familiar with any equipment to be used in the presentation—use your own laptop. The day before, practice the complete presentation using all visual aids and equipment.

Suggestions for Presentation
Focus on the pain for which your venture will be the solution. Demonstrate the reachable market. Explain the business model. Tout the management team. Explain your metrics. Motivate the audience. Why you and why now?

Key Terms and Concepts business model business plan elevator pitch
five-minute reading management team market niche marketing segment marketing strategy metrics milestone schedule segment pain reachable market

CHAPTER # 13 Introduction to Entrepreneurship, 8e Donald F. Kuratko Strategic Growth In Entrepreneurship

Chapter Objectives To introduce the importance of strategic planning for an entrepreneurial venture To discuss some of the reasons entrepreneurs do not carry out strategic planning To relate some of the benefits of strategic planning To discuss the five stages of a typical venture life cycle: development, start-up, growth, stabilization, and innovation or decline To explore the elements involved with an entrepreneurial firm

To examine the transition that occurs in the movement from an entrepreneurial style to a managerial approach To identify the key factors that play a major role during the growth stage To discuss the complex management of paradox and contradiction To introduce the steps useful for breaking through the growth wall To identify the unique managerial concerns with growth businesses

The Nature of Planning in Emerging Firms
Most entrepreneurs’ planning for their ventures is informal and unsystematic. The need for formal, systematic planning arises when: The firm is expanding with constantly increasing personnel size and market operations A high degree of uncertainty exists There is strong competition There is a lack of adequate experience, either technological or business

Strategic Planning Strategic Planning
The formulation of long-range plans for the effective management of environmental opportunities and threats in light of a venture’s strengths and weaknesses. Includes: Defining the venture’s mission Specifying achievable objectives Developing strategies Setting policy guidelines

Strategic Planning (cont’d)
Basic Steps in Strategic Planning: Examine the internal and external environments of the venture (strengths, weaknesses, opportunities, threats). Formulate the venture’s long-range and short-range strategies (mission, objectives, strategies, policies). Implement the strategic plan (programs, budgets, procedures). Evaluate the performance of the strategy. Take follow-up action through continuous feedback.

Figure 13.1 The Strategic Management Process
Source: Michael A. Hitt, R. Duane Ireland, and Robert E. Hoskisson, Strategic Management: Competitiveness & Globalization, 8th ed. (Mason, OH: South-Western Publishing, 2009), 5. Reprinted with permission of South-Western, a division of Thomson Learning:

Key Dimensions Influencing a Firm’s Strategic Planning Activities
Demand on strategic managers’ time Decision-making speed Problems of internal politics Environmental uncertainty The entrepreneur’s vision Step 1: Commitment to an open planning process. Step 2: Accountability to a corporate conscience. Step 3: Establishment of a pattern of subordinate participation in the development of the strategic plan.

The Lack of Strategic Planning
Reasons for the Lack of Strategic Planning Time scarcity Lack of knowledge Lack of expertise/skills Lack of trust and openness Perception of high cost

The Value of Strategic Planning
Findings of Strategic Planning Studies Strategic planning is of value to a venture and that planning influences a venture’s survival. Benefits of Long-Range Planning Cost savings More efficient resource allocation Improved competitive position More timely information More accurate forecasts Reduced feelings of uncertainty Faster decision making Fewer cash-flow problems

Strategic Planning Levels (cont’d)
Strategic Planning Categories (Rue and Ibrahim) Category I: No written plan Category II: Moderately sophisticated planning Category III: Sophisticated planning Results: More than 88% of firms with Category II or III planning performed at or above the industry average compared with only 40% of firms with Category I planning. All research indicates: Firms that engage in strategic planning are more effective than those that do not. The planning process, rather than merely the plans, is a key to successful performance.

