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«Chapter 3 Starting a Small business CHAPTER OUTLINE Spotlight: Shorts International (1 Coming Up With Startup ...»

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Chapter 3 Starting a Small business


Spotlight: Shorts International


1 Coming Up With Startup Ideas

Distinguish among the different types and sources of startup ideas Types of Startup


 Exhibit 3-1 Types of Ideas That Develop into Startups

 Type A ideas – Startup ideas centered around providing customers with an

existing product not available in their market.

 Type B ideas – Startup ideas, involving new technology, centered around providing customers with a new product.

 Type C ideas – Startup ideas centered on providing customers with an improved product.

Ask students if they know of examples of a startup (created from scratch). Ask students for businesses that fit each of these types of ideas.

 Common Sources of Startup Ideas Discuss circumstances that lead to ideas for starting a new business.

 Exhibit 3-2 Common Sources of Startup Ideas (with percentages) Ask students if they have individual ideas for possible business startups.

 Accidental Discovery such as Serendipity – A gift for making desirable discoveries by accident  Hobbies and Personal Interests – grow beyond leisure into business  Keeping An Eye On Change  Exhibit 3-3 (Drucker) Change-Based Sources of Entrepreneurial Opportunities  Industry or Enterprise Factors – The unexpected, the incongruous, process needs, structural change  External Factors – Demographics, Changes in perception, New knowledge  Change inspires innovation  Other Idea Leads  Personal contacts with potential customers and suppliers, professors, patent attorneys, former or current employees or co-workers, venture capitalists, and chambers of commerce  Visiting trade shows, production facilities, universities, and research institutes  Observing trends everywhere  Reading widely even though the materials doesn’t seem related can spark ideas  Reading articles on the creativity of entrepreneurs  Visiting the library and looking through Yellow Pages in other cities  Traveling to other states to visit entrepreneurs in your area of interest.

 Searching the Internet for information.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated or posted to a publicly accessible website, in whole or in part.

Chapter 3 Starting a Small business 2 Using Innovative Thinking to Generate Business Ideas Use innovative thinking to generate ideas for high-potential startups.

 Suggestions for Search  When it comes to ideas, borrow heavily from existing products and services or other industries  Combine two businesses into one to create a market opening  Begin with a problem in mind, or think of a “pain” that you can relieve.

 Recognize a hot trend and ride the wave  Study an existing product or service and explore ways to improve its function  Think of possibilities that would streamline a customer’s activities  Consider ways to 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  Study a product or service to see if you can make it “green.

 Keep an eye on new technologies  Be open at all times for new ways to do business and new services and products 3 Using Internal and External Analyses to Identify Business Ideas Describe external and internal analyses that might shape the selection of opportunities.

 Outside-In Analysis  General environment – the broad environment, encompassing factors that influence most businesses in a society  Economic trends - changes in the rate of inflation, interest rates, and even currency exchange rates which promote or discourage business growth  Sociocultural trends – societal currents that may affect consumer demand, opening up new markets and forcing others into decline  Political/legal trends – changes in tax law and government regulation that may pose a threat to existing companies or devastate an inventive business concept  Global trends – reflect international developments that create new opportunities to expand markets, outsource, and invest abroad  Technological trends – may spawn or wipe out new ventures  Demographic trends- population size, age structure, ethnic mix, and wage distribution  Industry environment – the combined forces that directly impact a given firm and its competitors  New competitors  Substitute products/services  Rivalry  Suppliers  Buyers  Competitive environment – the environment that focuses on the strength, position, and likely moves and counter-moves of competitors in an industry  Who would be the new venture’s current competitors?

 What unique resources do they control?

 What are their strengths and weaknesses?

 How will they respond to the new venture’s decision to enter the industry?

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated or posted to a publicly accessible website, in whole or in part.

Chapter 3 Starting a Small business  How can the new venture respond?

 Who else might see and exploit the same opportunity?

 Are there ways to co-opt potential or actual competitors by forming alliances?

 Inside-Out Analysis  Resources and Capabilities  Resources - The basic inputs that a firm uses to conduct its business  Tangible resources – Those organizational resources that are visible and easy to measure  Intangible resources – Those organizational resources that are invisible and difficult to assess  Capabilities – The integration of various organizational resources that are deployed together to the firm’s advantage  Competitive advantage – A benefit that exists when a firm has a product or service that is seen by its target market as better than those of competitors  Core Competencies  Core competencies – Those capabilities that provide a firm with a competitive edge and reflect its personality  Determining the core competencies is possible once there is an accurate view of their resources and capabilities  Integrating Internal and External Analyses  SWOT analysis – An assessment that provides a concise overview of a firm’s strategic situation that deals with Strengths, Weaknesses, Opportunities, and Threats Have students enter “SWOT Analysis” into Google and see the many possible formats SWOT analysis can take. Have them choose a format and use that format for the Case at the end of the chapter.

