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PowerPoint Presentation by Charlie Cook
The University of West Alabama
Longenecker • Moore • Petty • Palich
© 2008 Cengage Learning.
All rights reserved.
CHAPTER 3
Getting Started
Starting from Scratch or Joining an Existing BusinessPart 2
© 2008 Cengage Learning. All rights reserved. 3–2
Looking AHEAD
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.
After you have read this chapter, you should be able to:
© 2008 Cengage Learning. All rights reserved. 3–3
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. 3–4
Is an Idea a Good Investment Opportunity?
Market
Factors
Competitive
AdvantageJudging a
Business
Opportunity
Management
CapabilityEconomics
Fatal
Flaws
© 2008 Cengage Learning. All rights reserved. 3–5
Creating a New Business from Scratch
To tap into
unique
resources
that are
available
To avoid
undesirable
features of
existing
companies
To develop a
commercial
market for new
product or
service.
Wanting the
challenge of
succeeding (or
failing) on your
own
Motivations
To Start
a Business
© 2008 Cengage Learning. All rights reserved. 3–6
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. 3–7
Selected Evaluation Criteria for a Startup3-1
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. 3–8
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. 3–9
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. 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
© 2008 Cengage Learning. All rights reserved. 3–11
Types of Ideas That Develop into Startups3-2
© 2008 Cengage Learning. All rights reserved. 3–12
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. 3–13
Sources of Startup Ideas3-3
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. 3–14
Change-Based Sources of Entrepreneurial Opportunities3-4
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.
© 2008 Cengage Learning. All rights reserved. 3–15
Applying Innovative Thinking to Business Ideas
1. Borrow ideas from existing products and services or other
industries.
2. Combine two businesses into one to create a market opening.
3. Begin with a problem in mind.
4. Recognize a hot trend and ride the wave.
5. Explore ways to improve a product or service’s function.
6. Think of how to streamline a customer’s activities.
7. Adapt a product or service to meet customer needs in a different
way.
8. Imagine how the market for a product or service could be
expanded.
9. Keep an eye on new technologies.
© 2008 Cengage Learning. 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.
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. 3–17
Segments of the General Environment3-5
© 2008 Cengage Learning. All rights reserved. 3–18
Major Factors Offsetting Market Attractiveness3-6
Bargaining Power
of Buyers
Threat of Substitute
Products or Services
Bargaining Power
of Suppliers
Intensity of Rivalry Among
Existing Competitors
Threat of New
Competitors
Attractiveness and
Profitability of a
Target Market
© 2008 Cengage Learning. 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?
© 2008 Cengage Learning. All rights reserved. 3–20
Evaluating Opportunities… (cont’d)
• Inside-Out AnalysisAssessing the firm’s internal competitive potential
• ResourcesBasic inputs that a firm uses to conduct its business
Tangible resources: visible and easy to measure.
Intangible resources: invisible, difficult to quantify
• CapabilitiesIntegration of various organizational resources that
are deployed together to the firm’s advantage.
• Core CompetenciesResources and capabilities that provide a firm with a
competitive advantage over its rivals.
© 2008 Cengage Learning. 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?
© 2008 Cengage Learning. All rights reserved. 3–22
Examples of SWOT Factors3-7
© 2008 Cengage Learning. All rights reserved. 3–23
The Opportunity “Sweet Spot”3-8
© 2008 Cengage Learning. All rights reserved. 3–24
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. 3–25
Setting a Direction for the Startup3-9
© 2008 Cengage Learning. All rights reserved. 3–26
Selecting Strategies That Capture Opportunities
Cost-Based
Strategy
Focus
Strategy
Broad-Based
Strategy
Differentiation-
Based Strategy
Strategies That
Capture
Opportunities
© 2008 Cengage Learning. All rights reserved. 3–27
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. 3–28
Focus Strategies (cont’d)
• Advantages
Niche market shields from direct competition.
Allow development of unique expertise
• Disadvantages
Focus markets can quickly erode if:
1. The focus strategy is imitated.
2. The target segment is structurally unattractive.
3. The target segment’s differences from other
segments narrow.
4. New firms subsegment the industry.
© 2008 Cengage Learning. All rights reserved. 3–29
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
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