Entrepreneurship Successfully Launching New Ventures 6th Edition By Bruce R. Barringer, Duane Irelan

INSTRUCTORS RESOURCE MANUAL FOR ENTREPRENEURSHIP, SUCCESSFULLY LAUNCHING NEW VENTURES 6TH EDITION BY BRUCE R BARRINGER, DUANE IRELAND

TABLE OF CONTENTS

Pa rt 1

Chapter Outlines, Answers to Boxed Features Questions, Answers to End-of-Chapter Questions, Analysis of “You Be the VC” Exercises, and Cases

Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15

Introduction to Entrepreneurship Recognizing Opportunities and Generating Ideas Feasibility Analysis Developing an Effective Business Model Industry and Competitor Analysis Writing a Business Plan Preparing the Proper Ethical and Legal Foundation Assessing a New Venture‘s Financial Strength and Viability Building a New-Venture Team Getting Financing or Funding Unique Marketing Issues The Importance of Intellectual Property Preparing for and Evaluating the Challenges of Growth Strategies for Firm Growth Franchising

1 23 44 67 87 111 135 161 183 202 224 246 268 288 308

Sample Course Outlines

332

Student and Instructor Resources

336

Pa rt 2 Pa rt 3

CHAPTER 1 INTRODUCTION TO ENTREPRENEURSHIP LEARNING OBJECTIVES After studying this chapter students should be ready to: 1.

2.

3.

4.

5.

6.

7.

Describe entrepreneurship, corporate entrepreneurship, and the characteristics of entrepreneurial firms.

Discuss three main reasons people decide to become entrepreneurs.

Identify four main characteristics of successful entrepreneurs.

Explain five common myths regarding entrepreneurship.

Discuss the three types of start-up firms.

Discuss the changing demographics of entrepreneurs in the United States.

Discuss the positive effects of entrepreneurship and entrepreneurial firms on economies and societies.

8. Explain the entrepreneurial process.

9.

Learn how understanding entrepreneurship and the entrepreneurial process can facilitate your career success.

CHAPTER OVERVIEW This chapter (1) introduces the book, (2) provides an overview of the entrepreneurial process, and (3) introduces a conceptual model that shows how the entrepreneurial process typically unfolds. The model, which is shown at the top of the next page, depicts the entrepreneurial process as a 10-step process, beginning with the decision to become an entrepreneur. The chapters of the book follow the model.

We hope that this approach provides your students a nice visual way of understanding how the entrepreneurial process unfolds.

The chapter focuses on why people become entrepreneurs, the characteristics of successful entrepreneurs, the changing demographics of entrepreneurs, and the importance of entrepreneurship to the economy and society. The three boxed features, which appear in every chapter, are introduced. The chapter ends with a brief discussion of each of the major sections of the book.

The chapter, like the rest of the book, is written in an upbeat yet realistic manner.

Basic Model of the Entrepreneurial Process The Model Parallels the Chapters in the Book

CHAPTER OUTLINE

CHAPTER OUTLINE I. II. III.

IV.

V.

VI. VII.

VIII.

Introduction to Entrepreneurship What Is Entrepreneurship and Why Is It Important?

Why Do People Become Entrepreneurs?

A. Be Their Own Boss B. Pursue Their Own Ideas C. Pursue Financial Rewards Characteristics of Successful Entrepreneurs A. Passion for the Business B. Product/Customer Focus C. Tenacity Despite Failure D. Execution Intelligence Common Myths About Entrepreneurs A. Myth 1: Entrepreneurs Are Born, Not Made B. Myth 2: Entrepreneurs Are Gamblers C. Myth 3: Entrepreneurs Are Motivated Primarily by Money D. Myth 4: Entrepreneurs Should be Young and Energetic E. Myth 5: Entrepreneurs Love the Spotlight Types of Start-Up Firms Changing Demographics of Entrepreneurs A. Women Entrepreneurs B. Minority Entrepreneurs C. Senior Entrepreneurs D. Millennial Entrepreneurs The Positive Effects of Entrepreneurship and Entrepreneurial Firms A. Economic Impact of Entrepreneurial Firms B. Entrepreneurial Firms‘ Impact on Society

C. Entrepreneurial Firms‘ Impact on Larger Firms The Entrepreneurial Process A. Decision to Become an Entrepreneur (Chapter 1) B. Developing Successful Business Ideas (Chapters 2–6) C. Moving from an Idea to an Entrepreneurial Firm (Chapters 7–10) D. Managing and Growing an Entrepreneurial Firm (Chapters 11–15) Developing Skills for your Career

IX.

X.

CHAPTER NOTES I.

Introduction to Entrepreneurship  

II. 

 

There is tremendous interest in entrepreneurship around the world.

Although the highest rates of entrepreneurial startup activity occur in low-income countries, where good jobs are not plentiful, the rates are also impressive in high-income countries. According to the GEM Study, 1 out of every 8 ½ (11.9%) of American adults is actively engaged in starting a business or is the owner/manager of a business that is less than three-and-a-half years old.

What Is Entrepreneurship and Why Is It Important?

Entrepreneurship is defined as the process by which individuals pursue opportunities without regard to resources they currently control for the purpose of exploiting future goods and services.

We want to note here that established firms with an orientation toward acting entrepreneurially practice corporate entrepreneurship.

All firms fall on a conceptual continuum that ranges from highly conservative to highly entrepreneurial.

III. Why Do People Become Entrepreneurs?

A. Be Their Own Boss. Many entrepreneurs want to be their own boss because either they have had a longterm ambition to own their own business or they have become frustrated working in traditional jobs.

B. Pursue Their Own Ideas. Some people are naturally alert, and when they recognize ideas for new products or services, they have a desire to see those ideas realized.

C. Pursue Financial Rewards. People start their own firms to pursue financial rewards. This motivation, however, is typically secondary to the first two and often fails to live up to its hype.

IV. Characteristics of Successful Entrepreneurs A. Passion for the Business. The number one characteristic shared by successful entrepreneurs is passion for the business. This passion typically stems from the entrepreneur‘s belief that the business will positively influence people‘s lives.

B. Product/Customer Focus. An entrepreneur‘s keen focus on products and customers typically stems from the fact that most entrepreneurs are, at heart, craftspeople.

C. Tenacity Despite Failure. Because entrepreneurs are typically trying something new, the failure rate associated with their efforts is naturally high.

Developing a new business may require a certain degree of experimentation before a success is attained. Setbacks and failures inevitably occur during the process. The litmus test of entrepreneurs is their ability to persevere through setbacks and failures.

D. Execution Intelligence. The ability to effectively execute a business idea means developing a business model, putting together a new-venture team, raising money, managing finances, leading employees, and so on.

V.

Common Myths About Entrepreneurs A. Myth 1: Entrepreneurs Are Born, Not Made. This myth is based on the mistaken belief that some people are genetically predisposed to be an entrepreneur.

B. Myth 2: Entrepreneurs Are Gamblers. Entrepreneurs are usually moderate risk takers, as are most people.

C. Myth 3: Entrepreneurs Are Motivated Primarily by Money. It is naïve to think that entrepreneurs don‘t seek financial rewards. As discussed previously, however, money is rarely the primary reason entrepreneurs start new firms.

D. Myth 4: Entrepreneurs Should Be Young and Energetic.

Although it is important to be energetic, investors often site the strength of the entrepreneurs (in terms of business experience, skill, and talent) as their most important criterion in the decision to fund a new venture.

E. Myth 5: Entrepreneurs Love the Spotlight. While some entrepreneurs are flamboyant, the vast majority of them do not seek or attract public attention.

Typically those that are working on proprietary products or services avoid public notice.

VI.

Types of Start-Up Firms

A. Salary-Substitute Firms. Are small firms that afford their owner or owners a similar level of income to what they would earn in a conventional job.

1. Examples of salary-substitute firms are dry cleaners, convenience stores, restaurants, accounting firms, and hairstyling salons.

B. Lifestyle Firms. Provide their owner or owners the opportunity to pursue a particular lifestyle and earn a living while doing so.

1. Examples of lifestyle firms include ski instructors, golf pros, and tour guides.

C. Entrepreneurial Firms. Bring new products and services to market by creating and seizing opportunities.

1. Examples of entrepreneurial firms are Dropbox, Facebook, and Uber.

VII. Changing Demographics of Entrepreneurs A. Women Entrepreneurs. Although men are still more likely to start businesses than women, the number of women-owned businesses is increasing. According to a study commissioned by American Express and OPEN, there were 11.3 million women-owned businesses in the United States in 2016.

B. Minority Entrepreneurs. There has been a substantial increase in minority entrepreneurs in the United

States. In 2012 (the most recent stats available), there were 8 million minority-owned firms.

1. The average gross receipts for minority-owned firms was $58,119.

C. Senior Entrepreneurs. The number of seniors (those 50 years of age and older) starting businesses is substantial and growing. In 2015, 5.4 percent of new businesses were started by people 62 years and older.

D. Millennial Entrepreneurs. A desire to pursue an entrepreneurial career is high among young people.

According to a Bentley University survey, 66 percent of millennials have a desire to start their own businesses.

VIII.The Positive Effects of Entrepreneurship and Entrepreneurial Firms A. Economic Impact of Entrepreneurial Firms. For two reasons, entrepreneurial behavior has a strong impact on an economy‘s strength and stability.

1. Innovation. Innovation is the process of creating something new, which is central to the entrepreneurial process. Small innovative firms are 16 times more productive than larger innovative firms in terms of patents per employee.

2. Job creation. According to the SBA, small businesses create a substantial number of net new jobs in the United States. Firms with 500 or fewer employees created more than 7 million out of the 11 million new jobs created during the recent economic recovery.

B. Entrepreneurial Firms‘ Impact on Society. The innovations of entrepreneurial firms have a dramatic impact on society. Think of all the new products and services that make our lives easier, enhance our productivity at work, improve our health, and entertain us. Many of these products and services were conceived and brought to market by entrepreneurial firms.

C. Entrepreneurial Firms‘ Impact on Larger Firms. In addition to the impact entrepreneurial firms have on

the economy and society, entrepreneurial firms have a positive impact on the effectiveness of larger firms.

1. For example, some entrepreneurial firms are original equipment manufacturers, producing parts that go into products that larger firms manufacture and sell.

2. Thus, many exciting new products are not solely the result of the efforts of larger companies with strong brand names. They were produced with the cutting-edge component parts or research development efforts provided by entrepreneurial firms.

3. The evidence shows that many entrepreneurial firms have built their entire business models around producing products and services that help larger firms be more efficient or effective.

IX. 

The Entrepreneurial Process Figure 1.3 in the book (and reproduced earlier in this review) models the entrepreneurial process.

This process is the guide or framework we use to develop this book‘s contents.

A. Decision to Become an Entrepreneur (Chapter 1). As discussed earlier, people become entrepreneurs to be their own boss, to pursue their own ideas, and to realize financial rewards.

B. Developing Successful Business Ideas (Chapters 2–6).

Many new businesses fail not because the entrepreneur didn‘t work hard but because there was no real opportunity to begin with.

1. Developing a successful business idea includes opportunity recognition, feasibility analysis, developing an effective business model, industry and competitor analysis, and writing a business plan.

C. Moving from an Idea to an Entrepreneurial Firm (Chapters 7–10). This is a critical stage in the entrepreneurial process.

1. This section deals with preparing the proper ethical and legal foundation, assessing a new venture‘s financial strength and viability,

building a new-venture team, and getting financing or funding.

D. Managing and Growing an Entrepreneurial Firm (Chapters 11–15). Given today‘s competitive environment, all firms must be managed and growth properly maintained to ensure their ongoing success.

This is the final stage of the entrepreneurial process.

1. This section deals with unique marketing issues, the importance of intellectual property, preparing for and evaluating the challenges of growth, strategies for growth, and franchising.

X.

Developing Skills for your Career A. Whether you want to be an entrepreneur or not, the contents of this book address a number of ―employability‖ skills that are critical to have a successful career in organizations. Key among these skills are ethics and social responsibility, critical thinking, collaboration, and data literacy.

BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING Note: Each boxed feature in the textbook is followed by four questions. The questions can be used for individual or group assignments or can be used to stimulate classroom discussion. The following are suggested answers for the questions at the end of each boxed feature.

What Went Wrong?

Prim: How a Lack of Passion and Resolve Can Kill a Business 1.

Why is passion such a critical part of entrepreneurial success? Prim‘s founders were apparently passionate about building a company but not the laundry business specifically. In what ways is this combination problematic?

Answer: The number one characteristic shared by successful entrepreneurs is a passion for their business. The passion typically stems from the entrepreneur‘s belief that the business will positively influence people‘s lives. Prim‘s founder may have mistakenly developed a passion for starting a business rather than a passion for the business they started. This is problematic because once the initial

excitement of starting the business was over (and the business started experiencing challenges), the founders were left with the day-to-day grind of running the business and may have found that they weren‘t as interested in the (laundry) business as they originally thought they would be. One way to check whether one‘s passion is real is to work in the industry your firm will participate in (over an extended period of time, if possible) to see if you like it. Some franchise organizations, for example, require prospective franchisees to work in one of the company‘s franchise outlets for a period of time, just to ensure that they like the work before they become franchisees.

As illustrated throughout the book, starting a business is a rewarding yet challenging process. There will be many ups and downs. A person‘s passion for the business that he or she starts is what sustains one during the challenging periods.

2.

How could Prim‘s co-founders have better anticipated that laundry services would eventually see Prim as siphoning off their own business and be reluctant to work with them?

Answer: Students will vary in terms of their answer to this question. One thing Prim‘s co-founders could have done prior to starting the business is complete a thorough feasibility analysis. This topic is addressed in Chapter 3. By talking to laundry services in advance, the founders may have gained an awareness that their business model was not viable.

3.

Rather than employ its own drivers to pick up and deliver laundry for its customers, Prim relied on the use of third-party delivery services. In what ways do you think this approach could have limited Prim‘s growth in other markets?

Answer: Prim was not developing core competencies in the logistics of its operations. At its heart, Prim was a pick up and delivery service. It picked up its customers‘ laundry, took the laundry to a laundry service to have washed and folded, and then returned the laundry to the customer. If Prim had developed unique capabilities in performing this task, it could have extended its pick up and delivery service to other industries. Instead, Prim outsourced this service so it developed no core competencies in this

area.

4.

San Francisco, the city in which Prim launched, has several innovative laundry services. These services include LaundryLocker, where you drop your clothes in a public locker; Sfwash, a delivery service where you pay by the pound; and Sudzee, which requires special lockable bags. Spend some time studying LaundryLocker (https://laundrylocker.com), Sfwash (https://sfwash.com), and Sudzee (http://sudzee.com).

Select the service that you think has the most potential and explain the rationale for your selection. Compare the service to Prim‘s approach.

Answer: LaundryLocker‘s customers place their laundry in a locker and the customers are notified by text when the laundry is finished and returned to the locker (within two business days). Sfwash picks up your laundry (at your home or business) and returns it to the same address. The pick up and delivery times are done within agreed upon windows of time. Sudzee offers two options. It offers home pick up and return, similar to Sfwash. It also offers a service where customers can place their laundry in a large secure container in a Sudzee bag. Sudzee will notify the customer when the laundry is done. The laundry can be retrieved from the container via a secure four-digit code. Pricing seems to be similar across the companies. Sudzee seems to be the best—capturing the advantages of both Sfwash, which offers a pick up and delivery service, and LaundryLocker, which offers a dropoff and retrieval service as explained. It also beats out Prim, which offered only the pick up and delivery service.

Savvy Entrepreneurial Firm Start-Up Incubators and Accelerators: A Smart Way of Gaining Access to Mentors, Partners, Investors, and Other Critical Start-Up Resources 1.

If you were starting a new venture, do you think you would benefit from participating in a business incubator or accelerator program? If so, what do you think the primary benefits would be?

Answer: Most students will say they would benefit from participating in a business incubator or accelerator program. The obvious benefits are gaining access to mentors and advisors. Start-up incubators and accelerators are also fertile places for entrepreneurs

to meet potential co-founders, business partners, and equity investors.

2.

Find an example of a start-up incubator or accelerator at the college or university you are attending or in the town you live in or a nearby city. Describe the program. Which one of the programs mentioned in this feature does it resemble the most?

Answer: Answers will vary for this question. Many university entrepreneurship programs support a startup incubator or accelerator, as do many towns and cities. The incubators and accelerators will vary in terms of the programs and terms they offer, but the benefits are similar across locations.

3.

If you have a promising business idea, what can you do while you‘re in college to improve your chances of being admitted to a prestigious start-up incubator or accelerator program when you graduate?

Answer: Answers will vary to this question. Most students will say that involvement in the following college activities will boost their chances of being accepted into an incubator:  Coursework in entrepreneurship.  Participation in entrepreneurship-related activities, such as pitch competitions and business plan competitions, and winning awards in those activities.  Participating in a college or universitysponsored incubator.  Networking (to the extent that the student could ask several high-profile entrepreneurs or investors to write letters of support).  Make good headway on a business idea, so the student is partway down the runway prior to applying for admittance to the incubator.

4.

Make a list of the types of mentors that a participant in a start-up incubator or accelerator program might encounter.

Answer: There are a number of partnership opportunities that are likely to emerge from participating in an accelerator program. They include: 

Identifying a potential co-founder for a business.

  

Identifying potential channel partners.

Identifying potential investors.

Identifying potential advisory board members and other mentors and advisors.

Partnering for Success Partnering with College Students via Campus Ambassador and Campus Rep Programs 1.

As part of your college experience, do you think you would benefit from participating in a campus ambassador or campus rep program? Why or why not?

Answer: Most students will say they would benefit from participating in a campus ambassador or campus rep program. These are more like paid internships and so the obvious benefits are gaining access to prospective employers and gaining experience at the same time. In addition, such positions also help to defray living costs.

2.

In what ways would participating in a campus ambassador or campus rep program help you prepare to own your own business someday?

Answer: The main way is that a campus ambassador or a campus rep becomes an evangelist for the product. This helps when marketing the product of one‘s own business. It also helps in creating a network which would be useful in helping a start-up succeed.

3.

Why do you think companies such as Apple, Flex Watches, and Her Campus Media sponsor campus ambassador or campus rep programs? How do the companies benefit?

Answer: The companies benefit because they get low cost grassroots marketing. Also, when a company‘s target market is young people, this allows for peerto-peer selling. Finally, it helps these companies in their recruitment process.

4.

What types of start-ups would benefit the most from starting campus ambassador programs?

Answer: It is likely that such programs help companies that sell a product or a service to consumers and not businesses. In addition, if the target demographic is young people, these programs help in grassroots

marketing.

REVIEW QUESTIONS 1-1.

Do you anticipate that entrepreneurship will continue spreading throughout the world, or do you think its appeal will subside over time?

Answer: All indicators point to entrepreneurship continuing to spread throughout the world. The primary reasons are: (1) the downsizing of large firms, which have placed a large number of people off the job market that would rather start their own firm than work for another large firm; (2) the push for improved efficiency and effectiveness on the part of firms and individuals, which has provided entrepreneurs the opportunity to meet needs; (3) the rapid pace of change that is taking place worldwide, which provides entrepreneurs additional opportunities to meet needs; and (4) the increasing recognition that entrepreneurship is the engine that fuels economic growth and prosperity worldwide. Most students will argue that there is no reason to think the appeal of entrepreneurship will subside over time. The need to solve problems and meet unmet needs is universal worldwide.

1-2.

What key insights does the GEM study provide us about entrepreneurship?

Answer: The key insight provided by the GEM study is that entrepreneurial activity is taking place across the world. In addition, although the highest rates of entrepreneurial start-up activities occur in lowincome countries, where good jobs are not as plentiful, the rates are also impressive in highincome countries such as France, United Kingdom, and the United States. The GEM study also identifies whether its respondents are starting a new business to take advantage of an attractive opportunity or because of necessity to earn an income. The majority of people in high-income countries are drawn to entrepreneurship to take advantage of attractive opportunities. The reverse is true of people in low-income countries, who tend to be drawn to entrepreneurship primarily because of necessity.

1-3.

What does evidence show us about the rate of failure associated with entrepreneurial ventures?

Answer: One criticism of entrepreneurship, which is often repeated in the press, is that the majority of new businesses fail. It simply isn‘t true. The often used statistic that 9 out of 10 businesses fail in their first few years is an exaggeration. According to the Bureau of Labor Statistics, over half the businesses started are still in existence five years later.

1-4.

What is entrepreneurship?

Answer: The standard definition for entrepreneurship is that it‘s ―the process by which individuals pursue opportunities without regard to resources they currently control.‖ It can occur at the individual level, the team or group level, or at the corporate level. There are other definitions of entrepreneurship. Fred Wilson, a venture capitalist, defines entrepreneurship as ―the art of turning an idea into a business.‖ Both definitions focus on behaviors. In general, entrepreneurship is associated with the task of identifying opportunities and putting useful ideas into practice.

1-5.

In what ways is an entrepreneur who just launched a restaurant different from someone who just took a job as the general manager of a restaurant owned by a major restaurant chain?

Answer: Entrepreneurial firms, which are the focus of this book, bring new products and services to market by seizing opportunities. The person who just launched a restaurant is bringing a new product or service to market, and is assuming the risk associated with doing that. The person who just took a job as the general manager of a restaurant isn‘t bringing something new to market. Although the person is assuming employment risk, he/she isn‘t assuming the risk of owning a business.

1-6.

What are the three main attributes of firms that pursue high levels of corporate entrepreneurship?

Answer: Entrepreneurial firms are typically proactive, innovative, and not averse to taking risks.

1-7.

What are the three primary reasons people become

entrepreneurs?

Answer: The three primary reasons that people become entrepreneurs and start their own firms are to (1) be their own boss, (2) pursue their own ideas, and (3) realize financial rewards.

1-8.

Of the three primary reasons people become entrepreneurs, which one is given most commonly and why?

Answer: Be their own boss. The reason this is the most common motivation for becoming an entrepreneur is either because some people have a long-standing ambition to be their own boss or because they become frustrated working in traditional jobs. For many people, a traditional job may be too confining and they yearn for the freedom that entrepreneurship brings.

1-9.

Why is passion such an important characteristic of successful entrepreneurs?

Answer: The passion that an entrepreneur feels for his or her business typically stems from a belief that the business will positively influence people‘s lives. It is important that this passion exist because the process of starting and building a new firm is demanding.

110.

What is it about passion that makes it particularly compatible with the entrepreneurial process?

Answer: Passion is particularly important because, although rewarding, the process of starting a firm or building a business is demanding. Absent passion, the demands would outweigh the potential rewards for people who are not passionate about what they‘re doing.

111.

Why is product/customer focus an important characteristic of successful entrepreneurs?

Answer: Although all parts of the entrepreneurial process are important, ultimately if a new business does not have a successful product that is directed toward a receptive market the business will fail. A product/market focus also involves the diligence to spot product opportunities and to see them through to completion.

112.

What is it about ―tenacity‖ that makes it such an important characteristic for entrepreneurs?

Answer: Because entrepreneurs are typically trying something new, the possibility of failure exists. The litmus test for entrepreneurs is the tenacity that

they have to persevere through setbacks and failures.

113.

What are the five common myths of entrepreneurship?

Answer: The five common myths of entrepreneurship are as follows: Myth 1: Entrepreneurs are born, not made.

Myth 2: Entrepreneurs are gamblers.

Myth 3: Entrepreneurs are motivated primarily by money.

Myth 4: Entrepreneurs should be young and energetic.

Myth 5: Entrepreneurs love the spotlight.

114.

What is the evidence that debunks the myth that entrepreneurs are born, not made?

Answer: The consensus of many hundreds of studies on the psychological and sociological makeup of entrepreneurs is that entrepreneurs are not genetically different from other people.

115.

What are the four distinctive parts of the entrepreneurial process and what is the relationship among the parts?

Answer: The four distinct parts of the entrepreneurial process are as follows: Part 1: Decision to become an entrepreneur.

Part 2: Developing successful business ideas.

Part 3: Moving from an idea to an entrepreneurial firm.

Part 4: Managing and growing an entrepreneurial firm.

Each part is intimately interrelated and interdependent with one another.

116.

How would you characterize the risk-taking propensity of most entrepreneurs?

MyLab Question.

117.

What factors favor older entrepreneurs as opposed to young entrepreneurs?

Answer: What makes an entrepreneur ―strong‖ in the eyes of an investor is experience in the area of the proposed business, skills and abilities that will help

the business, a solid reputation, a track record of success, and passion about the business idea. The first four of these characteristics favor older rather than younger entrepreneurs.

118.

What did Joseph Schumpeter mean by the term creative destruction?

MyLab Question.

119.

In general, what effects does entrepreneurship have on economies and societies throughout the world?

Answer: Entrepreneurship has a positive effect on both economies and societies throughout the world. For two reasons, entrepreneurial behavior has a strong impact on an economy‘s strength and stability. The reasons are innovation and job creation. According to the Small Business Administration Office of Advocacy, small innovative firms are 16 times more productive than larger innovative firms in terms of patents per employee. Small firms also create a substantial number of new jobs in the United States. In regard to the impact of entrepreneurial firms on societies, the new products and technologies created by entrepreneurial firms have a dramatic impact. Think of all the new products and services that make our lives easier, enhance our productivity at work, improve our health, and entertain us. Many of these products and services were created by entrepreneurial firms.

120.

What are the changes to the demographic makeup of entrepreneurs in the United States that are described in this chapter?

Answer: Over the past 10 years, the demographic makeup of entrepreneurial firms has changed in the United States and around the world. Of all the businesses in the United States, a growing number are owned by women, minorities, seniors, and young people. The changing demographic makeup of entrepreneurs is changing for two reasons. First, the United States itself is changing, and is becoming a much more diverse society. As a result, the changing demographic makeup of entrepreneurs reflects society as a whole.

Second, pursuing an entrepreneurial career is an exciting career choice, which is open to people across all demographic groups. As the ability to enter an entrepreneurial career becomes available to a larger number of people, it is not surprising that people

across all demographic groups would be drawn to this alternative.

APPLICATION QUESTIONS 121.

After rereading the opening case, identify all of the effective or smart moves Kirsten Blowers made in the early days of building Riffraff.

Answer: The following is a list of smart or effective moves that Kirsten Blowers made in the early days of building RiffRaff:     

122.

She started small and scaled up after essentially testing her idea.

She adapted quickly when Pinterest basically made her original idea unviable. She went from furniture to clothing and found success.

The clothing business exploits Kirsten‘s knack for picking the right clothes.

She focuses on execution. She is not a hands-off owner.

She is willing to learn and adapt based on market feedback as the Dallas store example points out.

Assume that you are the dean of a business school and that you are interested in more entrepreneurship courses being offered in your school. Surprisingly to you, some professors are resisting the idea of offering these courses on the basis of their view that entrepreneurship is a skill that can be learned only through experience. Using materials in this chapter, make an argument that entrepreneurship can be taught.

Answer: First, there are many examples of entrepreneurs that launched successful firms without prior entrepreneurial or business experience. Zach Schau and his founding team at Pure Fix Cycles is an example. So it‘s not fair to argue that entrepreneurship can be learned only through experience. Second, the four-step entrepreneurial process, introduced in the chapter, depicts the sequential nature of starting a new business. Anyone who ―learns‖ this process and studies each step in the process is better equipped to start a business than someone who is not familiar with the process. As a result, entrepreneurship clearly can be ―taught.‖

123.

Jose Reyes is a computer science student in his last semester. He just completed a class on how to build smartphone apps. The last day of class, Jose‘s professor pulled him aside and told him that he has excellent aptitude for building smartphone apps and that he should pursue doing so instead of taking a job with an existing company following graduation. Jose really respects his professor and is now thinking about doing what he recommended. He is confident that he can build successful smartphone apps and has thought previously about being an entrepreneur. The downside is that he isn‘t especially passionate about building smartphone apps. If Jose asked you for your advice, what would you tell him to do?

Answer: If Jose is not passionate about building smartphone apps, he should think long and hard about pursuing that path, regardless of his aptitude for building apps. Building a business is an entirely separate challenge from producing the product or service the business will sell. It‘s a difficult and challenging process. Unless Jose has a specific passion for building a business that sells smartphone apps, he will find it to be a difficult and exhausting process.

124.

One question that is often asked by people thinking about launching an entrepreneurial venture is ―what should first-time entrepreneurs know before they launch?‖ Based on information featured in Chapter 1,what should entrepreneurs know before they commit to launching their firm?

Answer: Students will vary in terms of their answer to this question. A lot of things have to go right for a business start to be successful. Each step in the entrepreneurial process must be accomplished with a degree of proficiency. As a result, first-time entrepreneurs should acquaint themselves with each step in the process prior to launching a business. The front-end of the entrepreneurial process is particularly important. Special care should be devoted to completing the steps involved with ―Developing Successful Business Ideas‖ in a deliberate and thoughtful manner.

125.

Assume you have a friend who is thinking about starting a business to sell jewelry that he has been making only for friends for several years. He is

coming to talk to you because he knows that you are pursuing a degree in entrepreneurship. Your friend says, ―I am worried that I may lack the skills to effectively operate a business if I decide to establish one.‖ Given your knowledge of ―execution intelligence‖ as discussed in this chapter, what advice would you give to your friend about how to successfully operate a firm on an ongoing basis?

Answer: Your friend is correct in recognizing that execution intelligence is key. It is one of the four characteristics of entrepreneurial firms discussed in the chapter. Prior to launching his business, your friend should find mentors and advisors who are willing to work with him on the execution-related issues that will be involved with his business. He may also want to work for a business that is similar to the one he is thinking about starting before starting his own firm. That way he will have execution-related experiences in his area before he launches his own firm.

126.

A friend of yours with whom you went to high school and now university as well is talking to you about his interest in becoming an entrepreneur. In a way, this does not surprise you in that Jackson, your friend, has always wanted to be his own boss. However, in discussing his interest to start his own real-estate firm, Jackson tells you that a substantial income is the primary reason he is thinking about becoming an entrepreneur. He asks you if wanting to earn a significant amount of money is the main reason most, if not all, entrepreneurs start their firms. In light of information included in this chapter, how would you respond to Jackson?

Answer: Although there is nothing inherently wrong with trying to make money, it is usually a secondary reason people start businesses. The primary reasons are to be their own boss and pursue their own ideas.

In addition, people often have unrealistic expectations about how much money they‘ll make as a business owner, opposed to pursuing a traditional career. The average entrepreneur does not make more money than someone with a similar amount of responsibility in a traditional job.

YOU BE THE VC EXERCISE

Note: The ―You Be the VC Exercise‖ is short for ―You Be the Venture Capitalist.‖ Each ―You Be the VC‖ feature provides an example of a real-life entrepreneurial firm. Each firm is young and its business concept hasn‘t been fully proven or developed. As a result, an effective way to use these exercises is to ask students to read them (and study the firm‘s Web site if you‘d like to extend the exercise), and say, ―You Be the VC. If you were a venture capitalist, would you offer this firm funding? Why or why not?‖ We have used these exercises and have found that they stimulate fascinating classroom discussion. By evaluating these young firms, students are forced to think about the same issues that venture capitalists think about. The exercises also make good individual and group assignments.

There are two ―You Be the VC‖ exercises at the end of each chapter of the textbook. We provide our take on each of the ―You Be the VC‖ exercises as shown below.

YOU BE THE VC 1.1 Company: Shyp (www.shyp.com) Business Idea: Create a shipping service that picks up, packages, and ships items for individuals and businesses via the most affordable option available.

You Be the VC Scorecard Shyp (www.welloshyp.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

Kevin Gibbon, the founder, was a seller on eBay who found that he was spending more and more of his time on shipping. Sensing an opportunity, he shut down his eBay shop and launched Shyp.

The website doesn‘t give us details of Shyp‘s management team.

Strength of the

1

2

3

4

5

Opportunity The strength of the opportunity is unclear. Although shipping is a hassle, it is not clear if people would be willing to pay $5 plus shipping just to avoid going through the process. Also, retailers like Amazon have made it easy to return goods.

Strength of the Industry

1

2

3

4

5

Online sales is growing and so shipping needs are exploding. This suggests that the growth prospects in the shipping industry are very attractive. We don‘t know of Shyp‘s competition, though.

Strength of Business Model

Shyp makes money in two ways: the $5 fee it charges each customer and the savings it gets from the difference between retail shipping rate and their discounted rate. What is not clear is how the company will overcome the $5 fee that many would consider excessive.

Average Score: 3.0/5.0 Decision: We would not fund Shyp for two reasons. First, we‘re not confident that people will be willing to pay $5 plus shipping just to avoid the hassle. Also, we are not sure how Shyp can create a ―moat‖ for itself when competition enters. Its model is replicable.

YOU BE THE VC 1.2 Company: Vital Vio (www.vitalvio.com) Business Idea: Design, manufacture, and sell LED lights that kill bacteria and other organisms in high-risk environments, such as health-care settings, airplanes, gyms, restaurants, office buildings, and public restrooms.

You Be the VC Scorecard Vital Vio

(www.vitalvio.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

Co-founder and President Colleen A. Costello has worked as a researcher at two hospitals, as a surgical device designer, and as a tissue engineering researcher.

Balance of management team consists of people with medical and business experience.

Has both a Board of Directors and an Advisory Board. Board of Directors has two members (in addition to Ms. Costello) who have corporate and venture capital experience. The same is true of the Advisory Board.

Strength of the Opportunity

1

2

3

4

5

MRSA infection accounts for 99,000 deaths in a year and so its prevention is important. LED lights have an advantage over UV lights that hospitals use to prevent MRSA infections in that the latter can be harmful.

Strength of the Industry

1

2

3

4

5

This is an unknown. While establishments other than hospitals are aware of MRSA infections, they don‘t seem to be willing to put money in remedies.

Strength of Business Model

1

2

3

4

5

The business model is appealing.

Vital Vio lights can be retrofitted to existing lighting systems and so extensive rewiring is not needed.

Licensing will help it expand quickly and cement its first mover advantage.

Average Score

3.75.0/5.0

Decision: We would fund this firm. Vital Vio‘s management team and its Board of Directors and Advisory Board are strong. It includes a nice mix of people with backgrounds in business, medicine, finance, and sales. We also like the fact that one Board member is from the investment community. The opportunity is also strong. Preventing deaths due to infection is an important market need. We also like the company‘s business model. It can grow fast via licensing.

We don‘t know much about the market and the willingness of hospitals to switch from UV to LED lighting. In addition, we do not know the interest in becoming a licensee of the company.

CASES Case 1.1 SoulCycle: A Classic Entrepreneurial Tale DISCUSSION QUESTIONS 131.

Which of the characteristics of a successful entrepreneur, discussed in the chapter, do you see in Julie Rice and Elizabeth Cutler? To what degree do you think these characteristics have contributed to SoulCycle‘s success?

Answer: Two of the four characteristics of successful entrepreneurs, product/customer focus and execution intelligence—are seen in Julie Rice and Elizabeth Cutler, and these characteristics have no doubt contributed to SoulCycle‘s success. The founders approached their business from a problem perspective and attempted to ―solve‖ the problem via their venture. Exercise can be a boring activity for the marginally motivated. Combining it with social interaction was a great business opportunity. But what really accounts for SoulCycle‘s success was that the founders executed on their idea really well.

132.

How does SoulCycle‘s basic offering, its 45 minute spinning classes, ―add value‖ to the lives of its customers?

Answer: For 45 minutes, the customer can not only get an intense workout but do it in a congenial setting – the music, the lighting, the instructor. To people whose professional and or personal lives is full of stress, SoulCycle offers a cure.

133.

On a scale of 1 to 10 (10 is high), rate SoulCycle on execution intelligence. Make a list of at least five things that you think SoulCycle did particularly well in this area. Justify your numerical ranking.

Answer: SoulCycle has excelled on execution and we would give it a score of 10 out of 10. The five things they have executed really well are: the instructor, the music, the atmosphere, the training, and the overall focus. The first three have to do with the ―product‖ – what SoulCycle offers its customers. Well-trained and motivated instructors are key, while the selection of music and the overall ambience add to the value. The last two have to do with growth. Having well-trained people is key to expanding and the company has paid a lot of attention to it. Finally, the co-founders have focused singularly on the business idea.

134.

Talk about the challenge that Peleton poses to SoulCycle. If you were asked to advise SoulCycle on how to respond to Peleton‘s threat, what would you tell the company to do?

Answer: Peleton offers a group workout, but unlike SoulCycle, it is from the comfort of one‘s own home.

It is a challenge for SoulCycle because it offers the exercise that SoulCycle does and simulates the camaraderie that comes from doing it collectively, except that Peleton does it via virtual reality. It has the added convenience of being on-demand. To respond, SoulCycle has to work on what made it successful in the first place – the instructors and the ambience.

Case 1.2 PatientsLikeMe: Allowing People with Serious Diseases to Connect with One Another and Exchange Support and Advice DISCUSSION QUESTIONS 135.

Of the reasons articulated in Chapter 1 that motivate people to start businesses, which of the three reasons was the primary motivation behind Jamie and Ben

Heywood‘s decision to launch PatientsLikeMe? Answer: A desire to pursue their own ideas. Also, a desire to make a positive difference in people‘s lives.

136.

How do those who are leading PatientsLikeMe practice ―product/customer focus‖ ? How do they practice ―execution intelligence‖?

Answer: While PatientsLikeMe seems to be almost singularly focused on execution intelligence, it does have a product/customer focus in that its key value proposition is to enable patients to interact with other patients in a way that is useful to them. As far as execution intelligence, in looking at the site and how people with serious diseases are able to interact with one another, one gets the impression that a tremendous amount of thought and empathy for people with serious diseases was put into the way the Web site and user experience has been set up. Another sign of execution intelligence is the way PatientsLikeMe makes money. Rather than charging users for its service, it generates revenue by selling aggregated data that it collects from its online patients‘ communities to medical companies. This lowers a barrier to participation (not having to pay a fee to use the service), which in the end makes its communities larger and richer. It also makes money by helping pharmaceutical companies enlist participants in drug trials and studies. This initiative is a winwin-win proposition. It‘s a win for pharmaceutical companies via an efficient method for signing up participants for trials. It‘s a win for patients with serious diseases, who are often eager to sign up for any initiative that might improve their condition or reverse their disease. And it‘s a win for PatientsLikeMe in that it generates revenue.

137.

What type of start-up firm is PatientsLikeMe? Answer: PatientsLikeMe is an entrepreneurial firm.

CHAPTER 2 RECOGNIZING OPPORTUNITIES AND GENERATING IDEAS

LEARNING OBJECTIVES 1.

2.

3.

4.

Explain the difference between opportunities and ideas.

Describe the three general approaches entrepreneurs use to identify opportunities.

Discuss the personal characteristics of entrepreneurs that contribute to their ability to recognize business opportunities.

Identify and describe techniques entrepreneurs use to generate ideas.

CHAPTER OVERVIEW This chapter begins by describing the difference between an opportunity and an idea. Students are reminded that many firms fail, not because the entrepreneurs involved didn‘t work hard, but because there was no real opportunity to begin with. The four components of a favorable opportunity (attractive, durable, timely, and anchored in a product, service, or business that adds value) are then discussed.

The middle of the chapter focuses on the three primary ways that entrepreneurs discover opportunities: by studying environmental trends, solving a problem, or finding gaps in the marketplace. This material is followed by a discussion of the personal characteristics of entrepreneurs that heighten their ability to recognize business opportunities.

The chapter then transitions to talking about techniques that can help entrepreneurs come up with new business or product ideas. The techniques introduced include brainstorming, focus groups, library and Internet research, and an assortment of other techniques.

CHAPTER OUTLINE XI. XII.

XIII.

XIV.

The Difference Between Opportunities and Ideas Three Ways to Identify Opportunities A. Observing Trends B. Solving a Problem C. Finding Gaps in the Marketplace Personal Characteristics of the Entrepreneur A. Prior Industry Experience B. Cognitive Factors C. Social Networks D. Creativity Techniques for Generating Ideas E. Brainstorming

F. Focus Groups G. Library and Internet Research H. Other Techniques CHAPTER NOTES I.

The Difference Between Opportunities and Ideas A. An opportunity is a favorable set of circumstances that creates a need for a new product, service, or business.

B. An opportunity has four essential qualities: it is (1) attractive, (2) durable, (3) timely, and (4) anchored in a product, service, or business thatcreates value for its buyer or end user.

C. For an entrepreneur to capitalize on an opportunity, its window of opportunity must be open.

2. The term ―window of opportunity‖ is a metaphor describing the time period in which a firm can realistically enter a new market.

D. It is important to understand that there is a difference between an opportunity and an idea.

1. An idea is a thought, impression, or notion. It may or may not meet the criteria of an opportunity. This is a critical point because, as we noted in Chapter 1, many businesses fail not because the entrepreneurs that started them didn‘t work hard, but because there was no real opportunity to begin with.

II.

Three Ways to Identify Opportunities

A. Observing Trends—The first approach to identifying opportunities is to observe trends and study how they create opportunities for entrepreneurs to pursue.

1. Economic Forces a. Economic forces affect consumers‘ level of disposable income. Individual sectors of the economy have a direct impact on consumer buying patterns.

b. For example, when the economy is strong, people have more money to spend and are willing to buy discretionary products and services that enhance their lives. In contrast, when the economy is weak, not only do people have less money to spend, but they are typically more reluctant to spend the money they have, fearing the economy may become even worse—and that in turn, they might lose their jobs because of a weakening economy.

2. Social Trends a. An understanding of the impact of social forces on trends and how they affect new product, service, and business ideas is a fundamental piece of the opportunity recognition puzzle. b. The persistent proliferation of fast-food restaurants, for example, isn‘t due primarily to people‘s love for fast food but rather to the fact that people are busy—the number of households with both parents working remains high. c. Some of the social trends that allow for new opportunities are as follows:        

Aging of the population The increasing diversity of the population Increased participation in social networks Growth in the use of mobile devices The increasing focus on health and wellness Emphasis on clean forms of energy including wind, solar, biofuels, and others Continual migration of people from small towns and rural areas to cities Desire for personalization (which creates a need for products and services that people can tailor to their own tastes and needs)

3. Technological Advances a. Given the rapid pace of technological change, it is vital for entrepreneurs to remain on top of how new technologies affect current and future opportunities. b. Once a technology is created, products emerge

to advance it. For example, the creation of the Apple iPhone, iPad, and similar devices has in turn spawned entire industries that produce compatible devices.

4. Political Action and Regulatory Changes a. Political action and regulatory changes also provide the basis for opportunities. For example, new laws create opportunities for entrepreneurs to start firms to help companies comply with these laws. This is currently happening as a result of the passage of the Affordable Care Act. b. Political change also engenders new businesses and product opportunities. For example, global political instability and the threat of terrorism have resulted in many firms becoming more security conscious. These companies need new products and services to protect their physical assets and intellectual property, as well as to protect their customers and employees.

B. Solving a Problem 1. Sometimes identifying opportunities simply involves noticing a problem and finding a way to solve it.

2. These problems can be pinpointed through observing trends and through more simple means, such as intuition, serendipity, or chance.

3. Some business ideas are clearly gleaned from the recognition of problems in emerging trends. For example, some older people find traditional cell phones hard to use—the buttons are small, the text is hard to read, and it‘s often difficult to hear someone on a cell phone in a noisy room. To solve these problems, GreatCall, a recent startup, is producing a cell phone called the Jitterbug, which is designed specifically for older users. a. A serendipitous discovery is a chance discovery made by someone with a prepared mind.

C. Finding Gaps in the Marketplace

1. The third approach to identifying opportunities is to recognize a need that consumers have that is not being satisfied—by either large, established firms or entrepreneurial ventures.

2. Large retailers compete primarily on price by serving large groups of customers with similar needs. They do this by offering the most popular items targeted toward mainstream consumers.

Although this approach allows the large retailers to achieve economies of scale, it leaves gaps in the marketplace. a. This is the reason that small clothing boutiques and specialty shops exist. The small boutiques, which often sell designer clothes or clothes for hard-to-fit people, are willing to carry merchandise that doesn‘t sell in large enough quantities for Wal-Mart or Costco to carry.

3. A common way that gaps in the marketplace are recognized is when people become frustrated because they can‘t find a product or service that they need and recognize that other people feel the same way.

III. Personal Characteristics of the Entrepreneur Researchers have identified several characteristics that tend to make some people better at recognizing opportunities than others. These characteristics are as follows.

A. Prior Industry Experience—Several studies show that prior experience in an industry helps entrepreneurs recognize business opportunities.

1. By working in an industry, an individual may spot a market niche that is underserved. It is also possible that while working in a particular area, an individual builds a network of social contacts in that industry that may provide insights that lead to opportunities.

B. Cognitive Factors—Opportunity recognition may be an innate skill or a cognitive process.

1. There are some who think that entrepreneurs have a ―sixth sense‖ that allows them to see opportunities that others miss. This sixth sense is called entrepreneurial alertness.

2. Entrepreneurial alertness is formally defined as the ability to notice things without engaging in deliberate search.

C. Social Networks—The extent and depth of an individual‘s social network affects opportunity recognition.

1. In one study, the differences between solo entrepreneurs (those who identified their business ideas on their own) and network entrepreneurs (those who identified their business ideas through social contacts) were examined. The researchers found that network entrepreneurs identified significantly more opportunities than solo entrepreneurs, but were less likely to describe themselves as being particularly alert or creative.

2. An important concept that sheds light on the importance of social networks to opportunity recognition is the differential impact of strongtie versus weak-tie relationships. Relationships with other people are called ties.

3. Strong-tie relationships are characterized by frequent interactions, such as ties between coworkers, friends, and spouses. Weak-tie relationships are characterized by infrequent interaction, such as ties between casual acquaintances. It is more likely that entrepreneurs will get business ideas via weaktie versus strong-tie relationships.

D. Creativity—Is the process of generating novel or useful ideas. Opportunity recognition may be, at least in part, a creative process. It is easy to see the creativity involved in forming many products, services, and businesses.

1. For an individual, the creative process can be broken down into five stages, as shown in Figure 2.4 in the textbook. The five steps are: a. Preparation—Is the background, experience, and

knowledge that an entrepreneur brings to the opportunity recognition process. b. Incubation—Is the stage during which a person considers an idea or thinks about a problem; it is the ―mulling things over‖ phase. c. Insight—Is the flash of recognition, when the solution to a problem is seen or an idea is born. d. Evaluation—Is the stage of the creative process during which an idea is subjected to scrutiny and analyzed for its viability. e. Elaboration—Is the stage during which the creative idea is put into a final form. The details are worked out, and the idea is transformed into something of value.

IV.

Techniques for Generating Ideas

A. Brainstorming 1. Is used to generate a number of ideas quickly. It is not used for analysis or decision making.

2. A brainstorming ―session‖ is targeted to a specific topic about which a group of people are instructed to come up with ideas.

3. The number one rule of brainstorming is that no criticism is allowed, including chuckles, raised eyebrows, or facial expressions that express skepticism or doubt. Criticism stymies creativity and inhibits the free flow of ideas. a. There are two reasons brainstorming generates ideas that might not arise otherwise. i. First, because no criticism is allowed, people are more likely to offer ideas than they would in a traditional setting. ii.

Second, brainstorming focuses on creativity rather than evaluation.

B. Focus Groups 1. A focus group is a gathering of 5 to 10 people

who are selected because of their relationship to the issue being discussed. Although focus groups are used for a variety of purposes, they can be used to help generate new business ideas.

2. The strength of focus groups is that they help companies uncover what‘s on their customers‘ minds through the give-and-take nature of a group discussion. The weakness is that because the participants do not represent a random sample, the results cannot be generalized to larger groups.

C. Library and Internet Research 1. Libraries are often an underutilized source of information for generating business ideas. The best approach to utilizing a library is to discuss your general area of interest with a reference librarian, who can point out useful resources.

2. Internet research is also important. a. If you are starting from scratch, simply typing ―new business ideas‖ into Google or Yahoo! will produce links to newspaper and magazine articles about the ―hottest‖ and ―latest‖ new business ideas. b. If you have a specific idea in mind, a useful technique is to set up a Google ―e-mail alert‖ using keywords that pertain to your topic of interest.

D. Other Techniques 1. Customer advisory boards. Some companies set up customer advisory boards that meet regularly to discuss needs, wants, and problems that may lead to new ideas.

2. Day-in-the-life research. Other companies conduct varying forms of anthropological research, such as day-in-the-life research.

BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING Savvy Entrepreneurial Firm Solving Problems via Social Ventures 1.

Refer to Figure 2.1. Are there differences between social ventures and for-profit organizations in regard to the essential qualities of an opportunity? If so, what are the differences?

Answer: Figure 2.1 looks at the four essential qualities of an opportunity – attractive, timely, durable, and anchored in a product or service. Social ventures deal with ―wicked‖ or difficult to solve problems, as the UCLA food wastage situation points out. This means that opportunities in social ventures may not fit easily with all the four qualities of an opportunity indicated above. For example, the UCLA students saw food waste, noticed that it was a problem, but this was not readily anchored in a product or service. The same goes for Soko and Drive for Change.

2.

For the social ventures highlighted in the feature, what was the role of changing environmental trends in enabling the social venture to address the problem it is tackling?

Answer: Key environmental trends common to all three is increasing income disparity on the one hand (artisans in sub-Saharan Africa versus arguably middle-class youth in the U.S.) and a growing consciousness that societal problems need to be tackled as otherwise they would not go away.

3.

How can social ventures attract talented employees, given that they typically do not pay as much as forprofit organizations?