Fatal Visions in Strategic Planning
Fatal mistakes that entrepreneurs fall prey to in their attempt to implement a strategy: Fatal Vision #1: Misunderstanding industry attractiveness Fatal Vision #2: No real competitive advantage Fatal Vision #3: Pursuing an unattainable competitive position Fatal Vision #4: Compromising strategy for growth Fatal Vision #5: Failure to explicitly communicate the venture’s strategy to employees

Figure 13.2 The Integration of Entrepreneurial and Strategic Actions
Source: R. Duane Ireland, Michael A. Hitt, S. Michael Camp, and Donald L. Sexton, “Integrating Entrepreneurship and Strategic Management Actions to Create Firm Wealth,” Academy of Management Executive 15(1) (February 2001): 51.

Strategic Positioning: The Entrepreneurial Edge
Strategic Positions Are often not obvious, and finding them requires creativity and insight. Are unique positions that have been available but simply overlooked by established competitors. Can help entrepreneurial ventures prosper by occupying a position that a competitor once held but has ceded through years of imitation and straddling.

Table 13.1 Strategic Approaches: Position, Leverage, Opportunities
Strategic Logic Establish position Leverage resources Pursue opportunities Strategic Steps Identify an attractive market Locate a defensible position Fortify and defend Establish a vision Build resources Leverage across markets Jump into the confusion Keep moving Seize opportunities Finish strong Strategic Question Where should we be? What should we be? How should we proceed? Source Of Advantage Unique, valuable position with tightly integrated activity system Unique, valuable, inimitable resources Key processes and unique simple rules Works Best In Slowly changing, well-structured markets Moderately changing, well-structured markets Rapidly changing, ambiguous markets Duration Of Advantage Sustained Unpredictable Risk It will be too difficult to alter position as conditions change Company will be too slow to build new resources as conditions change Managers will be too tentative in executing on promising opportunities Performance Goal Profitability Long-term dominance Growth Source: Reprinted by permission of Harvard Business Review from “Strategy as Simple Rules,” by Kathleen M. Eisenhardt and Donald N. Sull (January 2001): 109. Copyright © 2001 by the Harvard Business School Publishing Corporation; all rights reserved.

Figure 13.3 The Entrepreneurial Strategy Matrix: Independent Variables
Source: Matthew C. Sonfield and Robert N. Lussier, “The Entrepreneurial Strategic Matrix: A Model for New and Ongoing Ventures.” Reprinted with permission from Business Horizons, May/June 1997, by the trustees at Indiana University, Kelley School of Business.

Figure 13.4 The Entrepreneurial Strategy Matrix: Appropriate Strategies
Source: Matthew C. Sonfield and Robert N. Lussier, “The Entrepreneurial Strategic Matrix: A Model for New and Ongoing Ventures.” Reprinted with permission from Business Horizons, May/June 1997, by the trustees at Indiana University, Kelley School of Business.

Venture Development Stages
Life-Cycle Stages of an Enterprise (Chandler) Initial expansion and accumulation of resources Rationalization of the use of resources Expansion into new markets to assure the continued use of resources Development of new structures to ensure continuing mobilization of resources

Figure 13.5 A Venture’s Typical Life Cycle

The Entrepreneurial Company in the Twenty-First Century
Major Challenges: Building dynamic capabilities that are differentiated from those of emerging competitors Internal—utilization of the creativity and knowledge from employees External—the search for external competencies to complement the firm’s existing capabilities.

Figure 13.6 The Entrepreneurial Mindset

Table 13.2 The Managerial versus the Entrepreneurial Mind-Set
Managerial Mind-Set Entrepreneurial Mind-Set Decision-making assumptions The past is the best predictor of the future. Most business decisions can be quantified. A new idea or an insight from a unique experience is likely to provide the best estimate of emerging trends. Values The best decisions are those based on quantitative analyses. Rigorous analyses are highly valued for making critical decisions. New insights and real-world experiences are more highly valued than results based on historical data. Beliefs Law of large numbers: Chaos and uncertainty can be resolved by systematically analyzing the right data. Law of small numbers: A single incident or several isolated incidents quickly become pivotal for making decisions regarding future trends. Approach to problems Problems represent an unfortunate turn of events that threaten financial projections. Problems must be resolved with substantiated analyses. Problems represent an opportunity to detect emerging changes and possibly new business opportunities. Source: Mike Wright, Robert E. Hoskisson, and Lowell W. Busenitz, “Firm Rebirth: Buyouts as Facilitators of Strategic Growth and Entrepreneurship,” Academy of Management Executive 15(1): 114.