 Provides a succinct view of current conditions – must be repeated periodically to check conditions 4 Selecting Strategies That Capture Opportunities (Strategy – A plan of action that coordinates the resources and commitments of an organization to achieve superior performance) Explain broad-based strategy options and focus strategies. Have students define strategy.

 Broad-Based Strategy Options  Cost-Based Strategy – A plan of action that requires a firm to be the lowest-cost producer within its market  Differentiation-Based Strategy – A plan of action designed to provide a product or service with unique attributes that are valued by consumers  Focus Strategies  A plan of action that isolates an enterprise from competitors and other market forces by targeting a restricted market segment  Focus Strategy Selection and Implementation  A decision regarding the direction a firm will take in relating to its customers and competitors  Implemented by  Restricting focus to a single subset of customers © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated or posted to a publicly accessible website, in whole or in part.

Chapter 3 Starting a Small business  Emphasizing a single product or service  Limiting the market to a single geographical region  Concentrating on superiority of the product or service  Drawbacks of Focus Strategies  A firm may become too specialized  Strategy guru Michael Porter) indicates four conditions that may cause a segmented market to erode  The focus strategy is imitated  Target segment becomes structurally unattractive because the structure erodes or because demand simply disappears  Target segment’s differences from other segments narrow  New firms sub segment the industry 5 Is Your Startup Idea Feasible?

Assess the feasibility of a startup idea before writing a business plan.

 Feasibility analysis – A preliminary assessment of a business idea that gauges whether or not the venture envisioned is likely to succeed  Fatal flaw – A circumstance or development that alone could render a new business unsuccessful (see Exhibit 3-9 A Feasibility Analysis Framework)  Market Potential  Includes buyers (current or potential customers) who have the ability to pay for the product or service and sellers who compete with one another by offering identical or similar products or services to the same general group of buyers  Feasibility analysis helps identify a potential trend that can support promising startup ideas  Macro-market analysis establishes boundaries including the number of customers target for study and their overall purchasing power and habits  Micro-market analysis ties idea to market niche that appears to offer acceptable prospects for growth and a path to market entry that seems to be protected from existing competition  Industry Attractiveness  Macro-level industry analysis used to establish overall attractiveness of the industry in which the startup will be established (see questions presented in the

appendix to this chapter)

 Micro-level industry assessment focused more on the probability of a startup’s success over the long term  New Venture Leadership – A new business will only be as strong as its leader which means it is important to assess whether the entrepreneur or the entrepreneurial team can handle the job 6 Looking Forward – discussion of chapter topics for Chapters 4-13


1. Why might an entrepreneur prefer to launch an entirely new venture rather than buy an existing firm?

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated or posted to a publicly accessible website, in whole or in part.

Chapter 3 Starting a Small business There are several reasons. The entrepreneur may have a new product or service that necessitates a new business. Also, those businesses that are available for sale may be handicapped by poor locations or undesirable facilities that the entrepreneur wishes to avoid.

2. What are the three basic types of startup ideas? What are the most common sources of inspiration for startup ideas?

Type A ideas are those concerned with providing customers with a product or service that does not exist in a particular market but that exists somewhere else.

Type B ideas are those that involve new or relatively new technology. Type C ideas are those based on offering customers benefits from new and improved ways of performing old functions. Type C ideas account for the largest number of startups.

3. List the six most important trends of the general environment. Give a hypothetical example of a way in which each trend might affect a small business.

The six general trends are economic trends, sociocultural trends, political/legal trends, global trends, and technological trends. Students may indicate hypothetical examples such as a business may be affected by political trends as governmental changes occur which may cause such things as tax law to change. These affect entrepreneurial activity because they generate the discontinuities that open the doors to new business opportunities. For example, the Internet (an innovation from the technological segment) has spawned countless new small firms that offer products and services to Internet users. Hypothetical examples of trends from each segment will vary, of course, but these should illustrate the potential of discontinuities (or radical shifts) that put existing firms at a disadvantage to new rivals that see the opportunities present in that trend.

4. What are the primary factors shaping competition in an industry, according to Porter’s model? In your opinion, which of these forces will have the greatest impact on industry prices and profits?

–  –  –

Different forces dominate industry competition depending on the particular circumstances. The entry of new competitors places a limit on prices. The threat of substitutes and buyer power also influence the prices that can be charged. The bargaining power of suppliers determines the cost of raw materials. Rivalry among existing competitors influences prices and costs of competing in areas such as product development, advertising, and sales force.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated or posted to a publicly accessible website, in whole or in part.

Chapter 3 Starting a Small business The relationship between the strength of industry forces and prices/profits in the industry represents an inverse function. That is, stronger forces generally lead to lower prices/profits, while weaker forces yield higher prices/profits. Experts disagree about which force has the greatest impact on prices and profits. For example, some empirical evidence suggests that the threat of new competitors has the strongest effect, while others contend that rivalry among existing competitors is most important. Student responses to this will vary, but it is important that they understand the dynamics of the five forces well enough to see how the impact might vary.

5. How are capabilities related to tangible and intangible resources? How are these related to core competencies?

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