Answer: Pay disparity is a challenge that most not-forprofits and social ventures face. They typically cannot match the salaries that for-profit companies will pay.

The key is to ensure that there are other motivations at work – the satisfaction of addressing a societal need, for example. In addition, given that most of such organizations are understaffed, growth opportunities and increasing work responsibilities can motivate people to join such firms.

4.

Would you enjoy working for a social venture? If so, why? Which of the social ventures highlighted in this feature interests you the most? Explain your answer.

Answer: Student responses will vary. Swipe Out Hunger deals with food wastage, Soko is an artists‘ cooperative and Drive For Change rehabilitates felons by getting them to work on a food truck business. Each one has attractions for some people.

What Went Wrong?

Why a Company that Solved a Problem with a Great Product Went Out of Business 1.

In the context of this chapter, make a list of three ―takeaways‖ from this feature that you can learn from and try to avoid if you set out to solve a problem by launching a business.

Answer: This is a good question for a group or individual assignment. Three potential takeaways are as follows: (1) When building a business, it is important to focus on both the quality of the product and business that needs to be built to bring the product to market. Everpix spent too much time on the quality of the product at the expense of the business; (2) Webbased apps are much more compelling if they are viral.

If a user can share with friends and family what he or she is doing on an app, then the app is more likely to grow; (3) Marketing matters—you may build the best product or service in the world, but if no one knows about it, it will ultimately fail.

2.

To what degree is there a difference between pursuing an opportunity to solve a problem and building a business? In what ways did Everpix fail to do both?

Answer: There is a big difference. An entrepreneur can pursue an opportunity and build a very elegant solution to a problem. But a profitable ―business‖ must ultimately be built to take the solution to market.

Everpix built an elegant solution in part, but it wasn‘t viral, which was a big handicap. Everpix failed in terms of building a profitable business.

3.

According to the feature, Everpix spent almost nothing on advertising and promotions. How large of a role do you think that decision played in Everpix‘s failure?

Answer: Most students will say that the decision to

spend almost nothing on advertising or promotions played a large role in Everpix‘s failure. There has to be a way for a company to ―get the word out‖ about its business for people to know about it. Everpix‘s shortcoming in this area was compounded by the fact that the service wasn‘t viral, so they weren‘t getting as many customers as they might have via word of mouth.

4.

Venture capitalists are often accused of swinging for the fences—in other words, they don‘t invest in firms that are hitting singles, doubles, or triples. They want home runs. In hindsight, do you think Everpix was building a business that had the potential to hit singles, doubles, or triples, or a business that had the potential to be a home run? Explain your answer.

Answer: Most students will say that Everpix wasn‘t thinking big enough—and ultimately was building a business that was akin to a single or a double rather than a home run. Although they were trying to solve a compelling problem (i.e., helping people store and organize photos in a manner that would encourage people to go back and look at them), they built a site that wasn‘t viral and wasn‘t marketed sufficiently to attract a large number of users.

Partnering for Success Want Help Converting a Business Idea Into a Profitable Company? Find a Mentor 1.

At this point in your educational process, your business (if you‘re starting one), and in your life in general, in what areas do you believe you could benefit the most from having a mentor? What would your expectations be for the mentor/mentee relationship?

Answer: Students will vary in their answers to this question.

2.

Make a list of the opportunities on your campus and the surrounding community for connecting with potential mentors. Which opportunities do you think would be the best bet for you in terms of connecting with a potential mentor?

Answer: Most students will say that having a mentor could make a substantial difference between an entrepreneur succeeding or failing. An inclination in this direction results from the fact that most students

have had a coach, a teacher, or an older relative or friend who has ―mentored‖ them in some way, so they see mentoring as a useful process. Students will vary in terms of what areas of the entrepreneurial process that they believe mentors are called upon the most. It‘s been our experience that mentoring is particularly helpful in the areas of manufacturing and production (for start-ups with a physical product) and in raising financing or funding.

3.

Go to LinkedIn and type in the name of your university and a functional area (marketing, finance, entrepreneurship, engineering, etc.) in which you have an interest. How many search results did the query produce? As you scanned the search results, did you notice anyone with whom you would like to connect?

Answer: Students will vary in their answers to this question. Challenge your students to be as exhaustive as possible in the list they complete for their area.

4.

To what degree do you believe that having a mentor can make the difference between an entrepreneur succeeding or failing? Have you had a mentor at any point in your life? If so, briefly relate the manner in which your mentor was able to help you.

Answer: Students will vary in their answers to this question. A reasonable answer is to listen to advice, and then pursue the advice that resonates with you.

Another way of thinking about this is to record the advice from different people, and then pursue the advice that seems to represent the consensus of the people that you talk to.

REVIEW QUESTIONS 2-1.

What is a product opportunity gap?

Answer: A product opportunity gap is the gap between what is currently on the market and the possibility for a new or significantly improved product, service, or business that results from emerging trends.

2-2.

How can an entrepreneur tell if a product opportunity

gap exists?

Answer: Via careful observation and then via (1) emphasizing or enhancing personal characteristics that contribute to opportunity recognition, such as prior experience, cognitive factors, social networks, and creativity and (2) utilizing the techniques highlighted in the chapters for improving opportunity recognition, such as brainstorming, focus groups, and library and Internet research.

2-3.

What is an opportunity?

Answer: An opportunity is a favorable set of circumstances that creates a need for a new product, service, or business.

2-4.

What are the qualities of an opportunity, and why is each quality important?

Answer: An opportunity has four essential qualities: it is (1) attractive, (2) durable, (3) timely, and (4) is anchored in a product, service, or business that creates or adds value for its buyer or end user. An opportunity would not be attractive if any of the qualities were missing.

2-5.

What four environmental trends are most instrumental in creating business opportunities? Provide an example of each environmental trend and the type of business opportunity that it might help create.

Answer: The four environmental trends (or factors) that are most important in creating business opportunities are: economic factors, social factors, technological advances, and political action and regulatory changes.

Environmental Factor it Might Create Economic factor disposable income in the hands of

Business Opportunity An increase in

teenagers creates opportunities to create new electronics products that appeal to teenagers.

Social factors in the percentage of elderly people in

An increase the

U.S. creates opportunities to create new products that help elderly people deal with everyday chores.

Technological factors percentage of people who use

An increase in the

smartphones creates opportunities for companies to create products and services that enhance the usefulness of smartphones.

Political Action and new environmental protection Regulatory Changes opportunities for companies to

The passage of regulations creates

create products to help firms comply with the regulations.

2-6.

How can ―solving a problem‖ create a businessopportunity for an entrepreneur to pursue?

MyLab Question.

2-7.

How can finding a gap in the marketplace create a business opportunity?

Answer: A gap in the marketplace suggests that particular clientele, such as people who need plussized clothing or people who are hard to fit, are not being adequately serviced. Providing products or services for these people represents a business opportunity. The trick is whether there is a large enough critical mass of people in a particular area to support a business that fills a gap in their marketplace for a specific clientele.

2-8.

What is meant by the term opportunity recognition?

Answer: Opportunity recognition refers to the process of perceiving the possibility of a profitable new

business or a new product or service.

2-9.

In what ways does prior industry experience provide an entrepreneur an advantage in recognizing business opportunities?

Answer: By working in an industry, an individual may spot a market niche that is underserved.

210.

What is entrepreneurial alertness and why is it important to entrepreneurs?

Answer: There are some who think that entrepreneurs have a ―sixth sense‖ that allows them to see opportunities that others miss. This sixth sense is called entrepreneurial alertness, which is formally defined as the ability to notice things without engaging in deliberate search. Entrepreneurial alertness is important, because individuals with higher levels of entrepreneurial alertness will presumably identify more business opportunities.

211.

How does an extensive social network provide an entrepreneur an advantage in recognizing business opportunities?

Answer: The extent and depth of an individual‘s social network affects opportunity recognition. People who build a substantial network of social and professional contacts will be exposed to more opportunities or ideas than people with sparse networks. This exposure can lead to new business starts.

212.

What is the difference between a weak-tie and a strong-tie relationship? Which type of tie is most likely to help an entrepreneur find an idea and why?

MyLab Question.

213.

What is creativity?

Answer: Creativity is the process of generating a novel or useful idea. Opportunity recognition may be, at least in part, a creative process. It is easy to see the creativity involved in the formation of many products, services, and businesses.

214.

How does creativity contribute to the opportunity recognition process?

Answer: Opportunity recognition may be, at least in part, a creative process. On an anecdotal basis, it is easy to see the creativity involved in forming many products, services, and businesses.

215.

What are the five stages of the creative process for an individual?

Answer: The five stages of the creative process are as follows: Stage 1: Preparation is the background, experience, and knowledge that an entrepreneur brings to the opportunity recognition process.

Stage 2: Incubation is the stage during which a person considers an idea or thinks about a problem; it is the ―mulling things over‖ phase.

Stage 3: Insight is the flash of recognition—when the solution to a problem is seen or an idea is born.

Stage 4: Evaluation is the stage of the creative process during which an idea is subjected to scrutiny and analyzed for its viability.

Stage 5: Elaboration is the stage during which the creative idea is put into a final form.

216.

What are the differences between an opportunity and an idea and why are those differences important for entrepreneurs?

Answer: An opportunity has four essential qualities: it is (1) attractive, (2) durable, (3) timely, and (4) anchored in a product, service, or business that creates or adds value for its buyers or end users. An idea is a thought, impression, or notion. It may or may not meet the criteria of an opportunity.

217.

Why is ―no criticism‖ the number-one rule for brainstorming?

Answer: Brainstorming is used to generate a number of ideas quickly. It is not used for analysis or decision making. No criticism is allowed. Criticism stymies creativity and inhibits the free flow of ideas.

218.

How is a focus group used to generate new business ideas?

Answer: A focus group is a gathering of 5 to 10 people who are selected because of their relationship to the issue being discussed. Although focus groups are used

for a variety of purposes, they can be used to help generate new business ideas.

Usually focus groups are conducted by trained moderators. The moderator‘s primary goals are to keep the group ―focused‖ and to generate lively discussion.

219.

What is the purpose of day-in-the-life research?

Answer: Day-in-the-life research refers to sending a team of testers to the homes (or businesses) of a company‘s users, to see how its products are working and gain insights for new product ideas.

APPLICATION QUESTIONS 220.

Justin Coban plans to write an e-mail message to his dad asking for a loan. The purpose of the loan will be to start a company to sell an environmentally friendly line of cleaning supplies that are suitable for light manufacturing facilities. Justin has spent the past two years developing the products in his spare time, and wants to convince his dad that the idea represents an attractive business opportunity. What information and insights about his potential company should Justin include in the e-mail message?

Answer: Justin should try to convince his dad that (1) the idea meets the four tests of an opportunity, (2) the idea either takes advantage of an environmental trend, solves a problem, or fills a gap in the marketplace, and (3) he has done sufficient research, either through brainstorming, focus groups, and/or library and Internet research, to assure himself that the idea is attractive.

221.

Identify three start-ups, other than those discussed in the chapter and listed in Table 2.2, which were started to solve a problem. Briefly describe the problems the three start-ups are solving and how they are going about doing so.

Answer: There are countless examples that students might suggest. Urge your students to browse through magazines such as Inc. and Entrepreneur for suggestions if they are having a hard time coming up with ideas. The Springwise blog (www.springwise.com) also provides fresh examples of new products and services on a near daily basis.

222.

Marshall Hanson, the founder of Santa Fe Hitching Rail, a chain of nine steak restaurants in New Mexico, is considering expanding his menu, which is currently restricted to steak, hamburger, potatoes, and fries.

He has just read a book about entrepreneurship and learned that entrepreneurs should study social trends to help identify new product opportunities. What are some current social trends that might help Marshall choose items to add to his menu? Given the trends you list, what items do you suggest Marshall add to expand his restaurant‘s menu?

Answer: This is a good thought question for students.

The obvious social trend that Marshall should pay attention to is the increasing emphasis that Americans are paying to health and fitness. Marshall‘s menu features food that is high in fat and cholesterol.

Although that menu may appeal to a certain clientele, Marshall might think about broadening his menu to include lower fat foods, such as chicken, fish, and salads.

223.

Tiffany Jones owns a small chain of fast-casual restaurants in Denver that sell sandwiches, soups, wraps, and desserts. In general, her restaurants are successful, but she feels they are getting ―stale‖ and could benefit from new ideas. What techniques could Tiffany use to generate new ideas for her restaurants.

Answer: Brainstorming, focus groups, and Internet and library research.

224.

As mentioned in the chapter, ―prior experience‖ in an industry helps entrepreneurs recognize business opportunities. This concept of ―help‖ extends to prior experience in any aspect of life—whether it is sports, music, or a volunteer activity. In what areas do you have a good amount of prior experience? How could this prior experience position you to start a business?

Answer: This is a good question for an individual assignment. Make sure your students directly tie their prior experience to a potential business opportunity.

Some students will argue that they really don‘t have any prior experience that would lend itself to a business opportunity. In these cases, challenge your students to think harder. All of us have unique experiences that might lend themselves to business opportunities.

225.

Make a list of your strong-tie and weak-tie relationships. Include at least five ties on each list. Select two names from your list of weak-tie relationships, and speculate on the types of new business ideas that you think these individuals would be uniquely qualified to help you contemplate.

Answer: This is a good question for an individual assignment.

226.

Imagine that you‘ve been hired by Fitbit, the wearable activity tracker, to conduct focus groups on your campus to get a better sense of how Fitbit can be as relevant and useful to college students as possible.

How would you go about setting up the focus groups?

What are the primary issues on which you would concentrate with the focus groups?

Answer: Most students will repeat the material in the chapter in regard to how to set up a focus group to get a better sense of how Fitbit can be as relevant and useful to college students as possible. Challenge your students to be as thoughtful and creative as possible in regard to the primary issues they‘d zero in on in the focus group.

227.

How could Jamie Heywood and Ben Heywood, the cofounders of PatientsLikeMe, the subject of case 1.2 in Chapter 1, have utilized library and Internet research to flesh out their business idea?

Answer: There is undoubtedly much that Jamie and Ben Heywood could have learned about amyotrophic lateral sclerosis (ALS) and other diseases (and how people coped with them) via library and Internet research, regarding what the options were, the cost of treatment, etc.

YOU BE THE VC 2.1 Company: PillPack (www.pillpack.com) Business Idea: Create an online pharmacy that is easier to use than traditional pharmacies.

You Be the VC Scorecard PillPack (www.pillpack.com) Item

Score/Comments

Strength of NewVenture Team

1

Strength of the Opportunity

2

3

4

5

PillPack was founded by T.J. Parker, a second-generation pharmacist, and Elliot Cohen from MIT. The two met at an MIT event and decided to launch PillPack. Elliot Cohen has a background in computer science and an MBA. Parker worked in his family‘s pharmacy before launching PillPack.

1 2 3 4 5 Societal trends are working in favor of PillPack. The aging of America means there are more older people who take a number of medications every day. PillPack‘s service addresses two important pain points: the trouble of going several times to pharmacies to get prescriptions filled AND the need to remember what medication to take when.

Strength of the Industry

1

2

3

4

5

Medications for the elderly is a growing market and there do not appear to be others addressing the issues that PillPack addresses.

Strength of Business Model

1

2

3

4

5

This is a tough one. Since PillPack does not charge its customers for the services it provides, it has to absorb them in the margins it gets from buying the drugs and getting insurance reimbursement. Insurance companies have tremendous pricing power and PillPack‘s initial size may work against good prices to cover their costs.

Average Score

4.25/5.0

Decision: We would fund this firm. A big plus in PillPack‘s favor is the strength of its opportunity. We have no quibbles there. PillPack addresses two major pain points.

They do not seem to have direct competitors and so they are likely to get a first mover advantage. Their business model is less encouraging until they get to be the size that increases their pricing power.

YOU BE THE VC 2.2 Company: Feetz (www.feetz.com) Business Idea: Using 3D printing technology, make custom fit shoes for every person.

You Be the VC Scorecard Feetz (www.feetz.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

Principal founder Lucy Beard is a Chartered Financial Analyst and former actuary who has held positions at Intuit and Zynga before launching Feetz with her husband, Nigel. Nigel Beard, a Ph.D. in microfluids, is chief technical officer. There is both the technical and the business side well represented here.

Strength of the Opportunity

1

2

3

4

5

This is a hard one to evaluate. For many people, footwear is a fashion accessory. Feetz seems to address the comfort part well but not necessarily the fashion part. There is an opportunity to focus on the part of the footwear market that is looking simply for comfortable footwear, but we don‘t know how big that is.

Strength of the

1

2

3

4

5

Industry Given the success of the Dr. Scholes brand, it is possible that there is a sizeable market for people who want shoes that are comfortable and not necessarily fashionable. We don‘t know that. Given that Feetz focuses on comfort primarily, they may be addressing a smaller part of the market.

Strength of Business Model

1

2

3

4

5

The model is not scalable as is since each pair needs to be custom made.

Down the road, Feetz is looking at selling the technology and/or partnerships with shoe retailers like DSM. This may be the better way to go.

Average Score

3.25/5.0

Decision: We would not fund Feetz. The management team appears quite capable but less attractive is the size of the opportunity and the current business model. We don‘t know the size of the intersection in the market between those who need comfortable shoes and are less particular about fashion. If this segment is very small, then Feetz doesn‘t have any headroom to grow. We do not know the full financial effect of their partnerships for us to evaluate if this is the path forward.

CASES Case 2.1 PledgeMusic and Zinepak: Creating New Businesses in the Music Industry by Directly Engaging Fans DISCUSSION QUESTIONS 2.32. What environmental trends are working in favor of PledgeMusic and Zinepak? What environmental trends are working against each company?

Answer: The environmental trends that are working for both PledgeMusic and ZinePak are (1) an increased level of comfort that people have on technology; (2)

the need for interactive, more immersive experience that digital technology enables; (3) an increase in the number of social media platforms that people work from, which now includes Facebook and Twitter; and (4) an increasing mobile population. All of these factors favor both companies‘ immersive solution that can be accessed from all of a user‘s devices. The trends working against both companies are (1) the sheer number of devices that people have is increasing the complexity of the services offered and (2) the threat that either company could be vulnerable to technological disruption.

2.33. What gap or gaps in the marketplace does both PledgeMusic and ZinePak fill? On a scale of 1 to 10 (10 is high), how elegantly do you think each company is filling the gap or gaps you identified?

Answer: Both companies fill a similar gap: hard core music fans – the Super Fans – are willing to spend more money than what they currently spend to get to know their favorite performers, except that there are very few avenues for them to do it. While student reactions may differ, PledgeMusic may have the more elegant solution (grade of 8-9) because what it is offering is more interactive and more immersive that what ZinePak does.

2.34. Suggest one or two additional business ideas that would allow musicians to better engage with their Super Fans.

Answer: One idea could be for performers to record personal birthday or other wishes for their fans.

This is a good exercise to get students to exercise their creativity.

Case 2.2 Rover.com: Don‘t Chuckle: This Is One Impressive Business Idea DISCUSSION QUESTIONS 2.35. In the United States, what environmental trends are

supporting the development of Rover.com‘s business?

Answer: Most students will assemble a list that includes (1) increasingly mobile population—which necessitates that dog owners need their dogs watched by others more often, (2) aging of the population— many older people have dogs for companionship, and (3) increase in the spread of technology and mobile devices—people may be more willing to leave their dogs in the care of others if they can get frequent updates on their dogs via e-mail and other forms of digital communications.

2.36. How might Rover.com use focus groups to gain a better understanding of its current and potential customers and their needs?

Answer: Most students will revert to the information in the chapter about focus groups. Challenge your students to apply the material in the text to specifically how Rover.com would set up focus groups and utilize the information gleaned through them.

2.37. In this chapter, we noted that a true business opportunity is attractive, durable, timely, and anchored in a product or service that creates value for a buyer. To what extent does Rover.com‘s service satisfy each of these criteria?

Answer: Rover.com‘s service is attractive in that it places a dog owner‘s dog in a home rather than a kennel. This aspect of Rover.com‘s service provides a dog more personalized attention and is healthier, given that the dog will not be in close proximity to a large number of other dogs, some of which may be sick. The service is durable in that the number of dogs and dog owners in the United States continues to go up. The amount of money that people spend on their pets, dogs included, also continues to go up each year. The service is timely in that the population in general is increasingly mobile, meaning that people travel more which necessitates dog owners needing to find others to watch their dogs. Finally, the service is anchored in a product or service that creates value for a buyer. The entire intent of Rover.com is to provide a dog owner a better experience than placing a dog in a kennel. There are many examples throughout the case where Rover.com achieves this objective.

CHAPTER 3 FEASIBILITY ANALYSIS LEARNING OBJECTIVES 1.

2.

3.

4.

5.

6.

Explain what a feasibility analysis is and why it‘s important.

Describe a product/service feasibility analysis, explain its purpose, and discuss the two primary issues that a proposed business should consider in this area.

Describe an industry/market feasibility analysis, explain its purpose, and discuss the two primary issues to consider when completing this analysis.

Explain what an organizational feasibility analysis is and its purpose and discuss the two primary issues to consider when completing this analysis.

Describe what a financial feasibility analysis is, explain its importance, and discuss the most critical issues to consider when completing this analysis.

Describe a feasibility analysis template and explain why it is important for entrepreneurs to use this template.

CHAPTER OVERVIEW This chapter introduces feasibility analysis and makes the case for the importance of feasibility analysis as a way of testing the potential viability of a business idea. The chapter stresses that the proper time to complete a feasibility analysis is after opportunity recognition but before the completion of a business plan. The value of completing a concept statement is discussed. A concept statement is a one-page description of a business idea, which an entrepreneur uses to solicit feedback about the potential viability of the idea.

The four stages of feasibility analysis are introduced, including product/service feasibility, industry/target market feasibility, organizational feasibility, and financial feasibility. The major issues to consider in each stage of feasibility analysis are introduced and discussed.

The chapter concludes by introducing First Screen, which is a feasibility analysis template. It is called First Screen

because a feasibility analysis is an entrepreneur‘s initial pass at determining the feasibility of a business idea.

Appendix 3.1 provides tips for conducting feasibility analysis interviews. The template is available in Appendix 3.2. An Internet Resource Table, which provides the Web site addresses for resources that are helpful in completing a feasibility analysis, is included in Appendix 3.3.

CHAPTER OUTLINE XV. XVI. XVII. XVIII. XIX.

VI.

Feasibility Analysis Product/Service Feasibility Analysis D. Product/Service Desirability E. Product/Service Demand Industry/Target Market Feasibility Analysis E. Industry Attractiveness F. Target Market Attractiveness Organizational Feasibility Analysis I. Management Prowess J. Resource Sufficiency Financial Feasibility Analysis F. Total Start-Up Cash Needed G. Financial Performance of Similar Businesses H. Overall Financial Attractiveness of the Proposed Venture A Feasibility Analysis Template

CHAPTER NOTES I. Feasibility Analysis A. Feasibility analysis is the process of determining if a business idea is viable.

B. As a preliminary evaluation of a business idea, a feasibility analysis is completed to determine if an idea is worth pursuing and to screen ideas before spending resources on them.

C. It follows the opportunity recognition stage but comes before the development of a business plan, as illustrated in Figure 3.1 in the textbook.

D. Although the sequence pictured in Figure 3.1 makes perfect sense, statistics show that the majority of entrepreneurs do not follow this pattern before launching their ventures. Several studies have investigated why this is the case. The consensus of

the research is that entrepreneurs tend to underestimate the amount of competition there will be in the marketplace and tend to overestimate their personal chances for success.

E. Completing a feasibility analysis requires both primary and secondary research. Primary research is research that is collected by the person or persons completing the analysis. Secondary research probes data that is already collected.

II. 

Product/Service Feasibility Analysis Product/service feasibility analysis is an assessment of the overall appeal of the product or service being proposed.



There are two components to product/service feasibility analysis: product/service desirability and product/service demand.

A. Product/Service Desirability—The first component of product/service feasibility analysis is to affirm that the proposed product or service is desirable and serves a need in the marketplace.

1. Concept Test a. A concept test entails showing a preliminary description of a product or service idea, called a concept statement, to industry experts and prospective customers to solicit their feedback.

It is a one-page document that normally includes (1) a description of the product or service, (2) the intended target market, (3) the benefits of the product or service, (4) a description of how the product or service will be positioned relative to competitors, and (5) a brief description of the company‘s management team. b. After the concept statement is developed, it should be shown to at least 25 people who are familiar with the industry that the firm plans to enter and can provide informed feedback. c. The concept statement for a fictitious company named New Venture Fitness Drinks is included in Figure 3.2 in the chapter. i. A description of the product or service being offered

ii. The intended target market iii. The benefits of the product or service iv. A description of how the product will be positioned relative to similar ones in the market v. A brief description of the company‘s management team 2. Online Tools Available for Completing Feasibility Analysis a. Rather than developing a formal concept statement, some entrepreneurs conduct their initial product/service feasibility analysis by simply talking through their ideas with prospective customers. The ideal combination is to do both—distribute a concept statement and engage in verbal give-and-take with as many industry experts and prospective customers as possible. b. There are also a growing number of online tools that help entrepreneurs quickly and inexpensively make contact with prospective customers and complete other steps in the feasibility analysis process. A sample of the online tools that are available are provided in Table 3.2 in the chapter.

B. Product/Service Demand—The second component of product/service feasibility analysis is to determine if there is demand for the product or service. The commonly used methods for doing this are shown below.

1. Talking Face-to-Face with Potential Customers a. The only way to know if your product or service is what people want is by talking to them. The idea is to gauge customer reaction to the general concept of what you want to sell. Entrepreneurs are often surprised to find out that a product idea that they think solves a compelling problem gets a lukewarm reception when they talk to actual customers.

2. Utilizing Online Tools, Such As Google AdWords and Landing Pages, to Assess Demand a. Another common approach to assessing product demand is to use online tools, such as Google AdWords and landing pages.

b. A landing page is a single Web page that typically provides direct sales copy, such as ―click here to buy a Hawaiian vacation.‖ The methodology for using Google AdWords and landing pages to assess the demand for a new product or service is explained in the chapter.

3. Library, Internet, and Gumshoe Research a. The third way to assess demand for a product or service idea is by conducting library, Internet, and gumshoe research. Although talking to prospective customers is critical, collecting secondary data on an industry or business idea is also helpful. b. For your particular product or service you need archival as well as primary forms of research to assess likely demand. Your college or university library is a good place to start. c. The Internet is also a valuable resource. The Internet Resource Table in Appendix 3.3 provides specific recommendations of online resources to utilize. d. Simple gumshoe research is also important for gaining a sense of the likely demand for a product or service idea. A gumshoe is a detective or an investigator who scrounges around for information or clues wherever they can be found.

III. Industry/Target Market Feasibility Analysis 

Industry/target market feasibility is an assessment of the overall appeal of the industry and the target market for the product or service being proposed.



An industry is a group of firms producing a similar product or service, such as airplanes, fitness drinks, or children‘s toys. A target market is the limited portion of the industry that a particular business goes after. Most firms do not try to service an entire industry.

A. Industry Attractiveness—Industries vary in terms of their overall attractiveness. In general, the most attractive industries have the following characteristics (Table 3.4):

1. Are young rather than old 2. Are early rather than late in their life cycle 3. Are fragmented rather than concentrated 4. Are growing rather than shrinking 5. Are selling products or services that customers ―must have‖ rather than ―want to have‖ 6. Are not crowded 7. Have high rather than low operating margins 8. Are not highly dependent on the historically low price of a key raw material, such as gasoline or flour, to remain profitable B. Target Market Attractiveness 1. A target market is a place within a larger market segment that represents a narrow group of customers with similar needs.

2. The challenge in identifying an attractive target market is to find a market that‘s large enough to avoid attracting competitors at least until the entrepreneurial venture can get off to a successful start.

3. The sources of information to mine and tap are not as obvious when investigating target market attractiveness opposed to industry attractiveness.

IV. 

Organizational Feasibility Analysis Organizational feasibility analysis is conducted to determine whether a proposed venture has sufficient management expertise, organizational competence, and resources to successfully launch. There are two primary issues to consider in this area: management prowess and resource sufficiency.

A. Management Prowess 1. A firm should candidly evaluate the prowess, or ability, of its management team.

2. Two of the most important factors in this area are the passion that the sole entrepreneur or management team has for the business idea and the extent to which the management team or sole entrepreneur understands the markets in which the firm will compete.

B. Resource Sufficiency

1. The second area of organizational feasibility analysis is to determine whether the potential new venture has sufficient resources to move forward in order to successfully develop a product or service.

2. The focus in organizational feasibility analysis should be on nonfinancial resources that are critical to many start-ups‘ success (Table 3.5).

3. Types of nonfinancial resources that are critical to many start-ups‘ success: a. Affordable office space b. Lab space, manufacturing space, or space to launch a service business c. Contract manufacturers or service providers d. Key management employees (now and in the future) e. Key support personnel (now and in the future) f. Key equipment needed to operate the business (computers, machinery, delivery vehicles) g. Ability to obtain intellectual property protection h. Support of local governments and state government if applicable for business launch i. Ability to form favorable business partnerships V. Financial Feasibility Analysis 

Financial feasibility analysis is the final component of a comprehensive feasibility analysis. For feasibility analysis, a preliminary financial assessment is usually sufficient.



The most important issues to consider at this state are total start-up cash needed, financial performance of similar businesses, and the overall financial attractiveness of the proposed venture.

A. Total Start-Up Cash Needed 1. The first issue refers to the total cash needed to prepare the business to make its first sale. An actual budget should be prepared that lists all the anticipated capital purchases and operating expenses needed to generate the first $1 in revenues. a. The financial feasibility analysis should state specifically where the money will come from to fund the venture‘s start-up costs.

B. Financial Performance of Similar Businesses 1. The second component of financial feasibility analysis is estimating a proposed start-up‘s potential financial performance by comparing it to similar, already established, businesses. Obviously, this number will result in approximate rather than exact numbers.

2. There are several ways of doing this, all of which involve a little ethical detective work.

C. Overall Financial Attractiveness of the Proposed Venture 1. A number of other factors are associated with evaluating the financial attractiveness of a proposed venture.

2. Typically, these evaluations are based primarily on a new venture‘s projected financial rate of return.

At the macro level, the following factors should be considered to determine whether the projected return is adequate to justify the launch of the business. a. The amount of capital invested b. The risks assumed in launching the business c. The existing alternatives for the money being invested d. The existing alternatives for the entrepreneur‘s time and efforts 3. Opportunities demanding substantial capital, requiring long periods of time to mature, and having a lot of risk involved make little sense unless they provide high rates of return.

D. Overall Attractiveness of the Investment 1. A number of other financial factors are associated with promising business opportunities. Examples are reflected in Table 3.6 in the textbook.

VI.

A Feasibility Analysis Template

A. First Screen, shown in Appendix 3.2, is a template entrepreneurial firms use to complete a feasibility analysis.

B. It is called First Screen because a feasibility analysis is an entrepreneur‘s (or group of entrepreneurs‘) initial pass at determining the feasibility of a business idea.

C. The mechanics for filling out the First Screen worksheet are straightforward. It maps the four areas of feasibility analysis described in the chapter, accentuating the most important points in each area.

D. The final section of the worksheet, ―Overall Potential,‖ includes a section that allows for suggested revisions to the business idea to improve its potential or feasibility.

BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING What Went Wrong?

How Feasible Was the Keurig At-Home Soda Machine to Begin With?

1.

Of the five facts that contributed to Kold‘s failure, which one do you think was the most damaging? Explain your answer.

Answer: Students will vary in terms of their answers to this question. Many students will say that reason #1 and reason #5 were particularly damaging. It is critical that entrepreneurs have a strong understanding of the industries that they enter, and get their products in the hands of customers (for feedback) as soon as possible. The Keurig Kold may have had a completely different outcome if those two issues had been handled differently.

2.

Describe the feasibility analysis that Keurig Kold should have conducted prior to the Kold‘s debut. Do you think Keurig would have produced the same product if they had followed your recommendations? In what ways do you think the product would have been different?

Answer: The feasibility analysis that Keurig should have conducted for the Kold should have focused on where the typical customer would place the machine at home to get a sense of the size dimension. It should have addressed the serving size issue in addition to the place of use issue for electrical connection.

Keurig may not have produced at all if they had a proper feasibility study because they would have gotten

the point that people don‘t make soda at home.

3.

Why is it so difficult to change people‘s behavior? How would you have gone about convincing people that making soda in their home is a good idea?

Answer: Behaviors are ingrained and so hard to change.

SodaStream has tremendous acceptance in Europe because of the sustainability issue – buying bottles and cans pose a recycling problem; making soda at home using a SodaStream solves that. That may have been a good way to position the Kold.

4.

Write a 200-word essay on what a start-up can learn about feasibility analysis from the Keurig Kold failure.

Answer: The essay should talk about the following. That feasibility analysis is an absolute necessity, regardless of how ―hot‖ an industry is or how attractive the business idea seems when describing it to others. Obviously, Keurig didn‘t anticipate that their product would fail when they launched it. They felt confident that they were proceeding in a fruitful manner. They were wrong—on all the five major dimensions. Certainly, a carefully conducted feasibility analysis would have been helpful in avoiding mistakes and maximizing their chances for success.

Savvy Entrepreneurial Firm Prototyping: How to Build What the Customer Wants 1.

What are the advantages of showing rough prototypes to potential customers, like those produced for Step 1 and Step 2, rather than showing them a well-developed prototype to begin with?

Answer: Prototyping is an iterative process and each iteration costs the entrepreneur time and money.

Showing Step 1 and Step 2 prototypes has the advantage of falling down early and getting up quickly to make changes. A drawing and a description and a prototype made of (say) cardboard can be done quickly and important feedback can be obtained before going forward.

2.

Make a list of the things the inventor of the new toaster in the feature might learn as a result of the

prototyping process.

Answer: Students are likely to come up with a variety of factors. Possible questions include: size of the toaster (given kitchen space) – the inventor‘s original may not fit apartment kitchens; perhaps the toaster should have wheels for easy movement across the kitchen top.

3.

For the prototyping process described above, why was it necessary to go into the homes of the people who might use the device? Couldn‘t similar information have been learned in a lab?

Answer: It is important to track how people use the toaster in their kitchen. This cannot be done in a lab; it has to be done in the very place where the toaster is going to reside – the kitchens of buyers. Just like the founders of Owlet Baby Monitors found out that owners liked to move the base from room to room, the product has to be observed when in use.

4.

Do some Internet research and learn about the ―Lean Startup‖ movement. In what ways is prototyping an essential part of the lean start-up approach?

Answer: While the Lean Startup methodology (theleanstartup.com) does not explicitly talk about prototyping, it used a term called ―minimum viable product‖ which is essentially the same thing. The goalis to collect maximum information about the product andits usage with minimum effort, which is the essence of prototyping.

Partnering for Success Finding the Right Business Partner 1.

Think about your personality and work habits. What type of person (in terms of personality and work habits) do you think you‘d work well with and what type of person do you think you‘d be in constant conflict with?

Answer: This question makes for a good individual assignment.

2.

Do you think it‘s a good idea or a bad idea to form a business partnership with a close friend? How could you go about discerning if a good friend would make for a good business partner?

Answer: There are both positives and negatives involved in partnering with a good friend. On the positive side, it‘s important to partner with someone you get along with, trust, and like to spend time with. On the negative side, friends are often

reluctant to challenge one another when they think a mistake is being made, because they don‘t want to put their friendship at risk. In the end it‘s a judgment call. In regard to discerning whether a good friend would make for a good business partner, your friend should be subject to the same criteria (mentioned in the article) as any other potential business partner. It‘s usually a mistake to cut your friend slack on one or more of the criteria, just because he or she is a friend.

3.

Provide some suggestions, other than those mentioned in the feature, for places (online or offline) for finding a business partner.

Answer: This is a good question for a group or individual assignment. Urge your students to think about the networking events and other resources that are available at your college or university and in your local community for making connections with potential business partners. An example would be taking a business plan class. There are many examples of students who met one another in a business plan class, worked together on a business plan to fulfill class requirements, and then actually started the business after graduation.

4.

Spend some time looking at LinkedIn. How could you use LinkedIn to help find a business partner?

Answer: One of the main purposes of LinkedIn is to help users maintain a list of contacts with whom they have some level of relationship. As a result, if you developed a robust list of contacts, you could reach out to your contacts indicating that you‘re looking for a business partner, and see if your contacts make any useful recommendations.

REVIEW QUESTIONS 3-1.

How would you describe the four areas that a properly executed feasibility analysis explores?

Answer: Product/service feasibility analysis is an assessment of the overall appeal of the product or service being proposed. Industry/target market feasibility analysis is an assessment of the overall appeal of the industry and the target market for the product or service being proposed. Organizational feasibility analysis is conducted to determine whether a proposed business has sufficient management expertise, organizational competence, and resources to successfully launch its business. Financial feasibility analysis provides a quick financial assessment of the viability of a business idea.

3-2.

What is a product/service feasibility analysis?

Answer: Product/service feasibility analysis is an assessment of the overall appeal of the product or service being proposed.

3-3.

What is the difference between primary research and secondary research?

Answer: Primary research is research that is original and is collected by the entrepreneur. An example would be an entrepreneur distributing a concept statement of a business idea and asking for feedback.

Secondary research probes data that are already collected. An example would be an entrepreneur studying industry publications to gain information about potential customers and competitors.

3-4.

What is a concept statement?

Answer: A concept statement is a preliminary description of a business. A concept statement represents the first step in a feasibility analysis.

Feedback from the concept statement helps direct the remaining stages of the feasibility analysis.

3-5.

What are the two ways that entrepreneurs assess the likely product demand for the proposed product or service they are analyzing?

Answer: By talking face-to-face with potential customers and via utilizing online tools, such as Google AdWords and landing pages.

3-6.

What is gumshoe research in the context of product/service feasibility analysis?

Answer: In the context of product/service feasibility analysis, gumshoe research is doing what it takes, which may involve scrounging for information and clues wherever they can be found, to gain insight about the demand for a product idea.

3-7.

What is industry/target market feasibility analysis?

Answer: Industry/target market feasibility analysis is an assessment of the overall appeal of the market

for the product or service being proposed. The two components of industry/target market feasibility analysis are industry attractiveness and target market attractiveness.

3-8.

What are the attributes or characteristics of an attractive industry for a new venture?

Answer: In general, the most attractive industries for new ventures have the following characteristics:     

Are young rather than old Are early rather than late in their life cycle Are fragmented rather than concentrated Are growing rather than shrinking Sell products or services that customers ―must have‖ rather than ―want to have‖  Are not crowded  Have high rather than low operating margins  Are not highly dependent on the historically low price of a key raw material, such as gasoline or flour, to remain competitive 3-9.

What is a target market?

Answer: A target market is a place within a larger market segment that represents a narrower group of customers with similar needs. Most start-ups don‘t have the resources needed to participate in broad markets, at least initially. Instead, by focusing on a smaller target market, a firm can usually avoid head-to-head competition with industry leaders and can focus on serving a specialized market very well.

310.

Why do most start-ups focus on relatively small target markets to begin with rather than larger markets with more substantial demand?

Answer: Because it takes substantial resources to attack a large market. Entrepreneurial firms typically have only the resources and the expertise to attack a small target market or a segment within a larger target market, at least at the outset.

311.

What are some of the ways to determine the attractiveness of a small target market within a larger industry?

MyLab Question.

312.

What is organizational feasibility analysis?

Answer: Organizational feasibility analysis is conducted to determine whether a proposed business has sufficient management expertise, organizational competence, and resources to successfully launch its business. There are two primary issues to consider in this area: management prowess and resource sufficiency.

313.

What are the two primary issues to consider when conducting an organizational feasibility analysis?

Answer: First, a potential firm should candidly evaluate the prowess, or ability, of its management team. This means that the entrepreneur must complete a self-assessment. Second, a potential firm should determine if it has sufficient resources to move forward to successfully develop a product or service idea. The focus in organizational feasibility analysis should be on nonfinancial resources in that financial feasibility is considered separately.

Several areas should be examined, including the availability of office space, the quality of the labor pool in the area where the business will be located, and the possibility of obtaining intellectual property protection on key aspects of the new business.

314.

What is a new-venture team?

Answer: A new-venture team is the group of founders, key employees, and advisers that either manage or help manage a new business in its start-up years.

315.

What is financial feasibility analysis?

Answer: Financial feasibility analysis is determining the financial feasibility of a proposed new venture.

316.

What are the three separate components of financial feasibility analysis?

Answer: The three separate components of financial feasibility analysis are: capital requirements, financial rate of return, and overall attractiveness of the investment.

In regard to capital requirements, an assessment of

the feasibility of raising enough money to fund the capital requirements for the business is necessary.

An entrepreneur should also have a good grasp on what the capital requirements for launching his or her business will be. In regard to financial rate of return, an entrepreneur must determine whether the projected return on the proposed business is adequate to justify the investment. Finally, in regard to the overall attractiveness of the investment, an entrepreneur must determine, on an overall basis, whether the potential financial returns from a proposed venture are sufficiently attractive to move forward. Table 3-6 in the chapter provides a list of factors that pertain to this topic.

317.

What are some of the techniques a start-up can use to estimate its potential financial performance by comparing it to similar, already established businesses?

Answer: First, substantial archival data is available online, which offers detailed financial reports on thousands of individual firms (to compare against).

Second, locate a business that is similar to the one you‘re starting, and if the business isn‘t likely to be a direct competitor, simply ask the owner.

Finally, simple observation and legwork. For example, if you were proposing to open a new smoothie shop, you could gauge the type of sales to expect by estimating the number of people, along with the average purchase per visit, who patronize similar smoothie shops in your area.

318.

What are some factors that make a potential start-up attractive from an overall financial perspective?

MyLab Question.

319.

What is the purpose of a First Screen analysis?

Answer: First Screen is a template for completing a feasibility analysis. It is called First Screen because a feasibility analysis is an entrepreneur‘s initial pass at determining the feasibility of a business idea. If a business idea cuts muster at this stage, the next step is to complete a business plan.

APPLICATION QUESTIONS

3-20. Jackson Reed, a friend of yours, just told you an interesting story. He was at his parents‘ house over the weekend. While there, his father saw the entrepreneurship textbook that is being used in one of the classes Jackson is taking this semester. He looked through the book and spent a bit of time studying the chapter on feasibility analysis. After doing so, he said to Jackson, ―When you were growing up, I launched and sold three successful businesses and never once completed a feasibility analysis.

What do you think the authors of the text would say about that?‖ What would you suggest that Jackson say in response to his father‘s question?

Answer: Many start-ups may be successful without a feasibility analysis. But a feasibility analysis is still an important step to help an entrepreneur assess the potential feasibility of a business idea before a substantial amount of time and effort is expended. In addition, Jackson‘s father may have completed many of the steps in a formal feasibility analysis—he just did them informally rather than formally. For example, he probably did a lot of reading about the businesses he started before he started them and talked to trusted friends about whether he was making the right decisions. He probably also penciled out whether the businesses were financially realistic. A feasibility analysis formalizes these steps and is inclusive enough that a key step isn‘t overlooked. If Jackson pinned his father down he would probably admit that there is nothing in a feasibility analysis that isn‘t a good use of an entrepreneur‘s time to complete before a new business venture is initiated.

3-21. Jennifer Pisano just applied for a bank loan to finance an Italian restaurant she wants to launch.

When visiting with the banker about the loan application, she was asked if she had conducted any primary research to assess the feasibility of her proposed business. Jennifer replied that she had spent many, many evenings and weekends in the library and on the Internet collecting information about restaurants in general and Italian restaurants in particular. She further noted that the information she had collected through these efforts increased her confidence that she could open and operate a successful restaurant. One reason for her confidence, Jennifer noted to the banker, was that her library and Internet searches were carefully

conducted in ways that allowed her to verify that Italian restaurants did well in demographic areas that are similar to the one in which she wants to open her business. If you were the banker, what would you say to Jennifer in response to her comments?

Answer: Jennifer has a misunderstanding of what primary research is. Primary research is research that is collected by the person or persons completing the analysis. Administering a concept statement is an example of primary research. What Jennifer has done is complete secondary research, which probes data that‘s already collected.

Jennifer‘s banker may appreciate the secondary research she‘s done, but probably wants to see evidence that Jennifer has actually talked to potential customers and business partners.

3-22.

If you were one of the recipients of New Venture Fitness Drinks‘ concept statement, as presented earlier in the chapter, what type of feedback would you have given the company about the viability of its product idea?

Answer: This is a good question for an individual or group assignment. It‘s actually a fun question— students often come up with very innovative and creative ways that New Venture Fitness Drinks‘ business can be improved. The exercise illustrates the importance of asking for feedback.

3-23.

Linda Toombs, who has considerable experience in the home security industry, is planning to launch a new line of home security alarms that she believes would be superior to other products in the market. Linda knows how to develop a concept statement and administer a buying intentions survey but is less clear about the type of library and Internet research that might help her assess the demand for her product. If Linda asked you about this, what advice would you give to her about how to conduct successful library and Internet searches?

Answer: There are many things that Linda can potentially learn via Internet and library research.

First, she should access and read industry reports

that are available via the resources listed in Appendix 3.3 (IBISWorld and BizMiner are our favorites) about the industry she is about to enter.

Second, she should ask a reference librarian for additional suggestions for trade journals, magazines, or other publications that are related to her industry. There may be a trade journal, for example, that deals with the home security industry that the library has access to. Simply browsing through several issues of the journal may give Linda useful insights and ideas. Finally, Linda should conduct Internet searches about her industry and see if there are blogs available to access and follow.

She should also set up Google e-mail alerts with keywords that pertain to the home security industry.

3-24.

Assess the industry attractiveness for the industry in which Tyto Care, the firm featured in the ―You Be the VC 3.1‖ feature, competes.

Answer: Urge your students to use resources listed in Appendix 3.3 to complete this assignment. IBISWorld and BizMiner, in particular, are excellent resources for conducting an industry analysis.

3-25.

If you were interested in opening a musical instruments store near the college of university you are attending in order to sell guitars, drums, and other types of musical instruments, what online resources would you draw on to conduct secondary research regarding the industry/target market feasibility of your business idea?

Answer: IBISWorld and BizMiner are excellent databases to check out. For example, at the time this Instructor‘s Manual was written, IBISWorld had just released a lengthy report titled ―Musical Instrument & Supply Stores in the U.S.‖ (NAICS 45114). General Internet research is also very helpful. More powerful search engines, typically available through a university library, such as LexisNexis Academic and ProQuest, may also be useful.

3-26.

Keith Ambrose, who is a physical therapist, is thinking about starting a firm to provide in-home therapy services for people who are suffering from sportsrelated injuries. Keith lives in Columbus, Ohio. He doesn‘t know if Columbus is large enough to support his proposed business or if people would pay a premium to receive treatment in their homes for their sports-related injuries.

What suggestions do you have for Keith about primary and secondary research he might conduct to learn more about the potential target market for his proposed business?

Answer: First, Keith should assess how large his trade area is. In his case, his trade area is defined by how far it‘s practical for him to travel to provide his inhome service. If it‘s 20 miles, he could then draw a circle extending 20 miles in every direction, to determine his trade area. He could then use resources such as American Factfinder, City-Data.com, Census Bureau data, and/or data from local government authorities to determine how many people live in his trade area.

The next step would be to determine the national average for how many sportsrelated injuries occur per 1,000 people and how often they occur, and then extrapolate to determine how many people in his trade area are experiencing sports-related injuries. If his area includes a large number of younger people who are extremely active, then he might be justified in using a number higher than the national average to determine the number of people in his trade area who are likely experiencing sports-related injuries.

Next up would be to conduct primary research to determine what percent of people who experience sports-related injuries would pay a premium for inhome service. This might involve not only talking to people with sports-related injuries, but medical practitioners who currently treat sports-related injury patients. Insurance providers would be another potential source of information.

The final step would be to assess the competition that Keith has in his trade area.

Keith could synthesize all the information he collected to make an informed judgment regarding whether his trade area is large enough to support his service.

3-27.

If you were considering the possibility of launching a Web site that you‘ve developed in order to sell sports apparel for petite women, what are some specific actions you could take to collect feedback regarding the usability of your Web site?

Answer: You could conduct usability studies by asking friends and potential clients to experiment with your Web site and provide feedback. You could also employ one of the online services featured in Table 3.2, such as Usertesting or Verify.

3-28.

What are some of the red flags that would suggest that the overall financial attractiveness of a proposed new venture is poor? Which of the red flags you identified would suggest that realistically, a proposed venture isn‘t feasible?

Answer: A sample of the red flags are as follows:  Initial capital investment is high.  The time to break even is lengthy.

 The financial performance of similar businesses is weak.  Sales will be slow to develop.  Low percentage of recurring revenue.  Difficult to forecast income and expenses with a reasonable degree of certainty.  Ventures in the industry have a high failure rate.

The first three red flags are the most problematic, although each of the red flags should be taken seriously, and may suggest that the proposed venture isn‘t financially feasible.

3-29.

A friend of yours just completed a First Screen analysis for an e-commerce site that she hopes to launch to sell horse riding supplies, including saddles, tack, lead ropes, and feed buckets. She‘s disappointed because she rated 10 of the 25 items included in First Screen as having either low or moderate potential. After thinking about this, your friend says to you, ―Well that‘s that. Good thing I completed a feasibility analysis. I definitely do not want to start the business I was thinking about.‖ Is your fiend correct in reaching this conclusion? How would you advise her to interpret the results of her First Screen analysis?

