1. CHAPTER 3 Getting Started
Part 2
Starting from Scratch or Joining an Existing Business
CHAPTER 3 Getting Started
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2. Looking AHEAD After you have read this chapter, you should be able to:
Identify several factors that determine whether an idea for a new venture is a good investment opportunity.
Give several reasons for starting a new business from scratch rather than buying a franchise or an existing business.
Distinguish among the different types and sources of startup ideas.
Describe external and internal analyses that might shape new venture opportunities.
Explain broad-based strategy options and focus strategies.
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3. Identifying Startup Ideas
Opportunity Recognition
Identification of potential new products or services that may lead to promising businesses
Entrepreneurial Alertness
Readiness to act on existing, but unnoticed, business opportunities
Good Investment Qualities
Products that serve clear and important needs
Products that customers know about
Products that customers can afford
A good idea is not the same as a good opportunity.
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4. Is an Idea a Good Investment Opportunity?
Market Factors
Fatal Flaws
Judging a Business Opportunity
Competitive Advantage
Management Capability
Economics
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5. Creating a New Business from Scratch
To develop a commercial market for new product or service.
To tap into unique resources that are available
Motivations To Start a Business
Wanting the challenge of succeeding (or failing) on your own
To avoid undesirable features of existing companies
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6. Basic Questions about Startups
What other startup types might be considered?
What are some sources for more new ideas?
How to identify a genuine opportunity that creates value, for both the company and the company’s owners?
How should the idea be refined?
What can be done to increase the chances that the business will be successful?
What competitive advantage does the business have over its rivals?
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7. Selected Evaluation Criteria for a Startup
3-1
Selected Evaluation Criteria for a Startup
ATTRACTIVENESS
Criterion
Favorable
Unfavorable
Market Factors
Need for the product
Well identified
Unfocused
Customers
Reachable; receptive
Unreachable; strong loyalty to competitor’s product or service
Value created for customers
Significant
Not significant
Market structure
Emerging industry; not highly competitive
Mature or declining industry; highly concentrated competition
Market growth rate
Growing by at least 15% a year
Growing by less than 10% a year
Competitive Advantage
Control over prices, costs, and distribution
Moderate to strong
Weak to nonexistent
Barriers to entry:
Proprietary information or regulatory protection
Have or can develop
Not possible
Response/lead time advantage
Competition slow, nonresponsive
Unable to gain an edge
Legal/contractual advantage
Proprietary or exclusive
Nonexistent
Contacts and networks
Well developed; accessible
Poorly developed; limited
Economics
Return on investment
25% or more; sustainable
Less than 15%; unpredictable
Investment requirements
Small to moderate; easily financed
Large; difficult to finance
Time required to break even or to reach positive cash flows
Under 2 years
More than 4 years
Management Capability
Management team with diverse skills and relevant experience
Solo entrepreneur with no related experience
Fatal flaws
None
One or more
Source: Adapted from Jeffrey A. Timmons and Stephen Spinelli, New Venture Creation: Entrepreneurship for the 21st Century (Boston: McGraw-Hill Irwin, 2007), pp. 128–129.
© 2008 Cengage Learning. All rights reserved.

8. Evaluation Criteria for a Startup
Marketing Factors
Need for product
Identified or unfocused
Customers
Reachable or not, brand loyal
Value created for customer
Significant or insignificant
Life of product
Recovery of cost by customer
© 2008 Cengage Learning. All rights reserved.

9. Evaluation Criteria for a Startup
Marketing Factors (cont’d)
Market structure
Emerging or mature
Market size (known or unknown?)
Market growth (how fast?)
Competitive Advantage
Cost structure
Control over price, costs, channels of supply
Barriers to entry: regulatory protection, response/ lead-time advantage, legal, contacts and networks
© 2008 Cengage Learning. All rights reserved.

10. Evaluation Criteria for a Startup
Economics
Return on investment?
Investment requirements
Break-even point
Management Capability
Diverse skills or solo entrepreneur with no related experience
Fatal Flaws
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11. Types of Ideas That Develop into Startups
3-2
Types of Ideas That Develop into Startups
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12. Kinds of Startup Ideas Type A Type B Type C
Are centered around providing customers with an existing product not available in their market.
Type B
Involve new ideas, involve new technology, centered around providing customers with a new product.
Type C
Are centered around providing customers with an improved product.
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13. Sources of Startup Ideas
3-3
Sources of Startup Ideas
Source: Data developed and provided by the National Federation of Independent Business and sponsored by the American Express Travel Related Services Company, Inc.
© 2008 Cengage Learning. All rights reserved.