Building the Adaptive Firm
An Adaptive Firm One that Increases opportunity for its employees, initiates change, and instills a desire to be innovative. How to remain adaptive and innovative: Share the entrepreneur’s vision Increase the perception of opportunity Institutionalize change as the venture’s goal Instill the desire to be innovative: A reward system An environment that allows for failure Flexible operations The development of venture teams

The Transition from an Entrepreneurial Style to a Managerial Approach
Impediments to Transition: A highly centralized decision-making system An overdependence on one or two key individuals, An inadequate repertoire of managerial skills and training A paternalistic atmosphere

Table 13.3 The Entrepreneurial Culture versus the Administrative Culture
Entrepreneurial Focus Administrative Focus Characteristics Pressures Strategic Orientation Driven by perception of opportunity Diminishing opportunities Rapidly changing technology, consumer economics, social values, and political rules Planning systems and cycles Social contracts Performance measurement criteria Commitment to Seize Opportunities Revolutionary, with short duration Action orientation Narrow decision windows Acceptance of reasonable risks Few decision constituencies Evolutionary, with long duration Acknowledgement of multiple constituencies Negotiation about strategic course Risk reduction Coordination with existing resource base Commitment of Resources Many stages, with minimal exposure at each stage Lack of predictable resource needs Lack of control over the environment Social demands for appropriate use of resources Foreign competition Demands for more efficient use A single stage, with complete commitment out of decision Need to reduce risk Incentive compensation Turnover in managers Capital budgeting systems Formal planning systems Control of Resources Episodic use or rent of required resources Increased resource specialization Long resource life compared with need Risk of obsolescence Risk inherent in the identified opportunity Inflexibility of permanent commitment to resources Ownership or employment of required resources Power, status, and financial rewards Coordination of activity Efficiency measures Inertia and cost of change Industry structures Management Structure Flat, with multiple informal networks Coordination of key noncontrolled resources Challenge to hierarchy Employees’ desire for independence Hierarchy Need for clearly defined authority and responsibility Organizational culture Reward systems Management theory Source: Reprinted by permission of the Harvard Business Review. An exhibit from “The Heart of Entrepreneurship,” by Howard H. Stevenson and David E. Gumpert, March/April 1985, 89. Copyright © 1985 by the President and Fellows of Harvard College; all rights reserved.

Balancing the Focus—Entrepreneurial versus Manager (Stevenson and Gumpert)
The Entrepreneur’s Point of View Where is the opportunity? How do I capitalize on it? What resources do I need? How do I gain control over them? What structure is best? The Administrative Point of View What resources do I control? What structure determines our organization’s relationship to its market? How can I minimize the impact of others on my ability to perform? What opportunity is appropriate?

Understanding the Growth Stage
Key Factors During the Growth Stage Control Does the control system imply trust? Does the resource allocation system imply trust? Is it easier to ask permission than to ask forgiveness? Responsibility Creating a sense of responsibility that establishes flexibility, innovation, and a supportive environment. Tolerance of failure Moral failure Personal failure Uncontrollable failure Change

Understanding the Growth Stage (cont’d)
Managing Paradox and Contradiction Bureaucratization versus decentralization Environment versus strategy Strategic emphases: Quality versus cost versus innovation

Confronting the Growth Wall
Successful growth-oriented firms have exhibited consistent themes: The entrepreneur is able to envision and anticipate the firm as a larger entity. The team needed for tomorrow is hired and developed today. The original core vision of the firm is constantly and zealously reinforced. “Big-company” processes are introduced gradually as supplements to, rather than replacements for, existing approaches. Hierarchy is minimized. Employees hold a financial stake in the firm.

Unique Managerial Concerns of Growing Ventures
Distinction of Small Size One-Person-Band Syndrome Continuous Learning Growing Venture Time Management Community Pressures

The International Environment: Global Opportunities
Global Entrepreneurs Rely on global networks for resources, design, and distribution. Are adept at recognizing opportunities that require agility, certainty, and ingenuity with a global perspective. Must be global thinkers in order to design and adopt strategies for different countries.