Answer: Your friend shouldn‘t rule the business out just because 10 of the 25 items on the First Screen are rated at low or moderate potential for the following reasons. First, rating a section as low or moderate potential assesses the business idea ―as is.‖ One of the most valuable aspects of the First Screen analysis is that it calls attention to these issues. Your friend may be able to go back to these issues, and find ways to improve upon her plan in ways that raise one or more of these issues into a more acceptable category. Second, First Screen is meant to provide an overall impression of a business idea—it is not a definitive checklist. All businesses have weaknesses. So your friend should look at the potential positives of the business idea and the potential negatives, and make a judgment based on a holistic view of the business idea to determine if it‘s feasible.

YOU BE THE VC 3.1 Company: Tyto Care (www.tytocare.com) Business Idea: Develop an in-home medical device that offers patients the chance to meet with a doctor, 24/7, without leaving their home.

You Be the VC Scorecard Tyto Care (www.tytocare.com) Item

Score/Comments

Strength of NewVenture Team

1 4

2

3

5

Tyto Care was founded by Dedi Gilad and Ofer Tzadik. Tzadik came from a health care background, while Gilad had extensive entrepreneurship background. Together, the two have put together a top notch team with extensive functional experience in the health care sector.

Strength of the Opportunity

1 4

2 5

3

The opportunity is hard to gauge. As the case indicates, telehealth hasn‘t gained much traction because of the difficulties associated with remote diagnosis. Tyto Care‘s core product seemingly offers a good alternative to waiting in doctor‘s offices. It is important to consider, though, that there is already a form of disruption in health care via businesses such as Minute Clinic (inside CVS Pharmacies) that offer quick service for common illnesses.

Strength of the Industry

1 4

2 5

3

Also hard to gauge. It is telehealth or alternatives to conventional primary care physician-centered

health care. It is hard to estimate the size of the market and how the conventional health care industry will react to this. Insurance companies are also an unknown factor here in terms of how they will react to this.

Strength of Business Model

1 4

2 5

3

As far as we can tell, Tyto care has a traditional retail business model.

A Tyto Care device is a one-time purchase and that‘s the end of it.

The downside of this model is that it doesn‘t produce recurring revenue.

Average Score

3.50/5.00

Decision: We would not fund this firm. It just strikes us as too much of a niche product. We do not know how disruptive it would be in the health care industry and how much key stakeholder (doctors, insurance companies) support it would get.

YOU BE THE VC 3.2 Company: Wonder Workshop (www.makewonder.com) Business Idea: Create a pair of toy robots, named Dash and Dot, that teach kids how to code.

You Be the VC Scorecard Wonder Workshop (www.makewonder.com) Item

Score/Comments

Strength of NewVenture Team

1 4

2

3

5

Co-founder Vikas Gupta has considerable start-up experience plus he had worked at Google and Amazon after graduating with a graduate degree in computer science from Georgia Tech. The second co-founder

is Saurabh Gupta (not related to Vikas), a graduate of Stanford who had worked at Apple. The co-founders have put together a solid top management with considerable experience in the major functional areas.

Strength of the Opportunity

1 4

2 5

3

Coding is increasingly becoming important in today‘s digital world.

There is an opportunity to getting young children exposed to coding early on in a fun and interactive way. The price point of around $200 is a challenge, though. It is higher than the high ends that children play with. That could be a barrier.

Strength of the Industry

1 4

2 5

3

Strength of Business Model

In a broad sense, the industry is toys. This is a huge and growing space. But, more specifically, it belongs to the segment of educational toys. This is an attractive space to be in.

1 2 3 4 5

Average Score

It is a transaction-based model where Wonder Workshop sells these products to end users. We don‘t know anything about their margins or their retail penetration. This makes it hard to fully assess the strength of Wonder Workshop‘s business model.

4.50/5.0

Decision: We would fund this firm. Its management team is top notch. It‘s the perfect combination of business experience and specific product/market experience. The product fills a need in the marketplace and it does not appear that they have any direct competitors.

CASES

Case 3.1 ―Something Borrowed‖ – How Feasibility Analysis Shaped Rent the Runway into the Business it is Today DISCUSSION QUESTIONS 334.

Make a list of the ways in which Hyman and Fleiss vetted their business idea prior to launch. How long was it between the initial idea for Rent the Runway and when the business was launched? What does the amount of time between the two events tell you about Hyman and Fleiss‘ feasibility analysis process?

Answer: It took one whole year – November 2008 to November 2009 – from idea to launch for Rent the Runway. During this time they: honed and adapted their original business, sought validation and support from both suppliers and customers, field tested their concept, and only then did they launch.

The long period of time between idea formulation and launch shows how diligent the two Jennifers were about feasibility analysis. They were meticulous in fine tuning their idea via feasibility analysis.

335.

To what degree would Rent the Runway be a different company today if Hyman and Fleiss had not conducted a feasibility analysis? Do you think the business would be as successful as is currently the case?

Answer: While it is difficult to truly decide what would have happened to their idea if the two founders had stuck to their original business concept, it is clear that they would likely have stumbled along without the feasibility analysis they did. It is important to note that they completely changed their target market after the initial feasibility analysis.

They went after younger women with aspirations rather than the traditional buyers of designer labels. This opened up a much larger opportunity for them.

336.

Identify at least two ―take aways‖ from the Rent the Runway story not mentioned in the Lessons Learned portion of the case.

Answer: Students are likely to come up with their own lessons learned or take aways, such as:





337.

The importance of adaptability. When their original business idea proved to be less appealing (after their conversation with Diane von Furstenberg), they were quite willing to change things up fundamentally.

Launching a business is an arduous and stress filled process. It is important to work with people who you can get along with. The two cofounders were in the same cohort and socialized together. It made it easy to work long and hard on the launch.

What can young entrepreneurs with business ideas learn from Hyman and Fleiss‘ experiences?

Answer: Adaptability and diligence are two important things that ensured the success of Rent the Runway.

The co-founders were willing to adapt their business model and, more importantly, test every part of it during the feasibility analysis.

Case 3.2 Embrace Infant Warmer: Sometimes a Business Start Is a Matter of Life and Death DISCUSSION QUESTIONS 3-38

What target market does Embrace seek to serve and how attractive is that market?

Answer: Embrace has two target markets. Its principle market is villagers in rural villages in India. To reach its target market, Embrace is partnering with multinational medical device companies such as GE Healthcare and with local NGOs. The other target market is hospitals and clinics. The Embrace Infant Warmer is not only used in rural villages. It is also used in hospitals and clinics to move premature babies from location to location and to use when a premature baby is born and all of the traditional incubators are already in use.

339.

What examples of primary research that Embrace‘s founders completed appear in the case?

Answer: The Embrace team conducted extensive primary research to ensure the feasibility of their device.

They initially took their prototype to India to solicit customer feedback. They used rapid

prototyping techniques to iterate on feedback and zero in on the attributes that are of highest relevance and value in a rural setting. They continued to talk to villagers, which lead to many insights. Field research took place, involving village mothers in every aspect of the design of the product. The Embrace Infant Warmer was formally launched in April 2011, after completing clinical trials. It went through more than 50 iterations before a final design was settled on.

340.

What actions did Embrace‘s founders take to solicit feedback from prospective customers and what did they learn from these efforts?

Answer: As mentioned above, substantial primary research was conducted. They learned a lot as a result of the research. For example, they found that women in India believe that Western medicine is very powerful, so they routinely cut back on the recommended dosages of Western medicine, just to be safe. That knowledge resulted in design changes in the Embrace device. They learned that villagers wanted different pricing options—like an option to rent the device rather than buy. Spending time in homes in rural India produced additional insights.

They found that the mother-in-law plays a major role in families in rural India. As a result, they determined a way to involve mothers-in-law in the process of using the Embrace Infant Warmer.

341.

If you were asked to conduct a financial feasibility analysis for Embrace, what issues would you consider to complete this analysis and why are those important?

Answer: A financial feasibility analysis involves three parts: total start-up cost needed, financial performance of similar businesses, and overall financial attractiveness of the proposed venture.

CHAPTER 4 DEVELOPING AN EFFECTIVE BUSINESS MODEL LEARNING OBJECTIVES

1.

2.

3.

Describe business models and discuss their importance.

Identify and describe the two general types of business models—standard and disruptive.

Explain the components of the Barringer/Ireland Business Model Template that entrepreneurs can use to develop a business model for their firm.

CHAPTER OVERVIEW This chapter introduces the concept of the business model.

A business model is defined as a firm‘s plan or recipe for how it creates, delivers, and captures value. The chapter discusses the two general categories of business models: standard business models and disruptive business models.

Examples of both standard and disruptive business models are provided.

The middle portion of the chapter introduces the Barringer/Ireland Business Model Template. It is slightly more comprehensive than the Business Model Canvas in that it consists of 4 major categories and 12 individual parts.

The final section of the chapter explains each of the components of the Barringer/Ireland Business Model Template. The first category, Core Strategy, consists of Business Mission, Basis of Differentiation, Target Market, and Product/Market Scope. The second category, Resources, consists of core competencies and key assets. The third category, Financials, consists of Revenue Streams, Cost Structure, and Financing/Funding. The final category, Operations, consists of Product (or Service) Production, Channels, and Key Partners.

CHAPTER OUTLINE I. Business Models and Their Importance II General Categories of Business Models A. Standard Business Models B. Disruptive Business Models III. The Barringer/Ireland Business Model Template A. Core Strategy 1. Business Mission 2. Basis of Differentiation 3. Target Market 4. Product/Market Scope B. Resources 1. Core Competencies

2. Key Assets C. Financials 1. Revenue Streams 2. Cost Structure 3. Financing/Funding D. Operations 1. Product (or Service) Production 2. Channels 3. Key Partners CHAPTER NOTES I. Business Models and Their Importance A. A firm‘s business model is its plan or recipe for how it creates, delivers, and captures value for its stakeholders.

B. Glance ahead to Figure 4.2, the Barringer/Ireland Business Model Template. As you can see by looking at the template, a firm‘s business model represents the core aspects of its business.

C. It also describes how the core aspects fit together and support one another.

II.

General Categories of Business Models

A. Standard business models depict existing plans or recipes firms can use to determine how they will create, deliver, and capture value for their stakeholders.

1. There are a number of standard business models. An abbreviated list is shown in Table 4.1. a. Among the standard business models are the following: i. ii. iii. iv. v. vi. vii. viii. ix. x.

Advertising Business Model Auction Business Model Bricks and Clicks Business Model Franchise Business Model Freemium Business Model Low-Cost Business Model Manufacturer/Retailer Business Model Peer-to-Peer Business Model Razor and Blades Business Model Subscription Business Model

xi.

Traditional Retailer Business Model

2. It is important to understand that there is no perfect business model. Each of the standard models has inherent strengths and weaknesses.

B. Disruptive business models, which are rare, are models that do not fit the profile of a standard business model, and are impactful enough that they disrupt or change the way business is conducted in an industry or an important niche within an industry.

1. In Table 4.2, we describe actual disruptive business models that were used by four different companies.

The companies are: Dell, Google, Salesforce.com, and Uber.

2. There are three types of disruptive business models. a. A new market disruption addresses a market that previously wasn‘t served. An example is Google and its AdWords program. b. The second type of disruptive business model is referred to as low-end market disruption. Low-end disruption is possible when the firms in an industry continue to improve products or services to the point where they are actually better than a sizable portion of their clientele needs or desires. This ―performance oversupply‖ creates a vacuum that provides an opportunity for simple, typically low-cost business models to exist.

Examples here include Southwest Airlines in the United States and Ryanair in Europe. c. Low-end disruptive business models are also introduced to offer simpler, cheaper, or more convenient ways to perform an everyday task. If a start-up goes this route, the advantages must be compelling, and the company must strike a nerve to pull it off. An example of a firm that‘s pulled this off is Uber.

III. The Barringer/Ireland Business Model Template 

The business model framework used here, the Barringer/Ireland Business Model Template, is shown in Figure 4.2 in the chapter.



It is slightly more comprehensive than the Business Model Canvas in that it consists of 4 major categories and 12 individual parts. The 4 categories and 12 parts make up a firm‘s business model.



The job of the entrepreneur, or team of entrepreneurs, is to configure their firm‘s business model in a manner that produces a viable and exciting business.



Appendix 4.1 (of the chapter) contains an expanded version of the Barringer/Ireland Template shown here.

Feel free to copy and use the template to help formulate the business model for an individual firm.

A. Core Strategy (Part 1) 1. The first component of a business model is core strategy. A core strategy describes how the firm plans to compete relative to its competitors.

2. The primary elements of core strategy are: business mission, basis of differentiation, target market, and product/market scope. a. Mission Statement. A business mission or mission statement describes why it exists and what its business model is supposed to accomplish. If carefully written and used properly, a mission statement can articulate a business‘s overarching priorities and act as its financial and moral compass. b. Basis of Differentiation. It‘s important that a business clearly articulates the points that differentiate its product or service from competitors. This is akin to what some authors refer to as a company‘s value proposition. c. Target Market. The identification of the target market in which the firm will compete is extremely important. A target market is a place within a larger market segment that represents a narrower group of customers with similar interests. Most new businesses do not start by selling to broad markets. Instead, most start by identifying an emerging or underserved niche within a larger market.

d. Product/Market Scope. A company‘s product/market scope defines the products and markets on which it will concentrate. Most firms start narrow and pursue adjacent product and market opportunities as the company grows and becomes financially secure.

B. Resources 1. A firm is not able to implement a strategy without resources, so the resources a firm has affect its business model substantially. The two most important strategic resources are core competencies and key assets.

2. Resources are the inputs a firm uses to produce, sell, distribute, and service a product or service.

3. Resources are developed and accumulated over a period of time. As a result, when completing the Barringer/Ireland Business Model Template, the current resources a company possesses should be the resources that are noted, but aspirational resources should be kept in mind. a. Core Competencies. A core competency is a specific factor or capability that supports a firm‘s business model and sets it apart from its rivals. A core competency can take on various forms, such as technical know-how, an efficient process, a trusting relationship with customers, expertise in product design, and so forth. Most start-ups will list two to three core competencies on the business model template. b. Key Assets. Key assets are the assets that a firm owns that enable its business model to work. The assets can be physical, financial, intellectual, or human. Different key resources are needed depending on the business model that a firm conceives. In filling out the Barringer/Ireland Business Model Template, a firm should list three to four key assets that it possesses that support its business model as a whole.

C. Financials 1. The third component of a business model focuses on a firm‘s financials.

2. For most businesses, the manner in which it makes money is one of the most fundamental aspects around which its business model is built. a. Revenue Streams. A firm‘s revenue streams describe the ways in which it makes money. Some businesses have a single revenue stream, whereas others have several. The most common revenue streams are shown in Table 4.3. b. Cost Structure. A business‘s cost structure describes the most important costs incurred to support its business model. Initially, it is important to determine the role of costs in a business. Cost-driven businesses focus on minimizing costs wherever possible. c. Financing/Funding. Finally, many business models rely on a certain amount of financing or funding to bring their business models to life.

D. Operations 1. The final quadrant in a firm‘s business model focuses on operations.

2. Operations are both integral to a firm‘s overall business model and represent the day-to-day heartbeat of a firm. a. Product (or Service) Production. This section focuses on how a firm‘s products and/or services are produced. If a firm sells physical products, the products can be manufactured or produced inhouse, by a contract manufacturer, or via an outsource provider. This decision has a major impact on all aspects of a firm‘s business model.

If a firm is providing a service rather than a physical product, a brief description of how the service will be produced should be provided. b. Channels. A company‘s channels describe how it delivers its product or service to its customers.

Businesses sell direct, through intermediaries, or through a combination of both. A firm‘s selection of channels affects other aspects of its business model. c. Key Partners. The final element of a firm‘s business model is key partners. Start-ups, in

particular, typically do not have sufficient resources to perform all the tasks needed to make their business models work, so they rely on partners to perform key roles.

BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING What Went Wrong?

Peer-to-Peer Business Models: Good for Some, Not So Good for Others 1.

Prior to launching their firms, how could BlackJet, Ridejoy, and Neighborrow.com have better anticipated the issues that ultimately caused them to fail?

Answer: They could have conducted a thorough feasibility analysis prior to launching. Also, they could have better understood that peer-to-peer services that are used only occasionally are less compelling than those that are used frequently. Part of the success of Uber and Lyft, for example, is that its customers use the service frequently. That wasn‘t the case with BlackJet, Ridejoy, and Neighborrow.com.

2.

In regard to putting together an effective business model, what can other peer-to-peer business model start-ups learn from the failure of BlackJet, Ridejoy, and Neighborrow.com?

Answer: That services that are used only occasionally are much less compelling than services that are used often.

3.

Spend some time looking at Lyft, one of the successful peer-to-peer business model companies mentioned in the feature. Why do you think Lyft has been successful while BlackJet, Ridejoy, and Neighborrow.com failed?

Answer: This is a good question for an individual or a group assignment. Lyft has been successful in part because (1) it is a service that its customers use frequently and (2) it provides a convenient alternative to taxi service. Most people don‘t enjoy the experience of taking a cab. It‘s often a hassle to find a cab and the cars are often unappealing. Lyft offers quick pick up and clean and comfortable cars to ride in. Its service offering is simply more compelling than the services of the failed start-ups.

4.

What role do you think the industry that a start-up is in plays in its success or failure as a peer-to-peer business? Are some industries more receptive to peerto-peer business model start-ups than others? Explain.

Answer: Industry plays an important role. Very few people like taxis—thus the appeal of Lyft and Uber. In large cities, particularly during conventions, it‘s hard to find a hotel room, and most convention hotels charge $150 or more per night. Airbnb offers an attractive affordable alternative—thus the appeal of its service. BlackJet, for example, didn‘t share these advantages. As mentioned in the feature, people can book first class tickets on airlines and fly in luxury. BlackJet‘s service was more expensive for offering a similar experience.

Savvy Entrepreneurial Firm CoachUp: How One Company Creates, Delivers, and Captures Value for Its Stakeholders 1.

Do you think CoachUp‘s business model is sound? If you could make any changes to the firm‘s business model, what would you suggest?

Answer: Most students will say that CoachUp‘s business model is sound. Its business model addresses the value creation, value delivery, and value capture parts in a convincing way. Challenge your students to suggest changes in CoachUp‘s business model. Finding good suggestions for changes in CoachUp‘s business model is a challenge. CoachUp has a very well thought out business model that has facilitated CoachUp‘s success.

2.

To what degree does CoachUp‘s business model reflect the attributes of a sound business idea as described in Chapter 2?

Answer: A sound business opportunity is attractive, timely, durable, and is anchored in a product, service, or business that creates or adds value for its buyer or end user. Most students will argue that CoachUp‘s business reflects all of these attributes.

3.

Read the ―What Went Wrong?‖ feature for this chapter. The feature focuses on peer-to-peer business models, and makes the point that the peer-to-peer approach works in some instances and in some instances it doesn‘t. Why do you think CoachUp‘s peer-to-peer business model is working while others haven‘t?

Answer: Peer-to-peer businesses act as matchmakers. In the case of CoachUp, the match is between an athlete who has clear aspirations and a coach who

can help the athlete achieve the goals. It has succeeded because there is potentially a large pool of aspiring athletes on the one side and coaches who desire extra income on the other. The key is to have a critical mass on both sides.

4.

Do some additional research on CoachUp. Complete the Barringer/Ireland Business Model Template for the company.

Answer: This is a good question for an individual assignment because it helps students to apply the template for a successful company. Possible sources include: https://www.si.com/tech-media/2016/08/24/coachup-athlete-trainingstephen-curry-nerlens-noel; https://www.inc.com/kevin-j-ryan/2015-30under-30-coachup.html.

Partnering for Success Upwork and Guru: Platforms That Facilitate the Forming of Partnerships with Freelancers 1.

Imagine that you are the founder of a company and need help setting up QuickBooks for your company. QuickBooks is an accounting and bookkeeping platform for small businesses. Search Upwork and Guru for QuickBooks freelancers. Select the one that you think represents the best combination of expertise, experience, and cost. Summarize the key attributes of the person you selected.

Answer: This is a good question for an individual or a group assignment.

2.

To what degree is it appropriate or inappropriate to hire freelancers to fulfill some of the core competencies of a business?

Answer: It is inappropriate to hire freelancers to fulfill some of the core competencies of a business. A core competency is a specific factor or capability that supports a firm‘s business model and sets it apart from its competitors. As a result, it should be handled by the founders and permanent employees of a firm.

Freelancers are typically hired to fill gaps that companies have in their expertise, rather than support a core competency.

3.

Make a bullet-point list of the advantages of hiring freelancers to do short-term projects for a start-up?

Answer: Advantages of hiring freelancers include the following:

  



4.

Can fill gaps that companies have in their expertise.

They can be hired on an ―as-needed basis,‖ so they are typically cheaper than hiring a part-time employee.

If a project a freelancer is hired to complete doesn‘t work out, a business can simply not hire the same freelancer again. It is more difficult to separate from part-time and full-time employees.

There are a growing number of Web-based platforms that make it easy to identify and hire experienced freelancers.

In what ways do you believe a freelancer could become a partner of a company rather than an arms-length independent contractor?

Answer: If a company uses the same freelancer frequently, it might make sense to frame the relationship more as a partnership rather than an armslength relationship. This might result in giving the freelancer more regular work and treating him or her more as a partner rather than a contractor.

REVIEW QUESTIONS 4-1.

What is a business model?

Answer: A business model is a firm‘s plan or recipe for how it creates, delivers, and captures value for its stakeholders.

4-2.

How does a freemium business model work?

Answer: A freemium business model is a business model in which a firm provides a basic version of its service for free, and makes money by selling a premium version of the service.

4-3.

What is the best time for a firm to develop its business model?

Answer: After the initial validation of the business idea and prior to fleshing out the operational details of the company.

4-4.

What is a standard business model and what is a disruptive business model?

Answer: Standard business models depict existing plans or recipes firms can use

4-5.

to determine how they will create, deliver, and capture value for their stakeholders. Disruptive business models, which are rare, are models that do not fit the profile of a standard business model, and are impactful enough that they disrupt or change the way business is conducted in an industry or an important niche within an industry.

What are the four major categories that comprise the Barringer/Ireland Business Model Template?

Answer: Core Strategy, Resources, Financials, and Operations.

4-6.

How are a firm‘s core strategy and its mission related to each other as parts of a business template?

Answer: The Barringer/Ireland Business Model Template consists of four categories: Core Strategy, Resources, Financials, and Operations. A firm‘s mission is one of four elements of the core strategy portion of the business model template.

4-7.

What is a company‘s ―basis of differentiation‖ and what is the importance of this part of a business template?

Answer: A business‘s basis of differentiation is what differentiates it from competitors. It‘s important that a business clearly articulate the points that differentiate its product or service from competitors.

A company‘s basis of differentiation is what causes consumers to pick one company‘s products over another‘s. It is what solves a problem or satisfies a customer need.

4-8.

Why do most entrepreneurial firms initially choose to compete within a narrow target market?

Answer: Because a new business typically does not have sufficient resources to compete in broad markets.

4-9.

What is a company‘s product/market scope?

Answer: A company‘s product/market scope defines the products and markets on which it will concentrate.

410.

Why are the resources a firm possesses a critical part of its business model?

Answer: Resources are the inputs a firm uses to produce, sell, distribute, and service a product or service. A firm must have sufficient resources to make its business model work.

411.

What is a core competency?

Answer: A core competency is a specific factor or capability that supports a firm‘s business model and sets it apart from rivals.

412.

How many core competencies do most start-ups have?

Answer: Two to three.

413.

What are a firm‘s key assets?

Answer: Key assets are the assets that a firm owns that enable its business model to work.

414.

What are the differences between a firm‘s physical assets and its intellectual assets?

MyLab Question.

415.

What is a revenue stream and why is it so important to a firm‘s short- and long-term success?

Answer: A revenue stream describes a way in which a business makes money. It is important because revenues drive the business both in the short and in the longterm.

416.

How do fixed costs differ from variable costs?

Answer: Fixed costs are costs that remain the same despite the volume of goods or services provided.

Variable costs vary proportionally with the volume of goods or services provided.

417.

What are the primary elements of the Operations component of the Barringer/Ireland Business Model Template?

Answer: Product (or Service) Production, Channels, and Key Partners.

418.

Who are ―key partners‖ and why are they important to the success of an entrepreneurial venture?

Answer: Key partners include the key relationships that start-ups strike with other businesses. Start-ups

typically do not have sufficient resources to perform all the tasks needed to make their business models work, so they rely on partners to perform key roles.

419.

What are some common advantages that accrue to a firm as a result of partnering with other companies?

Answer: Gaining access to a particular resource, risk and cost sharing, speed to market, and learning.

420.

Who are ―freelancers‖ and why are these individuals potentially attractive as partners for an entrepreneurial venture?

MyLab Question.

APPLICATION QUESTIONS 421.

Naomi Stephenson plans to open a company that will design and manufacture accessories for smartphones.

She has read that having a clearly articulated business model will help ―all of the elements of her business fit together.‖ Naomi isn‘t quite certain she believes this statement. If Naomi asked for your opinion about this statement, what detailed response would you offer?

Answer: A firm‘s business model includes all the activities that define how it competes in the marketplace. As a result, a clearly articulated business model helps a firm integrate its activities. Using a business model perspective also helps a firm think in a holistic manner. It allows an entrepreneur to step back and envision all parts of his or her firm working together.

422.

Do you think that the business models of daily newspapers are viable in the long run? If you were the owner of a daily newspaper in a major U.S. city, would you try to maintain the print edition of your paper, evolve to strictly an online presence, or do something else?

Answer: This is a good thought question for students.

Some newspapers have already failed or have cut back on the frequency of their publications, citing an untenable business model as the primary reason. The largest threats to the business model of newspapers are (1) people have an increasing number of ways to obtain news so they are decreasingly relying on newspapers, and (2) many newspapers place the majority of their content online, for free, which provides a

disincentive for people to buy the print edition of the paper.

423.

Spend some time looking at Wonder Workshop, the focus of the ―You Be the VC 3.2‖ feature. What are five actions this firm could have taken when completing its feasibility analysis that would have been particularly helpful in supporting its business model?

Answer: Students will vary in their responses to this question. Suggested answers include: 

424.

 

Made sure that the basis of differentiation that the company‘s service is based on is something customers value and will pay for.

Made sure the target market was right.

Made sure the product/market scope was appropriate.

 

Made sure the industry was sound (preferably growing).

Made sure the company‘s revenue streams would support the business.

Twitter (http://twitter.com) is a free networking and micro-blogging service that allows its users to send and read other users‘ updates, called ―tweets.‖ This business model continues to be criticized for not being viable in the long-term.

Spend some time studying how Twitter does business. How does the company earn money? Does it or does it not have a business model with long-term potential? If it does not have a viable long-term business model in your view, what changes to its business model should Twitter make to increase its competitiveness?

Answer: As of October 2017 (the time this response was written), Twitter‘s business model still wasn‘t entirely clear. The primary concern is how Twitter will make money. It‘s not uncommon for an Internet business to focus first on building their traffic and then on their business model (this is admittedly a risky strategy, but it‘s the way both Google and Facebook developed). Twitter has basically three choices for making money: (1) charging access for its service—it could offer basic service for free and enhanced tiers of service for a monthly or yearly fee; (2) online advertising; or (3) act as a platform for third-party application and take a piece of the profits that are earned. It has initiated a number of online advertising programs. The jury is still out regarding whether the programs will be successful enough to solidify Twitter‘s business model and provide the firm a long-term upward trajectory. This is a good project for students to work on changes to Twitter‘s business model.

425.

Debra McGahan, a close friend of yours, mentioned to you that to complete a project in one of the courses she is taking this semester, she needs to describe a firm that is using an effective business model. Your immediate response is to recall that you just read this chapter and learned about CoachUp‘s successful business model while reading the Savvy Entrepreneurial Firm feature. Describe CoachUp‘s business model to Debra for the purpose of explaining to her how this particular model allows CoachUp to create value for the firm‘s stakeholders.

Answer: CoachUp is a matchmaking business that connects aspiring athletes who need coaching to realize their goals with coaches who can provide the training. CoachUp takes a commission from the fees paid by the athletes and also a $9.99 per year membership fee from coaches. CoachUp creates value for its stakeholders by getting customers (athletes) to pay for a service that they are unable to search and fit effectively on their own.

426.

Resources and core competencies are both important parts of the Barringer/Ireland Business Model Template. What are the differences between resources and core competencies and why must an entrepreneurial firm have both resources and core competencies in order to develop an effective business model?

Answer: Resources are the inputs a firm uses to produce, sell, distribute, and service a product or service. A core competency is a specific factor or capability that support‘s a firm‘s business model and sets it apart from rivals. Resources are not enough to support an effective business model. Firms must also have capabilities (i.e., core competencies) that enable them to deploy their resources in a manner that not only supports their initiatives but is also difficult to imitate and find a substitute for.

427.

What are some examples of instances in which location is an important part of a firm‘s business model?

Answer: Location is an extremely critical issue for retail stores, certain service businesses, and professional practices (such as doctor‘s offices) that deal directly with the public. In contrast, location isn‘t as important for businesses that don‘t maintain a storefront but go to their customers‘ homes or businesses, such as plumbers, painters, and electricians. A similar rationale applies to Internet and mail-order businesses.

428.

Re-read the opening profile about IndieU. What are the most significant threats to this firm‘s currently successful business model? What actions should the firm take to successfully deal with the threats you identified?

Answer: This is a good question for a group or an individual assignment. Some of the threats to IndieU‘s business model include:    

Keeping its network of volunteer campus brand ambassadors together Keeping its connections to the indie music scene intact Finding the right people to add to the team as the company grows Maintaining its core competency of developing compelling connections at a low cost

 

Maintaining the attractiveness of IndieU‘s platform to the campuses and indie artists Maintaining healthy business partnerships

These threats can be handled by having the right people to support Natalie Edell and her father, Jeffrey as the firm scales up by growing.

429.

Basis of differentiation is part of the Barringer/Ireland Business Model Template. This term was defined in the chapter as ―what causes consumers to pick one company‘s products over another‘s.‖ What is Apple‘s basis of differentiation?

Answer: Product innovation and design and the ambience and design of their retail stores.

YOU BE THE VC 4.1 Company: DoorDash (www.doordash.com) Business Idea: Launch an on-demand restaurant delivery service that empowers small business owners to offer delivery of their food items in an affordable and convenient manner.

You Be the VC Scorecard DoorDash (www.doordash.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

DoorDash was co-founded by four Stanford University graduates – Tony Xu, Stanley Tang, Andy Fang, and Evan Charles Moore. The team has both the technical and the business experience.

In addition, DoorDash is funded by well-known Silicon Valley venture funds such as Sequoia, Kleiner Perkins, and Khosla Ventures and key people from these funds provide mentoring to the management team.

Strength of the Opportunity

1

2

3

4

5

The delivery market is estimated to be $70 billion. Although the delivery space is crowded (GrubHub is a big player), DoorDash is positioning itself as a logistics expert in this space. If it catches on, its service has substantial upside potential, not only from a monetary standpoint but from the standpoint of providing a convenient service.

Strength of the Industry

1

2

3

4

5

While there are chain restaurants, by and large in a typical city, the restaurant market is highly fragmented and the typical independent restaurant does not have the scale to offer delivery. DoorDash connects customers with these restaurants and offers delivery service. While entry barriers are low (it is easy to start a city-specific delivery service), DoorDash seems to have the technology platform that start-ups may not have.

Strength of Business Model

1

2

3

4

5

DoorDash has three sources of revenues and regards its drivers (called ―Dashers‖ ) as Uber-type freelancers. The key aspect of its business model is its technology platform.

Average Score

4.0/5.0

Decision: We would fund this firm. Although the delivery market is crowded and it‘s hard to get noticed, we believe in DoorDash‘s management team and believe that their service adds sufficient value that they will be noticed and adopted. We also believe in their business model—that is, relying on three sources of revenues. Because of this

model, there will be very little resistance on the consumer side to using the service. The restaurants benefit by using the relationship with DoorDash to augment their revenues via delivery. It‘s a win-win-win strategy for the customer, DoorDash, and the restaurants.

YOU BE THE VC 4.2 Company: Zagster (www.zagster.com) Business Idea: Launch a company that designs, builds, and operates private bike sharing programs for clients of all sizes, including universities, apartment complexes, hotels, multi-family communities, and corporate campuses across the United States.

You Be the VC Scorecard Zagster (www.zagster.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

Zagster was founded by Drexel University graduates Timothy Ericson and Jason Menizer. Prior to Zagster, Ericson was with Fleming Consulting and Pennoni Associates, and Menizer was a student. Ericson and Menizer have built out the Zagster team which now numbers around 12. The team consists of a nice mix of people with business and start-up experience.

Strength of the Opportunity

1

2

3

4

5

The opportunity is moderate. Both cities and private organizations are launching bike sharing programs.

Zagster does benefit from the environment trend of people seeking out healthier and fitter lifestyles.

It also ties into the trend of cities, communities, and private organizations offering more healthand fitness-enhancing services and amenities to their constituents.

Strength of the Industry

1

2

3

4

5

Hard to tell. On the one hand, there are reports that more than 500 cities (worldwide) now have some type of bike sharing program, and the number of bike sharing programs offered by cities and private organizations is growing. On the other hand, a large number of bike sharing programs have failed. In addition, despite the good intentions of most cities and organizations that set up bike sharing programs, some generate negative attention. People in cities where bike sharing programs are heavily subsidized complain that the bikes are under-utilized, the bike stands weather and become unsightly, and that the bikes are often used by tourists or novice riders that are prone to accidents. We were unable to find conclusive evidence one way or another, other than the fact that bike sharing programs show both great promise and are subject to being troubled.

Strength of Business Model

1

2

3

4

5

Zagster‘s business model is fairly straightforward. It enlists clients to use its service and charges a monthly fee based on the number of bikes installed. It is up to the client to give away the service or charge a fee.

Average Score

3.5/5.0

Decision: We would not fund this firm. Although we applaud Zagster for providing businesses and others a turnkey solution for providing their employees or customers a bike sharing service, we‘re suspicious it isn‘t a very good business. Most cities that offer bike sharing services must heavily subsidize them to make them work. Zagster is removing this risk (to its customers) by charging them a monthly fee based on the number of bikes they use, but we wonder how Zagster will make this work. If cities that

support bike sharing programs are finding that the programs are more expensive than they projected that they would be, we wonder if Zagster won‘t experience the same. We hope we‘re wrong—we‘d like to see a vibrant bike sharing program on our own campuses. We‘re just not ready to fund one yet.

CASES Case 4.1 Etsy: Breaking Down a Business Model DISCUSSION QUESTIONS 434.

How does Etsy create, deliver, and capture value for its shareholders?

Answer: Etsy‘s core strategy is laid out in the case.

The company‘s mission is to ―re-imagine commerce in ways that build a more fulfilling and lasting world.‖ To do this, its basis of differentiation flows from its mission to focus on handmade goods, the number of buyers and sellers on its site, and the sense of community it has created. It has two target markets—its sellers and its buyers. Its sellers are the producers of handmade goods. Its buyers are people drawn to the site because they want something unique, something that has a story. Etsy‘s product/market scope has expanded since its inception. Although the majority of items are still handmade, on October 1, 2013, Etsy announced it would allow factory-made goods on its site (under certain conditions).

435.

Is Etsy‘s business model a standard or a disruptive business model? Explain your answer.

Answer: Most students will argue that Etsy does have a disruptive business model. A disruptive business model is one that does not fit the profile of a standard business model, and is impactful enough that it disrupts or changes the way business is conducted in an industry. Most students will agree that it‘s fair to say that Etsy has changed the way people sell handmade items. As a result of Etsy, people that sell handmade items for the first time have a robust online platform through which they can establish an online store and make their products available to a wide population.

436.

How is Etsy‘s business model different from eBay‘s business model for the makers of handmade goods?

Answer: In regard to basis for differentiation from eBay, the things that differentiate Etsy are:

437.

 Focus on handmade goods  The number of buyers and sellers on its site  The sense of community that it has developed In your opinion, what is the most serious challenge facing Etsy? To what extent does the challenge threaten Etsy‘s business model? How should Etsy confront the challenge?

Answer: While student opinions may vary, Etsy faces at least three challenges. (1) the development of tools and educational materials to empower sellers, (2) the growth of a vibrant community of buyers and sellers, and (3) the ability to generate word-of-mouth awareness of the business. While these are core competencies that help all aspects of Etsy‘s business model work, any one of these may be challenged by competitors. For example, Etsy differentiates itself from its competitors by the number of buyers and sellers on its site. It wouldn‘t have a large number of buyers and sellers on its site if it wasn‘t for the core competencies listed above.

However, competitors can get a large number of both buyers and sellers to their site. Similarly, Etsy gleans substantial revenue from sales commissions and listing fees. Again, competitors may undercut Etsy by quoting lower fees. Etsy has to continually update its business model to confront these challenges.

Case 4.2 TOMS‘ One-for-One Business Model: Is It Sustainable for the Future?

DISCUSSION QUESTIONS 438.

Given TOMS‘ mission and the way its business model is constructed, would you characterize TOMS‘ business model as a standard business model or a disruptive business model? What impact has TOMS‘ business model had on socially-minded organizations?

Answer: TOMS‘ business model disrupts the ways products are sold and hence it is a disruptive model. TOMS‘ target market is consumers who resonate with the company‘s one-for-one approach and the company‘s combined for-profit/philanthropic persona. It‘s not

likely that TOMS‘ target market will change in the future. It will continue to appeal to people who know they are paying a little more for TOMS‘ shoes, coffee, and eyewear because part of the purchase price is used for a philanthropic purpose.

439.

What revenue streams does TOMS have that support how the firm competes? How sustainable are these revenue streams?

Answer: TOMS has the following revenue streams: 

Product sales, which include shoes, eyewear, and coffee  TOMS branded products, which include t-shirts, sweatshirts, caps, and TOMS‘ flags  Miscellaneous items available via the TOMS Marketplace Most students will argue that the revenue streams are sustainable. Shoes are not a one-time purchase. If a person likes the TOMS shoes that they buy, they will probable buy more (and encourage others to buy TOMS shoes). Coffee is a consumable product, so if someone likes TOMS coffee they could become a frequent purchaser. Eyewear is a more infrequent purchase, but may still have an appeal to a large number of TOMS followers.

440.

What key assets does TOMS possess and how sustainable are those assets?

Answer: TOMS‘ key assets include the following:       

Blake Mycoskie Corporate culture Relationships with nonprofits that help TOMS distribute products to children and people in need TOMS volunteers Interns (that work in TOMS facilities) Campus clubs Day Without Shoes Campaign

Most students will say that the assets are sustainable.

Obviously, Blake Mycoskie will eventually retire or exit TOMS for another reason. It‘s not a stretch to believe that he‘ll be careful to select a replacement that will carry on TOMS‘ mission.

441.

What are the major challenges TOMS faces as the firm continues implementing its business model as a means of reaching its mission? Which of these challenges is the most serious and why?

Answer: TOMS‘ major challenges are as follows: 





Meeting the criticisms of those that point out flaws in TOMS‘ basic approach. The criticisms include: (1) making people in poor countries depend on the good will of others, rather than creating opportunities to take care of themselves; (2) utilizing manufacturing facilities in China and elsewhere in the world where human rights violations have been documented; and (3) inadvertently stymieing local entrepreneurship.

Maintaining momentum given the growing number of organizations that have a social purpose and are competing for the same socially conscious consumer that TOMS is.

Maintaining a vibrant volunteer network of people who help make its business model work.

The most serious challenge is meeting the criticisms of those that point out the flaws in TOMS. As articulated in the case, TOMS is addressing the concerns in a thoughtful and substantive manner.

CHAPTER 5 INDUSTRY AND COMPETITOR ANALYSIS LEARNING OBJECTIVES 1.

2.

3.

4.

5.

Explain the purpose of an industry analysis.

Identify and discuss the five competitive forces that determine industry profitability.

Explain the value that entrepreneurial firms create by successfully using the five forces model.

Identify the five primary industry types and the opportunities they offer.

Explain the purpose of a competitor analysis and a competitive analysis grid.

CHAPTER OVERVIEW Chapter 5 focuses on industry analysis. A critical aspect

of any start-up‘s chances for success is the industry it enters and how it positions itself relative to its industry rivals. The WriteLab feature at the beginning of the chapter provides an example of how a start-up positioned itself in a savvy manner in a difficult industry.

The chapter examines industry dynamics by first talking about the importance of studying industry trends and then by walking through Porter‘s five forces that determine industry profitability. This discussion concludes with an explanation of the four industry-related questions that a new firm should ask before proceeding. The five industry types and the opportunities they offer are explained and discussed.

The chapter concludes with a discussion of competitor analysis. The three groups of competitors a new firm must face are introduced and discussed. A description of how firms collect competitive analysis is provided. The chapter concludes with a description of how to complete a competitive analysis grid.

CHAPTER OUTLINE I. Industry Analysis A. Studying Industry Trends 1. Environmental Trends 2. Business Trends II. The Five Forces Model A. Threat of Substitutes B. Threat of New Entrants 1. Barriers to Entry a. Economies of Scale b. Product Differentiation c. Capital Requirements d. Cost Advantages Independent of Size e. Access to Distribution Channels f. Government and Legal Barriers C. Rivalry Among Existing Firms 1. Number and Balance of Competitors 2. Degree of Difference Between Products 3. Growth Rate of an Industry 4. Level of Fixed Costs D. Bargaining Power of Suppliers 1. Supplier Concentration 2. Switching Costs 3. Attractiveness of Substitutes 4. Threat of Forward Integration

E. Bargaining Power of Buyers 1. Buyer Group Concentration 2. Buyer‘s Costs 3. Degree of Standardization of Supplier‘s Products 4. Threat of Backward Integration III. The Value of the Five Forces Model IV. Industry Types and the Opportunities They Offer A. Emerging Industries B. Fragmented Industries C. Mature Industries D. Declining Industries E. Global Industries V. Competitor Analysis A. Identifying Competitors B. Sources of Competitive Intelligence C. Completing a Competitive Analysis Grid CHAPTER NOTES I. Industry Analysis 

Industry analysis is business research that focuses on the potential of an industry.



An industry is a group of firms producing a similar product or service, such as music, fitness drinks, or electronic games.

•

Once it is determined that a new venture is feasible in regard to the industry and market in which it will compete, a more in-depth analysis is needed to learn the ins and outs of the industry the firm plans to enter.

A. Studying Industry Trends 1. Environmental Trends—Economic trends, social trends, technological advances, and political and regulatory changes are the most important environmental trends for entrepreneurs to study.

2. Business Trends—Other trends impact industries that aren‘t environmental trends per se but are important to mention. For example, the firms in some industries benefit from an increased ability to outsource manufacturing or service functions to lower-cost labor markets, whereas firms in other industries don‘t share this advantage.

II.

The Five Forces Model



The five competitive forces model is a framework for understanding the structure of an industry and was developed by Harvard professor Michael Porter.



Shown in Figure 5.1 in the textbook, the framework is comprised of the forces that determine industry profitability.



These forces—the threat of substitutes, the entry of new competitors, rivalry among existing firms, the bargaining power of suppliers, and the bargaining power of buyers—determine the average rate of return for the firms in an industry.

•

Each of Porter‘s five forces impacts the average rate of return for the firms in an industry by applying pressure on industry profitability. Well-managed companies try to position their firms in a way that avoids or diminishes these forces—in an attempt to beat the average rate of return for the industry.

A. Threat of Substitutes 1. The price that consumers are willing to pay for a product depends in part on the availability of substitute products.

2. For example, there are few, if any, substitutes for prescription medicines, which is one of the reasons the pharmaceutical industry is so profitable.

3. In contrast, when close substitutes for a product do exist, industry profitability is suppressed because consumers will opt not to buy when the price is too high.

B. Threat of New Entrants 1. If the firms in an industry are highly profitable, the industry becomes a magnet to new entrants.

2. Unless something is done to stop this, the competition in the industry will increase, and average industry profitability will decline.

3. There are a number of ways that firms in an industry can keep the number of new entrants low. These techniques are referred to as barriers to entry. The

six major sources of barriers to entry are shown below: a. Barriers to Entry i. Economies of scale ii. Product differentiation iii. Capital requirements iv. Cost advantages independent of size v. Access to distribution channels vi. Government and legal barriers C. Rivalry Among Existing Firms 1. In most industries, the major determinant of industry profitability is the level of competition among the firms already competing in the industry.

2. Some industries are fiercely competitive to the point where prices are pushed below the level of costs. When this happens, industry-wide losses occur.

3. There are four primary factors that determine the nature and intensity of the rivalry among existing firms in an industry. i. Number and balance of competitors ii. Degree of difference between products iii.

Growth rate of an industry iv. Level of fixed costs D. Bargaining Power of Suppliers 1. In some cases, suppliers can suppress the profitability of the industries to which they sell by raising prices or reducing the quality of the components they provide.

2. If a supplier reduces the quality of the components it supplies, the quality of the finished product will suffer, and the manufacturer will eventually have to lower its price.

3. If the suppliers are powerful relative to the firms in the industry to which they sell, industry profitability can suffer.

4. Several factors have an impact on the ability of suppliers to exert pressure on buyers and suppress

the profitability of the industries they serve.

These include: i. Supplier concentration ii. Switching costs iii.

Attractiveness of substitutes iv. Threat of forward integration E. Bargaining Power of Buyers 1. Buyers can suppress the profitability of the industries from which they purchase by demanding price concessions or increases in quality.

2. For example, the automobile industry is dominated by a handful of large automakers that buy products from thousands of suppliers in different industries. This enables the automakers to suppress the profitability of the industries from which they buy by demanding price reductions.

3. Several factors affect buyers‘ ability to exert pressure on suppliers and suppress the profitability of the industries from which they buy. These include the following: i. Buyer group concentration ii. Buyer‘s costs iii.

Degree of standardization of supplier‘s products iv. Threat of backward integration III. The Value of the Five Forces Model 

Along with helping a firm understand the dynamics of the industry it plans to enter, the five forces model can be used in two ways to help a firm determine whether it should enter a particular industry and whether it can carve out an attractive position in that industry.

•

First, the five forces model can be used to assess the attractiveness of an industry or a specific position within an industry by determining the level of threat to industry profitability for each of the five forces, as shown in Table 5.2 in the textbook.

•

For example, if a firm filled out the form shown in Table 5.2 and several of the threats to industry profitability were high, the firm may want to

reconsider entering the industry or think carefully about the position it will occupy in the industry.

•

IV.

The second way a new firm can apply the five forces model to help determine whether it should enter an industry is by using the model to answer several key questions. By doing so, a new venture can assess the thresholds it may have to meet to be successful in a particular industry. These questions are: 

Question 1: Is the industry a realistic place for our new venture to enter?



Question 2: If we do enter the industry, can our firm do a better job than the industry as a whole in avoiding or diminishing the impact of the forces that suppress industry profitability?



Question 3: Is there a unique position in the industry that avoids or diminishes the forces that suppress industry profitability?

•

Question 4: Is there a superior business model that can be put in place that would be hard for industry incumbents to duplicate?

Industry Types and the Opportunities They Offer

A. Emerging Industries 1. An emerging industry is a new industry in which standard operating procedures have yet to be developed.

2. The firm that pioneers or takes the leadership of an emerging industry often captures a first-mover advantage.

B. Fragmented Industries 1. A fragmented industry is one that is characterized by a large number of firms of approximately the same size.

2. The primary opportunity existing for start-ups in fragmented industries is to consolidate the industry and establish industry leadership as a result of doing so.

C. Mature Industries 1. A mature industry is an industry that is experiencing slow or no increase in demand, has numerous repeat customers, and has limited product innovation.

2. Occasionally, entrepreneurs introduce new product innovations to mature industries, surprising industry incumbents who thought nothing new was possible in their industries.

D. Declining Industries 1. A declining industry is an industry that is experiencing a reduction in demand.

2. Typically, entrepreneurs shy away from declining industries because the firms in the industry don‘t meet the tests of an attractive opportunity described in Chapter 2.

E. Global Industries 1. A global industry is an industry that is experiencing significant international sales.

2. Many start-ups enter global industries and from day one try to appeal to international rather than just domestic markets.

3. The two most common strategies pursued by firms in global industries are the multidomestic strategy and the global strategy. a. Firms that pursue a multidomestic strategy compete for market share on a country-by-country basis and vary their product or service offerings to meet the demands of a local market. b. In contrast, firms pursuing a global strategy use the same basic approach in all foreign markets.

Firms that sell more universal products, such as athletic shoes, have been successful with global strategies.

V. Competitor Analysis



After a firm has gained an understanding of the industry and markets in which it plans to compete, the next step is to complete a competitor analysis.



A competitor analysis is a detailed analysis of a firm‘s competition. It helps a firm understand the positions of its major competitors and the opportunities that are available to obtain a competitive advantage in one or more areas.



A competitive analysis grid is a tool for organizing the information a firm collects about its primary competitors.

A. Identifying Competitors 1. The different types of competitors a business will face are shown in Figure 5.3 in the textbook.

a. Direct competitors b. Indirect competitors c. Future competitors B. Sources of Competitive Intelligence 1. To complete a meaningful competitive analysis grid, a firm must first understand the strategies and behaviors of its competitors.