14. Change-Based Sources of Entrepreneurial Opportunities
3-4
Change-Based Sources of Entrepreneurial Opportunities
Change Factor
Definition
Industry Factors
The unexpected
Unanticipated events lead to either enterprise success or failure.
The incongruous
What is expected is out of line with what will work.
Process needs
Current technology is insufficient to address an emerging challenge.
Structural change
Changes in technology, markets, etc., alter industry dynamics.
Human and Economic Factors
Demographics
Shifts in population size, age structure, ethnicity, and income distribution impact product demand.
Changes in perception
Perceptual variations determine product demand.
New knowledge
Learning opens the door to new product opportunities with commercial potential.
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15. Applying Innovative Thinking to Business Ideas
Borrow ideas from existing products and services or other industries.
Combine two businesses into one to create a market opening.
Begin with a problem in mind.
Recognize a hot trend and ride the wave.
Explore ways to improve a product or service’s function.
Think of how to streamline a customer’s activities.
Adapt a product or service to meet customer needs in a different way.
Imagine how the market for a product or service could be expanded.
Keep an eye on new technologies.
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16. Evaluating Entrepreneurial Opportunities
Outside-In Analysis
Studying the context of the venture to identify business ideas and determine which ideas qualify as opportunities.
General Environment
A broad environment, encompassing factors that influence most businesses in a society.
Industry Environment
The combined forces that directly impact a given firm and its competitors.
Competitive Environment
The environment that focuses on the strength, position, and likely moves and countermoves of competitors in an industry.
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17. Segments of the General Environment
3-5
Segments of the General Environment
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18. Major Factors Offsetting Market Attractiveness
3-6
Major Factors Offsetting Market Attractiveness
Threat of New Competitors
Threat of Substitute Products or Services
Attractiveness and Profitability of a Target Market
Intensity of Rivalry Among Existing Competitors
Bargaining Power of Suppliers
Bargaining Power of Buyers
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19. Competitor Analysis Who are the new venture’s current competitors?
What resources do they control?
What are their strengths and weaknesses?
How will they respond to the new venture’s decision to enter the industry?
How can the new venture respond?
Who else might be able to observe and exploit the same opportunity?
Are there ways to co-opt potential or actual competitors by forming alliances?
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20. Evaluating Opportunities… (cont’d)
Inside-Out Analysis
Assessing the firm’s internal competitive potential
Resources
Basic inputs that a firm uses to conduct its business
Tangible resources: visible and easy to measure.
Intangible resources: invisible, difficult to quantify
Capabilities
Integration of various organizational resources that are deployed together to the firm’s advantage.
Core Competencies
Resources and capabilities that provide a firm with a competitive advantage over its rivals.
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21. Integrating Internal and External Analyses
Strengths, Weaknesses, Opportunities, and Threats (SWOT) Analysis
A type of assessment that provides a concise overview of a firm’s strategic situation.
Helps identify opportunities that match the venture.
Seeking Competitive Insight
Will the opportunity lead to others in the future?
Will the opportunity build skills that open the door to new opportunities in the future?
Will pursuit of the opportunity be likely to lead to competitive response by potential rivals?
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22. Examples of SWOT Factors
3-7
Examples of SWOT Factors
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23. The Opportunity “Sweet Spot”
3-8
The Opportunity “Sweet Spot”
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24. Important Strategic Terms
Strategy
A plan of action that coordinates the resources and commitments of an organization to achieve superior performance.
Strategic Decision
A decision regarding the direction a firm will take in relating to its customers and competitors.
Sustainable Competitive Advantage
A value-creating industry position that is likely to endure over time.
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25. Setting a Direction for the Startup
3-9
Setting a Direction for the Startup
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26. Selecting Strategies That Capture Opportunities
Cost-Based Strategy
Focus Strategy
Broad-Based Strategy
Differentiation-Based Strategy
Strategies That Capture Opportunities
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27. Focus Strategies Focus Strategy Implementation
Restricting focus to a single subset of customers.
Emphasizing a single product or service.
Limiting the market to a single geographical region.
Concentrating on superiority of product or service.
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28. Focus Strategies (cont’d)
Advantages
Niche market shields from direct competition.
Allow development of unique expertise
Disadvantages
Focus markets can quickly erode if:
The focus strategy is imitated.
The target segment is structurally unattractive.
The target segment’s differences from other segments narrow.
New firms subsegment the industry.
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29. Key TERMS opportunity recognition entrepreneurial alertness
competitive advantage
Type A ideas
Type B ideas
Type C ideas
serendipity
general environment
industry environment
competitive environment
resources
tangible resources
intangible resources
capabilities
core competencies
SWOT analysis
strategy
cost-based strategy
differentiation-based strategy
focus strategy
strategic decision
© 2008 Cengage Learning. All rights reserved.