CHAPTER 3 Getting Started

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

2. LookingAHEAD • 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. After you have read this chapter, you should be able to: © 2008 Cengage Learning. All rights reserved.

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. © 2008 Cengage Learning. All rights reserved.

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

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

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? © 2008 Cengage Learning. All rights reserved.

7. 3-1 Selected Evaluation Criteria for a Startup 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 © 2008 Cengage Learning. All rights reserved.

11. 3-2 Types of Ideas That Develop into Startups © 2008 Cengage Learning. All rights reserved.

12. Kinds of Startup Ideas • Type A • Are centered around providing customers with an existing product not available in their market. • Type B • Involve new ideas, involve new technology, centered around providing customers with a new product. • Type C • Are centered around providing customers with an improved product. © 2008 Cengage Learning. All rights reserved.

13. 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. 3-4 Change-Based Sources of Entrepreneurial Opportunities © 2008 Cengage Learning. All rights reserved.

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. © 2008 Cengage Learning. All rights reserved.

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. © 2008 Cengage Learning. All rights reserved.

17. 3-5 Segments of the General Environment © 2008 Cengage Learning. All rights reserved.

18. 3-6 Major Factors Offsetting Market Attractiveness Threat of New Competitors Threat of Substitute Products or Services Attractiveness and Profitability of a Target Market Intensity of Rivalry Among Existing Competitors Bargaining Power of Suppliers Bargaining Power of Buyers © 2008 Cengage Learning. All rights reserved.

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? © 2008 Cengage Learning. All rights reserved.

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. © 2008 Cengage Learning. All rights reserved.

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? © 2008 Cengage Learning. All rights reserved.

22. 3-7 Examples of SWOT Factors © 2008 Cengage Learning. All rights reserved.

23. 3-8 The Opportunity “Sweet Spot” © 2008 Cengage Learning. All rights reserved.

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. © 2008 Cengage Learning. All rights reserved.

25. 3-9 Setting a Direction for the Startup © 2008 Cengage Learning. All rights reserved.

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

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. © 2008 Cengage Learning. All rights reserved.

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. © 2008 Cengage Learning. All rights reserved.

29. 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 Key TERMS © 2008 Cengage Learning. All rights reserved.