1. PowerPoint Presentation by Charlie Cook The University of West Alabama Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Part 2 Starting From Scratch or Joining an Existing Business Getting Started

2. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–23–2 Looking Ahead After studying this chapter, you should be able to: 1. Identify several factors that determine whether an idea for a new venture is a good investment opportunity. 2. Give several reasons for starting a new business from scratch rather than buying a franchise or an existing business. 3. Distinguish among the different types and sources of startup ideas. 4. Describe external and internal analyses that might shape new venture opportunities. 5. Explain broad-based strategy options and focus strategies.

3. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–33–3 Identifying Startup Ideas “Startups with products that do not serve clear and important needs cannot expect to be ‘discovered’ by enough customers to make a difference.”—Amar Bhide –Infatuation with an idea may lead to an underestimation of the difficulty of developing market receptivity and building a firm to capture the opportunity.

4. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–43–4 Is an Idea a Good Investment Opportunity? Market Factors –Is there a clearly defined market need for the product or service, and is the timing right? Competitive Advantage –Can the proposed business achieve a durable or sustainable competitive advantage? Economics –Is the venture financially rewarding, and does it have significant profit and growth potential? Management Capability –Is there a good fit between entrepreneur and opportunity? Fatal Flaws –Is there a fatal flaw that will make the venture unsuccessful?

5. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–53–5 Two Paths to Entrepreneurship Startup Creating a new business from scratch Buyout Purchasing an existing business

6. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–63–6 Reasons for Starting a New Business Developing a commercial market for a recently invented or newly developed product or service Taking advantage of available resources, ideal location, advances in equipment, employees, suppliers, and bankers Avoiding precedents, policies, procedures, and legal commitments of existing firms Wanting the challenge of succeeding or failing on your own

7. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–73–7 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?

8. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–83–8 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

9. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–93–9 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 Degree of control over: price, costs, channels of supply Barriers to entry: regulatory protection, response/lead-time advantage, legal, contacts, and networks

10. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–10 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

11. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–11 Kinds of Startup Ideas Type A –Startup ideas centered around providing customers with an existing product not available in their market Type B –Startup ideas involving new ideas, involving new technology, centered around providing customers with a new product Type C –Startup ideas centered around providing customers with an improved product

12. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–12 Exhibit 3.2 Example: Targeting the "New Age" beverage market by selling soft drinks with nutritional value New Market Type A Ideas Example: Using high-tech computers to develop a simulated helicopter ride Type B Ideas New Technology Example: Developing a personal misting device to keep workers cool Type C Ideas New Benefit Types of Ideas that Develop into Startups

13. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–13 Exhibit. 3.3 Family Business 6% Friends/Relatives 5% Personal Interest/Hobby 16% Suggestion 7% Education/Courses 6% Chance Happening 11% Other 4% Prior Work Experience 45% Sources of Startup Ideas Source: Data developed and provided by the National Federation of Independent Business Foundation and sponsored by American Express Travel Related Services Company, Inc.

14. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–14 Change-based Sources of Entrepreneurial Opportunities Exhibit 3.4

15. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–15 Change-based Sources of Entrepreneurial Opportunities Exhibit 3.4 (cont’d.)

16. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–16 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

17. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–17 Segments of the General Environment Exhibit 3.5

18. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–18 Major Factors Offsetting Market Attractive- ness Bargaining Power of Buyers Threat of Substitute Products or Services Bargaining Power of Suppliers Intensity of Rivalry Among Existing Products Threat of New Competitors Attractiveness and Profitability of a Target Market Fig 2.5 Exhibit 3.6

19. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–19 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?

20. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–20 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 and 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

21. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–21 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?

22. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–22 Examples of SWOT Factors Exhibit 3.7

23. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–23 Strategies that Capture Opportunities Broad-Based Strategy –Seeking an advantage in cost or competition Cost-Based Strategy –Requiring the firm to be the lowest-cost producer Differentiation-Based Strategy –Emphasizing the uniqueness of the firm’s product or service Focus Strategies –Targeting a specific market segment (niche) using either a cost- or a differentiation-based strategy

24. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–24 Setting a Direction for the Startup Exhibit 3.8

25. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–25 Implementation of Focus Strategies Restricting focus to a single subset of customers Emphasizing a single product or service Limiting the market to a single geographical region Concentrating on superiority of product or service

26. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–26 Disadvantages of Focus Strategies 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.

27. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–27 Important Strategic Terms 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

28. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 3–28 Key Terms competitive analysis Type A ideas Type B ideas Type C ideas serendipity general environment industry environment resources tangible resources intangible resources capabilities core competencies SWOT analysis strategy cost-based strategy differentiation-based strategy focus strategy strategic decision