2. The information that is gathered by a firm to learn about its competitors is referred to as competitive intelligence.

3. The following are examples of ways a firm can ethically obtain information about its competitors: a. Attend conferences and trade shows b. Purchase competitors‘ products c. Study competitors‘ Web sites d. Set up Google e-mail alerts e. Read industry-related books, magazines, and Web sites f. Talk to customers about what motivated them to buy your product as opposed to your competitor‘s product C. Completing a Competitive Analysis Grid

1. An example of a competitive analysis grid is provided in Table 5.5.

BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING What Went Wrong?

SharpScholar: Lessons Learned from a Failed EdTech Start-Up 1.

What lessons does SharpScholar‘s failure have for entrepreneurs who are considering entering the EdTech industry?

Answer: The main lessons are to avoid the things that sunk SharpScholar. As the founder points out in his post-failure blog, entrepreneurs have to have a clear focus on who their customer is. While there are industries where the customer pays for a product that he/she does not choose (like a textbook for a class), this split does cause challenges. The most important thing, though, is to identify who the decision maker is (in SharpScholar‘s case it is likely the teacher) and go after him/her.

2.

We studied business models in chapter 4. Would you classify SharpScholar‘s business model as standard or disruptive? What types of execution-related challenges are associated with the type of business model you believe SharpScholar sought to implement?

Answer: Arguably SharpScholar disrupted the education industry via technology. In disruption, a key challenge is educating the market on what benefit your product/service can offer. This is the biggest implementation challenge in implementing a business model such as that of SharpScholar.

3.

As explained in this feature, SharpScholar did not have a precise image of who was the firm‘s target customer.

Examine the ―bargaining power of buyers‖ from the perspective of the different customers mentioned in the feature who may have been SharpScholar‘s target customer. Which of the potential target customers would possess the greatest amount of buyer power relative to SharpScholar and why?

Answer: The teacher makes the adoption decision which is then paid for either by the school or the student.

The key ―buyer‖ is the teacher and teachers in thiscase have considerable bargaining power.

4.

What actions could SharpScholar have taken, throughout the life of its business, that may have enabled it to remain competitive and still be a successful firm today?

Answer: Students will vary in terms of their answers to this question. Most students will point to the mistakes that SharpScholar made and suggest that had they avoided the mistakes and spent more time listening to their users, they would have significantly increased their chances of success.

Savvy Entrepreneurial Firm Thriving in a Crowded Industry by Creating Meaningful Value and Differentiation from Competitors 1.

What are the common attributes across the three companies in the feature? How do these attributes help the companies thrive in otherwise competitive industries?

Answer: The common attribute is that all three companies differentiate themselves from competitors in unique ways. The distinct attribute enables each company to correctly position itself given the context of its industry.

2.

In what ways are each companies‘ features redefining the customer experience in their industries?

Answer: Raden produces travel bags that integrate technology with comfort. Suja Juice sells healthy juices. Finally, The Muse is a job placement site. In each case, the company and the product in question address a customer pain point – Raden‘s bags help charge smartphones and allow users to find out where they are in a baggage carousel. Suja provides ―cold pressed‖ juices that offer a healthy alternative to regular juices. The Muse provides job seekers with more information about an employer.

3.

Of the three companies featured, which one do you think will have the most profound impact on its industry?

Describe what you think the impact or impacts will be.

Answer: Students will vary in terms of their answers to

this question. A case could be made for each of the three companies featured.

4.

Find an example of another company that is thriving in a highly competitive industry. Analyze the company and discern what sets it apart from its competitors.

Answer: This is a good question for an individual or group assignment.

Partnering for Success Three Ts That Are Important for Becoming Active in an Industry: Trade Associations, Trade Shows, and Trade Journals 1.

Pick an industry in which you have an interest. Make a list of the premier trade associations, trade shows, and trade journals associated with the industry.

Answer: This is a good question for an individual or a group assignment.

2.

How can an entrepreneur assess whether offering to serve in a leadership capacity in a trade association, on a volunteer basis, will be worth the time and effort? Establish a set of criteria that you would follow if making this type of decision.

Answer: It‘s a judgment call. A reasonable set of criteria for determining whether or not to become involved might be:  The extent of the entrepreneur‘s desire to help his or her industry.  The degree to which the entrepreneur thinks he or she could help move the industry in the right direction.  The visibility the entrepreneur would obtain by taking on a leadership position.  The potential benefits the entrepreneur might glean from ―networking‖ with other industry participants that are involved.

3.

Spend some time looking at the Web site of the Organic Trade Association. Make a list of networking opportunities made available via membership in this organization.

Answer: The networking opportunities made available via membership in this organization include (but may not be limited to) the following:        

4.

Attend the association‘s trade shows.

Participate in weekly Webinars.

Attend local chapter events.

Join the ―Section‖ within the organization that represents your specific interest.

Serve on the association‘s board of directors.

Take advantage of networking events that are periodically offered.

Participate in the social media platforms the association utilizes, including Twitter and Facebook.

Take advantage of the educational resources that are made available via the Association and interact with the people providing the education.

What are the risks involved with networking? For example, are there risks involved with sharing information with industry participants about how your firm competes? How can a company strike the right balance between giving out enough information about itself to attract the attention of potential partners without divulging too much proprietary information?

Answer: The risks associated with networking include (1) devoting too much time and energy to networking, at the expense of other activities, and (2) inadvertently revealing trade secrets to other industry participants (who may be competitors). Striking the right balance is a combination of practice and common sense.

REVIEW QUESTIONS 51.

What is an industry?

Answer: An industry is a group of firms producing a similar product or service.

An example of an industry is the airline industry. A partial list of the firms in the airline industry includes: Southwest Airlines, JetBlue, Delta, American, and Frontier Airlines.

52.

What is an industry analysis and why is it important for a new firm to analyze the industry in which it may choose to compete?

MyLab Question.

53.

54.

What are the four primary categories of environmental trends?

Answer: The four primary categories of environmental trends are economic trends, social trends, technological advances, and political and regulatory changes.

What are the five forces that determine an industry‘s profitability?

Answer: The threat of substitutes, the entry of new competitors, rivalry among existing firms, the bargaining power of suppliers, and the bargaining power of buyers. These are the forces that comprise Michael Porter‘s five forces analysis, as described in the book.

55.

How can the threat of substitute products suppress an industry‘s profitability?

Answer: The price that consumers are willing to pay for a product depends in part on the availability of substitute products. When close substitutes for a product exist, industry profitability is suppressed because consumers will opt not to buy when the price is too high. Consider the price of movie tickets. If the price gets too high, consumers can easily switch to watching rented videos, pay-per-view, or some other forms of entertainment.

56.

How can the threat of new entrants suppress an industry‘s profitability?

Answer: If the firms in an industry are highly profitable, the industry becomes a magnet to new entrants. Unless something is done to stop this, the competition in the industry will increase, and average industry profitability will decline.

57.

What are the six major sources of barriers to entry that can restrict a firm‘s entry into a market?

Answer: A barrier to entry is a condition that creates a disincentive for a new firm to enter an industry. The six major sources of barriers to entry are as follows: Economies of scale: Industries that are characterized by large economies of scale are difficult for new firms to enter, unless they have substantial resources or are willing to accept a cost disadvantage.

Product differentiation: Industries such as the soft drink industry that are characterized by firms with strong brands are difficult to break into without spending heavily on advertising.

Capital requirements: The need to invest large amounts of money to gain entrance to an industry is another barrier to entry.

Cost advantages independent of size: Entrenched competitors may have cost advantages not related to size that are not available to new entrants.

Access to distribution channels: Distribution channels are often hard to crack, particularly for new firms.

Government and legal barriers: In knowledge-intensive industries, patents,

trademarks, and copyrights form major barriers to entry. Other industries, such as banking and broadcasting, require the granting of a license by a public authority.

58.

How does rivalry among existing firms have the potential to suppress an industry‘s profitability?

Answer: In most industries, the major determinant of industry profitability is the level of competition among the firms already competing in the industry.

Some industries are fiercely competitive to the point where prices are pushed below the level of costs.

59.

What are the four primary factors that play a role in determining the nature and intensity of the bargaining power of suppliers?

Answer: The four factors that play a role in determining the nature and intensity of the bargaining power of suppliers are: Supplier concentration: When there are only a few suppliers that supply a critical product to a large number of buyers, the supplier has an advantage.

Switching costs: If switching costs are high, a buyer will be less likely to switch suppliers.

Attractiveness of substitutes: Supplier power is enhanced if there are no attractive substitutes for the products or services the supplier offers.

Threat of forward integration: The power of a supplier is enhanced if there is a credible possibility that the supplier might enter the buyer‘s industry.

510.

How does the bargaining power of suppliers have the potential to suppress an industry‘s profitability?

Answer: In some cases, suppliers can suppress the profitability of the industries to which they sell by raising prices or reducing quality of the components they provide.

511.

What are the four primary factors that play a role in determining the nature and intensity of the bargaining power of buyers?

Answer: The four factors that play a role in determining the nature and intensity of the bargaining power of buyers are: Buyer group concentration: If the buyers are concentrated, meaning that there are only a few large buyers, and they buy from a large number of suppliers, they can pressure the suppliers to lower costs.

Buyer’s costs: The greater the importance of an item to a buyer, the more sensitive the buyer will be to the price it pays.

Degree of standardization of supplier’s products: The degree to which a supplier‘s products differ from its competitors affects the buyer‘s bargaining

power.

Threat of backward integration: The power of a buyer is enhanced if there is a credible threat that the buyer might enter the supplier‘s industry.

Buyers can suppress the profitability of the industries from which they purchase by demanding price concessions or increases in quality.

512.

How does the bargaining power of buyers have the potential to suppress an industry‘s profitability?

Answer: Buyers can suppress the profitability of the industries from which they purchase by demanding price concessions or increases in quality.

513.

What are the nontraditional barriers to entry that are particularly suitable for entrepreneurial firms to study when selecting an industry in which to compete?

Answer: Strength of management team, first-mover advantage, passion of management team and employees, unique business model tied together by a network of relationships, unique or ―spot on‖ Internet domain names, and inventing a new approach to an industry and executing the idea in an exemplary fashion. These nontraditional barriers to entry are important for firms to consider and utilize when appropriate.

514.

How can a start-up avoid or sidestep the pressure applied by one of the five forces on industry profitability by establishing a unique ―position‖ in an industry?

Answer: A company‘s position determines how it is situated relative to its rivals.

An example of a company that has positioned itself in a favorable manner is Panera Bread, the subject of Case 5.1. By establishing a new category in the restaurant industry, which Panera Bread calls ―fast-casual,‖ Panera diminishes the ―rivalry among existing firms,‖ by avoiding direct head-to-head competition with the fast-food and the casual dining segments of the restaurant industry.

515.

What are the characteristics of a fragmented industry and why are these important for entrepreneurs?

MyLab Question.

516.

What is the primary opportunity for new firms in fragmented industries?

Answer: The primary opportunity existing for start-ups in fragmented industries is to consolidate the industry and establish industry leadership as a result of doing so.

517.

What are the characteristics of a mature industry?

Answer: A mature industry is an industry that is experiencing slow or no increase in demand, has numerous repeat customers, and has limited product innovation.

518.

What is the primary opportunity for new firms in a mature industry?

Answer: The primary opportunity for start-ups in mature industries is to introduce new product innovations.

519.

What is a global industry?

Answer: A global industry is an industry that is experiencing significant international sales.

520.

What are the two most common strategies pursued by firms in global industries?

Answer: The two most common strategies pursued by firms in global industries are the multidomestic strategy and the global strategy. Firms that pursue a multidomestic strategy compete for market share on a country-by-country basis and vary their product or service offerings to meet the demands of the local market. In contrast, firms pursuing a global strategy use the same basic approach in all foreign markets.

521.

What is the purpose of a competitor analysis?

522.

What are the differences among direct competitors, indirect competitors, and future competitors?

Answer: A competitor analysis is a detailed analysis of a firm‘s competitors. It helps a firm understand the positions of its major competitors and the opportunities that are available to obtain a competitor advantage in one or more areas.

Answer: The three different types of competitors referred to above are as follows: Direct competitors: These are businesses that offer products identical or similar to the products of the firm completing the analysis.

Indirect competitors: These competitors offer close substitutes to the product the firm completing the analysis sells.

Future competitors: These are companies that are not yet direct or indirect competitors but could move into one of these roles at any time.

523.

What is meant by the term competitive intelligence?

Answer: The information that is gathered by a firm to learn about its competitors is referred to as competitive intelligence.

524.

Why is it important for firms to collect intelligence about their competitors?

Answer: All companies benefit by knowing as much as is ethically possible about their competitors.

525.

Identify three sources of competitive intelligence that entrepreneurial firms should feel comfortable using to better understand their competitors.

Answer: Attending conferences and trade shows; reading industry-related books, magazines, and Web sites; and talking to customers about what motivated them to buy your product as opposed to your competitors. Another choice includes setting up Google and Yahoo! e-mail alerts.

526.

What is the purpose of completing a competitive analysis grid?

Answer: A competitive analysis grid is a tool for organizing the information a firm collects about its competitors. It can help a firm see how it stacks up against its competitors in key areas and illustrates a firm‘s primary sources of competitive advantage. To be a viable competitor, a new venture must have at least one clear competitive advantage over its major rivals.

APPLICATION QUESTIONS 527.

528.

Linda Henricks is thinking about starting a firm in the home health care provider industry. When asked by a potential investor if she had studied the industry, Linda replied, ―With the aging of the population and the fact that people are living longer than ever, the home health care provider industry is so full of potential it doesn‘t require formal analysis.‖ In what ways will Linda limit her possibilities with the potential investor if her current attitude about the importance of industry analysis doesn‘t change?

Answer: Linda‘s answer will not satisfy the investors. Although it may be true that the home health care industry is full of potential, that doesn‘t mean that the potential is available to start-ups. The window of opportunity for new entrants may be closed, or one or more of the five forces that determine industry profitability may be decidedly against new entrants. For example, the threat of new entrants in the industry is high, given the number of businesses that are entering the industry. Linda needs to determine specifically how serious of an issue the threat of new entrants is, and demonstrate to investors that her start-up has the potential to overcome this threat to industry profitability. Rivalry among existing firms is also high. Linda needs to have a plan for how to take market share away from rivals. Linda will limit her potential to attract investors if she doesn‘t change her attitude about industry analysis. Knowing the dynamics of the industry that one plans to enter is an important component of selling the potential of any new venture.

The ―You Be the VC 5.1‖ feature focuses on Prynt, a company in the smartphone industry. What environmental trends and business trends favor Prynt‘s unique approach and service?

Answer: Two environmental trends that work to Prynt‘s advantage are (1) an increased interest in social networking, which may encourage people to take pictures and share them in ways other than simply viewing them on a phone, and (2) an increased interest in chronicling one‘s experiences.

529.

Eric Andrews has been investigating the possibility of starting a service that will partner with grocery stores to provide a delivery service for their customers. The idea is that after purchasing their groceries, customers could go to a kiosk in the store, pay a small fee, and have their groceries delivered to their homes in 60 minutes. Which of the five forces in Porter‘s five forces model do you anticipate will most strongly affect Eric‘s potential business and why?

Answer: It will most likely be the threat of substitute products. For people who want their groceries delivered directly to their homes, a growing number of online grocery services are popping up, particularly in urban areas. In addition, companies such as Uber have in the works plans to deliver items such as groceries, picking the items up at grocery stores and delivering them to their customers‘ homes.

530.

Read Case 5.1, which focuses on Panera Bread. What are some of the entry barriers a firm would have to deal with and try to overcome if it tried to compete against Panera Bread in the casual dining segment of the restaurant industry?

Answer: There are several ―barriers to entry‖ that a firm entering the casual dining segment of the restaurant industry would have to deal with or try to overcome if they wanted to compete against Panera Bread. The entry barriers include:   



531.

Economies of scale. Panera Bread has 1,770 restaurants, which allows it to negotiate discounts when buying food and nonfood products for its restaurants.

Product differentiation. Panera Bread has a strong brand with food and bakery products people like.

Capital requirements. Panera Bread restaurants are not large but are stylish and are often located in premier locations, suggesting that considerable capital would have to be accumulated to build even a handful of competing restaurants.

Cost advantages independent of size. Panera Bread may have purchased some of the real estate it owns when real estate prices were lower and built some of the buildings that its restaurants are housed in when construction costs were lower.

As mentioned in this chapter, White Wave Inc. produces Silk Soymilk, a product that has done surprisingly well in the mature milk industry. Based on the material we‘ve covered so far, why do you think Silk Soymilk has been so successful?

Answer: Answers will vary to this question. Possible answers include:

   

The passion that the founders of White Wave have for their product The environmental trends that made the introduction of Silk Soymilk possible and has made the product attractive to a growing group of consumers The fact that the founders of White Wave have successfully introduced a new product innovation in a mature industry The fact that the founders of White Wave overcame the barriers to entry in the milk industry (even though White Wave isn‘t technically a milk product)

• The nontraditional barriers to entry that White Wave has now erected to prevent a proliferation of competitors 532.

Karen Sharp lives in a town of approximately 10,000 in Western Kentucky. There isn‘t a furniture store in the town. Karen is thinking about starting one. She has good business and marketing skills and is confident she can operate the store successfully. But, she isn‘t certain that a retail furniture store is an attractive industry. What would you recommend Karen do to consider this matter?

Answer: This is a good individual or group assignment.

Karen should first study environmental and business trends to assess the strength of the furniture market in general and in her trade area specifically. Next, she should conduct a five forces analysis. The five forces model for the furniture industry in general looks something like this: Furniture industry Competitive Force Threat of substitutes Threat of new entrants Rivalry among existing firms Bargaining power of suppliers Bargaining power of buyers

Threat to Industry Profitability Low Medium High X X X X X

This analysis shows that the industry in general has moderate profitability potential. Karen should go beyond this analysis and study her local market.

Because there isn‘t a furniture store in her town, ―rivalry among existing firms‖ wouldn‘t be as much ofan issue. In the end, Karen should consider all the factors and make a judgment call regarding the attractiveness of starting a furniture store in her town.

533.

Think about and find some information about trends in the motorcycle industry. In particular, identify the effects of economic, demographic, and regulatory changes that may affect the motorcycle industry at the time you are reading this book. Write a paragraph or two to describe the trends, and their implications for entrepreneurial firms, that you located while searching for information.

Answer: This answer was written in late 2017. At that time, an ―economic‖ factor affecting the motorcycle industry was the low price of gasoline. An incentive to buy a motorcycle, as opposed to a car, is to save money on gas. As the price of gas goes down, the strength of that incentive diminishes. A ―demographic‖ trend affecting the motorcycle industry was the increasing number of women purchasing and riding motorcycles. There were no significant regulatory trends affecting the motorcycle industry in late 2017.

534.

Your friend has developed what he believes is a novel floor cleaning product. The advantage of this product, he tells you, is that because of the unique chemicals used to create the cleaning fluid, people are able to use a fraction of the amount of fluid to clean floors compared to the amount of fluid that is necessary when using traditional, well-established products. Your friend is convinced that even Walmart will be willing to pay a handsome amount to him in order to stock and sell his product. Use your knowledge about the power of buyers to offer your friend a different perspective as to how Walmart might deal with him as he tries to sell his product to this giant firm.

Answer: Although there are many retail stores in the United States, there are only a handful of big box stores such as Walmart, Target, and Costco. These stores stock products from thousands of suppliers. As a result of the sheer size of Walmart, it is able to suppress the profitability of the suppliers it uses by demanding price reductions. Your friend might think that he has the upper hand as a result of the strength of his product. But Walmart sells thousands of products—having or not having a single product will

not measurably affect Walmart as a whole. As a result, Walmart has a strong bargaining position—a reality your friend will likely encounter when he starts negotiating with Walmart.

535.

Your friend, Lisa Ryan, is opening a smoothie shop that will sell a variety of smoothie drinks in the $5 to $7 price range. When you ask her if she was worried that the steep price of smoothies might encourage prospective customers to buy a soft drink or a sports drink instead of her product, Lisa says, ―You‘re right. This is a real concern I have. Is there anything I can do to discourage potential customers from making such a choice?‖ What information would you provide to Lisa in response to her question?

Answer: What companies often do when faced with Linda‘s situation is offer their customers amenities to reduce the likelihood of switching. To accomplish this, Linda might want to think about how she can create a fun, inviting atmosphere in her restaurant that would be appealing to her customers. If her customers value the atmosphere of her restaurant, the $5 to $7 price tag on the smoothies might not be as much of a concern.

YOU BE THE VC 5.1 Company: Prynt (www.prynt.co) Business Idea: Build a smartphone case that allows iPhone and Android users to print photos directly from their smartphones.

You Be the VC Scorecard Prynt (www.prynt.co) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

Clement Perrot and David Zhang cofounded Prynt in Paris, France. In October 2017, the company has a 20member team of technical and administrative people. Not much is

known about the two founders.

Prynt‘s investors include a number of venture capital firms such as GGV Capital, Root Ventures, and Greycroft Partners.

Strength of the Opportunity

1

2

3

4

5

It is hard to fully evaluate this opportunity. Perhaps students will have a different take, but the general thinking is that people like to share their photos digitally from their phone to the phones of others. How many want to share the printed version of photos remains to be seen, which is why it is hard to determine the opportunity here.

Strength of the Industry

Strength of Business Model

1

2

3

4

5

It appears that Prynt is the pioneer in this line of business.

Of course, they would be competing, as the case says, with Walgreens and CVS. While the market size is likely to be big, as said earlier, it is hard to evaluate this opportunity.

1 2 3 4 5 Prynt sells the case (a one-time transaction for the customer) and ZINK photo paper which is a recurring revenue item. The revenue model appears attractive although the customer value proposition does not appear to be compelling.

Average Score

3.00/5.00

Decision: We would not fund this firm. It is not clear how many smartphone users want to print their pictures when they share pictures digitally. In addition, not much is known about the co-founders although they have been successful in raising a fair amount of capital.

YOU BE THE VC 5.2 Company: ZUtA Labs (www.zutalabs.com) Business Idea: Develop and deploy a small, easy-to-use mobile robotic printer that will enable people to print anywhere and on any size paper.

You Be the VC Scorecard ZUtA Labs (www.zutalabs.com) Item

Score/Comments

Strength of NewVenture Team

1

Strength of the Opportunity

2

3

4

5

Tuvia Elbaum and Matan Caspi cofounded ZUtA Labs in Jerusalem, Israel. As of October 2017 its only source of capital is via crowdfunding. An Internet search did not reveal any details about the co-founders and so it is hard to evaluate the strength of the new-venture team.

1 2 3 4 5 The opportunity seems to be promising because mobile printing fills an important need. As the case points out, people working outside their offices and homes (such as in a trade show) sometimes need to print. An example is car rental drop off sites where the customer requires a receipt.

Strength of the Industry

1

2

3

4

5

Computer printing is a large industry, although the industry is focused on office or home-based printers. As the world becomes more mobile (enabled by smartphones), mobile printing is an important need.

Strength of Business Model

Average Score

1

2

3

4

5

While the customer value proposition is compelling, we don‘t know much about the business side of the start-up, such as product price, etc. This makes it hard to fully evaluate the strength of the business model.

3.5/5.0

Decision: We would not fund this firm, although the decision was not made quickly. There is a lot to like about ZUtA Labs‘ product. It is perhaps too early to make an informed judgment about whether this is an attractive start-up to invest in.

CASES Case 5.1 Panera Bread: Occupying a Favorable Position in a Highly Competitive Industry DISCUSSION QUESTIONS 540.

How has Panera Bread established a unique position in the restaurant industry?

Answer: Panera Bread has established a unique position in the restaurant industry. As explained in the case, the ―fast-casual‖ position that Panera has established allows it to capture the advantages of both fast food and casual dining.

541.

How has Panera Bread‘s unique position in the restaurant industry contributed to the firm‘s success?

Answer: It is clear that Panera‘s unique position has contributed to its success. It provides Panera a distinct point of differentiation between itself and many of its competitors, and allows the company to sell a fairly large volume of high-margin food products. Most students will say that Panera Bread will reach its goal of becoming a leading national brand in the restaurant industry.

542.

What barriers to entry has Panera Bread created for potential competitors?

Answer: Panera has created barriers to entry in the following areas:   



543.

Economies of scale. Panera Bread has 1,770 restaurants, which allows it to negotiate discounts when buying food and nonfood products for its restaurants.

Product differentiation. Panera Bread has a strong brand with food and bakery products people like.

Capital requirements. Panera Bread restaurants are not large but are stylish and are often located in premier locations, suggesting that considerable capital would have to be accumulated to build even a handful of competing restaurants.

Cost advantages independent of size. Panera Bread may have purchased some of the real estate it owns when real estate prices were lower and built some of the buildings that its restaurants are housed in when construction costs were lower.

What are Panera Bread‘s primary sources of competitive advantage?

Answer: Panera‘s primary sources of competitive advantage are: (1) its position in the restaurant industry, (2) its brand strength, (3) the atmosphere of its restaurants, and (4) the distinctive nature of its bakery products. Most students will argue that these sources of competitive advantage are sustainable.

544.

What are the ways that Panera Bread can conduct ethical and proper forms of competitive analysis to learn about potential competitors entering the fastcasual industry?

Answer: Panera can utilize all of the techniques listed in Table 5.4, including:     

Attend conferences and trade shows.

Purchase its competitors‘ products (and eating at their restaurants).

Study competitors‘ Web sites and social media pages.

Set up Google e-mail alerts (to track news about itself and its competitors).

Read industry-related books, magazines, Web sites, and blogs.



Talk to customers about what motivated them to dine at Panera Bread as opposed to at one of Panera‘s competitors.

Case 5.2 How Casper Woke Up the ―Sleepy‖ Mattress Industry DISCUSSION QUESTIONS 545.

To what degree do you think Casper has disrupted the mattress industry? To what degree did Casper‘s research about the mattress buying process resonate with you? Would you buy a Casper mattress? Why or why not?

Answer: Casper disrupted the mattress industry both in its product and in its selling method. In contrast to the myriad varieties of mattresses sold by a brand, Casper had just one. Instead of selling it through retail stores, Casper sells online.

Student responses will vary with respect to the other parts of the question.

546.

How has Casper established a unique position in the mattress industry? To what degree do you think its unique position is the basis of its early success?

Answer: Casper occupies a unique position because of its product and channel disruption. This unique position is because the market has accepted Casper‘s business model as evidenced both by its sales and by the influx of imitators.

547.

Are you surprised that Casper was able to generate so much excitement surrounding the process of buying a mattress? How did the company do that? Do you think the level of excitement and passion for buying a mattress could be translated to other non-tech industries?

Answer: Casper has a strong brand, strong management, and a growing clientele. They disrupted the mattress market and have generated tremendous excitement even for the mundane act of buying a mattress. It is likely to extend to non-tech industries as shown by Warby Parker in eyeglasses.

548.

Why do you think Casper added a dog mattress? What other sleep-related products do you think Casper has in its pipeline?

Answer: Students who have pets (particularly dogs) would likely respond positively to Casper‘s dog mattress, while others may have differing opinions on this.

It is a good exercise to get the class to brainstorm on other products that Casper can launch – pajamas?

The brainstorming activity can generate a lot of excitement and fun in the class because now students are forced to think of products that are related to mattresses and sleeping. It would be interesting to get students to stretch their thinking!

CHAPTER 6 WRITING A BUSINESS PLAN LEARNING OBJECTIVES 1.

2.

3.

4.

5.

Explain the purpose of a business plan.

Describe who reads a business plan and what they are looking for.

Discuss the guidelines to follow to write an effective business plan.

Identify and describe a suggested outline of a business plan.

Explain how to effectively present a business plan to potential investors.

CHAPTER OVERVIEW This chapter introduces the important topic of writing a business plan, which is a step that all start-up firms should go through. An emphasis is placed on the proper time to write a business plan—it should follow the completion of a feasibility analysis. An emphasis is also placed on the reasons for writing a business plan, who reads the plan and what they‘re looking for, and guidelines for writing a business plan.

The bulk of the chapter provides an outline of a comprehensive business plan. The chapter ends with a section titled ―Presenting the Business Plan to Investors.‖

This section provides guidelines on how to present a business plan to a group of investors in the most effective manner possible.

CHAPTER OUTLINE I. The Business Plan A. Reasons for Writing a Business Plan B. Who Reads the Business Plan—and What Are They Looking For? 1. A Firm‘s Employees 2. Investors and Other External Stakeholders C. Guidelines for Writing a Business Plan 1. Structure of the Business Plan 2. Content of the Business Plan a. Style or Format of the Business Plan b. Recognizing the Elements of the Plan May Change II. Outline of the Business Plan A. Exploring Each Section of the Plan 1. Cover Page and Table of Contents 2. Executive Summary 3. Industry Analysis 4. Company Description 5. Market Analysis 6. The Economics of the Business 7. Marketing Plan 8. Product (or Service) Design and Development Plan 9. Operations Plan 10. Management Team and Company Structure 11. Overall Schedule 12. Financial Projections 13. Appendix 14. Putting It All Together III. Presenting the Business Plan to Investors A. The Oral Presentation of a Business Plan B. Questions and Feedback to Expect from Investors CHAPTER NOTES I. The Business Plan A. Reasons for Writing a Business Plan 1. A business plan is important for two major reasons. a. First, a business plan is an internal document that forces the founding team to systematically think through every aspect of their new venture.

b. Second, a business plan communicates the merits of a new venture to outsiders, such as investors and bankers.

B. Who Reads the Business Plan—and What Are They Looking For? 1. A Firm‘s Employees. A clearly written business plan, which articulates the vision and future plans of a firm, is important for both the management team and the rank-and-file employees of a new venture.

2. Investors and Other External Stakeholders. External stakeholders, such as investors, potential business partners, potential customers, and key employees who are being recruited to join a firm, are the second audience for a business plan. a. A firm must validate the feasibility of its business idea, develop an effective business model, and have a good understanding of its competitive environment prior to presenting its business plan to others.

C.

Guidelines for Writing a Business Plan 1. Structure of the Business Plan. To make the best impression, a business plan should follow a conventional structure, such as the outline of the business plan shown in the next section of the chapter. a. Although some entrepreneurs want to demonstrate creativity in everything they do, departing from the basic structure of the conventional business plan format is usually a mistake. Typically, investors are very busy people and want a plan where they can easily find critical information. b. There are many software packages available that employ an interactive, menu-driven approach to assist in the writing of a business plan. Some of these programs are very helpful. However, entrepreneurs should avoid creating a boilerplate plan that looks as though it came from a ―canned‖ source.

2. Content of the Business Plan. The business plan should give clear and concise information on all the

important aspects of the proposed venture. For most plans, 25 to 35 pages are sufficient. a. Style or Format of the Business Plan. The appearance of the plan must be carefully thought out. It should look sharp but not give the impression that a lot of money was spent to produce it. There are three types of business plans. i. Summary plan: A summary business plan is 10 to 15 pages and works best for companies that are very early in their development and are not prepared to write a full plan. ii. Full business plan: A full business plan, which is the assumed focus of our discussion to this point in the chapter, is typically 25 to 35 pages long. iii. Operational business plan: Some established businesses will write an operational business plan, which is meant primarily for an internal audience. Commonly running between 40 and 100 pages in length, this plan can obviously feature a great amount of detail. b. Recognizing the Elements of the Plan May Change.

A final guideline for writing a business plan is to recognize that the plan will usually change as it is being written and as the business evolves.

II.

Outline of the Business Plan

*A suggested outline of the full business plan appears in Table 6.2 in the textbook. A specific firm‘s business plan may vary, depending on the nature of the business and the personalities of the founding entrepreneurs. Most businesses do not include all the elements introduced in Table 6.2; we include them here for the purposes of completeness.

A. Exploring Each Section of the Plan 1. Cover Page and Table of Contents. The cover page should include the name of the company, its address, its phone number, the date, and contact information for the lead entrepreneur.

2. Executive Summary. The executive summary is a short

overview of the entire business plan; it provides a busy reader with everything that needs to be known about the new venture‘s distinctive nature. a. Although the executive summary appears at the beginning of the business plan, it should be created after the plan is finished. Only then can an accurate overview of the plan be written. b. An executive summary shouldn‘t exceed two singlespaced pages. The cleanest format for an executive summary is to provide an overview of the business plan on a section-by-section basis.

3. Industry Analysis. This section should begin by describing the industry the new business will enter in terms of its size, growth rate, and sales projections. It is important to focus strictly on the business‘s industry and not its industry and target market simultaneously. Before a business selects its target market, it should have a good grasp on its industry—including where its industry‘s promising areas are and where its points of vulnerability are located. a. The sections to include in this portion of the plan include: Industry Size, Growth Rate and Sales Projections, Industry Structure, Nature of Participants, Key Success Factors, Industry Trends, and Long-Term Prospects. b. Industry structure refers to how concentrated or fragmented an industry is. Fragmented industries are more receptive to new entrants. c. Industry trends should be discussed, which include both environmental and business trends.

This is arguably the most important section of an industry analysis because it often lays the foundation for a new business idea in an industry.

4. Company Description. This section begins with a general description of the company. Although at first glance this section may seem less critical than the others, it is extremely important. It demonstrates to your reader that you know how to translate an idea into a business.

a. The company description should start with a brief introduction, which provides an overview of the company and reminds the reader of the reason it is starting. b. The sections to include in this portion of the plan include: Company History, Mission Statement, Products and Services, Current Status, Legal Status and Ownership, and Key Partnerships (if any).

5. Market Analysis. While the industry analysis focuses on the industry that a firm will participate in, the market analysis breaks the industry into segments and zeroes in on the specific segment (or target market) to which the firm will try to appeal. a. The sections to include in this portion of the plan include Market Segmentation and Target Market Selection, Buyer Behavior, and Competitor Analysis. b. Market segmentation is the process of dividing the market into distinct segments. Markets can be segmented in many ways, such as by geography, demographic variables, psychographic variables, and so forth. c. A competitor analysis is a detailed analysis of a firm‘s competitors.

6. The Economics of the Business. This section begins the financial analysis of the business, which is further fleshed out in the financial projections. It addresses the basic logic of how profits are earned in the business and how many units of a business‘s product or service must be sold for the business to ―break even‖ and then start earning a profit. a. Revenue drivers and profit margins. Summarize the major revenue drivers of the business in proportion to where you expect to make your money. Describe the size of the overall gross margins and margins for each of the major revenue drivers of the business. Then determine the weighted average contribution margins. b. Fixed and variable costs. Provide a detailed summary of fixed and variable costs for the venture.

c. Operating leverage and its implications.

Characterize whether your cost structure is predominantly fixed or variable and then indicate the implications. d. Start-up costs. Distinguish the one-time start-up costs of the business. e. Overall economic model. Put the pieces above together. Indicate how you will make money in terms of the combination of margins, volumes, operating leverage, and revenue source flexibility. How attractive is the combination? f. Breakeven chart and calculations. Compute the number of units the business has to sell to ―break even‖ prior to earning a profit. g. Profit durability. Address the issue of how solid or vulnerable the profit stream appears to be.

7. Marketing Plan. The marketing plan focuses on how the business will market and sell its product or service. It deals with the nuts and bolts of marketing in terms of price, promotion, distribution, and sales. a. The sections to include in this portion of the plan include Overall Marketing Strategy and Product, Price, Promotions, and Distribution. b. A firm‘s marketing strategy refers to its overall approach for marketing its products and services.

A firm‘s overall approach typically boils down to how it positions itself in its market and how it differentiates itself from its competitors. c. The next section should deal with your company‘s approach to product, price, promotion, and distribution. d. The final section should describe the company‘s sales process or cycle and specific sales tactics it will employ.

8. Product (or Service) Design and Development Plan. If you‘re developing a completely new product or service, you need to include a section in your business plan that focuses on the status of your

development efforts. a. The sections to include in this portion of the plan include: Development Status and Tasks, Challenges and Risks, and Intellectual Property. b. Most products follow a logical path of development that includes product conception, prototyping, initial production, and full production. You should describe specifically the point that your product or service is at and provide a timeline that describes the remaining steps. c. A prototype is the first physical depiction of a new product. A virtual prototype is a computergenerated 3D image of an idea. It displays an invention as a 3D model that can be viewed from all sides and rotated 360 degrees.

9. Operations Plan. The operations plan outlines how your business will be run and how your product or service will be produced. a. The sections to include in this portion of the plan include: General Approach to Operations, Business Location, Facilities, and Equipment. b. A useful way to illustrate how your business will be run is to first articulate your general approach to operations in terms of what‘s most important and what the make-or-break issues are.

You can then frame the discussion in terms of ―back stage,‖ or behind the scenes activities, and ―front stage,‖ or what the customer sees and experiences.

10. Management Team and Company Structure. This is a critical section of a business plan. Many investors and others who read business plans look first at the executive summary and then go directly to the management team section to assess the strength of the people starting the firm. a. The sections to include in this portion of the plan include: Management Team, Board of Directors, Board of Advisors, and Company Structure. b. A board of directors is a panel of individuals elected by a corporation‘s shareholders to

oversee the management of the firm, as explained in more detail in Chapter 9. c. A board of advisors is a panel of experts asked by a firm‘s management to provide counsel and advice on an ongoing basis. (Also covered in more detail in Chapter 9.) d. An organizational chart, which is often included in this section of the business plan, is a graphic representation of how authority and responsibility are distributed within the company.

11. Overall Schedule. A schedule should be prepared that shows the major events required to launch the business. The schedule should be in the format of milestones critical to the business‘s success.

12. Financial Projections. The final section of a business plan presents a firm‘s pro forma (or projected) financial projections. Having completed the previous sections of the plan, it‘s easy to see why the financial projections come last. They take the plans you‘ve developed and express them in financial terms. a. The sections to include in this portion of the plan include: Sources and Uses of Funds Statement, Assumptions Sheet, Pro Forma Income Statements, Pro Forma Balance Sheets, Pro Forma Cash Flows, and Ratio Analysis. b. A sources and uses of funds statement is a document that lays out specifically how much money a firm needs, where the money will come from, and what the money will be used for. c. Pro forma (or projected) financial statements are the heart of the financial section of a business plan. A firm‘s pro forma financial statements are similar to the historical statements an established firm would normally prepare, except they look forward rather than track the past. d. Ratio analysis—Most business plan writers interpret or make sense of a firm‘s historical and/or pro forma financial statements through ratio analysis. Ratios, such as return on assets (ROA) and return on sales (ROS), are computed by taking numbers out of financial statements and

forming ratios with them.

13. Appendix. Any material that does not easily fit into the body of a business plan should appear in an appendix.

14. Putting It All Together. In evaluating and reviewing the completed business plan, the writers should put themselves in the reader‘s shoes to determine if the most important questions about the viability of their business venture have been answered. a. Table 6.4 lists the 10 most important questions a business plan should answer. It‘s a good checklist of any business plan writer.

III. Presenting the Business Plan to Investors A. The Oral Presentation of a Business Plan 1. When asked to meet with an investor, the founders of a new venture should prepare a set of PowerPoint slides that will fill the time slot allowed for the presentation portion of the meeting.

2. The first rule in making an oral presentation is to follow instructions. If an investor tells an entrepreneur that he or she has one hour and that the hour will consist of a 30-minute presentation and a 30-minute question-and-answer period, the presentation shouldn‘t last more than 30 minutes.

3. The presentation should be smooth and wellrehearsed. The slides should be sharp and not cluttered with material.

B. Questions and Feedback to Expect from Investors 1. Whether in the initial meeting or on subsequent occasions, an entrepreneur will be asked a host of questions by potential investors. The smart entrepreneur has a good idea of what to expect and is prepared for these queries.

2. In the first meeting, investors typically focus on whether a real opportunity exists and whether the management team has the experience and skills to pull off the venture.

BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING What Went Wrong?

What Move Loot Learned the Hard Way about the Economics of a Business 1.

Once a piece of secondhand furniture was listed on Move Loot‘s website, if a customer didn‘t like the price, he or she could offer a lower amount. Move Loot‘s 50 percent commission was based on the final selling price. This must have made it difficult for Move Loot to forecast both its gross margin and its contribution margin on individual sales. To what do you believe this was a problem for Move Loot?

Answer: While students may have different opinions on this issue, it should be clear that is likely to have caused problems in a business where the fixed costs are quite high. The contribution dollars from each transaction (the 50 percent commission minus the variable costs of completing the transaction) should add up to pay for all the fixed costs. Forecasting the contribution margin when the selling price could move down is a big challenge.

2.

To what extent do you believe Move Loot‘s business model was sound?

Answer: It was an unsound business model because Move Loot had to perform a number of steps to complete a transaction and get paid for it. The case lists 8 discrete activities that entails both fixed and variable costs. At the end of it, what they are selling is somebody‘s unwanted used furniture!

3.

In your judgment, were the ―economics of the business‖ sound for Move Loot from the outset? How could Move Loot establish its business in a manner that the economics of the business made more sense?

Answer: The economics of the business rests on generating an adequate contribution margin from each transaction to cover the fixed costs and yield a profit. Move Loot had significant variable costs for each transaction, which, interestingly, had little to do with the commission from the sale. These costs were variable in that they were not incurred if a transaction did not take place. But whether they were selling a chair or a complete living room set, steps 1-8 listed in the case had to be performed. Perhaps, if Move Loot had set a minimum selling price for a transaction to occur, they may have had a better margin on each transaction.

4.

What can all start-up founders learn from the Move Loot case?

Answer: All parts of a start-up‘s business model must make sense, not the least of which is the economic model. Granted that the founders of Move Loot changed

their business model more than once toward the end, validating the business model at the outset is critical.

Urge your students to expand upon this and generate more takeaways.

Savvy Entrepreneurial Firm Know When to Hold Them, Know When to Fold Them 1.

Despite all the changes that have happened with the Internet since 2007, when Songkick was founded, why do you think the company has been able to successfully stick with its original business plan?

Answer: Songkick provides two fundamental services—it alerts people to when their favorite bands are in their area and it sells tickets for concerts and musicrelated events. Although the Internet has changed a lot since 2007, the fundamental needs that Songkick fulfills have not changed. As a result, Songkick‘s business model hasn‘t changed much since the company‘s inception.

2.

What do you think would have happened to Grubhub if it hadn‘t changed its business plan?

Answer: Grubhub would have waned in terms of popularity and profitability. Because restaurants were not comfortable paying upfront to be listed on Grubhubs‘s Web site, a large number of them would have eventually dropped the service. Grubhub essentially saved its business as a result of its willingness to change its business plan. Once Grubhub switched from a subscription pricing model to a transactional pricing model where they collected a commission for each order placed (rather than charging an upfront fee), they saw a dramatic increase in restaurants using its service.

3.

Why do you think some start-ups find it difficult to change their business plan, even when presented with evidence that their current business plan isn‘t working?

Answer: Some people are stubborn and don‘t want to admit that their initial plan isn‘t viable; so instead of changing, they persist even when faced with long odds. Other people suffer from hubris, which means they have excessive pride and/or arrogance, and simply won‘t

change. Still others may be so passionate about a business idea that they become blinded by their passion, and discount any information that isn‘t supportive of their current idea.

4.

Look at the ―You Be the VC‖ features at the end of Chapter 5, which focus on Prynt and ZUtA Labs, and the ―You Be the VC‖ features at the end of this chapter, which focus on Beyond Meat and Ava. From the information in the features and on each company‘s website, which company do you think will have the easiest time sticking to its original business plan?

Which company do you think will have the hardest time?

Explain your selections.

Answer: This is a good assignment for an individual or group assignment. We think ZUtA Labs will have the easiest time sticking to their business plan and Prynt will have the most difficult time, although students may come up with different conclusions.

Partnering for Success Establishing a Community of True Believers and Early Evangelists 1.

What are ways to get people to care about your product or service? Why is it important to establish a community of true believers and early evangelists?

Wouldn‘t it be easier to acquire customers via traditional advertising?

Answer: Most entrepreneurs (including those featured in various chapters in the book) initially reach out to their friends and family to gain support for what they are doing. In so doing, they introduce their product or service and get their network interested. When members of such a network begin talking to others about the product or service, there is a level of authenticity about this that traditional paid advertising does not have. Besides, soliciting the support of one‘s personal network doesn‘t have the same costs that traditional advertising has.

2.

Why are the people who are asked to test a prototype of a product or provide feedback in some other way ideal candidates to become true believers and early evangelists?

Answer: When someone is approached to test a product or service and provide feedback, there is an intense level of engagement between the two parties. Testers ―buy in‖ to the process and believe that their opinion is valued. Once they are attracted by the product or service, they carry their whole hearted embrace of the product or service to become evangelists for it.

3.

4.

On a scale of 1-10 (10 is high), how prominent a role do you think social media typically plays in helping companies gain early adopters for their product or service?

Answer: Social media increases the reach of an entrepreneur in accessing his or her network. Not only that, social media plays a big role in spreading the message about the product or service. Given that students are quite savvy about social media, they may give it a scale of 10 in this regard.

Brainstorm other ways to establish a community of true believers and evangelists not mentioned in the feature.

Answer: This is a good class exercise to get students to think of ways to reach out to and enlist the support of true believers and evangelists.

REVIEW QUESTIONS 6-1.

What is a business plan?

Answer: A business plan is a written narrative, typically 25 to 35 pages long, that describes what a new business plans to accomplish and how it plans to accomplish it.

6-2.

What are the advantages of preparing a business plan for a new venture?

Answer: For most new ventures, the business plan is a dual-purpose document used both inside and outside the firm. Inside the firm, the plan helps the company develop a ―road map‖ to follow in executing its strategies and plans.

Outside the firm, it introduces potential investors and other stakeholders with the business opportunity the firm is pursuing and how it plans to pursue it.

6-3.

When is the appropriate time to write a business plan?

Answer: The time to write a business plan is toward the end of the stage in the entrepreneurial process titled ―Moving from an Idea to an Entrepreneurial Firm.‖ It is a mistake to write a full business plan too early. The business plan must be substantive enough to have sufficient details about the merits of the new venture to convince the reader that the new business is exciting and should

receive support.

6-4.

What are the two primary reasons for those starting a new venture to write a business plan?

Answer: A business plan is important for two reasons. First, a business plan is an internal document that helps a new business flesh out its business model and solidify its goals. Second, a business plan is a selling document for a company.

It provides a mechanism for a young company to present itself to potential investors, suppliers, business partners, and key job candidates by showing how all the pieces of a new venture fit together to create an organization capable of meeting its goals and objectives.

6-5.

It is often argued that the process of writing a business plan is as important as the plan itself, particularly for the top management team of a young firm. Why is this so?

Answer: MyLab Question.

6-6.

Who reads the business plan and what are they looking for when doing so?

Answer: (1) A firm‘s employees and (2) investors and other external stakeholders. A firm‘s employees read its business plan to more fully understand the vision and mission of the firm, its operational details, and to make sure the role they play in the firm is in sync with the entirety of the plan.

Investors and other stakeholders read the plan to assess the feasibility of the business‘s idea and to make a judgment on how exciting an opportunity the business represents.

6-7.

How will investors typically react if they think a business plan is based on estimates and predictions rather than on careful analysis and facts?

Answer: To appeal to investors, a business plan must be realistic and not reflective on overconfidence on the firm‘s part. Overly optimistic statements or projections undermine a business plan‘s credibility, so it is foolish to include them. Entrepreneurs can obtain facts to substantiate their plans by conducting both primary and secondary research.

6-8.

Why is it important for a business plan to follow a conventional structure rather than be highly innovative and creative?

Answer: Typically, the people who read a business plan are very busy, and want a plan where they can easily find critical information.

6-9.

What are the differences between a summary business plan, a full business plan, and an operational business plan?

Answer: A summary business plan is 10 to 15 pages and works best for companies that are very early in their development and are not prepared to write a full plan. A full business plan is typically 25 to 35 pages long, and it works best for new ventures that are at the point where they need funding or financing, and serves as a ―blueprint‖ for a company‘s operations. An operational business plan is 40 to 100 pages long, and is meant primarily for an internal audience. It works best as a tool for creating a blueprint for a new venture‘s operations and providing guidance to operational managers.

610.

Why should the executive summary, which is one of the first things that appears in a business plan, be written last?

Answer: The plan itself will evolve as it‘s written, so not everything is known at the outset. In addition, if you write the executive summary first, you run the risk of trying to write a plan that fits the executive summary rather than thinking through each piece of the plan independently.

611.

What is the difference between the industry analysis section and the market analysis section of a business plan?

Answer: The industry analysis describes the industry the business will be in, such as the toy industry, the fitness center industry, or the electronic games industry. The market analysis describes the specific target market within the broader industry the firm plans to target, such as the educational toy market for two- to seven-year-old children in the broader toy industry.

6-12

What is the difference between a concentrated and a fragmented industry?

Answer: Concentrated industries are dominated by a few large firms, whereas fragmented industries include a large number of smaller companies.

Fragmented industries are more receptive to new firms.

613.

What is the purpose of ―The Economics of the Business‖ section of a business plan?

Answer: The economics of the business section of a business plan addresses the basic logic of how profits are earned in the business as well as the sales level required to break even.

614.

If you are developing a completely new product or service, what type of information should you include in your business plan regarding the status of the development efforts?

Answer: MyLab Question.

615.

What is the purpose of the ―Operations Plan‖ section of a business plan?

Answer: The operations plan section of a business plan outlines how the business will be run and how the product or service will be produced.

616.

Why is the ―Management Team and Company Structure‖ section of a business plan often touted as one of the most important sections?