Figure 13.7 Share of the World Population Engaged in Entrepreneurship
Source: Niels Bosma, Kent Jones, Erkko Autio, and Jonathan Levie, Global Entrepreneurship Monitor (Babson College, Babson Park, MA, and London Business School, London, 2007).

Achieving Entrepreneurial Leadership in the New Millennium
Arises when an entrepreneur attempts to manage the fast- paced, growth oriented company. Components of Entrepreneurial Leadership Determining the firm’s purpose or vision. Exploiting and maintaining the core competencies. Developing human capital. Sustaining an effective organizational culture. Emphasizing ethical practices. Establishing balanced organizational controls.

Table 13.4 Strategic, Visionary, and Managerial Leadership
STRATEGIC LEADERS synergistic combination of managerial and visionary leadership emphasis on ethical behavior and value-based decisions oversee operating (day-to-day) and strategic (long-term) responsibilities formulate and implement strategies for immediate impact and preservation of long-term goals to enhance organizational survival, growth, and long-term viability have strong, positive expectations of the performance they expect from their superiors, peers, subordinates, and themselves use strategic controls and financial controls, with emphasis on strategic controls use, and interchange, tacit and explicit knowledge on individual and organizational levels use linear and nonlinear thinking patterns believe in strategic choice, that is, their choices make a difference in their organizations and environment

Table 13.4 Strategic, Visionary, and Managerial Leadership
Visionary Leaders Managerial Leaders are proactive, shape ideas, change the way people think about what is desirable, possible, and necessary are reactive; adopt passive attitudes toward goals; goals arise out of necessities, not desires and dreams; goals based on past work to develop choices, fresh approaches to long standing problems; work from high-risk positions view work as an enabling process involving some combination of ideas and people interacting to establish strategies are concerned with ideas; relate to people in intuitive and empathetic ways relate to people according to their roles in the decision-making process feel separate from their environment; work in, but do not belong to, organizations; sense of who they are does not depend on work see themselves as conservators and regulators of existing order; sense of who they are depends on their role in organization influence attitudes and opinions of others within the organization influence actions and decisions of those with whom they work concerned with insuring future of organization, especially through development and management of people involved in situations and contexts characteristic of day-to-day activities more embedded in complexity, ambiguity, and information overload; engage in multifunctional, integrative tasks concerned with, and more comfortable in, functional areas of responsibilities know less than their functional area experts expert in their functional area more likely to make decisions based on values less likely to make value-based decisions more willing to invest in innovation, human capital, and creating and maintaining an effective culture to ensure long-term viability engage in, and support, short-term, least-cost behavior to enhance financial performance figures focus on tacit knowledge and develop strategies as communal forms of tacit knowledge that promote enactment of a vision focus on managing the exchange and combination of explicit knowledge and ensuring compliance to standard operating procedures utilize nonlinear thinking utilize linear thinking believe in strategic choice, that is, their choices make a difference in their organizations and environment believe in determinism, that is, the choices they make are determined by their internal and external environments Source: W. Glenn Rowe, “Creating Wealth in Organizations: The Role of Strategic Leadership,” Academy of Management Executive 15(1) (2001): 82.

Key Terms and Concepts adaptive firm entrepreneurial leadership
entrepreneurial strategy matrix global entrepreneur growth stage growth wall innovation lack of expertise/skills lack of knowledge lack of trust and openness life-cycle stages moral failure new-venture development one-person-band syndrome perception of high cost personal failure stabilization stage start-up activities strategic planning strategic positioning SWOT analysis time scarcity uncontrollable failure

CHAPTER # 14 Introduction to Entrepreneurship, 8e Donald F. Kuratko The Valuation Challenge Entrepreneurship

Chapter Objectives To explain the importance of valuation
To describe the basic elements of due diligence To examine the underlying issues involved in the acquisition process To outline the various aspects of analyzing a business To present the major points to consider when establishing a firm’s value To highlight the available methods of valuing a venture

Chapter Objectives To examine the three principal methods currently used in business valuations To consider additional factors affecting a venture’s valuation

The Importance of Business Valuation
Business valuation is essential when: Buying or selling a business, division, or major asset Establishing an employee stock option plan (ESOP) or profit-sharing plan for employees Raising growth capital through stock warrants or convertible loans Determining inheritance tax liability (potential estate tax liability) Giving a gift of stock to family members Structuring a buy/sell agreement with stockholders Attempting to buy out a partner Going public with the company or privately placing the stock

Underlying Issues When Acquiring a Venture
Reasons for the Acquisition Differing Goals of Buyer and Seller Emotional Bias of the Seller Valuation of the Venture

Reasons for an Acquisition
To gain access to new products or expand the existing product line To increase the number of customers and market share To integrate vertically, backward or forward to improve supply and distribution channels and to reduce inventory levels To develop or improve customer service functions To reduce indirect and direct operating costs and fixed costs by using excess production and service capacities and by eliminating duplicated operations

Evaluation of an Acquisition
A firm’s potential to pay for itself during a reasonable period of time The difficulties that the new owners will face during the transition period The amount of security or risk involved in the transaction; changes in interest rates The effect on the firm’s value if a turnaround is required The number of potential buyers Current managers’ intentions to remain with the firm The taxes associated with the purchase or sale of the enterprise

Due Diligence Questions
Why is this business being sold? What is the physical condition of the business? How many key personnel will remain? What is the degree of competition? What are the conditions of the lease? Do any liens against the business exist? Will the owner sign a covenant not to compete? Are any special licenses required? What are the future trends of the business? How much capital is needed to buy?

Figure 14.1 Total Amount Needed to Buy a Business
NOTE: Money for living and business expenses for at least three months should be set aside in a bank savings account and not used for any other purpose. This is a cushion to help get through the start-up period with a minimum of worry. If expense money for a longer period can be provided, it will add to peace of mind and help the buyer concentrate on building the business.

Analyzing the Business
Many closely held ventures have the following shortcomings: Lack of management depth Undercapitalization Insufficient controls Divergent goals

Establishing A Firm’s Value
Valuation Methods Adjusted Tangible Book Value Computing a firm’s net worth as the difference between total assets and total liabilities; adjusting the value of assets to reflect their true economic worth such as balance sheet and income statement adjustments that include: bad debt reserves low-interest, long-term debt securities investments in affiliates loans and advances to officers, employees, or other companies

Establishing A Firm’s Value (cont’d)
Valuation Methods (cont’d) Price/Earnings Ratio (Multiple of Earnings) Method Useful in valuing publicly held corporations. Valuation is determined by dividing the market price of the common stock by the earnings per share. Major drawbacks: The stock of a private company is not publicly traded. The stated net income of a private company may not truly reflect its actual earning power. The sale of a large controlling block of stock of closely held business can command a premium. It is very difficult to find a truly comparable publicly held company, even in the same industry.

Establishing A Firm’s Value
Valuation Methods (cont’d) Discounted Earnings Method The firm’s discounted cash flows are dollars earned in the future (based on projections) that worth less than dollars earned today (due to the loss of purchasing power). With this in mind, the “timing” of projected income or cash flows is a critical factor. The process of discounting cash flows: Expected cash flow is estimated. An appropriate discount rate is determined. A reasonable life expectancy of the firm is determined. The firm’s value is determined by discounting the estimated cash flow by the appropriate discount rate over the expected life of the business.

Term Sheets in Venture Valuation
Outlines the material terms and conditions of a venture agreement and guides legal counsel in the preparation of a proposed final agreement. Are very similar to letters of intent (LOI) in that they are both preliminary, mostly nonbinding documents meant to record two or more parties’ intentions to enter into a future agreement based on specified (but incomplete or preliminary) terms.