Answer: Because investors and others place a high value on the composition of a new venture‘s management team (in terms of experience, educational background, past accomplishments, etc.) and often look at other sections of the plan only if the Management Team and Company Structure section is sufficiently convincing.

617.

What is the purpose of a sources and uses of funds statement?

Answer: The financial portion of a business plan should begin with an explanation of the funding that will be needed by the business during the next three to five years along with an explanation of how the funds will be used. This information is called a sources and uses of funds statement.

618.

What is the purpose of an assumptions sheet?

Answer: An assumption sheet explains the basis for the numbers included in the pro forma financial statements. It is important to inform the readers of a business plan of the major ―assumptions‖ under which the financial numbers were generated.

619.

What are the differences between historical financial statements and pro forma financial statements?

Answer: Historical financial statements look backward and pro forma financial statements look forward.

620.

What is the number one rule in making an investor presentation?

Answer: Follow directions. For example, the presenter has to pay regard to the time limit for the presentation. If the presentation is scheduled for 20-minutes plus 40-minutes for a question and answer session, then the presenter must not exceed his/her allotted time.

APPLICATION QUESTIONS 621.

Travis Ryan is one of four cofounders of a skateboard company. The cofounders have decided to write a business plan to obtain funding for their venture.

During a recent meeting, Travis said, ―I know that we‘re all really busy, so I‘d like to volunteer to

write our business plan. A friend of mine has a house on a lake near where we are going to school. If the three of you agree, I‘ll take my laptop to my friend‘s house for a couple of days and knock out our business plan. Any objections?‖ If you were one of Travis‘s cofounders, what would you say? What alternative approaches to writing a business plan would you propose and why?

Answer: Travis may be well-intended, but his approach is incorrect. One of the biggest benefits of writing a business plan is that it allows the founders of a firm to work together to hash out and put in writing all aspects of the proposed business venture. By writing the plan himself, Travis will miss the insights that his co-founders could have provided.

Also, by writing a business plan together, the cofounders of a business get a sense of how well they‘ll work together once the business is launched.

If they experience significant disagreements or conflict during the process of writing a business plan, they should rethink whether they want to commit to working together to start a business.

The only sensible approach is for the four cofounders to write the business plan together.

622.

A good friend of yours, Andrew Waters, has decided to leave his corporate job in order to launch a private SEO (search engine optimization) consulting firm. He is putting together a business plan for this venture and says the following to you, ―I‘ve read several books and articles about how to write a business plan, and there is a point about which I am still a bit confused. Is a business plan written more for learning and discovering or is it written more for pitching and selling?‖ What would you say to Andrew in response to his question?

Answer: Both answers are right. A business plan is a dual-purpose document used both inside and outside the firm. Inside the firm, the plan helps the company develop a road-map to follow to execute its strategies and plans (this is where learning and discovering takes place). Outside the firm, it introduces potential investors and other stakeholders to the business opportunity the firm is pursuing and how it plans to pursue it (this is where the plan is developed for pitching and selling).

623.

Kevin Andrews and Karen Platt are college seniors.

They‘re in the process of launching an unsweetened, fruit-flavored bottled water start-up named Compete H2O. The start-up will be unique in that Compete H2O will be sold via small kiosks located in fitness centers. The university that Kevin and Karen attend hosts an annual business plan competition. Kevin is in favor of entering the competition. Karen is opposed to the idea, arguing that Compete H2O‘s business plan is complete and it is time to move forward. What advantages might Kevin and Karen gain by participating in the university‘s business plan competition?

Answer: Kevin and Karen should definitely compete.

There are two advantages. First, they will invariably get feedback from the judges that will be helpful to them. Entrepreneurs should never view their business plans as ―complete.‖ Even though the document may be complete, a vibrant business will always be in flux— tweaking itself based on feedback. The second reason to enter is that there may be prize money available.

Prize money is the best kind of money—no equity in the firm is surrendered and there is no money to pay back (which is the case when a business obtains a loan).

624.

Imagine you just received an e-mail message from a friend. The message reads, ―Want to let you know that I just finished writing the business plan for my new venture. I‘m very proud of what I‘ve written. The plan is comprehensive and just a bit over 100 pages in length. The executive summary itself is 9 pages long. I intend to send my plan to investors beginning next week. Do you have any words of advice for me before I do this? Be honest. I really want to get funding!‖ How would you respond to your friend‘s request for feedback?

Answer: Your friend‘s approach is a mistake. No one will read a 9-page executive summary, let alone a 100-page business plan. Most business plans are 25 to 35 pages long, and regardless of how complicated the new venture is, or how much work an individual is willing to put into a plan, it is best to stick to the conventional page limits. Remember, additional information can be placed in an appendix, but the plan itself should be rather short. As hard as it is to believe, most investors and others who read business plans see a long plan as a weakness rather

than a strength.

625.

The entrepreneurship class you are taking meets for four hours once per week. A break of 10 minutes or so takes place after the first two hours of each class.

During a recent break, you overheard one of your classmates say to another person that in her opinion, the teacher is overselling the importance to potential investors of a start-up‘s management team. ―After all,‖ the classmate says, ―a good product outweighs any deficiency a firm may have in terms of managers and their abilities.‖ Given what you have learned about business plans, what would you say to your classmate to convince her that she needs to rethink her view regarding potential investors‘ views about the quality of a proposed venture‘s management team?

Answer: Your classmate is incorrect. Investors read more business plans with interesting ideas than they are able to finance. As a result, it‘s often not the idea or market that wins funding among competing plans, but the perception that one management team is better prepared to execute its idea than the others.

Piggybacking on this point, an often repeated phrase among investors is that they‘d rather fund an A management team and a B idea than an A idea and a B management team. The rationale for this notion is that the idea will invariably change. It‘s the prowess of the management team to determine the changes that need to be made and to execute upon the best possible idea.

626.

d.light, which operates as a for-profit social enterprise, is the focus of Case 6.2.

What, if any, special factors should be kept in mind when writing a business plan for a for-profit social enterprise?

Answer: The most important thing to keep in mind when writing a business plan for a for-profit social enterprise is to carefully explain how the firm will achieve its social mission, while earning a profit and attracting the attention of potential investors.

627.

Michael Graves and Jill Simpson just left their jobs with Microsoft to launch a business that will sell a new type of fax machine. They wrote a full business plan that they‘ve asked you to review. When reading the plan, you noticed that several key sections begin with the phrase ―We believe….‖ Is any knowledgeable

person who reads this business plan going to know what ―We believe…‖ really means? What is the problem with including the phrase ―We believe…‖ to introduce key sections of a business plan?

Answer: The problem with the statement ―We believe‖ is that it suggests what is about to be said is based on what the writer believes to be true, not what has been proven to be true by data or careful analysis. Business plans ring hollow if they‘re based on the writer‘s personal beliefs or mere speculation or guesswork.

The most compelling business plans are based on conclusions produced by solid primary and secondary research.

628.

Recently, Megan, Jennifer, and Mark, the cofounders of a medical products company, presented their business plan to a group of investors in the hopes of receiving funding for their venture. One of the investors asked the three, ―How much of your personal money do each of you have invested in this firm?‖ Is this a legitimate question for the proposed investor to ask? Why would an investor want to know how much of their own money each cofounder has committed to the proposed new venture?

Answer: It is a legitimate question to ask. The investor wants to know how much ―skin in the game‖ that Megan, Jennifer, and Mark have. There are two reasons that investors want entrepreneurs to have ―skin in the game.‖ The first is that if the cofounders of a business don‘t have sufficient confidence in the future of their firm to invest (and risk) their own money, why should the investor take the risk? Second, if the co-founders of a business have little or no money of their own invested in a venture, it is much easier for them to walk away than if they had their own money invested and at risk.

629.

Patty Carroll is thinking about opening a high-end fashion boutique in an affluent suburb of Minneapolis. She contacts an angel investor she knows has previously invested in this type of firm and asked if he would read her business plan. She received the following response from the angel investor: ―I would be glad to read your plan. But you should know that when examining business plans for high-end fashion boutiques, the section that I concentrate on with great intensity is called ‗The Economics of the Business.‘‖ Why do you think the angel investor concentrates on this particular section of a business plan when studying proposals to launch a high-end fashion boutique? What specifically do you think the angel investor is interested in understanding when concentrating on this section?

Answer: Fashion boutiques are typically low-volume high-margin businesses with relatively high fixed costs. What the angel investor is probably looking for is convincing evidence that the business is financially viable (i.e., the margins

and projected sales are high enough to cover variable and fixed costs and provide an adequate return to investors). The investor is also probably interested in the break-even analysis, and whether the break-even numbers seem realistic.

YOU BE THE VC 6.1 Company: Beyond Meat (www.beyondmeat.com) Business Idea: Provide consumers with plant-based protein foods that take the animal out of meat – without sacrificing the taste, chew, or satisfaction.

You Be the VC Scorecard Beyond Meat (www.beyondmeat.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

Ethan Brown is the founder and CEO of Beyond Meat. The start-up bolstered its new-venture team via two critical additions: getting Seth Goldman, the founder of Honest Tea, to be the Executive Chairman of the Board, and getting Don Thompson, former CEO of McDonald‘s, as a Board member.

Goldman sold his successful start-up to Coca-Cola and Thompson ran the world‘s largest restaurant chain.

Strength of the Opportunity

1

2

3

4

5

The opportunity is large. Although it is not known how many people are actually averse to meat (not because of its taste, but because of other factors), this is likely to be a big market. Beyond Meat is already in several major retailers – Albertson‘s, Wegman‘s – and as it expands its product line, it could scale up quickly.

Strength of the Industry

1

2

3

4

5

Buzzy competes in the food products

Strength of Business Model

Average Score

industry. The industry is strong and growing. Beyond Meat‘s Chicken-Free Strips offer a number of benefits – gluten free, etc. – that are likely to appeal to its target market.

1 2 3 4 5 Beyond Meat has a straightforward business model. It sells its product through retailers, which means it has to excel in manufacturing and distribution.

4.25/5.0

Decision: We would fund this firm. We like the founder of the firm (and the management team he has put together), the opportunity Beyond Meat is pursuing, and the strength of the industry. We also like the fact that Beyond Meat is solving a problem that will bring relief to people who are averse to meat in its traditional form.

YOU BE THE VC 6.2 Company: Ava (www.ava.me) Business Idea: Build a smartphone app that transcribes conversations received through mobile phones‘ microphones into text, so people with hearing problems can follow along in a group setting.

You Be the VC Scorecard Ava (www.ava.me) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

Co-founders Thibault Duchemin and Skinner Cheng have assembled a team of people with both technical and business expertise. Although it is hard to get details of this management team, the team looks quite committed and capable.

Strength of the

1

2

3

4

5

Opportunity As the case indicates, there are 360 million people (about 5 percent of the world‘s population) who are deaf or hearing-impaired. Of course, being a smartphone app that requires others in a conversation also to have smartphones, Ava is likely to reach only a small subset of this market.

Perhaps the real opportunity is in the business world where deaf or hearing-impaired people may want to use the Ava app.

Strength of the Industry

1

2

3

4

5

The Ava app competes with other products – hearing aids, transcribers, interpreters – that cater to this market. We don‘t know the size of this market to make an informed conclusion, although, as indicated above, the product requires a smartphone and others who have a smartphone.

Strength of Business Model

1

2

3

4

5

Since Ava is an app, it bypasses middlemen and goes directly to the end user. From their website, we understand that the basic Ava app is free and they sell an advanced one for $29.99 a month. The basic app has significant limitations and so the company is using it to draw customers to its product so that they will switch to the paid one.

Average Score

3.00/4.00

Decision: We wrestled with this one for a while before making a decision. Ultimately, we decided that we would not fund the firm. We like the management team and the product.

We‘re just not sure how widely it will be adopted. Given that it requires a smartphone for the user and others involved in the conversation also to have smartphones, the market appears to be limited.

CASES Case 6.1 Birchbox: Leveraging the College Experience to Write a Business Plan and Launch a Growing Start-Up DISCUSSION QUESTIONS 634.

How effectively do you think Katie Beauchamp and Hayley Barna used their time in college to advance their business idea?

Answer: Most students will say that Beauchamp and Barna used their time in college to advance their business idea very effectively. The specifics of how they used their time is chronicled under ―The College Experience‖ and ―Last Semester at Harvard—A Testing Ground for Birchbox‖ portions of the case.

635.

In what ways is Birchbox‘s business approach a win-win for both its suppliers and its customers?

Answer: Birchbox‘s approach is a win for its suppliers because it allows its suppliers to get its products in front of a receptive audience. By doing so, its suppliers hope to acquire new customers that will buy full-sized versions of the products via Birchbox‘s Web site or any other place the product is sold. Birchbox is a win for customers because it allows customers to ―discover‖ new beauty products. It also provides a convenient way for its subscribers to buy full-sized versions of the products they like via the Birchbox Web site.

636.

How was writing a business plan and preparing for a business plan competition helpful to Katie Beauchamp and Hayley Barna while Birchbox was still in the planning, testing, and prototyping stage?

Answer: Beauchamp and Barna took several steps leading up to the competition that were helpful. They essentially completed a product/service feasibility analysis by building a prototype of the box, persuading several suppliers to sign on to test whether the service was feasible, and then signing on an initial handful of subscribers to test the service to see if it was valuable. They solicited feedback from all the groups along the way. The competition

itself provided tremendous exposure for Birchbox and from Beauchamp and Barna as nascent entrepreneurs.

They met people who became advisors and mentors. They also made contact with venture capitalists, some of which offered them funding.

637.

Going forward, what are the most serious challenges facing Birchbox? Which of these challenges do you believe is the most threatening to the firm‘s success?

Do you think Birchbox will have to pivot its business plan again? If so, what factors do you think will precipitate the next pivot?

Answer: The most serious challenges are (1) Birchbox at some point may plateau in terms of subscribers for its stable women‘s subscription service; (2) new markets may be more difficult to grow than their initial one (for example, the number of products and product samples made for men‘s grooming and lifestyle supplies is much lower than those made for women); and (3) growing competition. Although Birchbox remains the clear leader in its space, a number of copycat companies have launched that are competing with Birchbox for subscribers.

Students will vary in terms of which challenge they see as the most threatening to Birchbox‘s success.

Urge your students to make a strong case for the challenge that they think is the most problematic.

This should lead to a discussion of whether Birchbox will have to pivot its business plan. Clearly, the nature of the challenge identified will impact this.

Case 6.2 d.light: How Bringing Its Business Plan to Life Helped a Social Enterprise Get Off to a Strong Start DISCUSSION QUESTIONS 638.

Why is the problem of bringing light to people who don‘t have access to reliable electricity not being tackled in a meaningful way by a large lighting company, such as GE (General Electric) or Philips?

Answer: The thing that Sam Goldman and his team have that a company such as General Electric or Philips doesn‘t have is the entrepreneurial zeal and passion to totally commit to the idea of bringing light to

people without reliable electricity, and to work as many hours a week as necessary to bring the idea to fruition. It‘s very difficult for a company such as General Electric to match this zeal and passion with ―employees.‖ In addition, Goldman and his team have the advantage of focusing solely on their vision.

General Electric is a large diversified company that has many product lines and pursuits, so it‘s not able to focus as intently on a single issue.

639.

What qualities do Sam Goldman and his team have that will help them solve the problem of providing light to the billions of people in the world who lack access to reliable electricity?

Answer: There are several qualities that Sam Goldman and his team have that will help them solve the problem of providing light to the billions of the people in the world who lack access to reliable electricity. They are as follows: 











Sam Goldman has lived in villages that do not have access to electricity. As a result, he can personally relate to the challenges that the people d.light is building products for are experiencing.

Goldman and members of his team attended Stanford, where they participated in an Entrepreneurial Design class. As a result, they have been exposed to ideas and concepts that will be helpful to them in building their business. d.light‘s entire team, from the outset, has traveled to locations where their product will be used to see first-hand the challenges their customers are facing.

Goldman and his team have a big vision. The company‘s goal is not to impact 100,000 people or a million people but to impact hundreds of millions of people. A staple concept of human psychology is that people will sacrifice and work extraordinarily hard to achieve a big goal.

Goldman and his team have participated in several high-quality business plan competitions.

Each competition provided them access to advice from judges.

Goldman and his founders are fully committed to d.light. They passed on corporate jobs and are focused on d.light full time.

 

640.

d.light has a strong team, with a balance of business and engineering expertise.

Goldman and his team are not reluctant to iterate on their idea based on new information and customer feedback.

Why does Sam Goldman go out of his way to talk about the importance of d.light‘s business plan? In what ways do you think having a meticulously created business plan helped d.light in its launch efforts?

Answer: Apparently, Goldman and his team feel that the business plan they developed for d.light has been a major component of the company‘s success, so they hold it in high esteem. d.light‘s business plan has probably helped them in the exact ways suggested in the chapter. As a dual-use document, it has undoubtedly helped them develop a ―road map‖ to follow in executing its strategies and plans, and has provided them a selling document to show to potential investors and other stakeholders.

641.

If you were one of d.light‘s founders, what would your marketing strategy be? How would you go about educating people in remote areas of the world about your product and the benefits associated with purchasing it?

Answer: Most students will champion the idea of using rural entrepreneurs, or indigenous personnel, who know the local customs, people, and language, to sell its products on a commission basis. The rural entrepreneurs could not only sell the device but educate people on the benefits of purchasing it.

CHAPTER 7 PREPARING THE PROPER ETHICAL AND LEGAL FOUNDATION LEARNING OBJECTIVES 1.

Discuss the actions founders can take to establish a strong ethical culture in their entrepreneurial

ventures.

2.

Describe actions taken in new firms to effectively deal with legal issues.

3.

Provide an overview of the business licenses and permits that a start-up must obtain before it begins operating.

4.

Identify and describe the different forms of organization available to new firms.

CHAPTER OVERVIEW This chapter focuses on the ethical and legal challenges involved with starting a firm. Most entrepreneurs overestimate their knowledge of the legal issues involved with starting and running a business. As a result, it is necessary for an entrepreneur to thoroughly review the legal issues involved to make sure that a costly mistake isn‘t made.

The chapter begins by discussing the most important ethical and legal issues facing a new firm, including establishing a strong ethical culture for the firm, choosing an attorney, drafting a founder‘s (or shareholder‘s) agreement, and avoiding legal disputes. The chapter next discusses the licenses and permits that businesses need before they can start conducting business. The chapter ends with a discussion of the different forms of business organization available to new firms, including sole proprietorships, partnerships, corporations, and limited liability companies.

CHAPTER OUTLINE I. Establishing a Strong Ethical Culture for a Firm A. Lead by Example B. Establish a Code of Conduct C. Implement an Ethics Training Program II. Dealing Effectively with Legal Issues A. Choosing an Attorney for a Firm B. Drafting a Founders Agreement C. Avoiding Legal Disputes 1. Meet All Contractual Obligations 2. Avoid Undercapitalization

3. Get Everything in Writing 4. Set Standards III. Obtaining Business Licenses and Permits A. Federal Licenses and Permits B. State Licenses and Permits 1. Business Registration Requirements 2. Sales Tax Permits 3. Professional and Occupational Licenses and Permits C. Local Licenses and Permits IV. Choosing a Form of Business Organization A. Sole Proprietorship 1. Advantages of a Sole Proprietorship 2. Disadvantages of a Sole Proprietorship B. Partnerships 1. General Partnerships 2. Advantages of a General Partnership 3. Disadvantages of a General Partnership 4. Limited Partnerships C. Corporations 1. C Corporations 2. Advantages of a C Corporation 3. Disadvantages of a C Corporation 4. Subchapter S Corporation D. Limited Liability Company 1. Advantages of a Limited Liability Company 2. Disadvantages of a Limited Liability Company CHAPTER NOTES I. Establishing a Strong Ethical Culture for a Firm 

As the opening case suggests, new ventures must deal with important ethical and legal issues at the time of their launching. Ethical and legal errors made early on can be extremely costly for a new venture down the road.

• And there is a tendency for entrepreneurs to overestimate their knowledge of the law.

A. Lead by Example 1. Leading by example is the most important thing that any entrepreneur, manager, or supervisor can do to build an ethical culture in their organization.

B. Establish a Code of Conduct

1. A code of conduct is a formal statement of an organization‘s values on certain ethical and social issues.

2. The advantage of having a code of conduct is that it provides specific guidance to entrepreneurs, managers, and employees regarding expectations of them in terms of ethical behavior.

C. Implement an Ethics Training Program 1. Ethics training programs teach business ethics to help employees deal with ethical dilemmas and improve overall ethical conduct. a. An ethical dilemma is a situation that involves doing something that is beneficial to oneself or the organization, but may be unethical. Ethics training programs are designed to help employees resolve ethical dilemmas in an appropriate manner. b. Ethics training programs can be provided by outside vendors or can be developed in-house.

II.

Dealing Effectively with Legal Issues

A. Choosing an Attorney for a Firm 1. It is important for an entrepreneur to select an attorney as early as possible when developing a business venture. Table 7.3 in the textbook provides guidelines to consider when selecting an attorney.

2. It is critically important that the attorney be familiar with start-up issues and that he or she has successfully shepherded entrepreneurs through the start-up process before.

3. Many attorneys recognize that start-ups are short on cash and will work out an installment plan or other payment arrangement to get the firm the legal help it needs without starving it of cash.

4. The following are several ways for entrepreneurs to save on legal fees. a. Group together legal matters. b. Offer to assist the attorney. c. Ask your attorney to join your advisory board.

d. Use nonlawyer professionals.

B. Drafting a Founders‘ Agreement 1. A founders‘ agreement (or shareholders‘ agreement) is a written document that deals with issues such as the relative split of the equity among the founders of the firm, how individual founders will be compensated for the cash or the ―sweat equity‖ they put into the firm, and how long the founders will have to remain with the firm for their shares to fully vest.

2. Most founders‘ agreements include a buyback clause, which legally obligates the departing founder to sell his or her interest in the firm to the remaining founders if they are interested.

3. The presence of a buyback clause is important for at least two reasons. First, if a founder leaves the firm, the remaining founders may need the shares to offer to a replacement person. Second, if founders leave because they are disgruntled, the buyback clause provides the remaining founders a mechanism to keep the shares of the firm in the hands of people who are fully committed to a positive future for the venture.

C. Avoiding Legal Disputes Most legal disputes are the result of misunderstandings, sloppiness, or a simple lack of knowledge of the law. Getting bogged down in legal disputes is something that an entrepreneur should work hard to avoid. There are several steps entrepreneurs can take to avoid legal disputes and complications.

1. Meet all contractual obligations. It is important to meet all contractual obligations on time. This includes paying vendors, contractors, and employees as agreed and delivering goods or services as promised.

2. Avoid undercapitalization. If a new business is starved for money, it is much more likely to experience financial problems that will lead to litigation.

3. Get everything in writing. Many business disputes arise because of the lack of a written agreement or

because poorly prepared written agreements do not anticipate potential areas of dispute.

4. Set standards. Organizations should also set standards that govern employees‘ behavior beyond what can be expressed via a code of conduct. a. When legal disputes do occur, they can often be settled through negotiation or mediation, rather than more expensive and potentially damaging litigation. b. Mediation is a process in which an impartial third party (usually a professional mediator) helps those involved in a dispute reach an agreement.

III. Obtaining Business Licenses and Permits Before a business is launched, a number of licenses and permits are typically needed. What is actually needed varies by city, country, and state, as well as by type of business, so it‘s important for the entrepreneur to study local regulations carefully.

A. Federal Licenses and Permits 1. Most businesses do not require a federal license to operate, although some do. Table 7.5 in the chapter contains a partial list of the business activities that require a federal license or permit, along with the federal agency to contact and its Web site address.

2. Seemingly simple businesses sometimes require more licenses and permits than one might think. For example, if you prepare tax returns for others you are required by the IRS to register and obtain a tax preparer tax identification number (PTIN).

B. State Licenses and Permits 1. Business Registration Requirements a. Some states require all new businesses to register with the state.

2. Sales Tax Permits

a. Most states and communities require businesses that sell goods, and in some cases services, to collect sales tax and submit the tax to the proper state authorities. b. If you‘re obligated to collect sales tax, you must get a permit from your state.

3. Professional and Occupational Licenses and Permits a. In all states, there are laws that require people in certain professions to pass a state examination and maintain a professional license to conduct business. b. Examples include barbers, chiropractors, nurses, tattoo artists, land surveyors, and real estate agents. c. There are also certain businesses that require a state occupational license or permit to operate.

Examples include plumbers, daycare centers, trucking companies, and insurance agents.

C. Local Licenses and Permits 1. On the local level, there are two categories of licenses and permits that may be needed.

2. The first is a permit to operate a certain type of business. Examples include childcare, barber shops and salons, automotive repair, and hotels and motels.

3. In addition to obtaining the proper licenses and permits, if you plan to use a fictitious name for your business, you‘ll need to obtain a fictitious business name permit (also called dba or doing business as).

4. Finally, all businesses, other than sole proprietorships that do not have employees, are required to obtain a Federal Employee Identification Number (EIN).

IV.

Choosing a Form of Business Organization

• When a business is launched, a form of legal entity must be chosen. The most common legal entities are

sole proprietorship, partnership, corporations, and limited liability companies.

• There is no single form of business ownership that

works best in all situations. It is up to the owners of a firm and their attorney to select the legal entity that best meets their needs.

• The decision typically hinges on several factors, including the following: • • • •

The cost of setting up and maintaining the legal form The extent to which an entrepreneur can shield his or her personal assets from the liabilities of the business Tax considerations The ease of raising capital

A. Sole Proprietorship 1. A sole proprietorship is a form of business organization involving one person, and the person and the business are essentially the same.

2. Setting up a sole proprietorship is cheap and relatively easy compared to the other forms of business ownership. The only legal requirement, in most states, is to obtain a license to do business.

3. A sole proprietorship is not a separate legal entity. For tax purposes, the profits or losses of the business flow through to the owner‘s personal tax return.

4. The primary advantages and disadvantages of a sole proprietorship are as follows: a. Advantages of a Sole Proprietorship i. Creating one is easy and inexpensive. ii. The owner maintains complete control of the business and retains all the profits. iii. Business losses can be deducted against the sole proprietor‘s other sources of income. iv. It is not subject to double taxation (explained later). v. The business is easy to dissolve.

b. Disadvantages of a Sole Proprietorship i. Liability on the owner‘s part is unlimited. ii. The business relies on the skills and abilities of a single owner to be successful. iii. Raising capital can be difficult. iv. The business ends at the owner‘s death or loss of interest in the business. v. The liquidity of the owner‘s investment is low.

B. Partnerships 1. Partnerships are organized as either general or limited partnership. a. A general partnership is a form of business organization where two or more people pool their skills, abilities, and resources to run a business. The primary advantages and disadvantages of a general partnership are as follows: i. Advantages of a General Partnership a) Creating one is relatively easy and inexpensive compared to a corporation or limited liability company. b) The skills and abilities of more than one individual are available to the firm. c) Having more than one owner may make it easier to raise funds. d) Business losses can be deducted against the partners‘ other sources of income. e) It is not subject to double taxation (explained later). ii.

Disadvantages of a General Partnership

a) Liability on the part of each general partner is unlimited. b) The business relies on the skills and ability of a fixed number of partners. c) Raising capital can be difficult. d) Because decision making among the partners is shared, disagreements can occur. e) The business ends at the death or withdrawal of one partner unless otherwise stated in the partnership agreement. f) The liquidity of each partner‘s investment

is low.

2. A limited partnership is a modified form of a general partnership. The major difference between the two is that a limited partnership includes two classes of owners: general partners and limited partners. a. Similar to a general partnership, the general partners are liable for the debts and obligations of the partnership, but the limited partners are liable only up to the amount of their investment. b. Limited partnerships are common in real estate development, oil and gas exploration, and motion picture ventures.

C. Corporations 1. A corporation is a separate legal entity organized under the authority of a state.

2. Corporations are organized as either C corporations or subchapter S corporations. a. A C corporation is a separate legal entity that, in the eyes of the law, is separate from its owners. b. A corporation is formed by filing articles of incorporation with the secretary of state‘s office in the state of incorporation. c. If the owners of a corporation don‘t file their annual paperwork, neglect to pay their annual fees, or commit fraud, a court could ignore the fact that a corporation has been established, and the owners could be held personally liable for actions of the corporation. This chain of events is referred to as ―piercing the corporate veil.‖ d. A disadvantage of corporations is that they are subject to double taxation, which means that a corporation is taxed on its net income and, when the income is distributed to shareholders in the form of dividends, is taxed again on shareholders‘ personal income tax returns. e. The following are the advantages and

disadvantages of a C corporation. i. Advantages of a C Corporation a) Owners are liable only for the debts and obligations of the corporation up to the amount of their investment. b) The mechanics of raising capital is easier. c) No restrictions exist on the number of shareholders, which differs from subchapter S corporations. d) Stock is liquid if traded on a major stock exchange. e) The ability to share stock with employees through stock options or other incentive plans can be a powerful form of employee motivation. ii.

Disadvantages of a C Corporation

a) Setting up and maintaining one is more difficult than for a sole proprietorship or a partnership. b) Business losses cannot be deducted against the shareholders‘ other sources of income. c) Income is subject to double taxation, meaning that it is taxed at the corporate and the shareholder levels. d) Small shareholders typically have little voice in the management of the firm. f. A subchapter S corporation combines the advantages of a partnership and a C corporation.

It is similar to a partnership in that the profits and losses of the business are not subject to double taxation. i. Standards to Qualify for a Subchapter S Corporation a) The business cannot be a subsidiary of another corporation. b) The shareholders must be U.S. citizens.

Partnerships and C corporations may not own shares in a subchapter S corporation.

Certain types of trusts and estates are eligible to own shares in a subchapter C corporation. c) It can have only one class of stock issued and outstanding (either preferred stock or common stock).

d) It can have no more than 100 members.

Husbands and wives count as one member, even if they own separate shares of stock. e) All shareholders must agree to have the corporation formed as a subchapter S. D. Limited Liability Company 1. The limited liability company is a form of business organization that is rapidly gaining popularity in the United States.

2. As with partnerships and corporations, the profits of an LLC flow through to the tax returns of the owners and are not subject to double taxation.

3. The main advantage of the LLC is that all partners enjoy limited liability. This differs from regular and limited partnerships, where at least one partner is liable for the debts of the partnership.

4. The advantages and disadvantages of an LLC are as follows: a. Advantages of a Limited Liability Company i. Members are liable for the debts and obligations of the business only up to the amount of their investment. ii. The number of shareholders is unlimited. iii. An LLC can elect to be taxed as a sole proprietor, partnership, S corporation, or corporation—providing much flexibility. iv. Because profits are taxed only at the shareholder level, there is no double taxation. b. Disadvantages of a Limited Liability Company i. Setting up and maintaining one is more difficult and expensive. ii. Tax accounting can be complicated. iii. Some of the regulations governing LLCs vary by state. iv.

Because LLCs are a relatively new type of business entity, there is not as much legal precedent available for owners to anticipate how legal disputes might affect their business. v. Some states levy a franchise tax on LLCs—which is essentially a fee the LLC pays the state for the benefit of limited liability.

BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING What Went Wrong?

How Flytenow Got Grounded by Government Regulations 1.

Which side do you agree with in this case – Flytenow or the FAA? Explain your answer.

Answer: Students will vary in their responses to this question. On the one hand, Flytenow should have gotten a ruling from the FAA before launching its business.

Some students will argue, though, that Flytenow is only organizing what was an unorganized practice in the industry (pilots posting for riders to share costs) and therefore, should be allowed to continue. It comes down to an interpretation of law.

2.

If you started a business in an industry you weren‘t intimately familiar with, how would you go about determining the proper licenses and permits to obtain, and whether there are additional government regulations that affect the product or service you plan to offer?

Answer: The best approach would be engage the services of an industry consultant or an attorney who practices in that area. In today‘s age, a lot of the information is available on the Web.

3.

If you were starting an aviation-related company, how would you go about locating an attorney that specialized in aviation law?

Answer: One approach is to contact the local bar association and find out if they have a database of lawyers specializing in aviation law. The trade association for the aviation industry may also be a good source.

4.

Do you think the founders of Flytenow will find a way to resurrect the service, or do you think the company is permanently out of business? Explain your answer.

Answer: Answers will vary. Flytenow‘s future may depend on changes in regulations and laws or having a good team of lawyers to appeal the court‘s ruling.

Savvy Entrepreneurial Firm Don‘t Hesitate to Say ―We‘re Sorry‖

1.

On a scale of 1-10 (10 is high), how important is transparency, fairness, and honesty for a firm such as Zendesk? What does a firm have to lose if its customers feel it is subpar on these qualities?

Answer: Most students will make the point that transparency, fairness and honesty is important for all firms, and not just those like Zendesk. Zendesk is a start-up and it sells its service via subscriptions. It is a software company that works closely with customers and customer data. It goes to say that the three attributes are extremely important for the long-term viability of Zendesk.

2.

Why do you think Svane‘s first message to Zendesk‘s customers didn‘t work? Why do you think the second message did?

Answer: As Svane indicates in the case, relationships are not about reasoning, but about being receptive to feelings. The first letter‘s tone was likely all logical reasoning to justify the price increase. The second one focused on relationship building.

3.

In the end, to what degree do you think Zendesk handled its crisis appropriately?

Answer: It did handle the crisis appropriately because it got over it and grew as a company.

4.

What can entrepreneurial firms learn from Zendesk‘s experience? What did you learn from it?

Answer: The key take away is that a firm‘s relationship with its customers is critical and a firm has to be honest, fair, and transparent in dealing with them.

Partnering for Success Vesting Ownership in Company Stock: A Sound Strategy for Start-Ups 1.

Investors are often criticized for insisting that a vesting schedule be put in place for stock that‘s issued to employees. After reading this feature, do you think this criticism is justified? If a company anticipated that it will never take money from an

investor, is it still a good idea to establish a vesting schedule? Explain your answer.

Answer: Most students will see the value in a vesting schedule, side with investors, and state that they don‘t agree that the criticism is justified.

Additionally, the first two of the three reasons vesting makes sense articulated in the article apply whether a firm takes money from an investor or not.

Vesting helps keep employees motivated and engaged. In addition, if an employee‘s departure is acrimonious, there isn‘t any squabbling about how many shares the employee will leave with—the answer to this question is spelled out in the vesting schedule.

2.

Why do you think start-ups launch and distribute stock to founders and others members of their new-venture team without vesting schedules?

Answer: Typically, this would happen only if (1) the people involved were uninformed or (2) the people involved wanted their shares vested all at once. The second reason is ill-advised, for the reasons described in the feature.

3.

Is it typically necessary to hire an attorney to establish a vesting schedule for an entrepreneurial venture or can the new firm do it on its own?

Answer: A firm can do it on its own, but it is best to hire an attorney to do it.

4.

Given your reading of this feature, explain how you think employees who own shares of a newly-launched firm would view themselves as partners in such a situation?

Answer: The idea of vesting is that shares of stock are given gradually when they are ―earned.‖ This means employees who get vested stock can view themselves as partners who help the firm grow and are rewarded for it.

REVIEW QUESTIONS 7-1

When should your friend, who is considering launching a consulting firm to provide financial services to small businesses, think about the ethical climate she wants to establish in her venture?

Answer: Before the firm is launched.

7-2.

Based on the information included in this chapter, in general, do entrepreneurs tend to overestimate or underestimate their knowledge of the laws that pertain to starting a new firm, and why?

Answer: In general, entrepreneurs tend to overestimate their knowledge of the law. As a result, entrepreneurs should seek legal advice before they start a firm, and also read books and study Web sites to acquaint themselves with the most pertinent legal issues they will confront.

7-3.

Why is it important for an entrepreneur to build a strong ethical culture for his or her firm?

Answer: Ethical errors early on can be extremely costly for a new firm, in terms of its reputation and its ability to forge favorable business partnerships.

7-4.

What are some of the specific steps that can be taken in an entrepreneurial venture for the purpose of building a strong ethical culture?

Answer: Some specific steps an entrepreneurial venture can take to build a strong ethical culture are: lead by example, establish a code of conduct, and implement an ethics training program.

7-5

What is the purpose of a code of conduct?

Answer: A code of conduct describes the firm‘s general value system, moral principles, and specific ethical rules that apply in a particular business. The purpose is to promote a healthy climate of business ethics in a firm. It can also help a firm avoid litigation.

7-6.

7-7.

What is the purpose of establishing and using an ethics training program in an entrepreneurial firm?

MyLab Question.

What are some of the more important criteria to consider when selecting an attorney for a new firm?

Answer: Table 7.3 in the textbook provides guidelines to consider when selecting an attorney. It is critically important that the attorney be familiar with start-up issues and that he or she has

successfully shepherded entrepreneurs through the start-up process before.

7-8.

What is a founders‘ agreement and why is it important for a team of entrepreneurs to have one in place when launching a venture?

Answer: A founders‘ agreement is a written document that deals with issues such as the relative split of the equity among the founders of the firm, how individual founders will be compensated for the cash or the ―sweat equity‖ they put into the firm, and how long the founders will have to remain with the firm for their shares to fully vest.

7-9.

What is the purpose of a nondisclosure agreement and the purpose of a noncompete agreement?

Answer: A nondisclosure agreement is a promise made by an employee or another party (such as a supplier) to not disclose a company‘s trade secrets. A noncompete agreement prevents an individual from competing against a former employer for a specific period of time.

710.

How can entrepreneurial ventures avoid legal disputes?

Answer: Meet all contractual obligations on time, avoid undercapitalization, get everything in writing, and promote business ethics.

711.

What is mediation and how do entrepreneurs use it to resolve disputes?

Answer: Mediation is a process in which an impartial third party (usually a professional mediator) helps those involved in a dispute reach an agreement.

Note: Wikipedia has an excellent page on mediation.

712.

At what point, during the process of starting a firm, does a business need to focus on the business licenses and permits that it needs, and why at that point?

Answer: Almost all licenses and permits must be in place before a business launches. Business licenses and permits vary by city, so it‘s important to check local rules and ordinances. For example, some cities (and even neighborhoods within cities) have very strict rules about putting up signs, whereas other cities have lax rules.

713.

Why is it important for the founders of a firm to think carefully about the name they pick for their company?

MyLab Question.

7-14

Why isn‘t choosing a legal entity a one-time event?

Answer: As a business grows and matures, it is necessary to periodically review whether the current form of business organization remains appropriate.

715.

What might trigger a firm‘s decision to change how it is legally organized?

Answer: A firm‘s decision to change how it is legally organized might be triggered by a shift in strategy, or by tax or legal issues.

716.

What are the advantages and disadvantages of organizing a new firm as a sole proprietorship?

Answer: Advantages of organizing as a sole proprietorship: (1) creating one is easy and inexpensive; (2) the owner maintains complete control of the business and retains all the profits; (3) business losses can be deducted against the sole proprietor‘s other sources of income; (4) the business is not subject to double taxation; and (5) the business is easy to dissolve.

Disadvantages of a sole proprietorship: (1) liability on the owner‘s part is unlimited; (2) the business relies on the skills and abilities of a single owner; (3) raising capital can be difficult; (4) the business ends at the owner‘s death or loss of interest in the business; and (5) the liquidity of the owner‘s investment is low.

717.

Is a sole proprietorship an appropriate form of ownership for an aggressive entrepreneurial firm? Why or why not?

Answer: A sole proprietorship is not an appropriate form of ownership for an aggressive entrepreneurial firm. An aggressive firm will probably need to raise capital early in its life, which is not possible under the sole proprietorship form of ownership (i.e.,

equity can‘t be shared with others). A sole proprietorship also needlessly exposes an entrepreneur to personal liability for the actions of the firm.

718.

What are the differences between a general partnership and a limited partnership?

Answer: A general partnership is a form of business organization where two or more people pool their skills, abilities, and resources to run a business. A limited partnership is a modified form of a general partnership. The major difference between the two is that a limited partnership includes two classes of owners: general partners and limited partners. The general partner is liable for the behavior of the firm. The limited partners are liable only up to the amount of their investment.

719.

What are the major advantages and disadvantages of a C corporation?

Answer: Advantages of a C corporation: owners are liable only for the debts and obligations of the corporation up to the amount of their investment; the mechanics of raising capital is easier; no restrictions on the number of shareholders; stock is liquid if traded on a major stock exchange; and the ability to share stock with employees through stock option or other incentive plans can be a powerful form of employee motivation.

Disadvantages of a C corporation include: setting up and maintaining one is more difficult than for a sole proprietorship or a partnership; business losses cannot be deducted against the shareholders‘ other sources of income; income is subject to double taxation, meaning that it is taxed at the corporate and the shareholder levels; and small shareholders typically have little voice in the management of the firm.

720.

How is a C corporation subject to double taxation?

Answer: A disadvantage of corporations is that they are subject to double taxation, which means that a corporation is taxed on its net income and when the same income is distributed to shareholders in the form of dividends, is taxed again on shareholders‘ personal income tax returns.

721.

What is the difference between preferred stock and common stock?

Answer: Most C corporations have two classes of stock: common and preferred. Preferred stock is typically issued to conservative investors who have preferential rights over common stockholders in regard to dividends and to the assets of the corporation in the event of liquidation. Common stock is issued more broadly than preferred stock. The common stockholders have voting rights and elect the board of directors of the firm.

The common stockholders are typically the last to get paid in the event of the liquidation of the corporation, that is, after the creditors and the preferred stockholders.

722.

What is meant by the term piercing the corporate veil and what are the implications for the owners of a corporation if the corporate veil is pierced?

Answer: It is important that a corporation‘s owners fully comply with all regulations pertaining to a corporation. If the owners of a corporation don‘t file their annual paperwork, neglect to pay their annual fees, or commit fraud, a court could ignore the fact that a corporation has been established, and the owners could be held personally liable for actions of the corporation. This chain of events is referred to as piercing the corporate veil.

723.

What are the differences among a public corporation, a closely held corporation, and a private corporation?

Answer: Public corporations are firms that are listed on a major stock exchange, such as the New York Stock Exchange or the Nasdaq. Closely held corporations are firms that are owned by a small number of individuals and the corporation‘s stock is very thinly or infrequently traded. Private corporations are firms in which all the shares are held by a few shareholders, such as management and family members, and are not publicly traded. Public corporations enjoy the highest level of liquidity for its stock.

724.

What are stock options and why would a corporation offer stock options to its employees?

Answer: Stock options are a special form of incentive

compensation. These plans provide employees the option or right to buy a certain number of shares of their company‘s stock at a stated price over a certain period of time. The most compelling advantage of stock options is the potential rewards to participants when (and if) the stock price increases. As employees accumulate stock options, the link between their potential reward and their company‘s stock price becomes increasingly clear. This link provides a powerful inducement for employees to exert extra effort on behalf of their firms in hopes of positively affecting the stock price.

725.

What are the advantages and disadvantages of a limited liability company?

Answer: Advantages of a limited liability company: members are liable for the debts and obligations of the business only up to the amount of their investment; the number of shareholders is unlimited; an LLC can elect to be taxed as a sole proprietor, partnership, S corporation, or corporation, providing much flexibility; and because profits are taxed only at the shareholder level, there is no double taxation.

Disadvantages of a limited liability company: setting up and maintaining one is more difficult and expensive; tax accounting can be complicated; some of the regulations governing limited liability companies vary by state; because LLCs are a relatively new type of business entity, there is not as much legal precedent available for owners to anticipate how legal disputes might affect the business; and some states level a franchise tax on LLCs—which is essentially a fee the LLC pays the state for the benefit of limited liability.

726.

Is a limited liability company an appropriate form of ownership for an aggressive entrepreneurial firm? Why or why not?

Answer: A limited liability company is an appropriate form of ownership for an aggressive entrepreneurial firm. It is a more suitable form of ownership than a sole proprietorship or a general partnership for raising money, it shields its owners from personal liability, and it avoids the double taxation complication of a C corporation.

APPLICATION QUESTIONS

727.

Under what circumstances should ethical considerations be part of a company‘s business plan? Should a company periodically measure its ethical performance? If so, what are the best ways for a firm to do this?

Answer: Ethical considerations should be an integral part of a company‘s business plan. Particularly if the company deals with client privacy, public safety, is safeguarding clients‘ money or other resources, or is involved in a similar activity. It‘s important for a company to assert that it plans to adopt high ethical standards and explain how high ethical standards will be implemented and institutionalized. There are various methods that a company can utilize to measure its ethical performance. One set of methods is based on external feedback, such as counting the number of complaints it receives or the number of fines it is subject to. Other methods are based on internal feedback, such as administering confidential surveys to ask employees how many times they‘ve committed ethical breaches or how many times they‘ve observed coworkers committing ethical breaches.

728.

Tom Andersen owns an electronics firm in Wichita, Kansas. He has told you that he has been suffering some cash flow problems recently, but has avoided having to borrow money by letting some of his firm‘s bills run late. When you raised your eyebrows in response to hearing these comments from Tom, he said, ―Don‘t worry. I‘m really not nervous about this situation in that I have some large orders coming in soon. I‘ll use the cash from these orders to catch up on my bills.‖ Does what Tom told you seem to be a sound strategy for him to follow? What are the downsides associated with how Tom is approaching his cash flow issues?

Answer: Tom does not have a good strategy. One way to avoid legal disputes, and keep one‘s reputation intact, is to pay all of your bills on time. If an obligation can‘t be met on time, the problem should be communicated to the affected parties as soon as possible. Tom‘s strategy will irritate everyone involved, and it‘s just not good business—even if he ultimately makes good on his obligations.

729.

Kimberly Smith, a friend of yours, is a freelance journalist. She writes articles on business topics and sells them to business periodicals, newspapers, and

online sites. She just read an article about the advantages of organizing as a subchapter S corporation or an LLC; however, Kimberly does not know if the article‘s contents apply to her and her situation or not. Currently, she is organized as a sole proprietorship and doesn‘t know if it is appropriate or advisable for a freelance journalist to set up a subchapter S corporation or an LLC. Kimberly has turned to you for advice. What advice would you offer to her regarding the issue at hand?

Answer: Kimberly should set up a subchapter S corporation or an LLC. There is no downside and substantial upside to a subchapter S corporation or an LLC over a sole proprietorship.

730.

DipJar is the focus of the ―You Be the VC 7.1‖ feature. Assume that this firm‘s founders have asked you to help them write a code of conduct for their firm. Given your understanding of how DipJar operates as an entrepreneurial venture, put together a table of contents for the firm‘s code of conduct.

Answer: DipJar provides devices to enable money collection via credit or debit cards. As an example, a DipJar device will help a Salvation Army volunteer who collects money from passersby. Since fewer people are carrying cash in an increasingly cashless society, DipJar enables people without cash to contribute via their card.

This is a good exercise for a team project. Table 7.2 in the chapter is a helpful resource because it outlines Facebook‘s code of conduct‘s table of contents.

731.

Nancy Wills is purchasing a business named Niagara Laser Optics that is located near Buffalo, New York.

The business has had several brushes with the law during the past several years, dealing with claims of false advertising and wrongful termination of employees. As a result, Nancy is quite concerned about the firm‘s ethical culture. What specific techniques could Nancy use to increase the emphasis placed on business ethics when she takes control of the firm she has purchased?

Answer: There are at least four techniques that Nancy could use.



   732.

Put in place a set of procedures to help avoid legal complications. These procedures are explained in the chapter, and include meeting contractual obligations, avoiding undercapitalization, getting everything in writing, and setting ethical standards.

Develop a code of ethics and stick to it.

Provide employees ethics training on an ongoing basis.

Consult with an attorney on any ethics-related issues that are worrisome or unclear.

You have been approached by a close family friend who is putting together a limited liability company to purchase a condominium complex near Cocoa Beach in Florida. He is asking you, along with a number of family members, to each invest $10,000 in his company.

The condominium complex is for sale for $5 million.

Your friend hopes to convince 50 people to invest $10,000 apiece, which will raise $500,000; he intends to borrow the remaining $4.5 million to close the deal. ―I don‘t mind investing the $10,000, but I‘m really nervous about being on the hook for a $4.5 million loan if the deal goes bad,‖ you note to your friend. In response, he insists that all you would have at risk is $10,000 and that you would not be liable for anything else. Is your friend right or wrong about this?

Answer: Your friend is right. If the LLC is set up right, you are only liable up to the amount of your investment.

733.

Laura Simpson just took a job with Cisco Systems in San Jose, CA. One of the attractions of this job is the stock option plan Cisco offers to its employees.

What is meant by the term stock option? Why would Cisco, as well as other companies, choose to offer stock options to its employees?

Answer: Stock options are a special form of incentive compensation. These plans provide employees the option or right to buy a certain number of shares of their company‘s stock at a stated price over a certain period of time. The most compelling advantage of stock options is the potential rewards to participants when (and if) the stock price increases. Many employees receive stock options at the time they are hired and then periodically receive additional options. As

employees accumulate stock options, the link between their potential reward and their company‘s stock becomes increasingly clear. This link provides a powerful inducement for employees to exert extra effort on behalf of their firm in hopes of positively affecting the stock price.

734.

If you launched a start-up venture before graduating with your degree, why would you or why would you not offer stock options to your employees?

Answer: Most students will say that they would offer stock options. The case in favor of issuing stock options is that it helps a firm attract high quality employees. It‘s also a form of employee motivation. As employees accumulate stock options, the link between their potential rewards and their company‘s stock price becomes increasingly clear.