Figure 14.2 The Pricing Formula
Step 1. Determine the adjusted tangible net worth of the business (the total market value of all current and long-term assets less liabilities). Step 2. Estimate how much the buyer could earn annually with an amount equal to the value of the tangible net worth invested elsewhere. Step 3. Add to this a salary normal for an owner/operator of the business. This combined figure provides a reasonable estimate of the income the buyer can earn elsewhere with the investment and effort involved in working in the business. Step 4. Determine the average annual net earnings of the business (net profit before subtracting owner’s salary) over the past few years. Step 5. Subtract the total of earning power (2) and reasonable salary (3) from this average net earnings figure (4). This gives the extra earning power of the business. Step 6. Use this extra earnings figure to estimate the value of the intangibles. This is done by multiplying the extra earnings by what is termed the “years-of-profit” figure. Step 7. Final price equals adjusted tangible net worth plus value of intangibles (extra earnings times “years of profit”). Source: Reprinted with permission from Bank of America NT&SA, “How to Buy and Sell a Business or Franchise,” Small Business Reporter, copyright ©1987, 17.

Figure 14.2 The Pricing Formula (cont’d)
In example A, the seller receives a value for goodwill because the business is moderately well established and earning more than the buyer could earn elsewhere with similar risks and effort. In example B, the seller receives no value for goodwill because the business, even though it may have existed for a considerable time, is not earning as much as the buyer could through outside investment and effort. In fact, the buyer may feel that even an investment of $100,000—the current appraised value of net assets—is too much because it cannot earn sufficient return. a This is an arbitrary figure, used for illustration. A reasonable figure depends on the stability and relative risks of the business and the investment picture generally. The rate of return should be similar to that which could be earned elsewhere with the same approximate risk. Source: Reprinted with permission from Bank of America NT&SA, “How to Buy and Sell a Business or Franchise,” Small Business Reporter, copyright ©1987, 17.

Terms in Letters of Intent (LOI)
Price/Valuation Fully Diluted Ownership Type of Security Convertible preferred stock Liquidation Preference Dividend Preference Cumulative Noncumulative and discretionary Redemption Preferred Optional Mandatory Conversion Rights Antidilution Protection Price protection Ratchet protection Weighted average protection Voting Rights Right of First Refusal Co-Sale Right Registration Rights Piggyback rights Demand rights Vesting on Founders’ Stock

Other Factors to Consider
Additional factors that may influence the final valuation of the venture: Avoiding start-up costs Buyers are willing to pay more than the evaluated price for an existing firm to avoid start- up costs. Accuracy of projections The sales and earnings of a venture are always projected on the basis of historical financial and economic data. Control factor The degree of control an owner legally has over the firm can affect its valuation; more control, more value.

Key Terms and Concepts adjusted tangible book value
anti-dilution protection business valuation control factor discounted earnings method divergent goals due diligence emotional bias fully diluted letter of intent (LOI) liquidation preference price/earnings ratio (P/E) term sheet undercapitalization

CHAPTER # 15 Introduction to Entrepreneurship, 8e Donald F. Kuratko The Final Harvest of a New Venture

Chapter Objectives To present the concept of “harvest” as a plan for the future. To examine the key factors in the management succession of a venture. To identify and describe some of the most important sources of succession To discuss the potential impact of recent legislation on family business succession To relate the ways to develop a succession strategy

To examine the specifics of an IPO as a potential harvest strategy To present “selling out” as a final alternative in the harvest strategy

Harvesting the Venture: A Focus on the Future
Harvest Plan Defines how and when the owners and investors will realize an actual cash return on their investment. Reasons for Harvesting To maintain managerial control and succession for successful continued operations. To initiate a “liquidity event” that will generate a significant amount of cash for the investors. An IPO (initial public offering) has become a reality. Most realistic opportunity is sale of the business.

Advantages and Disadvantages of Family Controlled Firms
Long-term orientation Greater independence of action Family culture as a source of pride Greater resilience in hard times Less bureaucratic and impersonal Financial benefits Knowing the business Disadvantages Less access to capital markets may curtail growth Confusing organization Nepotism Spoiled-kid syndrome Paternalistic/autocratic rule Financial strain Succession dramas

The Management Succession Strategy
Is the transition of managerial decision making Is one of the greatest challenges confronting owners and entrepreneurs in privately held businesses. Research on private firms shows: Many go out of existence after 10 years; only 3 out of 10 survive into a second generation. Only 16% make it to a third generation. Their average life expectancy is 24 years, which is also the average tenure for founders of a business.