YOU BE THE VC 7.1 Company: GiveForward (www.giveforward.com) Business Idea: Launch a crowdfunding platform that allows people to send financial support and encouragement to individuals facing a medical crisis to provide for their out-of-pocket medical expenses.

You Be the VC Scorecard GiveForward (www.giveforward.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

GiveForward was started by Desiree Vargas Wrigley and Ethan Austin.

Wrigley graduated from Yale in 2004, and prior to GiveForward worked at the Kauffman Foundation. Austin previously worked for DealGooder, a Web-based platform that connects socially conscious shoppers, businesses, and charitable organizations and Climate Cycle, a nonprofit focused on climate and sustainability issues.

Strength of the Opportunity

1

2

3

4

5

The opportunity is large.

Uncertainties surrounding health insurance coverages and the aging of the population suggest that an increasing number of people will experience financial stress paying for medical procedures and emergencies. By creating a crowdfunding platform that is restricted to medical fundraising, GiveForward has become the #1 site in its niche. It is also the only medical fundraising site that provides guidance and coaching for how to raise money via its site.

Since 2009, the site has helped its users raise more than $15 million in donations.

Strength of the Industry

1

2

3

4

5

Medical fundraising is a growing industry.

Strength of Business Model

1

2

3

4

5

GiveForward takes a 7 percent commission on funds raised via its site. Of that amount, it keeps 4.5 percent and 2.5 percent goes to PayPal. The site is a rallying point for those in need. As the GiveForward brand becomes better known, it is hosting increasingly high-profile fundraising drives. For example, the family of Canadian freestyle skier Sarah Burke, who died in a training accident, raised more than $250,000 via GiveForward in just one day to cover expenses related to her care.

GiveForward is a for-profit organization. Its founders believe in a dual purpose of doing good and making money. In addition, if GiveForward were a nonprofit organization, it would not be able to

help individuals (who are not affiliated with a nonprofit organization) raise funds to pay for personal expenses.

We do worry about the sustainability of GiveForward‘s 7 percent commission. That number seems high to us.

Average Score

3.5/5.0

Decision: This is a tough one. There is a lot to like about GiveForward. Although its management team is inexperienced, we like their backgrounds and their obvious passion for what they are doing. Crowdfunding is growing in importance and popularity, and we like the niche that GiveForward is in. At the end of the day, we decided not to fund the firm.

Our reason is that although we admire what GiveForward is doing, the 7 percent fee they take causes us pause, making us wonder if GiveForward‘s business model is sustainable.

Seven percent seems like a high commission. Also, more ubiquitous sites, such as Kickstarter, could significantly erode GiveForward‘s market share if it opened its platform to medical fundraising. We plan to follow GiveForward and admire its ideals.

YOU BE THE VC 7.2 Company: DipJar (www.dipjar.com) Business Idea: Create a hardware device that makes it easy for people to use credit or debit cards to leave tips for service workers or donate to a nonprofit organization, such as the Salvation Army or the public library.

You Be the VC Scorecard DipJar (www.dipjar.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

Ryder and Judd Kessler and Jordan Bar Am founded DipJar in 2012. They have raised seed capital of $2.82 million

through two rounds. Ryder has a corporate background, Judd has an academic background and it appears that this is Jordan‘s first management job. They have hired an outsider as the COO. Strength of the Opportunity

1

2

3

4

5

The opportunity is moderate at best.

From their Web site it appears that they are pushing the fund raising side more than sales of their device to restaurants and other for-profit outlets. Their product works best for an organization like the Salvation Army that collects small amounts from multiple donors. It is unclear how big an opportunity is from other types of charity organizations.

Strength of the Industry

1

2

3

4

5

There is no formal industry to speak of as DipJar has entered a space where the option is dropping bills or coins into a jar. It is hard to evaluate the industry when DipJar is a pioneer.

Strength of Business Model

1

2

3

4

5

DipJar is rolling out a disruptive business model, with the disruptee being the jar for people to deposit money in! It charges charity organizations to buy the device.

This may be an obstacle as such organizations have resource constraints.

Average Score

3.25/5.0

Decision: We would not fund this firm. The company is featuring a disruptive business model and is going after a payer who is resource-constrained to begin with. It remains to be seen how supportive such organizations will be to pay for a device to help them collect small donations. If the

company targets for-profit businesses such as restaurants, it may have a more attractive model.

CASES Case 7.1 Preparing a Proper Legal Foundation: A Start-Up Fable DISCUSSION QUESTIONS 739.

Complete Jack and Sarah‘s list for them, including the issues you think they will place on the list along with their recommendations. Which of the issues do you think will stimulate the most discussion with the attorney, and which issues do you think will stimulate the least?

Answer: This is an excellent question for an individual or group assignment. Jack and Sarah‘s list will invariably include topics pertaining to drafting a founders‘ agreement, writing nondisclosure and noncompete agreements for future employees, deciding how the initial ownership in the company will be divided, determining the business licenses and permits they will need, and choosing a form of business ownership. They may also talk about ethics-related issues.

740.

What are some of the actions Jack and Sarah took prior to meeting with the attorney that are appropriate for them to have taken?

Answer: Most students will argue that Jack and Sarah did the following things right for their meeting with the attorney:     

741.

They obtained a referral before they selected an attorney.

They picked an attorney that specializes in small business.

They scheduled an appointment with the attorney.

They were well prepared for their meeting with the attorney.

They e-mailed the attorney a list of the issues they wanted to talk about ahead of the meeting.

Is it too early for Jack and Sarah to begin laying an ethical foundation for their proposed venture? If not,

what steps could they take now as a foundation for an ethical culture within their firm?

Answer: No, it is not too early for Jack and Sarah to begin laying an ethical foundation for their proposed venture. The steps they can take are the ones articulated in the chapter: Lead by Example, Establish a Code of Conduct, and Implement an Ethics Training Program. They already have an attorney, which is an excellent step. It will help their company get off to a good legal start. They should also have a founders‘ agreement and take steps to avoid legal disputes.

742.

What advantages do Jack and Sarah have starting iUser Accessories together, rather than one of them starting it as a sole entrepreneur?

Answer: It is generally believed that new ventures started by a team have an advantage over those started by an individual because a team brings more talent, resources, ideas, and professional contacts to a new venture than does a sole entrepreneur. The difficulties Jack and Sarah might encounter are deciding how to split ownership in the firm (50/50 ownership leaves no one clearly in charge) and deciding how to resolve differences in opinion that will invariably emerge.

743.

Based on information featured in the case, what challenges do you think Jack and Sarah will have keeping their partnership active?

Answer: Jack and Sarah are young, so their interests may diverge over time. This is all the more reason to have a founders‘ agreement. If a business‘s founders anticipate up-front that there may come a day when they will go their separate ways, the founders‘ agreement will spell out how their individual shares in the firm will be dealt with. Jack and Sarah may also feel pressure from their individual families.

Recall, they each received investments of $30,000 apiece from family members. If the businesses doesn‘t pan out as well as expected, either Jack or Sarah‘s family may urge them to sell the business or to ask the remaining partner to buy them out.

Case 7.2 Peloton Cycle and DonorsChoose: How For-Profit and Nonprofit Start-Ups Build Credibility and Trust

DISCUSSION QUESTIONS 744.

Why is building credibility, legitimacy, and trust particularly important for a start-up venture, regardless of whether it is a for-profit or a nonprofit organization?

Answer: Take the case of Peloton. It is a new product that is quite pricey ($1,195 for the bike plus a monthly subscription for the service) and a key aspect of it is the community-type benefit it enables. Both for selling the product and for growing as a start-up, an organization – be it Peloton or DonorsChoose – needs credibility for it to interact with stakeholders.

745.

How can building trust and credibility help start-up organizations avoid legal disputes and problems?

Answer: There are at least two ways that building credibility or trust can help a firm or organization avoid legal disputes. First, there is evidence to suggest that when firms present themselves as being very credible and are willing to say they‘re ―sorry‖ when mishaps happen, they are less likely to get sued.

In particular, a May 8, 2008 article in the New York Times titled ―Doctors Say ‗I‘m Sorry‘ Before ‗See You in Court‘‖ reported that doctors and hospitals that readily admit mistakes see dramatic drops in lawsuits and legal costs. Second, the process of building credibility and trust is likely to make a firm more sensitive to ethics-related issues and instills a culture of high ethical standards in a firm. It is even better if a firm puts actual accountability measures in place to track ethics-related compliance.

746.

As related to ethics and ethical behavior, what are the characteristics you anticipate are associated with the cultures at Peloton Cycle and DonorsChoose?

Answer: Both Peloton and DonorsChoose place their core values front and center in everything they do. Peloton has allowed many news outlets and reports to ask questions and examine its operations. Its Web site features video testimonials of real clients telling their stories. It also offers a 100 percent money-back guarantee on all its products. All of these actions depict an organization that has firm beliefs and is

not at all reluctant to have others examine what it is doing.

DonorsChoose‘s core belief is that donors have priorities to funding specific types of projects and they are more likely to fund if they know where their money is going. DonorsChoose is not reluctant to have others examine what it is doing, as evidenced by the number of news outlets and reporters who have written about the company and its projects. It has aligned itself with high profile people, who have placed their stamp of approval on its cause and the organization itself. It also disseminates statistics about the various projects, which legitimizes the cause it is working so hard to positively impact. All of these actions depict an organization with a strong ethical culture that it is consistently reinforcing.

747.

Do some additional research on Peloton Cycle and DonorsChoose, and describe some of the actions its founder or founders have taken (focus on John Foley for Peloton and Charles Best for DonorsChoose) to lead by example in terms of helping their organizations build credibility and trust.

Answer: This is a good project for student teams.

CHAPTER 8 ASSESSING A NEW VENTURE’S FINANCIAL STRENGTH AND VIABILITY LEARNING OBJECTIVES 1.

Learn about the importance of understanding the financial management of an entrepreneurial firm.

2.

Identify the four main financial objectives of entrepreneurial ventures.

3.

Describe the process of financial management as used in entrepreneurial firms.

4.

Explain the difference between historical and pro forma financial statements.

5.

Describe the different historical financial statements and their purposes.

6.

Discuss the role of forecasts in projecting a firm‘s future income and expenses.

7.

Explain the purpose of pro forma financial statements.

CHAPTER OVERVIEW This chapter focuses on the important task of assessing a new venture‘s financial strength and viability. For the purpose of completeness, we look at how both existing ventures and start-up firms assess their financial strength and viability.

In the first section of the chapter, we focus on general financial management and discuss the financial objectives of a firm, which include profitability, liquidity, efficiency, and stability. We then articulate the steps involved in the financial management process. The second section of the chapter focuses on the development of historical financial statements, including the income statement, the balance sheet, and the statement of cash flows. The importance of developing forecasts to project future income and expenses is also discussed. The chapter closes with a discussion of the role of pro forma financial statements in assessing a new venture‘s financial strength and viability. The importance of ratio analysis is discussed.

Raising money is an important part of the financial management process. We address that topic in Chapter 10.

CHAPTER OUTLINE I. Introduction to Financial Management II. Financial Objectives of a Firm III. The Process of Financial Management IV. Financial Statements A. Historical Financial Statements 1. Income Statement

2. Balance Sheet 3. Statement of Cash Flows 4. Ratio Analysis 5. Comparing a Firm‘s Financial Results to Industry Norms V. Forecasts A. Sales Forecast B. Forecast of Costs of Sales and Other Items VI. Pro Forma Financial Statements A. Pro Forma Income Statement B. Pro Forms Balance Sheet C. Pro Forma Statement of Cash Flows D. Ratio Analysis CHAPTER NOTES I. Introduction to Financial Management A. Financial management deals with two things: raising money and managing a company‘s finances in a way that achieves the highest rate of return.

B. We cover the process of raising money in Chapter 10.

This chapter focuses on how a company manages its finances in an effort to increase its financial strength and earn the highest rate of return.

C. The financial management of a firm deals with questions such as the following on an ongoing basis: a. How are we doing? Are we making or losing money? b. How much cash do we have on hand? c. Do we have enough cash to meet our short-term obligations? d. How efficiently are we utilizing our assets? e. How do our growth and net profits compare to those of our industry peers? f. Where will the funds we need for capital improvements come from? g. Are there ways we can partner with other firms to share risk and reduce the amount of cash we need? h. Overall, are we in good shape financially?

D. A properly managed firm stays on top of these questions through the tools and techniques that are discussed in this chapter.

II.

Financial Objectives of a Firm

A. Profitability is the ability to earn a profit.

B. Liquidity is a company‘s ability to meet its shortterm financial obligations.

C. Efficiency is how productively a firm utilizes its assets relative to its revenue and profits.

D. Stability is the strength and vigor of the firm‘s overall financial position.

III. The Process of Financial Management A. To assess whether its financial objectives are being met, firms rely heavily on analysis of financial statements, forecasts, and budgets.

B. A financial statement is a written report that quantitatively describes a firm‘s financial health.

The income statement, the balance sheet, and the statement of cash flows are the financial statements entrepreneurs use most commonly.

C. Forecasts are an estimate of a firm‘s future income and expenses, based on its past performance, its current circumstances, and its future plans.

D. Budgets are itemized forecasts of a company‘s income, expenses, and capital needs and are also an important tool for financial planning and control.

E. The final step in the process of financial management is the ongoing analysis of a firm‘s financial results.

Financial ratios, which depict relationships between items on a firm‘s financial statements, are used to discern whether a firm is meeting its financial objectives and how it stacks up against its industry peers.

IV.

Financial Statements

•

Historical financial statements reflect past performance and are usually prepared on a quarterly and annual basis.

•

Pro forma financial statements are projections for future periods based on forecasts and are typically completed for two to three years in the future.

•

To illustrate how historical and pro forma financial statements are prepared, the chapter features New Venture Fitness Drinks, a fictitious sports drink company first introduced in Chapter 3.

A. Historical Financial Statements—Include the income statement, the balance sheet, and the statement of cash flows. The statements are usually prepared in this order because information flows logically from one to the next. In start-ups, financial statements are typically scrutinized closely to monitor the financial progress of the firm.

1. Income Statement. The income statement reflects the results of the operations of a firm over a specified period of time. It records all the revenues and expenses for the given period and shows whether the firm is making a profit or is experiencing a loss. a. The consolidated income statement for the past three years for New Venture Fitness Drinks is shown in Table 8.1 in the textbook. b. The three numbers that receive the most attention when evaluating an income statement are the following: i. Net sales consists of total sales minus allowances for returned goods and discounts. ii. Cost of sales includes all the direct costs associated with producing or delivering a product or service, including the material costs and direct labor. iii. Operating expenses include marketing, administrative costs, and other expenses not directly related to producing a product or service.

2. Balance Sheet. Unlike the income statement, which covers a specified period of time, a balance sheet is a snapshot of a company‘s assets, liabilities, and owners‘ equity at a specified point in time. a. The left-hand side of a balance sheet (or the top, depending on how it is displayed) shows a firm‘s assets, while the right-hand side (or bottom) shows its liabilities and owners‘ equity.

b. The consolidated balance sheet for New Venture Fitness Drinks is shown in Table 8.2 in the textbook. Multiple years are shown so trends can be easily spotted. c. The major categories of assets listed on a balance sheet are the following: i. Current assets include cash plus items that are readily convertible to cash, such as accounts receivable, marketable securities, and inventories. ii. Fixed assets are assets used over a longer time frame, such as real estate, buildings, equipment, and furniture. iii. Other assets are miscellaneous assets, including accumulated goodwill. d. The major categories of liabilities listed on a balance sheet are the following: i. Current liabilities include obligations that are payable within a year, including accounts payable, accrued expenses, and the current portion of long-term debt. ii. Long-term liabilities include notes or loans that are repayable beyond one year, including liabilities associated with purchasing real estate, buildings, and equipment. iii. Owners‘ equity is the equity invested in the business by its owners plus the accumulated earnings retained by the business after paying dividends.

3. Statement of Cash Flows. The statement of cash flows summarizes the changes in a firm‘s cash position for a specified period of time and details why the changes occurred. It is similar to a month-end bank statement. It reveals how much cash is on hand at the end of the month as well as how the cash was acquired and spent during the month. a. The statement of cash flows is divided into three separate activities: operating activities, investing activities, and financing activities.

b. These activities, which are explained in the following list, are the activities from which a firm obtains and uses cash: i. Operating activities include net income (or loss), depreciation, and changes in current assets and current liabilities other than cash and short-term debt. A firm‘s net income, taken from the income statement, is the first line on the corresponding period‘s cash flow statement. ii. Investing activities include the purchase, sale, or investment in fixed assets, such as real estate, equipment, and buildings. iii. Financing activities include cash raised during the period by borrowing money or selling stock and/or cash used during the period by paying dividends, buying back outstanding debt, or buying back outstanding bonds. c. The statement of cash flows for New Venture Fitness Drinks is shown in Table 8.3 in the textbook. As a management tool, it is intended to provide perspective on the following questions: i. Is the firm generating excess cash that could be used to pay down debt or be returned to stockholders in the form of dividends? ii. Is the firm generating enough cash to fund its investments from earnings, or is it relying on lenders or investors? iii. Is the firm generating sufficient cash to pay down its short-term liabilities, or are its short-term liabilities increasing as the result of an insufficient amount of cash?

4. Ratio Analysis. The most practical way to interpret or make sense of a firm‘s historical financial statement is through ratio analysis. Table 8.4 in the textbook is a summary of the ratios used to evaluate New Venture Fitness Drinks during the time period covered by the previously provided financial statements. a. These ratios provide a means of interpreting a firm‘s historical financial statements and provide a starting point for forecasting the

firm‘s financial performance and capabilities for the future.

5. Comparing a Firm‘s Financial Results to Industry Norms. Comparing its financial results to industry norms helps a firm determine how it stacks up against its competitors and if there are any financial ―red flags‖ requiring attention.

V. Forecasts •

Forecasts are predictions of a firm‘s future sales, expenses, income, and capital expenditures. A firm‘s forecasts provide the basis for its pro forma financial statements.

•

A well-developed set of pro forma financial statements helps a firm create accurate budgets, build financial plans, and manage its finances in a proactive rather than a reactive manner.

A. Sales Forecasts 1. A sales forecast is a projection of a firm‘s sales for a specified period (such as a year) though most firms forecast their sales for two to five years into the future.

2. A sales forecast for an existing firm is based on (1) its record of past sales, (2) its current production capacity and product demand, and (3) any factors that will affect its future production capacity and product demand.

B. Forecast of Costs of Sales and Other Items 1. Once a firm has completed its sales forecast, it must forecast the costs of sales and the other items on its income statement.

2. The most common way to do this is the percent-ofsales method, which is a method for expressing each expense item as a percentage of sales.

3. Once a firm completes its forecast using the percent-of-sales method, it usually goes through its income statement on an item-by-item basis to see if there are opportunities to make more precise forecasts.

4. If a firm determines that it can use the percent-ofsales method and it follows the procedure described in the chapter, then the net result is that each expense item on its income statement (with the exception of those items that can be individually forecast) will grow at the same rate as sales. This approach is called the constant ratio method of forecasting.

VI. •

Pro Forma Financial Statements A firm‘s pro forma financial statements are similar to its historical financial statements except that they look forward rather than track the past.

A. Pro Forma Income Statement 1. Once a firm forecasts its future income and expenses, the creation of the pro forma income statement is merely a matter of plugging in the numbers.

2. Table 8.6 in the textbook shows the pro forma income statement for New Venture Fitness Drinks.

B. Pro Forma Balance Sheet 1. The pro forma balance sheet provides a firm a sense of how its activities will affect its ability to meet its short-term liabilities and how its finances will evolve over time.

2. The pro forma balance sheet is also used to project the overall financial soundness of a company.

3. The pro forma balance sheet for New Venture Fitness Drinks is shown in Table 8.7 in the textbook.

C. Pro Forma Statement of Cash Flows 1. The pro forma statement of cash flows shows the projected flow of cash into and out of the company during a specified period.

2. The most important function of the pro forma statement of cash flows is to project whether the firm will have sufficient cash to meet its needs.

3. The pro forma consolidated statement of cash flows for New Venture Fitness Drinks is shown in Table 8.8

in the textbook.

D. Ratio Analysis 1. The same financial ratios used to evaluate a firm‘s historical financial statements should be used to evaluate the pro forma financial statements.

2. This work is completed so the firm can get a sense of how its projected financial performance compares to past performance and how its projected activities will affect its cash position and its overall financial soundness.

3. The historical financial ratios and projected ratios for New Venture Fitness Drinks are shown in Table 8.9 in the textbook.

BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING What Went Wrong?

Be Careful What You Wish For: How Growing Too Quickly Overwhelmed One Company‘s Cash Flow 1.

What lessons can be learned from Jim Picariello‘s agreement with the high net worth individual, who agreed to invest $1 million in Wise Acre Frozen Treats and then reneged on the agreement when the economy turned sour?

Answer: To not spend money until it‘s actually in the bank. According to the feature, Picariello placed orders for the material and equipment that Wise Acre Frozen Treats needed to fuel its growth, based on the promise from the investor that the money could be put together ―quickly.‖ When the investor reneged on his promise, Picariello had to scamble to try to make things work.

2.

Why is it that a company can grow too fast? If Wise Acre Frozen Treats significantly increased its sales, why wouldn‘t its increased income provide more than enough cash to even out its cash flow?

Answer: Because, as explained in the chapter, there is often a lag between the need for money and when a firm starts generating income from the increased sales.

Often, when a company is growing quickly, it has to buy new equipment, order new materials, hire and train new

employees, and so on, prior to the time the new sales start generating revenue. This set of circumstances often creates a cash flow bind, as cash is going out prior to the time it starts generating new income.

3.

Besides cash flow difficulties, what other problems can a firm experience by growing too quickly?

Answer: Several things. First, quality often suffers, as will be explained in Chapter 13. As a firm‘s pace of activity quickens, it invariably can‘t spend as much time on each order, so quality can slip. Second, it may hire employees too quickly, and find later that it hired employees that it regrets. Finally, a firm may need to buy additional equipment to help fuel its growth. In many instances, this requires a firm to raise additional capital, which can be a time-consuming and difficult process, as Jim Picariello experienced.

4.

If Jim Picariello starts another company, make a list of the things you think he‘ll do differently as a result of his Wise Acre Frozen Treats experience.

Answer: This is a good question for an individual or group assignment.

Savvy Entrepreneurial Firm Know the Facts Behind the Numbers 1.

Show the income statements for the three candidates to two or three friends who are majoring in business. Ask them to select the best CEO from among these three people on the basis of these income statements. In addition, ask your friends to explain their choices to you. Did your friends choose the same candidate? If not, what do you think caused the differences in their choices?

Answer: This is a good exercise for an individual or group assignment. Most students will pick the third candidate, the CEO of New Venture Sea Food. It will be a good exercise for your students to explain to their friends that an accurate evaluation can‘t be based simply on a firm‘s income statement (for a single year). The ―facts behind the numbers‖ are equally important.

2.

Based on material presented in this chapter, earlier chapters in the book, and your general business

knowledge, where would you go to find information about the growth of the different segments of the restaurant industry? Where would you go to find information about the profitability of the restaurant industry in general?

Answer: The best way to obtain this information is to ask a reference librarian for help. There are a number of companies that maintain databases that are very useful in obtaining information about the different segments of industries, some of which are listed in Appendix 3.2. IBISWorld, Mintel, and Standard & Poor‘s NetAdvantage (in that order) are our favorites.

3.

4.

What would have been the appropriate financial information to request from the three candidates for the job?

Answer: Three years of historic balance sheets, income statements, and statements of cash flows, along with three years of comparisons of a firm‘s financial ratios to industry averages (or industry peers, if available).

What are the three most important insights you gained from studying this feature? Which of these insights surprised you, and why?

Answer: Answers will vary to the questions. The most important single insight is that financial statements, such as a company‘s income statement, tell only part of the story of a firm‘s relative success or failure.

Again, the ―facts‖ behind the numbers are equally important.

Partnering for Success Organizing Buying Groups to Cut Costs and Maintain Competitiveness 1.

Which of the four financial objectives of a firm, profitability, liquidity, efficiency, and stability, does participating in a buying cooperative contribute to the most?

Answer: Most students will argue that participating in a buying group will have the largest impact on a company‘s profitability because it lowers the cost of goods sold, which translates into high profits. It should also have a direct impact on liquidity. If a company can get the same product bought at a lower cost, it will have less money tied up in inventory

and/or accounts payable.

2.

Do some Internet and/or library research to try to discern whether there is a small business buying group or groups that New Venture Fitness Drinks, the fictitious company introduced in Chapter 3 and used as an example throughout this chapter, could benefit from.

New Venture Fitness Drinks‘ products contain all the ingredients used to make smoothies and similar fitness drinks and shakes.

Answer: This is a good question for an individual or group assignment. There are a number of food-buying groups (or cooperatives) in the United States. Urge your students to find examples of buying cooperatives near your college or university.

3.

Identify three ways, other than buying cooperatives, that small businesses partner with other small businesses to cut costs without sacrificing their competitiveness.

Answer: There are a number of possible answers to this question. Possibilities include:   

4.

Sharing facilities Sharing employees, such as a real estate firm and an insurance company, located in the same building, sharing a receptionist Cobranding, which involves sharing advertising and marketing expenses

In an effort to improve the financial position of their firms, do you think the majority of entrepreneurs spend an equal amount of time focusing on (1) cost cutting and (2) increasing revenues? If not, which of the two do you think they spend more time on and why?

Answer: Most students will argue that entrepreneurs spend more time on increasing revenues than cutting costs. The reason is that cost cutting is painful whereas increasing revenues, through new product lines, extending operating hours, or through acquisitions, is more straightforward and doesn‘t involve as much sacrifice. This isn‘t to say that entrepreneurs should spend more time on increasing revenues than cutting costs. An entrepreneur should do what‘s best in his or her individual circumstance.

REVIEW QUESTIONS 8-1.

What are the two primary functions of the financial management of a firm?

Answer: Raising money and managing a company‘s finances in a way that achieves the highest rate of return.

8-2.

What are the four main financial objectives of a firm?

Answer: Profitability, liquidity, efficiency, and stability.

8-3.

Why is it important for a company to focus on its liquidity? What special challenges do entrepreneurial firms have in regard to remaining liquid?

MyLab Question.

8-4.

What is meant by the term efficiency as it relates to the financial management of a firm?

Answer: Efficiency is how productively a firm utilizes its assets relative to its revenue and its profits.

8-5.

What is meant by the term stability as it relates to the financial management of a firm?

Answer: Stability is the strength and vigor of the firm‘s overall financial posture.

8-6.

What is the purpose of a forecast? What factors does a firm use to create its forecasts of future sales, income, expenses, and capital expenditures?

Answer: A forecast is an estimate of a firm‘s future income and expenses, based on its past performance, its current circumstances, and its future plans. New ventures typically base their forecasts on an estimate of sales and then on industry averages or the experiences of similar start-ups regarding the cost of goods sold (based on a percentage of sales) and on other expenses.

8-7.

On what factors or conditions do completely new firms base their forecasts?

Answer: New ventures typically base their forecasts on

an estimate of sales and then on industry averages or the experiences of similar start-ups regarding the cost of goods sold (based on a percentage of sales) and on other expenses.

8-8.

What is the purpose of an income statement? What are the three numbers that receive the most attention when evaluating an income statement? Why are these numbers important?

Answer: The income statement reflects the results of the operations of a firm over a specified period of time. It records all the revenues and expenses for the given period and shows whether the firm is making a profit or is experiencing a loss. The three numbers that receive the most attention when evaluating an income statement are the following: Net sales consists of total sales minus allowances for returned goods and discounts.

Cost of sales includes all the direct costs associated with producing or delivering a product or service, including the material costs and direct labor.

Operating expenses include marketing, administrative costs, and other expenses not directly related to producing a product or service.

These numbers are instrumental in figuring the net income of a firm over a given period of time (usually a month or a year).

8-9.

How does a firm compute its profit margin? What is the significance of this ratio?

Answer: A firm‘s profit margin, or return on sales, is computed by dividing net income by net sales. A rising profit margin means that a firm is either boosting its sales without increasing its expenses or that it is doing a better job of controlling its costs. In contrast, a declining profit margin means that a firm is losing control of its costs or that it is slashing prices to maintain market share.

810.

How does a firm compute its price-to-earnings ratio?

Why does a high price-to-earnings ratio indicate that the stock market thinks the firm will grow?

Answer: Price-to-earnings ratio (P/E) is a simple ratio that measures the price of a company‘s stock against its earnings. Generally, the higher a

company‘s price-to-earnings ratio, the greater the market thinks it will grow.

811.

812.

What is the purpose of a balance sheet?

Answer: A balance sheet is a snapshot of a company‘s assets, liabilities, and owners‘ equity at a specific point in time (usually year-end).

What are the major categories of assets and liabilities on a balance sheet? Briefly explain each category.

Answer: The major categories of assets listed on a balance sheet are the following: Current assets include cash plus items that are readily convertible to cash, such as accounts receivable, marketable securities, and inventories.

Fixed assets are assets used over a longer time frame, such as real estate, buildings, equipment, and furniture.

Other assets are miscellaneous assets, including accumulated goodwill.

The major categories of liabilities listed on a balance sheet are the following: Current liabilities include obligations that are payable within a year, including accounts payable, accrued expenses, and the current portion of long-term debt.

Long-term liabilities include notes or loans that are repayable beyond one year, including liabilities associated with purchasing real estate, buildings, and equipment.

813.

What is meant by the term working capital? Why is working capital an important consideration for entrepreneurial firms?

MyLab Question.

814.

How does a firm compute its current ratio? Is this a relatively important or unimportant financial ratio?

Explain your answer.

Answer: A company‘s current ratio is its current assets divided by its current liabilities. Current ratio is an important financial ratio. It provides the managers of a firm another picture of the relationship

between its current assets and its current liabilities. This relationship provides an indication of whether a firm can pay its short-term liabilities.

815.

What is the purpose of a statement of cash flows?

Answer: The statement of cash flows summarizes the changes in a firm‘s cash position for a specified period of time and details why the change occurred.

The statement of cash flows is similar to a month-end bank statement. It reveals how much cash is on hand at the end of the month as well as how the cash was acquired and spent during the month.

816.

What are the three separate categories of activities that are reflected on a firm‘s statement of cash flows? Briefly explain the importance of each activity.

Answer: The statement of cash flows is divided into three separate activities: operating activities, investing activities, and financing activities. These activities are explained below: Operating activities include net income (or loss), depreciation, and changes in current assets and current liabilities other than cash and short-term debt.

Investing activities include the purchase, sale, or investment in fixed assets, such as real estate, equipment, and buildings.

Financing activities include cash raised during the period by borrowing money or selling stock and/or cash used during the period by paying dividends, buying back outstanding stock, or buying back outstanding bonds.

817.

What is the purpose of financial ratios? Why are financial ratios particularly useful in helping a firm interpret its financial statements?

Answer: Financial ratios depict relationships between items on a firm‘s financial statements. They are used for three purposes: (1) to depict relationships between items on a firm‘s financial statements; (2) to discern whether a firm is meeting its financial

objectives and how it stacks up against industry peers; and (3) to assess trends. The most practical way to interpret or make sense of a firm‘s historical financial statement is through ratio analysis. Table 8-4 in the textbook provides a summary of the ratios used to evaluate New Venture Fitness Drinks during the time period covered by the statements. The ratios are divided into profitability ratios, liquidity ratios, and overall financial stability ratios. These ratios provide a means of interpreting the historical financial statements for New Venture Fitness Drinks and provide a starting point for forecasting the firm‘s financial performance and capabilities for the future.

818.

What is the purpose of an assumptions sheet?

Answer: Completely new firms typically base their forecasts on a good-faith estimate of sales and on industry averages (based on a percentage of sales) or the experiences of similar start-ups for cost of goods sold and other expenses. As a result, a completely new firm‘s forecast should be preceded in its business plan by an explanation of the sources of the numbers for the forecast and the assumptions used to generate them. This explanation is called an assumptions sheet.

819.

Why is a firm‘s sales forecast the basis for most of its other forecasts?

Answer: Because as a firm‘s sales go up, its variable expenses typically go up in a proportionate manner.

820.

What is meant by the percent-of-sales method as it relates to forecasts?

Answer: Once a firm has completed its sales forecast, it must forecast its cost of sales (or cost of goods sold) and the other items on its income statement. The most common way to do this is to use the percent-ofsales method, which is a method for expressing each expense item as a percentage of sales.

APPLICATION QUESTIONS 821.

Suppose a friend of yours showed you the pro forma income statements for his start-up and exclaimed excitedly that during the first three years of operations his firm will make a net income of $150,000

per year, which is just the amount of money ($450,000) the firm will need to pay off a three-year loan. Given your study of the chapter, why is it that your friend may not actually have $450,000 in cash, even though his pro forma income statements say that he will earn that amount of money?

Answer: Although pro forma income statements do report a company‘s profit or loss, they do not reflect a company‘s cash position. Often, a company‘s cash position is lower than its profit, because it has cash tied up in inventory or accounts receivable, or it has reinvested its cash in the business.

822.

Kate Snow just retired from a career with Walmart, cashing out a sizable retirement fund at the time of doing so. To start a second career, she is looking at the possibility of buying three different businesses. She has three years‘ historical financial statements for each business and has been poring over the numbers. She was puzzled when she read the following statement in a book about small business financial management: ―Be careful when looking at balance sheets to fully understand what you‘re looking at. In some respects balance sheets are very revealing, and in other respects they can be very deceiving.‖ What do you think the author of the book meant by that statement?

Answer: The statement in the small business financial management book is accurate. Reading a balance sheet takes a little practice. A company‘s assets are recorded at cost rather than fair market value. For example, a firm may have invested $500,000 in real estate several years ago that is worth $1 million today. The value that is reflected on the firm‘s current balance sheet is the $500,000 purchase price, rather than the $1 million fair market value. Another example is intellectual property. A firm may have a patent worth $1 million, but it may not be valued at all on the balance sheet, or only the costs involved with obtaining the patent may be given value.

823.

Chipotle Mexican Grill is a publicly traded company.

Calculate the firm‘s price-to-earnings ratio (P/E).

What does Chipotle‘s P/E ratio tell you about investors‘ expectations regarding the company‘s growth? How do Chipotle‘s financial ratios compare to restaurant norms at the time of your analysis?

Answer: At the time this manual was written (October 2017) Chipotle Mexican Grill‘s P/E ratio was 69.81. A

firm‘s P/E ratio is a simple ratio that measures the price of its stock against its earnings. The higher the ratio, the greater the market thinks a company will grow. A P/E ratio of 69.81 is high, which indicates that the market thinks Chipotle Mexican Grill will grow. The P/E for the restaurant industry in general is 25.90. What this means is that investors think that Chipotle will grow at a rate much faster than the industry in general.

824.

Jorge Martinez is thinking about buying an existing printing business and has been carefully studying the records of the business to get a good handle on its historical financial performance. Jorge heard that you are taking a class in entrepreneurship and asks you, ―What suggestions do you have for me to make the best use of this financial information (i.e., three years of audited income statements, balance sheets, and statements of cash flows)?‖ What suggestions would you give Jorge for making the maximum use of the financial statements?

Answer: This is a good question for an individual or group assignment. Obviously, Jorge will want to determine if the firm is on firm ground financially, in regard to its overall financial soundness (determined by its balance sheets), its ability to make money (determined by its incomes statements), and its sources and uses of funds (statements of cash flows). Jorge will want to determine whether the firm is gaining or losing each year in terms of financial soundness and earnings. Jorge should also compare the firm to its industry peers.

825.

Casey Cordell is the owner of a digital photography service in Madison, WI. The company has been profitable every year of its existence. Its debt ratio is currently 68 percent, its current ratio is 1:1, and its debt-to-equity ratio is 72.2 percent. Do these financial numbers cause any reason to be concerned?

Why or why not?

Answer: These numbers are of concern. A company debt ratio is computed by dividing its total debt by its total assets. A debt ratio of 68 percent means that 68 percent of Casey‘s total assets are financed by debt and the remaining 32 percent is owners‘ equity. This means that the majority of Casey‘s assets are financed by debt rather than equity, which gives him little freedom to maneuver without consulting his creditors.

A current ratio of 1:1 is also of concern. A firm‘s current ratio is its current assets divided by its current liabilities. Casey‘s current ratio of 1:1 means that for every dollar of short-term assets the company has, it has one dollar of liabilities. This situation leaves Casey with no liquidity to meet unexpected expenses. Finally, Casey‘s debt-to-equity ratio is also a concern. A company‘s debt-to-equity ratio is calculated by dividing its long-term debt by its shareholders‘ equity. If a company‘s debt-toequity ratio is high (72.2 percent is high), it may have trouble meeting its obligations and securing the level of financing needed to fuel its growth.

826.

What items on the left side (or top) and what items on the right side (or bottom) of a firm‘s balance sheet should receive the greatest scrutiny? In regard to each of these items, what are the most important factors that a new venture should focus on to maintain its overall financial health?

Answer: One important factor is the working capital that a firm has, which is its current assets minuses its current liabilities. Thus, a firm‘s current assets versus its current liabilities are numbers that are scrutinized. A firm‘s inventory levels and its accounts receivable are individual numbers that are often looked at. A firm wants to minimize the inventory it has on hand and also minimize its level of accounts receivable. A firm‘s overall assets and its overall liabilities are also looked at. The ratio of overall assets to overall liabilities (debt-toasset ratio) is an indication of a firm‘s level of overall financial strength.

827.

Suppose a colleague of yours is gearing up to write a business plan for a business she intends to start. She told you she plans to prepare the financial statements first, to get that job out of the way before she tackles the rest of the plan. What is the flaw in your colleague‘s logic as described to you?

Answer: Writing the financial statements section of the plan first won‘t work. The financial portion of a firm‘s business plan relies heavily on numbers generated in other sections of the plan (or at least on the descriptions provided in other sections of the plan). For example, the marketing plan section of the business plan normally includes a marketing budget, which is plugged into the pro forma financial

statements. Similarly, a start-up‘s market analysis will normally include an estimate of the company‘s sales for the first one to three years of operations.

These figures are also plugged into the financial statements.

YOU BE THE VC 8.1 Company: CyPHY Works (www.cyphyworks.com) Business Idea: Build cutting-edge drones for the consumer, commercial, and defense markets that empower people by making the drones accessible, reliable, and practical.

You Be the VC Scorecard CyPHY Works (www.cyphyworks.com) Item

Score/Comments

Strength of New-Venture Team

1

Strength of the Opportunity

Strength of

2

3

4

5

The nine-member leadership team of CyPHY Works (accessed at https://www.cyphyworks.com/about/leadership/) is quite impressive. Given the technology that goes into drones, the team has both technical and business experts. In addition, given that the regulatory pathway for drones is still largely undecided, the company has a general counsel as part of the team.

1 2 3 4 5 The opportunity is quite attractive as the company is one of the early entrants to this fast-growing field. The case points out several uses of drones – deliver packages, event security – and more uses may be identified in the near future.

1

2

3

4

5

the Industry

Strength of Business Model

Average Score

As the case indicates, drones are a $3.3 billion industry and could grow a lot more once the many uses of drones become widely accepted. CyPHY makes various kinds of drones for various applications and so the prospects look bright.

1 2 3 4 5 The company‘s business model is still unclear and this is understandable as the regulations surrounding drones are still undecided. We don‘t know the sources of revenues for the company and also its cost structure.

3.75/5.00

Decision: We would not invest in CyPHY Works. Although we admire the company and the product they are producing, we don‘t know much about the business side of drones and the cost structure of drone manufacturing and marketing.

Perhaps these factors will become clearer in the future, at which point it may be a good idea to revisit the company.

YOU BE THE VC 8.2 Company: nuTonomy (www.nuTonomy.com) Business Idea: Develop and deploy fully autonomous vehicles.

You Be the VC Scorecard nuTonomy (www.nuTonomy.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

As the case indicates, nuTonomy came out of MIT when two engineers, Dr. Karl Iagnemma and Dr. Emilio Frazzoli, co-founded the firm. Since then they have added business experience to the top management team by bringing in Doug Parker and Gretchen Effgen. All in all, this looks like a capable management team with a good blend of expertise.

Strength of the Opportunity

1

2

3

4

5

Difficult to assess, except to state that this is part of the overall transportation market. By partnering with a ride-share company, nuTonomy is tipping its hat in terms of its future direction. Given that companies like Uber and Lyft in the U.S. and similar companies elsewhere have popularized ride sharing, this seems like a good opportunity.

Strength of the Industry

1

2

3

4

5

The ride sharing industry is large and is still growing. Driverless cars can cut the costs of transportation and so this is a potential strength.

Strength of Business Model

1

2

3

4

5

We don‘t know the company‘s business model yet because it is still in the product testing stage. It could simply license or sell its software to others or vertically integrate to becoming a ride share company on its own.

Average Score

4.0/5.00

Decision: We would fund this firm. We like the founders, like the business concept, and believe they have identified a fruitful gap in the ride sharing marketplace. They are spending a lot of time testing their product, which augurs well for its safety and acceptance.

CASES Case 8.1 Mary Lynn Schroeder: Building a Successful Business with Limited Money and Limited Business Experience DISCUSSION QUESTIONS 8-

What can a first-time entrepreneur, who may have a good

32

idea but not much money or business acumen, learn from Mary Lynn Schroeder‘s experience?

Answer: Mary Lynn Schroeder benefitted enormously from an ecosystem that entrepreneurs have access to. She did not have a lot of money and had very little business and zero coding experience and yet she was able to create a slick website (students can go to inbluehandmade.com and see for themselves), create an online shop, and become an active seller on Etsy!

833

To what degree do you think you‘d be capable of building a website on Squarespace and setting up an online store on Shopify? If you don‘t think you‘re capable of either of these tasks, what can you do now to obtain the necessary capabilities?

Answer: The typical student would be more than capable of easily setting up a website on Squarespace. The instructions are quite simple to follow and quite intuitive. Some may need a little bit of help on Shopify, though. However, they can get help on YouTube (a search on YouTube on how to set up a shop on Shopify yielded 225,000 results!).

834

To what degree do you believe ready-made platforms like Squarespace, Shopify, and Etsy have contributed to the entrepreneurial ecosystem in the United States and abroad? To what degree could you envision using one or more of these platforms if you launched a business of your own?

Answer: There is absolutely no doubt that providers such as Squarespace, Shopify, and Etsy have helped tremendously in lowering the entrepreneurial entry barriers for many. They help in creating a professional interface with little effort and at a very low cost.

Student responses will vary in terms of whether they would use one or more of these in their own ventures.

835

Identify and describe a ready-made platform, like Squarespace or Shopify that is not a direct competitor of either one of these platforms but fills a similar role in that it allows an entrepreneur to perform a vital task with very little capital investment.

Answer: This is a good question for an individual or group assignment. They can be asked to identify good candidates for a class presentation.

836

Why do you think this case was placed in the chapter titled ―Assessing a New Venture‘s Financial Strength and Viability‖ ?

Answer: Mary Lynn Schroeder, like many entrepreneurs, did not have a lot of capital, nor did she have a business that generated sizeable cash flows. That she could grow her business and become an online seller of goods even with a resource constraint, makes this an apt case in this chapter on a small business‘s finances.

Case 8.2 Fundbox: Designed to Help Small Businesses Minimize Cash Flow Shortfalls DISCUSSION QUESTIONS 837

Toward the beginning of this case, the following statement appears: ―Almost all small businesses experience cash flow shortfalls.‖ What is cash flow?Why is cash flow so critical to an entrepreneurial firm‘s success? Why do almost all small businesses experience cash flow shortfalls?

Answer: A business‘s cash flow is the money that comes into the business and the money that goes out. The amount of money coming into a business and the amount going out is a result of three activities: operating activities, investing activities, and financing activities. Cash is critical to an entrepreneurial firm‘s success in the same way it‘s critical to an individual‘s success. A business, just like a person, needs a positive balance in their bank account to pay for routine expenses, make payments on loans, and for other purposes. Almost all businesses experience cash flow shortfalls at times. Often equipment must be purchased and new employees hired and trained before the increased customer base generates additional income. The lag between spending to generate revenue and earning income from the firm‘s operations creates cash flow challenges, particularly for new, often small, ventures.

838

As explained in this chapter, a firm‘s statement of cash flows is divided into three separate activities.

Which of the activities from the statement of cash

flows would be affected by a firm‘s decision to use Fundbox‘s service? What are some of the potential effects of a small entrepreneurial firm‘s decision to use Fundbox on the components of that firm‘s statement of cash flows?

Answer: A firm would use Fundbox‘s service to cover cash flow shortfalls created by operating activities.

Often when a business invoices a customer, the customer has up to 30 days (and in some cases 60 days) to make payment. This is what causes cash flow challenges. A business incurs expenses to service a client, and then has to wait 30 to 60 days to get paid (which covers the expenses plus provides a profit). Fundbox solves this problem by loaning a business the amount of the invoice, so the business doesn‘t have to wait 30 to 60 days to get their payment. Of course, Fundbox charges for their service, but for many businesses it is well worth it to get paid earlier rather than later.

839

If Fundbox‘s co-founders (Yuval Ariav, Eyal Shinar, and Tomer Michael) were to ask your advice about the importance of pro forma statements to their firm‘s continuing success, what would you say to them? What pro forma statements would you recommend the cofounders develop and why?

Answer: They absolutely should complete pro forma statements for Fundbox. Pro forma statements are useful for a business‘s routine financial planning and to help prepare budgets. They should complete pro forma income statements, balance sheets, and statements of cash flow.

840

As a young entrepreneur, what lessons about the financial management of a firm can you learn from the actions taken by the three cofounders of Fundbox?

Answer: This is a good question for an individual or group assignment. Most students will say that the Fundbox case draws additional attention to the importance of cash flow management.

CHAPTER

9

BUILDING A NEW-VENTURE TEAM

LEARNING OBJECTIVES 1.

Explain the concept called liability of newness.

2.

Describe a new-venture team and discuss the primary elements that form such a team.

3.

Identify professional advisers and explain their role with a new-venture team.

4.

Explain why a new-venture team might use consultants to obtain advice.

CHAPTER OVERVIEW This chapter focuses on the important task of building a new-venture team. The point that is emphasized is that a firm‘s new-venture team doesn‘t consist merely of its founders and its initial employees, but consists of its board of directors (if it is incorporated), its board of advisors, its lenders and investors (if applicable), and other professionals that the firm does business with.

The chapter is divided into two parts. The first part of the chapter begins by discussing the role of the founder or the founders of a firm, and emphasizes the weighty impact that founders have on the future potential of their firms.

The section then talks about how the founders build a newventure team, including the recruitment and selection of key employees, the construction of a skills profile to identify the most important skills that are needed and where skills gaps exist, and the selection of a board of directors. The second section of the chapter discusses the important role that advisors play in shaping and rounding out a new-venture team, specifically, the role of a board of advisors, lenders and investors, and others.

CHAPTER OUTLINE I. Liability of Newness as a Challenge II. Creating a New-Venture Team A. The Founder or Founders of a Venture

1. Size of the Founding Team 2. Qualities of the Founders B. The Management Team and Key Employees C. The Roles of the Board of Directors 1. Provide Expert Guidance 2. Lend Legitimacy III. Rounding Out the Team: The Role of Professional Advisers A. Board of Advisors B. Lenders and Investors IV. Other Professionals A. Consultants CHAPTER NOTES I. Liability of Newness as a Challenge A. As we note throughout the text, new ventures have a high propensity to fail. The high failure rate is due in part to what is known as the liability of newness.

B. The liability of newness refers to the fact that companies often falter because the people who start them aren‘t able to adjust quickly enough to their new roles and because the firm lacks a ―track record‖ with outside buyers and sellers.

C. Assembling a talented and experienced new-venture team is one path firms can take to overcome these limitations.

II.

Creating a New-Venture Team

A. The Founder or Founders of a Venture 1. Size of the founding team—The first decision that most founders face is whether to start a firm on their own or whether to build an initial founding team. a. Studies show that 50 to 70 percent of all new firms are started by more than one individual.

Experts disagree about whether new ventures started by a team have an advantage over those started by sole entrepreneurs. b. Teams bring more talent, resources, ideas, and professional contacts to a new-venture team than a sole entrepreneur. Conversely, a lot can go

wrong in a partnership. Team members can easily disagree in terms of work habits, tolerances for risk, levels of passion for the business, and similar key issues. c. Several factors affect the value of a team that is starting a new firm. i. First, teams that have worked together before, as opposed to teams that are working together for the first time, have an edge. ii. Second, if the members of the team are heterogeneous, meaning that they are diverse in terms of their abilities and experiences, rather than homogeneous, meaning that their areas of expertise are very similar to one another, they are likely to have different points of view about important issues. These different points of view are likely to generate debate and constructive conflict. iii. There are two potential pitfalls associated with starting a firm as a team rather than as a sole entrepreneur. First, the team members may not get along. Second, if two or more people start a firm as ―equals,‖ conflicts can arise when the firm needs to establish a formal structure and designate one person as the CEO. 2. Qualities of the Founders a. One reason the founders are so important is that in the early days of the firm, their knowledge, skills, and experience are the most valuable resource the firm has. b. Several features are thought to be significant to a founder‘s success. These factors include: i. ii. iii. iv.

The level of the founder‘s education Prior entrepreneurial experience Relevant industry experience Networking (the depth of the founder‘s professional network)

B. The Management Team and Key Employees

1. Once the decision to launch a new venture has been made, building a management team and hiring key employees begins.

2. One technique available to entrepreneurs to help prioritize their hiring is to maintain a skills profile. a. A skills profile is a chart that depicts the most important skills that are needed and where skill gaps exist. b. A skills profile for New Venture Fitness Drinks is show in Figure 9.2 in the book.

3. New Venture uses four different types of labor to get their work done: these include full- or parttime employees, interns, freelancers, and virtual assistants. a. An employee is someone who works for a business, at the business‘s location or virtually, utilizing the business‘s tools and equipment and according to the business‘s policies and procedures. b. An intern is a person who works for a business as an apprentice or trainee for the purpose of obtaining practical experience. c. A freelancer (or contractor) is a person who is in business for themselves, works on their own time with their own tools and equipment, and performs services for a number of different clients. d. A virtual assistant is a freelancer who provides administrative, technical, or creative assistance to clients remotely from a home office.

C. The Role of the Board of Directors 1. If a new venture organizes as a corporation, it is legally required to have a board of directors—a panel of individuals who are elected by a corporation‘s shareholders to oversee the management of the firm.

2. A board is typically made up of both inside and outside directors. An inside director is a person who is also an officer of the firm. An outside

director is someone who is not employed by the firm.

3. A board of directors has three formal responsibilities: appoint the officers of the firm, declare dividends, and oversee the affairs of the corporation.

4. If handled properly, a company‘s board of directors can be an important part of its new-venture team.

Two ways a board of directors can help a new firm get off to a good start and develop what, it is hoped, will become a sustainable competitive advantage are by providing guidance and lending legitimacy. a. Provide expert guidance—Although a board of directors has formal governance responsibilities, its most useful role is to provide guidance and support to the firm‘s managers. b. Lend legitimacy—Providing legitimacy for the entrepreneurial venture is another important function of the board of directors. Well-known and respected board members bring instant credibility to the firm.

III. Rounding Out the Team—The Role of Professional Advisers A. Board of Advisors 1. A growing number of start-ups are forming advisory boards to provide them direction and advice.

2. An advisory board is a panel of experts who are asked by a firm‘s managers to provide counsel and advice on an ongoing basis.

3. Unlike a board of directors, an advisory board possesses no legal responsibility for the firm and gives nonbinding advice.

4. An advisory board can be established for general purposes or can be set up to address a specific issue or need. For example, some firms have customer advisory boards that help the firm identify new product and service ideas.

5. Most boards of advisors have between 5 and 15 members. Companies typically pay the members of

their board of advisors a small honorarium for their service either annually or on a per-meeting basis.

B. Lenders and Investors 1. As emphasized throughout this book, lenders and investors have a vested interest in the companies they finance, often causing them to become very involved in helping the firms they fund.

2. As with the other nonemployee members of a firm‘s new-venture team, lenders and investors help new firms by providing guidance, lending legitimacy, and assuming the natural role of providing financial oversight.

3. In some instances, lenders and investors also work hard to help new firms fill out their management teams.

IV. Other Professionals A. Consultants 1. A consultant is an individual who gives professional or expert advice. New ventures vary in terms of how much they rely on consultants for direction.

2. Consultants fall into two categories: paid consultants and consultants who are made available for free or at a reduced rate through a nonprofit or a government agency.

3. SCORE, for example, is a nonprofit organization that provides free consulting services to small businesses.

BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING Partnering for Success Collaborative Software: Helping New Venture Team Members Achieve Their Goals 1.

How large do you think a start-up needs to be to effectively take advantage of collaborative management programs? Along with full- and part-time employees, should companies include interns, freelancers, and virtual assistants on projects that use collaborative management programs? Why or why not?

Answer: Regardless of the size of the company, the need for collaborative

management programs depends on the nature of the tasks performed. If employees need to collaborate to get the work done, such programs are helpful.

The unit of analysis should be a project and so everyone involved in a project – including freelancers, interns, and virtual assistants – should be given access to such programs.

2.

If you set out to select a collaborative management program for a business you were building, how would you go about selecting the program that would work the best for your business?

Answer: This is a good question for an individual or group assignment. Urge your students to make their answers as comprehensive and thoughtful as possible.

They can research the various software programs available and rank them on various criteria.

3.

Imagine you‘ve started a home remodeling business. Discuss the advantages to using a collaborative management program such as Buildertrend from the outset for your business.

Answer: In a home remodeling project, various people are involved. Some of the work is independent while others may be sequential. In addition, there is the budget to keep track of. Using a program such as Buildertrend would help immensely in ensuring the project is proceeding according to schedule, is on time, and is on budget.

4.

The ―Opening Profile‖ focused on Wild Friends Foods, a start-up that is making products based on nut and seed butter. Discuss how Wild Friends Foods could benefit from using a collaborative software program like Smartsheet.

Answer: This is an interesting question because Wild Friends Foods makes and sells products and so is not an organization that lends itself to project management.

However, Erika Welsh and Keely Tillotson have grown the company so much so that it has a number of employees.

This means the company may benefit from collaborative software programs to keep track of various opportunities and ensure that everyone is on the same page.

What Went Wrong?

Devver: How Miscues in Regard to the Composition and Management of a New-Venture Team Can Kill a Start-Up 1.

In retrospect, Brinckerhoff believes that it would have

been to Devver‘s advantage to have had a businessoriented cofounder as part of Devver‘s new-venture team. Do you think the reverse is true? If two businesspeople are set to launch a technology-oriented firm, do you think it‘s to their advantage to have a technology-oriented cofounder, or is it sufficient to hire technology-oriented personnel?

Answer: Yes, the reverse is true. In almost all instances, if a company starts as a ―team,‖ it‘s better to have a heterogeneous team rather than a homogeneous team, in regard to team competencies and skills.

2.

Make a list of the pluses and minuses of adopting a philosophy of allowing workers to work remotely. Is this philosophy better for some types of start-ups than others? What is your opinion of this philosophy?

Answer: The pluses and minuses are pretty much spelled out in the article. The major positive of allowing employees to work remotely is that a company can hire the best talent available, and avoid the deterrent of requiring people to relocate. The major negative is that everyone isn‘t in the same place. This factor can complicate communication and administrative tasks, as illustrated by Devver‘s experience.

3.

The ―You Be the VC 9.1‖ feature focuses on Toptal, a platform, which enables companies to find top-notch software engineers, developers, and designers who are rigorously screened and are willing to work on a contract basis. What do you think a minimal viable product would have looked like for Toptal? How could Toptal have used the minimal viable product methodology to get user feedback about its site before committing substantial time and resources to building it out?

Answer: The minimal viable product for Toptal would be a Web site that had a select group of companies asking for freelancers on the one hand and a group of freelancers looking for work on the other hand. The site would not have to be 100 percent finished, but would have to work and have the majority of features in place. Toptal could have used the feedback from its minimal viable product to tweak the site and add functionality before it built the site out and expanded to additional companies.

4.

Do some Internet research to try to determine what Dan Mayer and Ben Brinckerhoff are doing today. What do you

think they will be doing say ten years from now and why?

Answer: This is a good question for an individual or group assignment.

Savvy Entrepreneurial Firm Seek out ―Lifehacks‖ to Increase Personal Productivity and Efficiency 1.

Consider the following statement: ―Lifehacking skills are particularly important for entrepreneurs because entrepreneurs are typically time and resourcestrapped.‖ Do you agree with the statement? If so, why?

If not, why not?

Answer: While student opinions will vary, it is likely that all students agree that entrepreneurs are hard pressed for time and so they would welcome any efficiency measure. A good way to approach this question is to identify 2-3 lifehacking tips and see if they apply to a typical entrepreneur.

2.

To what degree are you interested in increasing your lifehacking skills? How do you plan to go about achieving your objective?

Answer: This is a personal question and so answers will vary.

3.

Spend some time looking at the lifehacker blog (www.lifehacker.com) and pick one suggestion that you think you can incorporate into your daily life.

Describe the suggestion and why you selected it.

Answer: Students will vary in terms of their answers to this question. Some people find online forums and Q&A sites very helpful, whereas others don‘t. It depends on the disposition of the person. We have found many of the tips in this site to be extremely helpful.

4.

Go to Product Hunt‘s website at www.producthunt.com.

Locate the Lifehackers category. How many Lifehackerrelated products were listed the day you looked?

Identify three of the more interesting Lifehacker products listed, and briefly explain each one.

Answer: This is a good activity for a student presentation.

REVIEW QUESTIONS 9-1.

What is a new-venture team?

Answer: A new-venture team is the group of founders, key employees, and advisors that move a new venture from an idea to a fully functioning firm.

9-2.

Who are the primary participants in a start-up‘s new-venture team?

Answer: The components of a new-venture team are shown in Figure 9.1 in the textbook. They include: management team, key employees, board of directors (if the firm is incorporated), board of advisors, lenders and investors (if applicable), and other professionals.

9-3.

What is liability of newness?

Answer: Liability of newness is a concept that refers to the fact that start-ups often falter because the people who start the firms can‘t adjust quickly enough to their new roles and because the firm lacks a ―track record‖ with outside buyers and suppliers.

9-4.

What can a new venture do to overcome the liability of newness?

MyLab Question.

9-5.

Do new ventures started by a team have an advantage over new ventures started by a sole entrepreneur, or is the opposite the case?

Answer: It is generally believed that new ventures started by a team have an advantage over those started by an individual because a team brings more talent, resources, ideas, and professional contacts to a new venture than does a sole entrepreneur. In addition, the psychological support that co-founders of a new business can offer one another is an important element in the firm‘s success.

9-6.

What are the differences between a heterogeneous and a homogeneous founding team?

Answer: The members of a heterogeneous founding team are diverse in terms of their abilities and experiences. In contrast, the members of a homogeneous founding team are similar to one another in terms of their abilities and experiences.

9-7.

What are the two potential pitfalls of using a team to start a firm?

Answer: First, the team members may not get along. Second, if two or more people start a firm as ―equals,‖ conflicts can arise when the firm needs to establish a formal structure and designate one person as the CEO. 9-8.

What are the personal attributes that affect a founder‘s chances of launching a successful new firm?

Answer: The following are personal attributes that affect a founder‘s chances of launching a successful firm:

9-9.

 

Educational level attained Prior entrepreneurial experience

 

Relevant industry experience Networking abilities

Why does having relevant industry experience help the founder or founders of a firm?

Answer: Entrepreneurs with experience in the same industry as their current venture will have a more mature network of industry contacts and will have a better understanding of the subtleties of their respective industries.

910.

What is networking and why is it important for an entrepreneur to have a vibrant social and professional network?

MyLab Question.

911.

What are the reasons for completing a skills profile for a new firm?

Answer: Along with depicting where a firm‘s most important skills gaps exist, a skills profile should explain how current skills gaps are being dealt with.

912.

What is a board of directors?

Answer: A board of directors is a panel of individuals who are elected by a corporation‘s shareholders to oversee the management of the firm. A board is typically made up of both inside and outside directors.

913.

What is the difference between inside and outside directors?

Answer: An inside director is a person who is also an officer of the firm. An outside director is someone who is not employed by the firm.

914.

What are the three formal responsibilities of a board of directors?

Answer: The three formal responsibilities of a board of directors are as follows:

appoint the key officers of the firm, declare dividends, and oversee the affairs of the corporation.

915.

How does recruiting a well-known and highly respected board of directors lend legitimacy to a firm?

Answer: An important function of the board of directors is to lend legitimacy to a firm. For example, just imagine the positive buzz a firm could generate if it could say that Larry Page, one of the co-founders of Google, had agreed to serve on its board of directors.

916.

What is signaling and what is its potential value for a new venture?

Answer: When a respected individual joins the board of directors of a firm, it sends a message or signal to the marketplace. Presumably, a high-quality individual would be reluctant to serve on the board of a low-quality firm because that would put his or her reputation at risk. So, when a high-quality individual does agree to serve on a board of a firm, the individual is in essence ―signaling‖ that the company has potential to be successful.

917.

What is the purpose of forming an advisory board?

Answer: An advisory board is a panel of experts who are asked by a firm‘s managers to provide counsel and advice on an ongoing basis. Most students will say that if they were the founder of an entrepreneurial firm, they would set up an advisory board. The potential advantages of setting up an advisory board outweigh the potential disadvantages in most cases.

918.

What are the different ways that advisory boards meet and conduct their business?

Answer: Boards of advisers interact with one another and with a firm‘s managers in several ways. Some advisory boards meet three or four times a year at the company‘s headquarters or in another location. Other advisory boards meet in an online environment. In some cases, a firm‘s board of advisors are scattered across the country, making it more cost effective for a firm‘s managers to interact with the members of the board on the telephone or via e-mail rather than bringing them physically together. In these situations, board members don‘t interact with one another at all on a face-to-face basis yet still provide high levels of counsel and advice.

919.

What are the guidelines to follow when establishing a board of advisors?

Answer: The following are several guidelines for setting up a board of advisors:  

A board of advisors should not be organized just so a company can boast of it.

A firm should look for board members who are compatible and complement



920.

one another in terms of experience and expertise.

When inviting a person to serve on its board of advisors, a company should carefully spell out to the individual the rules in terms of access to confidential information.

In what ways do lenders and investors lend legitimacy to a firm?

Answer: Like board members, lenders and investors lend legitimacy to a firm when they agree to become involved. Again, think about the positive buzz that would be created about a firm if it announced that a prominent venture capital firm had decided to offer it funding.

921.

Why do new ventures often turn to consultants for advice?

Answer: If a new firm needs help in a specialized area, it may be more cost effective to hire a consultant to do the work, rather than to hire one or more additional employees.

922.

What is the purpose of SCORE? Answer: SCORE is a nonprofit organization that provides free consulting services to small business.

923.

What types of advice and counsel do SCORE volunteers provide?

Answer: SCORE volunteers provide advice on a wide range of issues, from marketing to accounting to operations.

APPLICATION QUESTIONS 924.

Currently, Ann Schafer is a sales representative for The Pampered Chef, a direct sales organization which sells kitchen utensils and related products. Ann, who lives near Houston, Texas, is thinking about leaving her current job so she can open her own firm which she envisions as a combination cookware store and cooking school near where she lives. Ann‘s background is in cooking and sales. She is thinking about finding a partner to join her in launching her firm. What qualities should she seek in a partner who might also be the cofounder of her firm? Also, what type of board of advisors should she establish?

Answer: Ann should strive to build a heterogeneous management team, so should look for a partner with complementary skills to her own. The ideal partner would be someone with business experience, but also a

passion for cooking. It‘s also important for Ann to select a partner who has the same vision for the business that she has.

925.

According to material in this chapter, prior entrepreneurial experience, relevant industry experience, and networking are attributes that strengthen a person‘s chances of launching a successful venture. Think about the type of company that you might choose to launch someday. Which of these three attributes do you possess? What steps can you take today to build strengths in the areas where you lack them?

Answer: This is a good question for an individual assignment.

926.

Kim Simpson owns a successful fitness center in an affluent suburb of St. Louis, Missouri. She just received funding and plans to open six new fitness centers in the St. Louis area over the next two years.

She will need to hire a general manager and staff for each center and is concerned about making the most effective hiring choices. Kim has turned to you for advice. Up to this point she has operated only the one center. Her questions to you are: ―What recruiting techniques would you suggest I use? How do I make smart hiring decisions?‖ What answers would you provide to Kim? Answer: This is a good question for an individual or group assignment, and will require students to go beyond the material in the chapter.

927.

Cindy Combs, a professional investor, was having lunch with a colleague recently and said, ―Do you remember Peter Kennedy, the entrepreneur we met the other day who created an iPhone app that helps busy families keep track of their activities? I checked up on him and concluded that he has all the right personal attributes not only to be an app developer but to be a successful entrepreneur. He‘s thinking about creating some additional family-focused apps and I‘m inclined to invest in his business.‖ Cindy‘s meal companion said, ―Really, tell me about Peter‘s characteristics that are so impressive to you.‖ What do you think Cindy said in response to her lunch companion‘s question about Peter‘s characteristics?

Answer: If Peter has all the right attributes to be a successful entrepreneur, he probably possesses the following characteristics:

      928.

Is part of a firm that was started by a team rather than an individual, assuming the team is diverse and the founders are compatible with one another.

Has a college education.

Has prior entrepreneurial experience.

Has experience in the same industry as his current venture.

Has a broad social and professional network.

Has a passion for what he‘s doing.

Jose Peacher is an executive with a large manufacturing company. A former coworker of his recently started a company and raised $1 million from a well-known angel investor even though he did not need the money to launch the business. Jose thinks his friend is foolish and cannot think of a single reason to take money from an investor if you do not require the funds to launch. If you were talking to Jose about his view, what would you tell him about this matter?

Answer: Jose‘s former coworker may have taken the money from the investor to help enhance the legitimacy of his firm. When a high-profile person agrees to fund a firm or become involved in some other way, it sends an important ―signal‖ to the business community. Presumably, a high-quality individual would be reluctant to serve on the board of a low-quality firm because that would put his or her reputation at risk. Jose‘s former coworker may also have taken the money from the investor to gain access to his or her advice, and his or her network of professional contacts.

929.

Lauren Mitchell is achieving some success with the real estate firm she launched two years ago. A rebounding local economy has helped as has the fact that she is well connected with those heading the chamber of commerce in the city in which her firm is located. She feels, however, that she is having to cover too many of the tasks required for her firm to keep running herself. She has asked you for your advice given that she knows you are taking an entrepreneurship course. Use your knowledge about a skills profile to help Lauren understand how to proceed with her labor-related challenges.

Answer: Linda could use the skills profile to determine where her firm‘s most important skills gaps exist, and then develop a plan for filling the gaps.

The plan could include filling the gaps via full- or part-time employees, interns, freelancers, virtual assistants, consultants, and/or members of her board of advisors.

930.

Charlie Berry, Shelly Toombs, Nancy Harder, James Ndofor, Jennifer Atwood, and Cliff Bell are all experienced software engineers. For some time, they‘ve been talking about starting a company—the six of them— around a software solution in which all of them have an interest. Based on materials in this chapter, what challenges do you anticipate these six people will likely encounter cofounding a firm?

Answer: They are likely to encounter all the challenges of starting a company as a team described in the chapter. The challenges increase in intensity as the number of co-founders increases. Six cofounders is a lot. There are three potential pitfalls associated with starting a firm as a team rather than as a sole entrepreneur. First, the team members may not get along. Second, if two or more people start a firm as ―equals,‖ conflicts can arise when the firm needs to establish a formal structure and designate one person as the CEO. Finally, if the founders of the firm have similar expertise (as is the case here), it can be problematic.

YOU BE THE VC 9.1 Company: Toptal (www.toptal.com) Business Idea: Launch a platform that enables companies to find top-notch software engineers, developers, and designers who are rigorously screened and are willing to work on a contract basis.

You Be the VC Scorecard Toptal (www.toptal.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

Toptal was founded by Taso Du Val and Breanden Beneschott. Both co-founders have an engineering background and worked elsewhere before founding Toptal. They have added talent to the top management team to augment their engineering skills. Their team looks quite accomplished and covers various

aspects of business operations.

Strength of the Opportunity

Strength of the Industry

1

2

3

4

5

Toptal‘s basic pitch is that it provides a more elegant job search solution than current providers. It matches capable freelancers who are willing to work on a project basis with companies looking for such talent. While it has competition in the job matching market, the fact that it specializes in technical and finance jobs helps it differentiate.

1 2 3 4 5 The job posting market is large.

Companies want to remain flexible with respect to their workforce and so are more willing to hire freelancers. Toptal is not the first mover into this space but appears to have identified a profitable niche to be in.

Strength of Business Model

1

2

3

4

5

The unique feature of Toptal is that it is Toptal and not the freelancer who makes the match. This gives the client security in that it is not a freelancer who is overselling his or her capability but it is Toptal that is making the matching decision here.

Toptal makes money by charging the client and keeping the difference between what the client pays and what they pay to the freelancer.

Average Score 4.0/5.0 Decision: We like what Toptal is doing, and we would invest in it. They appear to have isolated a great opportunity and their customer value proposition is also compelling.

YOU BE THE VC 9.2 Company: KaZAM Balance Bike (www.kazambikes.com)

Business Idea: Create a bike that teaches kids how to ride without training wheels in a safe, enjoyable, and confidence-building manner.

You Be the VC Scorecard KaZAM Balance Bike (www.kazambikes.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

KaZAM was founded by friends John Lugo and Michael Wagner. John Lugo‘s wife, Mary Beth Lugo, is also an important part of the management team. John Lugo is a Commander in the U.S. Navy. We were not able to find additional information about the Lugos or co-founder Michael Wagner.

Strength of the Opportunity

1

2

3

4

5

The opportunity is larger than we would have imagined. KaZAM sold nearly 1 million bikes in 2012 and expected to beat than number in 2013 (these are the most recent sales numbers available). We like the fact that key elements of the design of the bike are patented. We also like the philanthropic component of the company. KaZAM makes a $5 contribution to the American Widow Project for every KaZAM purchase at KazamBikes.com.

Strength of the Industry

1

2

3

4

5

Although the market for kids‘ bikes in the three- to six-year-old age range has remained fairly flat, KaZAM may be expanding the market via renewed interest created by its product.

Strength of Business Model

1

2

3

4

5

Strictly a retail business model. The

company has continued to increase the number of places where KaZAM bikes are sold. The bikes are sold online, via specialty bike shops, and a growing number of mainline retailers.

KaZAM bikes are available in 14 foreign countries and across the United States.

Average Score

3.5/5.0

Decision: Even though we only scored KaZAM a 3.50/5.00, we would invest in the company. It has excellent traction in a market that may be expanding as a result of its presence.

Its product has won several awards, including being named one of the 20 Best Summer Toys in the June 2011 edition of Parents Magazine. As indicated in the write-up, in May 2013 Mary Beth Lugo pitched KaZAM on Shark Tank. The pitch resulted in a $300,000 investment by sharks Mark Cuban and Barbara Corcoran in exchange for a 32 percent stake in the company. KaZAM is now branded a Mark Cuban company.

CASES Case 9.1 Basecamp: Implementing Novel Work Design and Human Resource Management Practices DISCUSSION QUESTIONS 935.

Share your general reaction to this case study. Do you think Basecamp‘s approaches to work design and HRM are transferable to other organizations, or do you think they‘re unique to Basecamp? Explain your answer.

Answer: While student opinions may differ, they should agree that Basecamp is one interesting company! They have a number of quirky policies but they all revolve around making the company a great place to work.

There is nothing that suggests that Basecamp‘s ideas won‘t transfer to other organizations. Take one example: the idea of synchronous meetings as a significant waste of time. Any organization can do what Basecamp is doing and have more asynchronous

information sharing sessions rather than face-to-face meetings.

9-36

Of the nine novel work design and HRM practices employed by Basecamp included in the case study, identify two practices that resonated with you the most, and that you believe would be most important to use in an entrepreneurial start-up firm.

Answer: Each student may pick his or her favorite, but here are two that seem quite promising. One is the 40-hour workweek and the other is the quiet Thursdays. Most firms expect their employees to work long hours, but this creates employee burnout.

Similarly, designating Thursday afternoons as quiet days is interesting because a lot can be accomplished when employees are not interrupted.

937.

938.

In the case, the observation was made that in many companies, long hours, excessive busyness, and a lack of sleep have become badges of honor. Why do you think this has happened? Do you agree with the leaders of Basecamp that that way of working is counterproductive? If you launched a start-up, how would you avoid allowing a culture to develop that championed long hours, excessive busyness, and a lack of sleep?

Answer: Note: Basecamp‘s 40-hour workweeks and being ―off the grid‖ after office hours are great examples of how a company can actually increase productivity.

This is a good question to start a class conversation about students‘ experience in various workplaces and use the discussion to talk about how Basecamp‘s leaders approached work at their company.

According to the case, Basecamp has been profitable 68 straight quarters, 17 straight years. To what degree do you think Basecamp‘s work design and HRM practices have contributed to its success?

Answer: This is a good question for an individual or group assignment.

Case 9.2 Zappos: Making Human Resources the Key to Customer Service DISCUSSION QUESTIONS 9-

What steps did Zappos take early in its life as a

39.

company to overcome the liability of newness?

Answer: By having excellent customer service and a generous return policy, Zappos overcame the liability of newness from the point-of-view of buyers. Buyers felt confident buying from the new company because customer service agents helped them make a decision and there was no cost to a wrong decision because the goods could be returned for full credit. By sticking to its culture, the company overcame the liability of newness for its employees.

940.

What can entrepreneurs learn from Zappos‘ experience about motivating employees and building a healthy organizational culture?

Answer: The reason that employees are so critical to Zappos‘ success is that although exemplary customer service may be what keeps customers coming back, the root of the company‘s competitive advantage is its employees. Ultimately, its Zappos‘ employees who deliver the high level of customer service and do everything that makes Zappos what it is.

Zappos has switched its approach to hiring new employees. It is ditching conventional job postings to recruit new hires, instead relying on Zappos Insiders, an internal social network designed to improve the recruiting process. The mechanics of how Zappos Insider works is described in the chapter.

941.

Do some additional Internet research about Zappos‘ decision to shift to a ―holacracy‖ approach to organization and management and whether Zappos is sticking with this approach. Use the information you found to provide an update on the health of Zappos‘ organizational culture.

Answer: Zappos is adopting a ―holacracy‖ approach to organizing its company. It is in the process of eliminating traditional managers, doing away with typical corporate hierarchy, and getting rid of job titles, at least internally. The idea is to replace the traditional corporate chain of command with a series of overlapping, self-governing teams. The idea is to give employees more of a voice in the way the company is run, and to keep Zappos lean and nimble as it continuous to grow.

Additional research on Zappos‘ ―holacracy‖ approach is a good topic for a student team project.

942.

In 2000, Tony Hsieh wrote a book titled Delivering Happiness in which he asserts that employee satisfaction is the key to business success. Do you think Hsieh is right? On a scale of 1 to 10 (10 is high), how important do you think employee satisfaction is to business success? Explain your answer.

Answer: This is a question where there could be a diversity of opinion among students. The instructor can get them to talk about their own work experience and see where they would place employee satisfaction on the 10-point scale.

CHAPTER 10 GETTING FINANCING OR FUNDING LEARNING OBJECTIVES 1.

2.

3.

4.

5.

6.

7.

Describe the importance of financing for entrepreneurial success.

Explain why most entrepreneurial ventures need to raise money during their early life.

Identify and describe the three sources of personal financing available to entrepreneurs.

Identify and explain the three steps involved in properly preparing to raise debt or equity financing.

Explain the three most important sources of equity funding that are available to the entrepreneurial firm.

Describe common sources of debt financing entrepreneurial firms use.

Describe several creative sources of financing entrepreneurial firms may choose to use.

CHAPTER OVERVIEW This chapter focuses on the important topic of getting financing or funding. The chapter begins by describing why most new ventures need funding. The chapter then transitions to discuss sources of personal financing, which includes an entrepreneur using his or her personal funds, bootstrapping, and borrowing from friends and family, which

are common occurrences in start-up firms. Strategies for preparing to raise debt or equity financing are discussed.

The concept of an elevator speech is introduced. An elevator speech is a brief, carefully constructed statement that outlines the merits of a business opportunity.

The center portion of the chapter focuses on the primary ways that entrepreneurs raise money: equity funding or debt financing. The common sources of both equity funding and debt financing are discussed. The chapter concludes with a discussion of creative sources of financing and funding, which includes crowdfunding, leasing, SBIR and STTR government grants, other grant programs, and strategic partners.

CHAPTER OUTLINE I. The Importance of Getting Financing or Funding II. Why Most New Ventures Need Funding A. Cash Flow Challenges B. Capital Investments C. Lengthy Product Development Cycles III. Sources of Personal Financing A. Personal Funds B. Friends and Family C. Bootstrapping IV. Preparing to Raise Debt or Equity Financing V. Sources of Equity Funding A. Business Angels B. Venture Capital C. Initial Public Offering VI. Sources of Debt Financing A. Commercial Banks B. SBA Guaranteed Loans C. Other Sources of Debt Financing VII. Creative Sources of Financing and Funding A. Crowdfunding B. Leasing C. SBIR and STTR Grant Programs D. Other Grant Programs E. Strategic Partners CHAPTER NOTES I. The Importance of Getting Financing or Funding Few people deal with the process of raising capital until

they need to raise capital for their own firm. As a result, many entrepreneurs go about the task of raising capital haphazardly, because they lack experience in this area and because they don‘t know much about their choices.

II.

Why Most New Ventures Need Funding

A. Cash Flow Challenges. Inventory must be purchased, employees must be trained and paid, and advertising must be paid for before cash is generated from sales.

B. Capital Investments. The cost of buying real estate, building facilities, and purchasing equipment typically exceeds a firm‘s ability to provide funds for these initial activities on its own.

C. Lengthy Product Development Cycles. Some products are under development for years before they generate earnings. The up-front costs often exceed a firm‘s ability to fund these activities on its own.

III. Sources of Personal Financing A. Personal Funds. Typically, the seed money that gets a company off the ground comes from the founders themselves—from their personal savings, mortgages, and credit cards and by tapping into the cash value of life insurance.

B. Friends and Family. Friends and family are the second source of funds for many new ventures. These forms of contribution often come in the form of loans or investments but can also involve outright gifts, forgone or delayed compensation, or reduced fees or rent.

C. Bootstrapping. Bootstrapping is a third source of seed money for new ventures. Bootstrapping is finding ways to avoid the need for external financing or funding through creativity, ingenuity, thriftiness, costcutting, or any means necessary.

IV. 

Preparing to Raise Debt or Equity Financing Once a start-up‘s financial needs exceed what personal funds, friends and family, and bootstrapping can

provide, debt and equity are the two most common sources of funds. The steps involved in properly preparing to raise debt or equity financing are shown in Figure 10.3 in the textbook and are outlined below.

Step 1: Determine precisely how much money the company needs.

Step 2: Determine the most appropriate type of financing or funding. a. Equity financing means exchanging partial ownership in a firm, usually in the form of stock, for funding. b. Debt financing is getting a loan.

Step 3: Develop a strategy for engaging potential investors or bankers. a. An elevator speech is a brief carefully constructed statement that outlines the merits of a business opportunity.

V. Sources of Equity Funding A. Business Angels 1. Business angels are individuals who invest their personal capital directly in start-ups. a. The prototypical business angel is about 50 years old, has high income and wealth, is well educated, has succeeded as an entrepreneur, and is interested in the start-up process. b. The number of angel investors in the United States has increased dramatically over the past decade, partly because of the high returns some report. c. Business angels are valuable because of their willingness to make relatively small investments.

This gives access to equity funding to a start-up that needs just $75,000 rather than the $1 million minimum investment that most venture capitalists require.

B. Venture Capital 1. Venture capital is money that is invested by venture

capital firms in start-ups and small businesses with exceptional growth potential.

2. Venture capital firms are limited partnerships of money managers who raise money in ―funds‖ to invest in start-ups and growing firms. The funds, or pools of money, are raised from wealthy individuals, pension plans, university endowments, foreign investors, and similar sources.

3. Many entrepreneurs get discouraged when they are repeatedly rejected for venture capital funding, even though they may have an excellent business plan. Venture capitalists are looking for the ―home run‖ and so reject the majority of the proposals they consider.

C. Initial Public Offering 1. An IPO is the first sale of stock by a firm to the public. When a company goes public, its stock is typically traded on one of the major stock exchanges.

2. Firms decide to go public for the following reasons: (1) it is a way to raise equity capital to fund current and future operations; (2) an IPO raises a firm‘s public profile; (3) an IPO is a liquidity event; and (4) an IPO creates another form of currency for a firm (liquid stock).

3. Although there are many advantages to going public, it is a complicated and expensive process. The first step is to hire an investment bank. An investment bank is an institution, such as Credit Suisse First Boston, that acts as an underwriter or agent for a firm issuing securities. The investment bank acts as the firm‘s advocate and adviser and walks it through the process of going public.

VI.

Sources of Debt Financing

A. Commercial Banks 1. Historically, commercial banks have not been viewed

as practical sources of financing for start-up firms. This sentiment is not a knock against banks; it is just that banks are risk averse, and financing start-ups is risky business.

2. There are two reasons that banks have historically been reluctant to lend money to start-ups. a. First, as mentioned previously, banks are risk averse. In addition, banks frequently have internal controls and regulatory restrictions prohibiting them from making high-risk loans. b. Second, lending to small firms is not as profitable as lending to large firms. In many instances, it is simply not worth a banker‘s time to do the due diligence necessary to determine the entrepreneur‘s risk profile.

B. SBA Guaranteed Loans 1. Many different types of banks in the United States participate in the SBA Guaranteed Loan Program.

Although these loans typically aren‘t available to start-ups, they are an important source of funding for small businesses in general.

2. The most notable SBA program available to small businesses is the 7(A) Loan Guaranty Program. This program accounts for 90 percent of the SBA‘s loan activity. Almost all small businesses are eligible to apply for an SBA guaranteed loan.

3. The SBA can guarantee as much as 75 percent (debt to equity) on loans up to $5 million and 85 percent on loans up to $150,000.

C. Other Sources of Debt Financing 1.

Peer-to-peer lending is a financial transaction that occurs directly between individuals or peers. Funding Circle, Lending Club, and StreetShares are examples of peer-to-peer lenders.

2.

Vendor credit (also known as trade credit) is when a vendor extends credit to a business in order to allow the business to buy its products and/or services up front but defer payment until later.

3.

Factoring is a hybrid method for obtaining cash. Not really debt financing per se, factoring is a financial transaction whereby a business sells its accounts receivable to a third party, called a factor, at a discount in exchange for cash.

VII. Creative Sources of Financing and Funding A. Crowdfunding 1. Crowdfunding is the practice of funding a project or new venture by raising monetary contributions from a large number of people, typically via the Internet.

There are two types of crowdfunding sites: rewardsbased crowdfunding and equity-based crowdfunding.

2. Rewards-based crowdfunding allows entrepreneurs to raise money in exchange for some type of amenity or reward. The most popular rewards-based crowdfunding sites are Kickstarter, Indiegogo, and RocketHub. 3. Equity-based crowdfunding helps businesses raise money by tapping individuals who provide funding in exchange for equity in the business. Three of the more popular equity-based crowdfunding sites are MicroVentures, Crowdfunder.com, and Circle Up. The catalyst for the advent of equity-based crowdfunding was the JOBS Act, which was passed in April of 2012.

B. Leasing 1. A lease is a written agreement in which the owner of a piece of property allows an individual or business to use the property for a specified period of time in exchange for payments.

2. The major advantage of leasing is that it enables a company to acquire the use of assets with very little or no down payment.

3. The two most common types of leases that new ventures enter into are leases for facilities and leases for equipment.

C. SBIR and STTR Grant Programs 1. The Small Business Innovation Research (SBIR) and

the Small Business Technology Transfer (STTR) programs are two important sources of early-stage funding for technology firms. These programs provide cash grants to entrepreneurs who are working on projects in specific areas.

2. The SBIR Program is a competitive grant program that provides more than $2.5 billion per year to small businesses for early-stage and development projects.

Each year, 11 federal departments and agencies are required by the SBIR to reserve a portion of their research and development funds for awards to small businesses. a. The SBIR is a three-phase program, meaning that firms that qualify have the potential to receive more than one grant to fund a particular proposal. b. Historically, less than 15 percent of all Phase I proposals are funded, and about 30 percent of all Phase II proposals are funded. The payoff for successful proposals, however, is high. The money is essentially free. It is a grant, meaning that it doesn‘t have to be paid back and no equity in the firm is at stake.

3. The STTR Program is a variation of the SBIR for collaborative research projects that involves small businesses and research organizations, such as universities and federal laboratories.

D. Other Grant Programs 1. There are a limited number of other grant programs available to entrepreneurs. Obtaining a grant takes a little detective work. Granting agencies are by nature low-key, so they normally need to be sought out.

2. The federal government has grant programs beyond the SBIR and STTR programs described previously. The full spectrum of grants available is listed at www.grants.gov.

3. One thing to be careful of is grant-related scams.

E. Strategic Partners 1. Strategic partners are another source of capital for new ventures. Indeed, strategic partners often play

a critical role in helping young firms fund their operations and round out their business models.

2. Biotechnology, for example, relies heavily on partners for financial support. Biotech firms, which are typically fairly small, often partner with larger drug companies to conduct clinical trials and bring products to market.

BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING What Went Wrong?

How One Start-Up Caught the Attention of VCs, Gained 25,000 Daily Users, and Still Failed 1.

Examine the problems that DrawQuest encountered. How could the company have avoided or navigated around each problem?

Answer: DrawQuest may have benefited from a comprehensive feasibility analysis. The feasibility analysis may have brought to light that only a small percentage of users would pay for the enhanced features. DrawQuest may also have benefited from developing a minimal viable product and testing it in the marketplace (with a small set of enhanced features included) to see if people would buy the enhanced features. Again, this approach may have alerted DrawQuest to the fact that only a small percentage of people would buy the enhanced features.

2.

What alternatives did DrawQuest have for generating income for its app? Why do you think the company didn‘t try any of these alternatives before shutting down?

Answer: DrawQuest could have (1) charged a download fee for the app, (2) included advertising on the app, (3) gave away a basic version of the app and charged from a more advanced version, or (4) any combination of the first three along with selling upgrades. It‘s unclear why DrawQuest did not try any of these alternatives.

3.

Based on what you learned in Chapter 4, complete a Barringer/Ireland Business Model template for DrawQuest. Is there anything that is noticeable in the business model template that may have forecast that

DrawQuest would have a hard time surviving?

Answer: This is a good question for an individual or group assignment. Most students will conclude that the major flaw in DrawQuest‘s business model was that it relied on a single source of revenue. The company simply didn‘t bring in enough money. DrawQuest clearly had a strong basis of differentiation, important core competencies, sound operations, and a viable target market. It just wasn‘t able to monetize these advantages via the single revenue stream that it had.

4.

A common start-up idea on college and university campuses is to build a smartphone app. What lessons can students building apps learn from DrawQuest‘s experience?

Answer: The main lesson students should learn from the DrawQuest experience is this: that regardless of how well the app is developed and how many people are using the app, there has to be sufficient revenue generated to make the app an attractive business.

Savvy Entrepreneurial Firm Working Together: How Biotech Firms and Large Drug Companies Bring Pharmaceutical Products to Market 1.

In your opinion, what factors in the business environment encourage firms to partner to compete?

Answer: Small firms partner with large firms for a number of reasons. The reasons include: gaining access to a particular resource (such as a large drug company‘s distribution network), risk and cost sharing (the large drug companies will often share the risk of developing a new pharmaceutical product with smaller companies), and speed to market (the financial resources provided by large firms often help smaller biotech firms get to market sooner).

2.

What risks do small firms face when partnering with large, successful companies? What risks do large companies take when they rely on small firms as a source of innovation?

Answer: Small firms face many risks when partnering with larger companies. These risks include: loss of proprietary information (by working with a large firm, the large firm may get access to some of the small firm‘s proprietary information that it wasn‘t entitled

to), risk becoming dependent on a partner (by working with large firms, small firms risk becoming overly reliant on their advice and financial clout), and partners‘ cultures may clash (a larger firm may simply be a hassle to deal with). Large firms take on similar risks in working with small firms.

3.

How might government policies affect partnering actions between small and large firms in the pharmaceutical industry?

Answer: There may be antitrust implications. If a small firm and a large firm partner in a way that monopolized a market, the government might intervene. In addition, it might be more complicated to show that procedures were followed according to FDA regulations in testing a new drug if the responsibilities were split between two companies.

4.

If you worked for an entrepreneurial venture, what would you want to know about a large company before recommending that your firm form a partnership with it?

Answer: Whether that firm had worked with entrepreneurial ventures before, and how successful the partnerships were. There is nothing wrong with asking for references when contemplating entering into a partnership with another firm. If the large firm is unwilling to give references, that is a ―red flag‖ pertaining to the potential partnership.

Partnering for Success Startup Weekend: A Fertile Place to Meet Business Cofounders 1.

In referring to Startup Weekend, someone made the comment ―It‘s not a start-up factory, it‘s an entrepreneur factory.‖ What do you think the person meant by that comment?

Answer: Most students will say that what the person meant is that more people will become excited about the entrepreneurial process as a result of attending a Startup Weekend than actual start-ups will be launched.

So, the real benefit of hosting a start-up weekend is to produce entrepreneurs rather than producing startups.

2.

To what degree do you agree with the basic premise of the feature that Startup Weekends represent a fertile place to meet business cofounders?

Answer: Most students will say that the premise is accurate. According to the case, about 55 percent of Startup Weekend participants continue working on their idea with their team intact after the Startup Weekend ends. That‘s a fairly high percentage. As a result, attending a Startup Weekend may be an excellent place to become part of a start-up team and to meet potential business co-founders.

3.

What can people learn by attending a Startup Weekend, even if they ultimately do not stay together with their team after the weekend ends?

Answer: They can learn a host of things, including:      

4.

How to pitch business ideas.

How to quickly assess whether a business idea is feasible.

How to quickly iterate on a business idea based on feedback from team members, mentors, and potential customers.

How to work on a business start-up team.

How to work with mentors and advisors in the context of thinking through a business start-up idea.

How to polish a presentation to present to a panel of potential investors.

Spend some time looking at the Web site for 3 Day Startup. How do Startup Weekend and 3 Day Startup compare? Are both equally suited for college student entrepreneurs?

Answer: The two organizations vary on the following dimensions:  

3 Day Startup is strictly for college students.

Startup Weekend is for anyone interested in the business start-up process.

3 Day Startup involves paying the 3 Day Startup organization a fee. In exchange, 3 Day Startup will send a trained facilitator to your location to lead the event. Startup Weekend is strictly organized and staffed at the local level. The Startup Weekend organization

 



provides a kit of support, but not a facilitator.

3 Day Startup is more structured than Startup Weekend.

There is typically no prize money available to the winning pitches that conclude a 3 Day Startup Event. Prize money or in-kind prizes are normally awarded to the best teams in a Startup Weekend.

3 Day Startup is sponsored by a university or a college within the university. There is typically not a fee for the participant.

Startup Weekend charges each participant a nominal fee.

Other than these points, 3 Day Startup and Startup Weekend are very similar. Students can benefit from both. 3 Day Startup may have a slight advantage for college students because it‘s designed specifically for them.

REVIEW QUESTIONS 101.

What are the three most common reasons most entrepreneurial ventures need to raise money in their early life?

Answer: Cash flow challenges, capital investments, and lengthy product development cycles.

102.

What is meant by the term burn rate? What are the consequences of experiencing a negative burn rate for a relatively long period of time?

Answer: A company‘s burn rate is the rate at which it is spending its capital until it reaches profitability. Although a negative cash flow is sometimes justified early in a firm‘s life—to build plant and equipment, train employees, and establish a brand—it can cause severe complications. A firm usually fails if it burns through all of its capital before it becomes profitable.

103.

What is meant by the term sweat equity?

Answer: Sweat equity represents the value and time that the founders of a firm put into their firm, prior to the time that actual equity (or money) is

involved.

104.

To what extent do entrepreneurs rely on their personal funds and funds from friends and families to finance their ventures? What are the three rules of thumb that a business owner should follow when asking friends and family members for start-up funds?

MyLab Question.

105.

What is bootstrapping? Provide several examples of how entrepreneurs bootstrap to raise money or cut costs. In your judgment, how important is the art of bootstrapping for an entrepreneurial venture?

Answer: An important source of seed money for many new ventures is referred to as bootstrapping.

Bootstrapping is the use of creativity, ingenuity, and any means possible to obtain resources other than borrowing money or raising capital from traditional sources. Most students will say that the art of bootstrapping is very important for entrepreneurial firms. Because it‘s hard for new firms to get financing or funding early on, many entrepreneurs bootstrap out of necessity. As a result, a firm may never get off the ground unless its founders are good at bootstrapping. Students should be encouraged to come up with examples of bootstrapping based on their own or the experiences of entrepreneurs they know.

106.

Describe the three steps involved in properly preparing to raise debt or equity financing.

Answer: The three steps involved in properly preparing to raise debt or equity financing are as follows: Step 1: Determine precisely how much money is needed.

Step 2: Determine the type of financing or funding that is the most appropriate.

Step 3: Develop a strategy for engaging potential investors or bankers.

107.

What is the difference between equity funding and debt financing?

Answer: Equity funding means exchanging partial ownership in a firm, usually in the form of stock, for funding. Debt financing is getting a loan.

108.

What are the most common sources of equity funding?

Answer: The most common sources of equity funding include angel investors, private placement, venture capital, and initial public offerings.

109.

Describe the most common sources of debt financing.

Answer: The most common sources of debt financing are commercial banks and the Small Business Administration (Guaranteed Loan Program).

1010.

What is the purpose of an elevator speech? Why is preparing an elevator speech one of the first things an entrepreneur should do in the process of raising money?

Answer: An elevator speech is a brief, carefully constructed statement that outlines the merits of a business opportunity. There are many occasions when a carefully constructed elevator speech might come in handy. For example, many university-sponsored centers for entrepreneurship hold events that bring investors and entrepreneurs together. Often, these events include social hours and refreshment breaks designed specifically for the purpose of allowing entrepreneurs looking for funding to mingle with potential investors. Having an elevator speech prepared equips an entrepreneur to be ready to quickly explain his or her business idea to a potential investor.

1011.

Why is it so important to get a personal introduction before approaching a potential investor or banker?

Answer: Bankers and investors receive many business plans, and most of them end up in a pile in their offices. As a result, to have your business plan noticed, it is necessary to find someone who knows the banker or the investor and ask for an introduction.

1012.

What are the three steps required to effectively engage potential investors or bankers?

Answer: The three steps required to effectively engage a potential investor or a banker are as follows:

Step 1: Prepare an elevator speech.

Step 2: Identify and contact the best prospects (preferably with an introduction).

Step 3: Be prepared to provide the investor or banker a completed business plan and make a presentation of the plan if requested.

1013.

What are the three most common sources of equity funding?

Answer: The most common sources of equity funding are business angels, venture capital, private placement, and initial public offering.

1014.

Describe the nature of business angel funding. What types of people typically become business angels, and what is the unique role that business angels play in the process of funding entrepreneurial firms?

MyLab Question.

1015.

What is meant by the term venture capital? Where do venture capital firms get their money? What types of firms do venture capitalists commonly want to fund?

Why? Answer: Venture capital is money that is invested by venture capital firms in start-ups and small businesses with exceptional growth potential. Venture capital firms are limited partnerships of money managers who raise money in ―funds‖ to invest in start-ups and growing firms. The funds, or pools of money, are raised from wealthy individuals, pension plans, university endowments, foreign investors, and similar sources. The investment preferences of venture capitalists are fairly narrow. A large share of venture capital money goes into the following industries: software, telecommunications, networking, computers and peripherals, semiconductors, medical devices, and biotechnology.

1016.

Describe the purpose of an initial public offering (IPO). Why is an initial public offering considered to be an important milestone for an entrepreneurial firm?

Answer: An initial public offering (IPO) is the first

sale of stock by a firm to the public. When a company goes public, its stock is typically traded on one of the major stock exchanges. An IPO is an important milestone for a firm. Typically, a firm is not able to go public until it has demonstrated that it is viable and has a bright future.

1017.

What is the purpose of the investment bank in the initial public offering process?

Answer: The first step in initiating an IPO is for a firm to hire an investment bank. An investment bank is an institution, such as Credit Suisse First Boston, that acts as an underwriter or agent for a firm issuing securities. The investment bank acts as the firm‘s advocate and advisor and walks it through the process of going public. The most important issues the firm and its investment bank must agree on are the amount of capital needed by the firm, the type of stock to be issued, the price of stock when it goes public, and the cost to the firm to issue the securities.

1018.

In general, why are commercial banks reluctant to loan money to start-ups?

Answer: There are two reasons that banks have historically been reluctant to lend money to startups. First, banks are risk averse. In addition, banks frequently have internal controls and regulatory restrictions prohibiting them from making high-risk loans. So, when an entrepreneur approaches a banker with a request for a $500,000 loan and the only collateral the entrepreneur has to offer is the recognition of a problem that needs to be solved and a plan to solve it and perhaps some intellectual property, there is usually no practical way for the bank to help. The second reason banks have historically been reluctant to lend money to startups is that lending to small firms is not as profitable as lending to large firms, which have historically been the staple clients of commercial banks.

1019.

Briefly describe the SBA‘s 7(A) Loan Guaranty Program. Do most start-up firms qualify for an SBA guaranteed loan? Why or why not?

Answer: The SBA 7(A) Guaranteed Loan Program operates

through private-sector lenders that provide loans that are guaranteed by the SBA. Almost all small businesses are eligible to apply for an SBA guaranteed loan. Most start-ups qualify for an SBA guaranteed loan, except those that are distressed businesses. These loans are only for viable businesses.

1020.

What is a Small Business Innovation Research (SBIR) grant? Why would a firm want to apply for such a grant if it qualifies for it?

Answer: The SBIR Program is a competitive grant program that provides more than $1 billion per year to small businesses for early-stage and development projects. Each year, 11 federal departments and agencies are required by the SBIR to reserve a portion of their research-and-development funds for awards to small businesses. Historically, only a small percentage of the firms that apply for an SBIR grant are successful; however, for those that receive grants, the payoff is high. The money is essentially free. It is a grant, meaning that it doesn‘t have to be paid back and no equity in the firm is at stake.

APPLICATION QUESTIONS 1021.