Table 15.1 Barriers to Succession Planning in Privately Held Businesses
Founder/Owner Family Death anxiety Company as a symbol Loss of identity Concern about legacy Dilemma of choice Fiction of equality Generational envy Loss of power Death as taboo Discussion is a hostile act Fear of loss/abandonment Fear of sibling rivalry Change of spouse’s position Source: Manfred F. R. Kets de Vries, “The Dynamics of Family-Controlled Firms: The Good News and the Bad News,” Organizational Dynamics (winter 1993): 68.

Figure 15.1 Pressures and Interests in a Family Business
Inside the Family Outside the Family Family Managers Employees Inside the Business Hanging onto or getting hold of company control Selection of family members as managers Continuity of family investment and involvement Building a dynasty Rivalry Rewards for loyalty Sharing of equity, growth, and success Professionalism Bridging family transitions Stake in the company The Family Nonfamily Elements Outside the Business Income and inheritance Family conflicts and alliances Degree of involvement in the business Competition Market, product, supply, and technology influence Tax laws Regulatory agencies Source: Adapted and reprinted by permission of the Harvard Business Review. An Exhibit from “Transferring Power in the Family Business,” by Louis B. Barnes and Simon A. Hershon (July/August 1976): 106. Copyright © 1976 by the President and Fellows of Harvard College; all rights reserved.

Figure 15.2 Sustainable Family Business Model
Source: Kathryn Stafford, Karen A. Duncan, Sharon Dane, Mary Winter, “A Research Model of Sustainable Family Business,” Family Business Review (September 1999): 197–208.

Key Factors in Succession
Forcing Events Happenings that cause the replacement of the owner-manager: Death Illness Mental or psychological breakdown Abrupt departure Legal problems Severe business decline Financial difficulties Pressures and Interests inside the Firm Family members Nonfamily employees Pressures and Interests outside the Firm Nonfamily elements

Sources of Succession Major Questions: Types of Successors
Inside or outside successor? Which entry strategy will be implemented? How will power be transferred? Can the successor to gain credibility with the firm’s employees? Types of Successors Entrepreneurial successor Managerial successor Interim specialist

Table 15.2 Comparison of Entry Strategies for Succession in Family Business
Advantages Disadvantages Early Entry Strategy Intimate familiarity with the nature of the business and employees is acquired. Skills specifically required by the business are developed. Exposure to others in the business facilitates acceptance and the achievement of credibility. Strong relationships with constituents are readily established. Conflict results when the owner has difficulty with teaching or relinquishing control to the successor. Normal mistakes tend to be viewed as incompetence in the successor. Knowledge of the environment is limited, and risks of inbreeding are incurred. Delayed Entry Strategy The successor’s skills are judged with greater objectivity. The development of self-confidence and growth independent of familial influence are achieved. Outside success establishes credibility and serves as a basis for accepting the successor as a competent executive. Perspective of the business environment is broadened. Specific expertise and understanding of the organization’s key success factors and culture may be lacking. Set patterns of outside activity may conflict with those prevailing in the family firm. Resentment may result when successors are advanced ahead of long-term employees. Source: Jeffrey A. Barach, Joseph Ganitsky, James A. Carson, and Benjamin A. Doochin, “Entry of the Next Generation: Strategic Challenge for Family Firms,” Journal of Small Business Management (April 1988): 53.

Legal Restrictions Privately-held Businesses, Nepotism and Succession Practices: Succession case: Oakland Scavenger Company “Nepotistic concerns cannot supersede the nation’s paramount goal of equal economic opportunity for all.” Almost any small business can be sued by an employee of a different ethnic origin than the owner, based upon not being accorded the same treatment of a son or daughter.

Developing a Succession Strategy
Time Type of Venture Entrepreneur’s Vision Capabilities of Managers Environmental Factors Understanding the Contextual Aspects

Developing a Succession Strategy (cont’d)
Carrying Out the Succession Plan Identify a successor Groom an heir Agree on a plan Consider outside help

Identifying Successor Qualities
Sufficient knowledge of the business Fundamental honesty and capability Good health; energy, alertness, and perception Enthusiasm about the enterprise Personality compatible with the business High degree of perseverance Stability and maturity Reasonable amount of aggressiveness Thoroughness and a proper respect for detail Problem-solving ability Resourcefulness Ability to plan and organize Talent to develop people Personality of a starter and a finisher; and appropriate agreement with the owner’s philosophy about the business.

Creating a Written Succession Strategy
Types of Succession Strategies The owner controls the management continuity strategy entirely. The owner consults with selected family members. The owner works with professional advisors. The owner works with family involvement. The owner formulates buy/sell agreements at the very outset of the company, or soon thereafter, and whenever a major change occurs. The owner considers employee stock ownership plans (ESOPs). The owner sells or liquidates the business when losing enthusiasm for it but is still physically able to go on. The owner sells or liquidates after discovering a terminal illness but still has time for the orderly transfer of management or ownership.

The Exit Strategy: Liquidity Events
Entrepreneurs consider selling their venture for numerous reasons: Boredom and burnout Lack of operating and growth capital No heirs to leave the business to Desire for liquidity Aging and health problems Desire to pursue other interests

Present proposal to the board.
Table 15.3 The IPO Process Present proposal to the board. Restate financial statements and refocus the company Find an underwriter and execute a “letter of intent.” Draft prospectus. Respond to due diligence. Select a financial printer. Assemble the syndicate. Perform the road show. Prepare, revise, and print the prospectus. Price the offering. Determine the offering size. Source: Adapted from Going Public (New York: The NASDAQ Stock Market, Inc., 2005), 5–9. Accessed: April, 2008.

Table 15.4 The Registration Process
Preliminary meeting to discuss issue Form selection Initial meeting of working group Second meeting of working group Meeting of board of directors Meeting of company counsel with underwriters Meeting of working group Prefiling conference with SEC staff Additional meetings of working group Meeting with board of directors Filing registration statement with SEC Distribution of “red herring” prospectus Receipt of letter of comments Due diligence meeting Pricing amendment Notice of acceptance Statement becomes effective Source: From An Introduction to the SEC, 5th ed. by K. Fred Skousen. Copyright © Reprinted by permission of South-Western, a division of Cengage Learning.

The Initial Public Offering (IPO): Prospectus
History and nature of the company Capital structure Description of any material contracts Description of securities being registered Salaries and security holdings of major officers and directors and the price they paid for holdings Underwriting arrangements Estimate and use of net proceeds Audited financial statements Information about the competition with an estimation of the chances of the company’s survival

Annual Reports: Disclosure Requirements
Audited financial statements: balance sheets for the past 2 years and income and funds statements for the past 3 years Five years of selected financial data Management’s discussion and analysis of financial conditions and results of operations A brief description of the business Line-of-business disclosures for the past three fiscal years Directors and executive officers The market in which the firm’s securities are traded Range of market prices and dividends for each quarter of the two most recent fiscal years An offer to provide a free copy of the 10-K report

SEC-Required Forms Form S-1 Form 10-Q Form 8-K Proxy statements
Information contained in the prospectus and other additional financial data Form 10-Q Quarterly financial statements and a summary of all important events that took place during the three-month period Form 8-K A report of unscheduled material events or corporate changes filed with the SEC within 15 days after the end of a month in which a significant material event transpired Proxy statements Information given in connection with a proxy solicitation

Complete Sale of the Venture
Steps for Selling a Business Step 1: Prepare a financial analysis Step 2: Segregate assets Step 3: Value the business Step 4: Identify the appropriate timing Step 5: Publicize the offer to sell Step 6: Finalize the prospective buyers Step 7: Remain involved through the closing Step 8: Communicate after the sale

Key Terms and Concepts buy/sell agreements delayed entry strategy
early entry strategy employee stock ownership plans (ESOPs) entrepreneurial successor exit strategy forcing events harvest strategy initial public offering (IPO) liquidity event management succession managerial successor nepotism Oakland Scavenger Company

CHAPTER # 1 Introduction to Entrepreneurship, 8e Donald F

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CHAPTER # 1 Introduction to Entrepreneurship, 8e Donald F

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Presentation on theme: "CHAPTER # 1 Introduction to Entrepreneurship, 8e Donald F"— Presentation transcript:

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