Write a 60-second elevator speech for Faraday Bikes, the focal firm discussed in the ―You Be the VC 10.1‖ feature.

Answer: This is a good question for an individual or a group assignment.

1022.

Samantha Smith, a friend of yours, was recently telling you about a company that her father is starting in the solar power industry. Samantha‘s father is using a technology he developed, which has received favorable write-ups in several technical publications. He has been approached by two angel investors who are eager to invest in his proposed venture. He‘s also been offered a spot in a prestigious technology incubator, where he can maintain an office and a lab to work on his project.

Samantha says that her dad has turned away the potential investors and is opting to work out of a shop on some property he owns, rather than move into

the incubator. He‘ll be able to fund the company from personal savings, at least for the first two years.

Do you think Samantha‘s dad is making good decisions?

What are the pluses and minuses of his decisions?

Answer: Most students will say that Samantha‘s dad is not making good decisions. By engaging the angel investors and moving into the incubator, Samantha‘s dad could build a strong network of fellow entrepreneurs and investors, which could serve him well in the future. By basically isolating himself, he misses the benefits of being surrounded by other entrepreneurs and by building a professional network.

Entrepreneurs often strengthen their business ideas by interacting with other entrepreneurs.

1023.

Jim Carter, a classmate of yours, is preparing to launch an e-commerce company to sell home repair guidebooks, tools, how-to videos, and related material for home repair and remodeling projects. He just told you that he talked to his paternal grandmother over the weekend, and she has agreed to lend him $25,000 to launch the firm. When you asked Jim what arrangements he has made with his grandmother to formalize the loan, he looked puzzled and said, ―She plans to send me a check in a week or so—she just needs to get the money out of her savings account.‖ Jim seemed concerned by the worried look on your face and said, ―Tell me what you‘re thinking, I really want to do the right thing here.‖ What would you say to Jim? Answer: There are two things to tell Jim. First, he and his grandmother should have a formal promissory note prepared, and should both sign it. The note should specify the repayment terms for the loan.

Second, Jim should carefully consider whether his grandmother is in a position to loan him money. It‘s not a good idea to ask a relative, or anyone for that matter, for financial assistance if losing the money would cripple them financially. He also doesn‘t want to jeopardize his personal relationship with his grandmother.

1024.

Kathy Baker is in the midst of starting a computer hardware firm and thinks she has identified a real problem that her company will be able to solve. She needs investment capital, but doesn‘t know much about the process and doesn‘t know where to begin. She‘s turned to you for advice. Write Kathy a 250- to 300-

word e-mail message introducing her to the process of raising investment capital.

Answer: This is a good question for an individual or a group assignment.

1025.

Imagine you invented a new type of car seat for children, which is lighter and safer than the car seats currently on the market. You have a business plan and have won two business plan contests based on your idea. You also have a working prototype. You‘d like to find an angel investor to fund the launch of your firm. Describe how you‘d go about finding an angel investor in the area in which you live. Make a list of the specific steps you‘d take, and the specific people you‘d talk to, to try to locate an appropriate angel investor.

Answer: The best way to identify a business angel is to work your network of acquaintances, including college professors, attorneys, accountants, bankers, and other people in the entrepreneurship community, such as SBDC counselors and SCORE advisors. It‘s best to get an introduction from one of these people.

1026.

Ed Sayers just returned from a meeting with his banker with a frustrated look on his face. He tosses his keys on the kitchen counter and tells his wife, ―I just can‘t understand where my banker is coming from. I have a great idea for a new firm, but the bank isn‘t interested in helping me with a loan.

Tomorrow, I‘m going to visit a couple of other banks to see if I have better luck.‖ Do you think Ed will have any better luck with the second and third bank he visits? Why or why not?

Answer: Unfortunately, Ed is unlikely to have any better luck with the second and third bank he visits.

As shown in Table 10.2 in the textbook, banks are interested in firms that have a strong cash flow, low leverage, audited financials, good management, and a healthy balance sheet. Although Ed may be very creditworthy and have a great idea, his potential new firm, like most potential new firms, simply doesn‘t meet the criteria that bankers are looking for. This reality isn‘t necessarily a knock against banks; it‘s just that banks are risk averse, and financing startups is a risky business.

10-

Joshua Sherman, who lives near Vancouver, Canada, is

27.

preparing to pitch an idea for a social gaming website to a group of angel investors. The site has some new and novel aspects to it. He made a practice presentation in front of his advisory board, and one question that an advisor urged him to prepare for is ―If you‘re successful, what‘s to prevent Facebook from launching a similar product?‖ Joshua frowned, and said he thinks it‘s unlikely he‘ll be asked that question. What do you think? If you were Joshua, how would you prepare to answer that question?

Answer: Jason is incorrect. He‘ll very likely be asked that question. He should prepare to answer the question by thinking about what makes his site special, and what he can do that Facebook can‘t do.

If Facebook tries to copy his site, his only chance for survival is to highlight what‘s ―different‖ about his site compared to Facebook‘s to maintain a competitive advantage.

YOU BE THE VC 10.1 Company: Faraday Bikes (www.faradaybikes.com) Business Idea: Design and produce a bicycle that is stylish, comfortable to ride, allows riders to work as much or as little as they want, and enables riders to bike to work without breaking a sweat.

You Be the VC Scorecard Faraday Bikes (www.faradaybikes.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

Faraday Bikes was founded by Adam Vollmer as a result of a design contest won by a team at Ideo.

Vollmer formed a team with a head of operations and finance and a marketing person. Given that they are producing a physical product that has inventory and working capital issues, it is hard to emphatically say that Vollmer and his team are ideal for the venture.

Strength of the Opportunity

Strength of the Industry

Strength of Business Model

1

2

3

4

5

The opportunity is consistent with the increased awareness of environmental pollution. In addition to alleviating the need for fossil fuel-based gasoline, Faraday Bikes‘ main product helps address traffic congestion in urban areas As time goes on, an increasing number of city dwellers will be in need of bicycles.

1 2 3 4 5 The bicycle industry is large and growing as there is an increased awareness of maintaining one‘s health and living in a way that results in minimal environmental pollution.

1 2 3 4 5 From their website, it appears that Faraday Bikes‘ business model consists of the company sending the assembly kit for their bike to a local bike shop near the customer‘s home. Say, I live in Apopka, Florida and I order a bike from Faraday Bikes. The company will deliver the unassembled bike to a bike shop in Apopka, which will assemble the bike for me to pick it up from the store.

While this model enlists the support of bike shops, it is unclear how much cost this adds to the product.

Average Score

3.75/5.0

Decision: We would fund this firm. It appears to be wellmanaged, has a solid business concept, and is in an industry that is growing. We also like the fact that it addresses both urban congestion and environmental pollution. We think it could be successful in a big way.

That makes it a very attractive investment opportunity.

YOU BE THE VC 10.2 Company: Lumo Bodytech (www.lumobodytech.com) Business Idea: Design and develop two small, unobtrusive wearable devices. The first device monitors and improves the user‘s posture – which allows the user to sit straighter, stand taller, and look better. The second device analyzes the user‘s running form and offers personalized coaching to help the user exceed his or her running goals.

You Be the VC Scorecard Lumo Bodytech (www.lumobodytech.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

Three Stanford entrepreneurs – Monisha Perkash, Dr. Charles Wang, and Andrew Chang – founded Lumo Bodytech. Perkash is a serial entrepreneur, who had previously founded and sold TuitionCoah. Wang is a trained physician, and Chang has extensive technical background.

Together, this appears to be a formidable team.

Strength of the Opportunity

1

2

3

4

5

The opportunity is quite strong.

While fitness trackers like FitBit help in measuring and keeping track of the number of steps a person takes a day and related metrics, the Lumo Lift helps in doing all that AND correcting body posture. Likewise, Lumo Run is a running coach. There is an increased awareness toward physical fitness and Lumo Bodytech taps into that.

Strength of the Industry

1

2

3

4

The fitness tracker industry is fairly new, but has grown

5

tremendously because of being paired with smartphones. Lumo Bodytech enters an already crowded space, but it is able to differentiate itself based on the value it provides.

Strength of Business Model

1

2

3

4

5

In late October 2017, the two main products of Lumo Bodytech were selling on Amazon. The Lumo Lift retails at $79.93 and the Lumo Run at $99.48. Since it is privately owned, we don‘t know what the company‘s margins are and its sales. It appears that they have a traditional retail model.

Average Score

4.00/5.0

Decision: We would fund Lumo Bodytech. We like the management team. Not only does the team have technical expertise both in IT and in medicine, it is also led by a successful entrepreneur. We believe they have two solid products, both of which meet specific needs, enabling the company to differentiate itself from the competition.

CASES Case 10.1 Revolights: Using Multiple Sources of Funding to Bring Its Innovative Bicycle Lighting System to Life DISCUSSION QUESTIONS 1032.

The following sentence appears early in this chapter: ―There are threee reasons that most entrepreneurial ventures need to raise money during their early life: cash flow challenges, capital investments, and lengthy product development cycles.‖ Evaluate Revolight‘s need to raise money in each of these areas.

Answer: (1) Cash flow challenges. Because the Revolights system is a physical product, inventory must be bought and paid for before the product is sold. As a result, the gap between when Revolights has to pay its suppliers (for the raw ingredients

needed to built its product) and when it gets paid by its customers causes cash flow challenges. (2) Capital investments. Revolights has less of a need for funding for capital investments. There is no indication that the company is investing money in manufacturing facilities, buildings, or property. (3) Lengthy product development cycles. Revolights does need money for this purpose. Prior to launching a new iteration of its bike lights, Revolights builds prototypes and tests them in the marketplace.

1033.

In response to a request from Kent Frankovich and Adam Pettler, write a 60-second elevator pitch about Revolights‘ current product.

Answer: This is a good question for an individual or a group assignment.

1034.

Do you think Revolights will need to raise additional capital? If so, why? Using Table 10.2 in the chapter as a guide, if Revolights raises additional capital, what would be the most appropriate source of financing or funding? Explain your answer.

Answer: From the table in the case, Revolights has raised a total of around $2 million, without including the undisclosed amount from VA Angels in 2015. Given that they sell a physical product that requires investing in inventory and waiting to collect on accounts receivable, working capital may be needed. From Table 10.2 in the book, Revolights best fits the third profile – unique business idea, etc. This suggests that equity financing is the best path forward.

1035.

To what degree do you think Revolights will be able to reach mainstream markets and sustain its growth?

How successful do you believe the firm will be?

Justify your answer based on criteria introduced in earlier chapters of this book and your own intuition.

Answer: Most students will argue that Revolights is a very successful start-up venture. It has produced a string of successfully attractive products, has garnered positive publicity (along with winning awards), and has attracted the attention of highprofile investors. It is also producing a product that makes people safer and could potentially save lives. As the case indicates, however, their $149 price point appears to be a growth hurdle. Although

they have brought the price down from $399, $149 is still a high price that may slow down Revolights‘ access to the mainstream market.

Case 10.2 Kickstarter: An Increasingly Important Forum for Raising Seed Capital DISCUSSION QUESTIONS 1036.

Do you think Kickstarter is a viable alternative to raising equity funding or debt financing? If so, under what circumstances?

Answer: Most students will say yes—Kickstarter is a viable alternative to raising equity funding or debt financing in most cases. It certaintly helped raise a substantial amount of money for the companies highlighted in the table in the case labeled ―Five Most Successful Kickstarter Projects to Date.‖ In fact, according to the case, since Kickstarter was started in 2009, it has reportedly helped raise more than $3 billion in pledges from 12.7 million donors to fund 123,387 projects. Some of the companies that raise money on Kickstarter will need additional rounds of equity funding or debt financing to further prove their concepts or to scale their business. But there are a growing number of businesses that are entirely funded by their Kickstarter campaign.

1037.

Kickstarter is not the first crowdfunding platform, yet it is the most successful. List five reasons that you believe account for Kickstarter‘s success.

Answer: Students will vary in regard to their answer to this question. There are several factors that contribute to Kickstarter‘s success:      

Elegent and easy-to-use Web site design Good name and URL (www.kickstarter.com) Partnership with Amazon.com Strong management team Has received substantial publicity, which has increased its legitimacy and visbility Raised venture capital funding from top-tier venture capital firms

1038.

Cities are able to set up Kickstarter pages that list all the active Kickstarter projects from their community. For example, the Kickstarter page for Nashville, TN is available at https://www.kickstarter.com/discover/places/nashvilletn. How should cities go about promoting their Kickstarter pages?

Answer: This is a good question for an individual or a group assignment. Most students will argue that Kickstarter is a potentially effective way for cities to promote arts and entrepreneurship. It is a wellknown easy-to-use platform that facilitates the fundraising process. Cities can come up with a number of creative ways to promote these campaigns, including utilizing social media outlets.

1039.

Wivv raised $566,401 from 4,829 backers in the Kickstarter campaign described in this case. What benefits, if any, other than raising money did Wivv glean from the campaign? If one of the cofounders of Wivv told you, ―I‘m very satisfied with the money we raised via the Kickstarter campaign, but raising money wasn‘t the primary reason we did it,‖ what do you think the primary reason was?

Answer: As the case indicates, there are a number of other benefits than purely fundraising via a Kickstarter campaign. For Wivv, these include: reaching an audience of 4,829 potential early adopters of their 3D technology-based custom sandals, growing a community of users who can market through word-of-mouth, validating the market for custom sandals, getting customer feedback and insight (the 213 comments), and generating buzz for the product.

CHAPTER

11

UNIQUE MARKETING ISSUES LEARNING OBJECTIVES 1.

Explain the three steps (segmenting the market, selecting a target market, and establishing a unique

2.

3.

4.

market position) entrepreneurial firms use to identify their customers.

Define a brand and explain why it is important to an entrepreneurial firm‘s marketing efforts.

Identify and explain the 4Ps of marketing activities (product, price, promotion, and place) used by entrepreneurial firms.

Describe the seven-step sales process an entrepreneurial firm uses to identify prospects and close sales.

CHAPTER OVERVIEW This chapter focuses on the marketing issues facing entrepreneurial firms. The chapter begins by discussing how firms define and select their target markets. Next, we discuss an issue that is particularly important for new firms: establishing a brand.

The chapter transitions to discuss the four key facets of marketing as they relate to young entrepreneurial firms.

The four facets, commonly referred to as the ―four Ps‖ of marketing, are product, price, promotion, and place (or distribution). The chapter concludes with a discussion of the sales process.

CHAPTER OUTLINE I. Selecting a Market and Establishing a Position A. Segmenting the Market B. Selecting a Target Market C. Crafting a Unique Market Position II. Branding III. The 4 Ps of Marketing for New Ventures A. Product B. Price C. Promotion D. Place (or Distribution) IV. Sales Process and Related Issues

CHAPTER NOTES I. Selecting a Market and Establishing a Position •

In order to succeed, a new firm must address this important question: Who are the customers and how will we appeal to them?

•

A well-managed start-up approaches this query by following a three-step process: segmenting the market, selecting or developing a niche within a target market, and establishing a unique position in the target market.

A. Segmenting the Market 1. The first step in selecting a target market is to study the industry in which the firm intends to compete and determine the different potential target markets in that industry.

2. This process is called market segmentation and is important because a new firm typically only has enough resources to target one market segment, at least initially.

3. Markets can be segmented in a number of different ways, including product type, price point, and customers served.

4. There are several important objectives a new firm should try to accomplish as part of its market segmentation process. a. The process should identify one or more relatively homogeneous groups of prospective buyers within the industry the firm plans to enter in regard to their wants and needs. b. Differences within the segment the firm chooses should be small compared to differences across segments. c. The segment should be distinct enough so that its members can be easily identified. d. It should be possible to determine the size of the segment so that a firm knows how large its potential market is before it aggressively moves forward.

B. Selecting a Target Market 1. Once a firm has segmented the market, the next step is to select a target market.

2. Typically, a firm (especially a start-up venture) doesn‘t target an entire segment of a market because many market segments are too large to target successfully.

3. Instead, most firms target a niche within the segment. a. A niche market is a place within a market segment that represents a narrower group of customers with similar interests. b. In most cases, the secret to appealing to a niche market is to understand the market and meet its customers‘ needs. By focusing on a clearly defined target market, a firm can become an expert in that market and then be able to provide its customers with high levels of value and service.

C. Crafting a Unique Market Position 1. After selecting a target market, the firm‘s next step is to establish a ―position‖ within it that differentiates it from its competitors.

2. As we discussed in Chapter 5, position is concerned with how the firm is situated relative to its competitors. In a sense, a position is the part of a market or of a segment of the market the firm is claiming as its own.

3. Once a company has identified its position and primary points of differentiation, a helpful technique is to develop a product attribute map, which illustrates a firm‘s positioning strategy relative to its major rivals.

4. A firm establishes a unique position in its customers‘ minds by consistently drawing attention to two or three of its product‘s attributes that define the essence of what the product is and what separates it from its competitors. a. Firms often develop a tagline to reinforce the

position they have staked out in their market, or a phrase that is used consistently in a company‘s literature, advertisements, promotions, stationery, and even invoices and thus becomes associated with the company. An example is Nike‘s familiar tagline, ―Just do it.‖ II.

Branding

A. Establishing a Brand 1. A brand is the set of attributes—positive or negative—that people associate with a company.

2. Some companies monitor the integrity of their brands through a program of brand management, or protecting the image and value of an organization‘s brand in consumers‘ minds.

3. Table 11.2 lists the different ways people think about the meaning of a brand.

4. The difference between a company‘s brand and its positioning strategy is this: the brand is all about the attributes and promises that people associate with a company, and the position is all about the details.

5. Start-ups must build a brand from scratch. One of the keys is to create a strong personality for the firm that appeals to the chosen target market. a. So how does a new firm develop a brand? On a philosophical level, a firm must have meaning in its customers‘ lives. It must create value. b. On a more practical level, brands are built through a number of techniques, including advertising, public relations, sponsorships, support of social causes, and good performance. c. Ultimately, a strong brand can be a very powerful asset for a firm. i. Brand equity is the term that denotes the set

of attributes and liabilities that are linked to a brand and enable it to raise a firm‘s valuation. ii.

Cobranding refers to a relationship between

two or more firms where the firms‘ brands promote each other.

III. The 4 Ps of Marketing for New Ventures

A.

•

Once a company decides on its target market, establishes a position within that market, and establishes a brand, it is ready to begin planning the details of its marketing mix.

•

A firm‘s marketing mix is the set of controllable, tactical marketing tools that it uses to produce the response it wants in the target market.

•

Most marketers organize their marketing mix into four categories: product, price, promotion, and place (or distribution).

Product 1. A firm‘s product, in the context of its marketing mix, is the good or service it offers to its target market.

2. Determining the product or products to be sold is central to the firm‘s entire marketing effort.

3. As the firm prepares to sell its product, an important distinction should be made between the core product and the actual product. a. While the core product may be a CD that contains an antivirus software program, the actual product, which is what the customer buys, may have as many as five characteristics: a quality level, features, design, a brand name, and packaging.

B. Price 1. Price is the amount of money consumers pay to buy a product. It is the only element of the marketing mix that produces revenue; all other elements represent costs.

2. Most entrepreneurs use one of two methods to set the price for their products: cost-based pricing or value-based pricing.

a. In cost-based pricing, the list price is determined by adding a markup percentage to a product‘s cost. b. In value-based pricing, the list price is determined by estimating what consumers are willing to pay for a product and then backing off a bit to provide a cushion.

3. Regardless of the method of pricing, a company can‘t charge a premium price without delivering on its positioning and branding promises and unless circumstances are right.

4. To charge a premium price, one or more of the following circumstances must be present: a. Demand for the product is strong relative to supply. b. Demand for the product is inelastic. c. The product is patent protected and has a clearly defined target market. d. The product offers additional features that are valued. e. A new technology is being introduced. f. The product is positioned as a luxury product.

C. Promotion 1. Promotion refers to the activities the firm takes on to communicate the merits of its product to its target market. Ultimately, the goal of these activities is to persuade people to buy the product.

2. Three common activities entrepreneurs use to promote their firms are advertising, public relations, and social media. a. Advertising is making people aware of a product or service in hopes of persuading them to buy it.

Advertising major goals are to do the following: i. Raise customer awareness of a product. ii. Explain a product‘s comparative benefits. iii. Create associations between a product and a certain lifestyle. b. Public relations refers to efforts to establish and maintain a company‘s image with the public.

There are a number of techniques that fit the

definition of public relations. These include: i. Press releases ii. Traditional media coverage iii. Social media coverage iv. Articles in industry press and periodicals v. Blogging vi. Monthly newsletter vii. Civic, social, and community involvement c. Social media consists primarily of blogging and establishing a presence and connecting with customers and others through social networking sites such as Facebook or Twitter. d. Other product-related activities. i. Viral marketing facilitates and encourages people to pass along a marketing message about a particular product. ii. Guerrilla marketing is a low-budget approach to marketing that relies on ingenuity, cleverness, and surprise rather than traditional techniques.

D. Place (or Distribution) 1. Place, or distribution, encompasses all the activities that move a firm‘s product from its place of origin to the consumer. A distribution channel is the route a product takes from the place it is made to the customer who is the end user.

2. The first choice a firm has to make regarding distribution is whether to sell its products directly to consumers or through intermediaries (such as wholesalers and retailers). a. Selling Direct. Many firms sell direct to customers. Being able to control the process of moving their products from their place of origin to the end user instead of relying on third parties is a major advantage of selling direct.

The disadvantage of selling direct is that a firm has more of its capital tied up in fixed assets because it must own or rent retail outlets or must field a sales force to sell its products. b. Selling Through Intermediaries. Firms that sell through intermediaries typically pass off their products to wholesalers who place them in retail

outlets to be sold. An advantage of this approach is that the firm does not need to own as much of the distribution channel. The disadvantage of selling through intermediaries is that a firm loses control of its product. There is no guarantee that Best Buy or Circuit City will talk up the firm‘s product as much as the manufacturer would if it had its own stores.

IV.

Sales Process and Related Issues

A. A firm‘s sales process (or sales funnel) depicts the steps it goes through to identify prospects and close sales.

1. Some companies just wing it when it comes to sales, which isn‘t recommended. It‘s much better to have a well thought-out approach to prospecting customers and closing sales.

2. A formal sales process involves a number of identifiable steps. Although the process varies by firm (and industry), it generally includes seven steps. The seven steps are as follows: a. Step 1: Prospect for (or gather) sales leads. b. Step 2: Make the initial contact. c. Step 3: Qualify the lead. d. Step 4: Make the sales presentation. e. Step 5: Meet objections and concerns. f..

Step 6: Close the sale. g. Step 7: Follow up.

BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING What Went Wrong?

What Start-Ups Can Learn about Marketing from Missteps at JCPenney 1.

How does a start-up establish a ―brand‖ ? What do we learn from JCPenney‘s miscues about the importance of branding?

Answer: A start-up establishes a brand two ways. First, on a philosophical level, a firm must have meaning in its customers‘ lives. It must create value—something for which customers are willing to pay. Second, on a more practical level, brands are built through a number

of techniques, including advertising, public relations, sponsorships, support of social causes, social media, and good performance.

What we learn from JCPenney‘s miscues is that there is a high price to pay if a new management team misreads a company‘s brand. Instead of building upon JCPenney‘s current brand and strengthening it, Johnson essentially ignored it and plowed ahead with initiatives that were inconsistent with the brand. It didn‘t work.

2.

Although the concept of selecting a target market and establishing a unique position is not specifically mentioned in the feature, what do we learn about these two topics from JCPenney‘s miscues?

Answer: Prior to Johnson‘s arrival, JCPenney had a well-established target market and a unique position in the department store industry. Its target market and unique position was bargain-minded shoppers who brought impatient kids into the store to buy school clothes and moved through the store quickly. Johnson tried to change the target market and position to people who weren‘t particularly bargain-minded and wanted to linger in the stores rather than move through them quickly. What we learn is that the change was too abrupt. The current target market was a completely different type of shopper than the new target market.

As a result, Johnson started losing the current target market without attracting the new target market (a net– net loss).

3.

What type of testing should a start-up do to ensure that its initial customers see its brand in the way that the company intended?

Answer: A complete feasibility analysis should have been conducted to test the new ideas, with an emphasis on product/service feasibility analysis and talking to customers.

4.

Do a little Internet or gumshoe research on JCPenney today. Where does the company stand in terms of how it prices its products? What does the company‘s brand mean to consumers today?

Answer: This is a good question for an individual or a group assignment.

Savvy Entrepreneurial Firm How Retail Start-ups Compete Against Walmart and Other Big Box Retailers 1.

What does this feature teach us about the importance of ―crafting a unique market position‖ when launchinga retail entrepreneurial venture?

Answer: The big-box stores have an unbeatable advantage in price and product line breadth. As the case points out, the typical Walmart carries around 125,000 items! There is no way a start-up is going to be able to compete with the big-box stores on these dimensions. This means that in order to succeed, the retail entrepreneurial venture has to craft a distinct market position. This market position must be able to convey some tangible value to the customer. As the TrackShack example in the case points out, one can buy running shoes at a big-box store, but at TrackShack you get an employee who is knowledgable about running and who can help you make the right choice.

2.

Spend some time looking at TrackShack‘s website at www.trackshack.com. Make a list of the reasons that someone interested in running shoes might shop at TrackShack instead of Academy, even if the shoes the consumer buys at TrackShack may be more expensive than comparable shoes at Academy.

Answer: The TrackShack website suggests a community of like-minded people – both the sellers and the buyers are interested in running and want products that will improve their ability. There is a tremendous selection of running shoes and each shoe comes with a detailed description of its features. The website also tells you about running events in the local area. In addition, there are a number of training programs that they offer, such as the 10-week ―Zero to Fit‖ program that combines walking and running. One may be able to buy the same pair of shoes for a lower price at Academy, but at TrackShack you may also get better running advice and conection to a community of runners.

3.

Suggest a fourth strategy that small retailers can employ to compete against big-box stores.

Answer: Customization and speed of delivery can be a fourth strategy for small retailers to compete against big-box stores. Students should be encouraged to visit

the TrackShack website (or store, if they live in the Orlando area) to see what else the store can do to compete better.

4.

Identify a locally owned business in the city or community in which you live. Describe how the business is competing against big-box stores.

Answer: This is a good question for an individual or a group assignment.

Partnering for Success Two Examples of Successful Co-Branding Partnerships 1.

Make a list of the potential pluses and minuses of the co-branding relationship between GoPro and Red Bull.

Indicate whether you believe the potential pluses outweigh the potential minuses. Explain your answer.

Answer: This is a good question for an individual or a group assignment.

Positives of the Red Bull/GoPro co-branding relationship include: 

 

The companies benefit from the brand appeal of each other. People who come into one of the cobranded events sponsored by Red Bull may get to use a GoPro camera for the first time and vice versa (when one is alerted of a Red Bull event when buying a GoPro camera).

The two companies sell complementary products.

The co-branded products have an important source of differentiation in that they both promote an active lifestyle.

A negative of the Red Bull/GoPro co-branded relationship is: 

If a customer patronizes a Red Bull event and has a bad experience with a GoPro, the customer may also associate the bad experience with Red Bull.

It is likely that the three pluses outweigh the one minus if the co-branding is carefully managed.

2.

To what degree do you believe brand management is more difficult in a co-branding relationship?

Answer: Brand management is a practice that companies employ to protect the image and value of their brand.

It‘s harder in a co-branded setting. As mentioned above, if someone comes to a Red Bull co-branded event and has a bad experience with a GoPro camera, the bad experience rubs off on Red Bull and erodes Red Bull‘s brand.

3.

Do some research so you can identify and be able to discuss two additional examples of co-branding.

Describe the rationale behind each co-branding relationship you found through your research.

Answer: This is a good question for an individual or group assignment. As mentioned in the case, simply type co-branding into the Google search engine and select images, and you‘ll see many examples of co-branding relationships.

4.

Examine the ―You Be the VC 11.1‖ feature, which focuses on Barnana, a company that produces a healthy snack made out of partially dehydrated bananas. Suggest some potential co-branding relationships for Barnana.

Answer: Some suggestions include:   

An athletic footwear company such as TrackShack because the two products complement each other.

A health club chain (to augment the workout with a healthy snack) A sports league that is kid oriented – such as Little League – to promote healthy eating along with exercise.

REVIEW QUESTIONS 111.

What is a target market? Why is it important for a firm to choose its target market early in the process of launching its venture?

Answer: A target market is the limited group of individuals or businesses that a firm goes after or tries to appeal to. It is important that a firm first choose its target market and position itself within its target market because virtually all its marketing decisions hinge on these critical initial choices.

112.

Explain the importance of market segmentation. What are several ways in which markets can be segmented?

MyLab Question.

113.

How should a firm go about constructing a product attribute map?

Answer: A product attribute map, like the map shown for Curves International in the chapter, illustrates a firm‘s positioning strategy relative to its major rivals. The map is based on the two primary attributes that are the most important for a firm and its major competitors. A firm plots itself and its competitors on the map to see how it compares to its competitors. See Figure 11.2 in the chapter for an example.

114.

What is a niche market?

Answer: A niche market is a place within a market segment that represents a narrower group of customers with similar interests. Niche markets in the women‘s clothing industry include clothing for petite women and plus-sized women.

115.

What is meant by a firm‘s positioning strategy?

Answer: After selecting a target market, the firm‘s next step is to establish a ―position‖ within the market that differentiates it from its competitors. A firm‘s position is concerned with how it is situated relative to its competitors. A firm‘s position is the part of the market or the segment of the market it is claiming as its own.

116.

What is a tagline? What is your favorite tagline?

Why? Answer: A tagline is a phrase that is used consistently in a company‘s literature and promotional material. An example of a tagline is Nike‘s familiar tagline, ―Just do it.‖ Students should be asked to talk about their favorite taglines with reasons as to why a specific one is their favorite.

117.

What is a brand? Provide an example of a brand that you buy frequently and describe the mental image that pops into your mind when you hear or see the brand‘s name.

Answer: A brand is the set of attributes—positive or negative—that people associate with a company. These attributes can be positive (such as trustworthy, innovative, or easy to deal with) or negative (such as cheap, unreliable, or difficult to deal with).

Good brands to promote a class discussion could be: FitBit, Chipotle Mexican Grill, and BMW.

118.

What is the purpose of brand management?

MyLab Question.

119.

What is meant by creating ―buzz‖ for a company?

Provide an example of a firm that has created effective buzz for its product or service.

Answer: Creating buzz means creating awareness and a sense of anticipation about a company and its offerings. The firms in the ―Savvy Entrepreneurial Firm‖ feature in this chapter have created effective buzz for their products and services.

1110.

What is meant by the term brand equity?

Answer: Brand equity is the term that denotes the set of assets and liabilities that are linked to a brand and enable it to raise a firm‘s valuation.

1111.

What are the four elements of a firm‘s ―marketing mix‖ ?

Answer: See below:    

Product—is the good or service that a firm offers to its target market.

Price—is the amount of money a firm charges its customers for its product or service.

Promotion—refers to the activities a firm takes to communicate the merits of its product to its target market.

Place (or distribution)—encompasses all the activities that move a firm‘s product from its place of origin to the consumer.

1112.

Describe the difference between a core product and an actual product.

Answer: The core product is the product itself, such as a CD that contains an antivirus program. The actual product, which is what the customer buys, may have as many as five characteristics: a quality level, features, design, a brand name, and packaging.

When first introducing a product to the market, an entrepreneur needs to make sure that more than the core product is right. Attention also needs to be paid to the actual product that constitutes the collection of benefits that the customer ultimately buys.

1113.

What is a reference account? How can having a reference account help a new firm?

Answer: A reference account is an early user of a firm‘s product who is willing to give a testimonial regarding his or her experience with the product.

1114.

Contrast cost-based pricing and value-based pricing.

Answer: In cost-based pricing, the list price is determined by adding a markup percentage to a product‘s cost. The markup percentage may be standard for the industry or may be arbitrarily determined by the entrepreneur. In value-based pricing, the list price is determined by estimating what consumers are willing to pay for a product and then backing off a bit to provide a cushion. What a consumer is willing to pay is determined by his or her perceived value of the product and by the number of choices available in the marketplace.

1115.

What is meant by the phrase ―price-quality attribution‖ ? How does an understanding of thisphrase help an entrepreneur know how to price aproduct?

Answer: The concept of price-quality attribution means that consumers naturally assume that the higher-priced product is also the better-quality product. What this concept helps an entrepreneur realize is that if a firm charges a low price for its products, it sends a signal to its customers that the product is low quality regardless of whether it really is.

1116.

What is meant by the term guerrilla marketing?

Provide an example of guerrilla marketing not provided in the chapter.

Answer: Guerrilla marketing is a low-budget approach to marketing that relies on ingenuity, cleverness, and surprise rather than traditional techniques. A company that uses Street Art to promote its product or service is an example of guerrilla marketing.

1117.

Contrast the roles of advertising and public relations in promoting a firm and its products.

Answer: Advertising is making people aware of a product or service in hopes of persuading them to buy it. It is something that a company pays for—such as a newspaper ad, a television ad, or a billboard. Public relations refer to efforts to establish and maintain a company‘s image with the public. A firm doesn‘t pay for public relations—at least directly (i.e., a firm may employ an individual to manage its public relationship, so that an individual‘s salary would represent an indirect cost). Examples of public relations initiatives are press releases, news conferences, and media coverage.

1118.

What is the purpose of writing a blog and establishing a presence on Facebook and Twitter?

Answer: The idea behind blogs is that they familiarize people with a business and help build an emotional bond between a business and its customers.

Many start-ups also benefit from establishing a presence on social networking sites such as Facebook and Twitter. Facebook‘s numbers are huge, which makes it particularly attractive. Businesses establish a presence on Facebook and Twitter to build a community around their products and services and to promote sales.

1119.

Contrast the advantages of selling direct versus the advantages of selling through an intermediary.

Answer: The advantage of selling direct is being able to control the process of moving a firm‘s products from their place of origin to the end user instead of relying on third parties. The disadvantage of selling

direct is that a firm has more of its capital tied up in fixed assets because it must own or rent retail outlets or must field a sales force to sell its products. It must also find buyers rather than have distributors that are constantly looking for new outlets for the firm‘s products.

In contrast, an advantage of selling through intermediaries is that the firm does not need to own as much of the distribution channel. For example, a firm can sell its products through an established retailer such as Walmart or Best Buy. It can also rely on its wholesalers to manage its relationships with its retailers. The disadvantage of selling through intermediaries is that a firm loses control of its product. There is no guarantee that Walmart or Best Buy will talk up the firm‘s product as much as the manufacturer would if it had its own stores.

1120

What is the purpose of having an organized sales process?

Answer: Following a formal or structured process to generate and close sales benefits a firm in two ways.

First, it enables a firm to fine-tune its approach to sales and build uniformity into the process. Second, it helps a firm qualify leads, so the firm can spend its time and money pursuing the most likely buyers of its products or services.

APPLICATION QUESTIONS 1121.

Reread the Opening Profile. After doing this, make a list of all the things that you think that Andrew Pohle, Jake Schaufeld, and Jordan Levy have done well in building an effective marketing program for Real Time Cases.

Answer: The following is a list of the things that the three entrepreneurs did right (and are still doing right) in building Real Time Cases‘ marketing program:  

They used various forms of guerilla marketing.

They got the support of educators by going to conferences to interact with them. Since educators are the ones making the adoption decision (which cases to be used), they went to the decision makers.

     1122.

They used press releases to talk constantly about their product.

To gain visibility, they attended every start-up and pitch competition.

They used their personal network to contact professors to tell them about their product.

They built a professional website that was both informative and easy to navigate.

They worked hard to establish their brand.

If you decided to start a small-business consulting service in Columbus, OH, how would you approach the following topics: market segmentation, selecting a target market, and developing a positioning strategy?

Answer: The following is one approach for answering this question. 





Market segmentation: The market for small business consulting services can be segmented in a number of ways, including product type, price point, and customers served. I would segment the market by product type (or industry type in this case).

There would be three segments: technology firm, consumer or retail firm, and non-high-tech manufacturing firm.

Target market. Once the market has been segmented, the next step is to select a target market. By focusing on a clearly defined target market, a firm can become an expert in that market and then be able to provide its customers with high levels of value and service. I would select technology firms as my target market.

Positioning strategy. After selecting a target market, the firm‘s next step is to establish a ―position‖ within it that differentiates it from its competitors. In a sense, a position is the part of a market or of a segment the firm is claiming for its own. The position I would select is to be the consulting firm that helps small technology firms plan their advertising and public relations strategies.

Point out to your students that the value of going through this process is that it helps a firm (1) clearly define itself in the marketplace and (2) develop core competencies that are consistent with its position.

1123.

Imagine you‘re opening a tutoring service near the campus of the college or university you attend. What would be the characteristics of a comprehensive social media strategy that you can employ to build your brand, engage customers, and generate leads and sales revenue?

Answer: This is a good question for an individual or group assignment. The strategy should include both blogs and social media platforms, such as Facebook and Twitter. It should also include how to use social media platforms such as Facebook and Twitter. For example, the use of social plugins can be very effective for online retailer companies.

1124.

Spend some time looking at Red Bull‘s website (www.redbull.com). Comment on each element of Red Bull‘s marketing mix (product, price, promotion, and place in terms of distribution and sales). If you need additional information, conduct Internet or library research to obtain it. On a scale of 1 to 10 (10 is high), what rating would you use to assess the strength of Red Bull‘s overall marketing plan? What evidence would you provide to support your rating?

Answer: Most students will be very impressed with Red Bull‘s marketing mix and will have plenty to say about each element. In terms of product, Red Bull does not have a complicated line of products. In terms of price, the company clearly pursues valuebased pricing, which most students will see as appropriate. In terms of promotion, Red Bull is exemplary in its efforts. It utilizes a number of innovative marketing techniques and sponsorships, as illustrated on the Web site. In terms of distribution, Red Bull has done a good job getting shelf space for its products in specialty stores as well as mainstream convenience and grocery stores. As far as the scoring goes, doing additional research on Red Bull‘s 4 Ps would be a good topic for a student team presentation.

1125.

Shannon Garza has developed a new type of space heater that is quieter and safer than previous generations of space heaters and is specifically geared to people who live in small spaces, such as apartments or dorm rooms. Shannon doesn‘t know how to price this product. Describe to Shannon the two most common methods of pricing as explained in this chapter. Which of these pricing methods would you

suggest Shannon use, and why?

Answer: Shannon has two choices. 

In cost-based pricing, the list price is determined by adding a markup percentage to a product‘s cost. The markup percentage may be standard for the industry or may be arbitrarily determined by the entrepreneur.  In value-based pricing, the list price is determined by estimating what consumers are willing to pay for a product and then backing off a bit to provide a cushion.

Given that the product is new in that it provides a new benefit, Shannon should use value pricing.

1126.

Read the ―You Be the VC 11.2‖ feature that deals with Eatsa. What actions would you suggest that this firm take to develop a guerilla marketing campaign?

Answer: Eatsa can do a number of things by way of guerilla marketing. Given that they are a techenabled restaurant chain, it is likely that they have an identifiable target market of people who are comfortable with technology AND who want to eat healthy. A robust social media-driven marketing strategy is probably the best and most cost effective way to reach this market.

1127.

KaZAM, the company producing a bike that teaches kids how to ride without training wheels in a safe, enjoyable, and confidence-building manner, is the subject firm described in the ―You Be the VC 9.2‖ feature (from Chapter 9). Reread that feature. What types of public relations activities, from among those considered in this chapter, would you recommend this company undertake to successfully promote the firm?

Answer: This is a good question for an individual or group assignment. Examples include:     

Press release Media coverage Articles in local press and periodicals Articles in industry press and periodicals Monthly newsletter to customers and potential

customers YOU BE THE VC 11.1 Company: Barnana (www.barnana.com) Business Idea: Produce a healthy snack that consists of bite-sized morsels of partially dehydrated bananas, which are easy to carry and are potassium-rich.

You Be the VC Scorecard Barnana (www.barnana.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

Barnana was founded by Caue Suplicy, Nik Ingersoll and Matt Clifford.

Suplicy is a former professional triathlete and founder of Suplicy Bicycles. Ingersoll is the former CIO and co-founder of Canday Lab, an interactive marketing firm. Clifford is the former executive of Pinance for BUMP Network, a venture-backed enterprise software firm.

Barnana has an active four-member board of directors. Notable participants include Patrick Finn, Managing Partner at Finn Capital Partners and Jeffrey Campbell, former SVP of Brand Development at PepsiCo and Former Chairman and CEO of Burger King.

Strength of the Opportunity

1

2

3

4

5

The opportunity is strong. Barnana has grown beyond the health food niche, and is now making its way into mainstream stores, such as Safeway and HyVee. Barnana‘s products take advantage of the societal trend toward healthier eating. It also

dovetails nicely with an increased participation nationwide in recreational activities such as running and biking.

Both of the authors of the book have tasted Barnana‘s products. They are delicious. Barnana is in the food category, so taste is important.

Strength of the Industry

1

2

3

4

5

The $35.2 billion-dollar snack food industry is expected to grow at a rate of 3.4 percent per year over the next several years, which is strong growth. The organic or ―better for you‖ portion of the industry is growing even faster.

Strength of Business Model

1

2

3

4

5

Barnana has a simple retail business model. Its products are sold in food stores, on its Web site, and via sites such as Amazon.com.

Average Score

4.00/5.00

Decision: We would fund Barnana. We like the management team, the manner in which the product has made its way into multiple retail channels, and the industry that it is in.

We also like the taste of the product. Both of the authors of the book have tasted Barnana‘s products and they are delicious. Barnana is a food product so taste is important.

The downside to Barnana is that it‘s in an increasingly crowded niche in the snack food industry. There are many choices for exercisers that want a healthy snack during a workout. For the reasons stated above, we think Barnana‘s products will rise to the top. In addition, as they become available in more places, we think Barnana‘s products will reach additional audiences. An example would be moms packing them in school lunches for their children.

YOU BE THE VC 11.2 Company: Eatsa (www.eatsa.com)

Business Idea: Create a highly-automated, fast-casual restaurant that allows customers to order a customized meal via an app and then retrieve the meal from a cubbyhole-like slot. Customers tap twice to open a door and extract their meal.

You Be the VC Scorecard Eatsa (www.eatsa.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

Eatsa was founded in 2015 by Scott Drummond and Tim Young in San Francisco.

At the time this assessment was written (October 2017), as per the website Crunchbase, the founders don‘t appear to be involved with the start-up. Instead, three new top management members are indicated.

Strength of the Opportunity

1

2

3

4

5

Unclear. As of late October 2017, the company closed all its non-San Francisco locations. It currently has only two locations. While the company‘s tag line is to change fast food forever, it is not clear if the market has responded to their differentiation feature.

Strength of the Industry

1

2

3

4

5

Hard to assess. Eatsa is part of the fast food industry which is a large industry with pockets of high growth but overall slow growth. Eatsa‘s offerings are more of a healthy kind (such as Quinoa) and so they appear to be in a niche.

Strength of Business

1

2

3

4

5

Model

Average Score

Strict retail business model. This means the company has to open retail outlets to serve their customers. If they don‘t franchise, they have to raise capital to grow their restaurant count. As indicated above, they have closed some of their existing restaurants – i.e., they have contracted rather than grown.

2.25/5.00

Decision: We will not fund this firm. Their idea of doing away with wait staff to cut down on labor costs is novel but we are not sure if it is novel enough to grow Eatsa.

Growth through company ownership seems to be a capitalintensive strategy and we don‘t think their business model is robust enough to succeed with it.

CASES Case 11.1 Nest Labs DISCUSSION QUESTIONS 1132.

Critique Nest‘s segmentation strategy, its selection of a target market, and its positioning strategy. To what degree are these elements of Nest‘s market strategy complementary and effective?

Answer: Nest had a clear segmentation strategy. Unlike traditional thermostat makers, first, they focused on the ―after‖ market – i.e., when consumers buy thermostats at retail channels, rather than go after the home builders‘ market. Within the consumer market, they were after people with a certain income level and were in a specific age category. They positioned themselves well in this market by pushing what the product does rather than emphasizing its technology.

This made Nest‘s market strategy both complementary (with respect to target market and positioning) and effective.

1133.

Describe Nest‘s brand. In what ways does Nest practice brand management?

Answer: The Nest brand stands for convenience, cost

savings, and control. They stand for taking ―unloved‖ products (such as the smoke detector) and converting them to ―loved‖ products. The company practices brand management by reiterating the message of their brand in everything they do. In addition, they promote their brand via social media to better appeal to their target market.

1134.

Identify other ―unloved‖ products in the home that Nest could convert into ―loved‖ products and continue working toward its mission of creating a more thoughtful home.

Answer: This is a good question for a team project that forces students to think creatively. They should be urged to take an inventory of their home and come up with a list of ―unloved‖ products that could be converted to ―loved‖ products.

1135.

Of the challenges facing Nest, which one do you think is the most threatening? Explain your answer.

Answer: This is a good question for an individual or group assignment. They should focus on competition and imitation.

Case 11.2 Proactiv: How Three Critical Marketing Decisions Shaped a New Venture‘s Future DISCUSSION QUESTIONS 1136.

How has Proactiv gone about establishing its brand? To what degree do you believe Proactiv is important in its customers‘ lives?

Answer: Proactiv has established a brand by providing acne sufferers a quality product to help free themselves of acne. Proactive is very important in its customers‘ lives. Most people are sensitive to their personal appearance, and acne can be an embarrassing malady. If Proactiv can help people eliminate acne, it will hold a position of high importance in their lives.

1137.

Discuss the things that Rodan and Fields learned, prior to meeting Guthy-Renker, that persuaded them that infomercials were the best way to sell Proactiv. If

Proactiv hadn‘t developed infomercials in partnership with Guthy-Renker, do you think Proactiv would be in existence today? Why were infomercials a better choice than print or media advertising for Proactiv when the company was first being introduced?

Answer: Prior to meeting the folks at Guthy-Renker, Rodan and Fields realized that infomercials might be the best way to educate people about their product. The reasons are laid out in the table in the feature. Most students will say that if Proactiv hadn‘t gone the infomercial route with Guthy-Renker, it would only be a shadow of the company it is today. Infomercials were a better choice than print or traditional media advertising for the reasons mentioned in the table.

1138.

Describe Proactiv‘s positioning strategy. To what extent did the three critical marketing decisions discussed in the case shape the evolution of Proactiv‘s positioning strategy?

Answer: Proactiv is positioned as a high-quality acne treatment product that is sold online, through a subscription service, and through upscale boutiques. It does not compete directly with low-cost acne products that can be purchased over the counter at Walgreens, Target, or similar retailers. It is positioned as an upscale product that can be acquired only through the methods described above.

1139.

What is the difference between Proactiv‘s core product and its actual product? Describe its actual product and your assessment of whether the actual product provides an attractive mix of characteristics.

Answer: The core product is the physical product that is used to treat acne. The actual product is the packaging, the way the product is sold and distributed, the ease of mind that it provides people who rely on it to rid themselves of acne, and its affiliation with celebrity endorsers. Most students will say that the actual product provides an attractive mix of characteristics.

CHAPTER 12 THE IMPORTANCE OF INTELLECTUAL PROPERTY

LEARNING OBJECTIVES 1.

2.

3.

4.

5.

6.

Define the term intellectual property and describe its importance.

Explain what a patent is and describe different types of patents.

Describe a trademark and explain the process entrepreneurs use to obtain one.

Define a copyright and identify what a copyright can protect.

Describe a trade secret and understand the common causes of trade secret disputes.

Explain what an intellectual property audit is and identify the two primary reasons entrepreneurial firms should complete this type of audit.

CHAPTER OVERVIEW This chapter focuses on the important topic of intellectual property. The chapter begins by talking about the importance of intellectual property, and discusses how to determine which intellectual property to legally protect.

The four key forms of intellectual property are then introduced, including patents, trademarks, copyright, and trade secrets.

The middle portion of the chapter focuses on patents, trademarks, copyrights, and trade secrets. A complete description of each of these forms of intellectual property is described, including how to obtain legal protection in each of these areas.

The chapter ends with a discussion of how to complete an intellectual property audit. It is important that a firm have a full awareness of the intellectual property that it owns, to make sure it is properly protected and to be able to justify its valuation in the event of an acquisition or merger.

CHAPTER OUTLINE I. The Importance of Intellectual Property A. Determining What Intellectual Property to Legally Protect B. The Four Key Forms of Intellectual Property II. Patents A. Types of Patents B. Who Can Apply for a Patent?

C. The Process of Obtaining a Patent D. Patent Infringement III. Trademarks A. The Four Types of Trademarks B. What Is Protected Under Trademark Law? C. Exclusions from Trademark Protection D. The Process of Obtaining a Trademark E. Trademark Infringement IV. Copyrights A. What Is Protected by a Copyright?

B. Exclusions from Copyright Protection C. How to Obtain a Copyright D. Copyright Infringement E. Copyright and the Internet V. Trade Secrets A. What Qualifies for Trade Secret Protection?

B. Trade Secret Disputes C. Trade Secret Protection Methods 1. Physical Measures 2. Written Agreements VI. Conducting an Intellectual Property Audit A. Why Conduct an Intellectual Property Audit?

B. The Process of Conducting an Intellectual Property Audit CHAPTER NOTES I. The Importance of Intellectual Property •

Intellectual property is any product of human intellect that is intangible but valued in the marketplace. It is called ―intellectual‖ property because it is the product of human imagination, creativity, and inventiveness.

•

Traditionally, businesses have thought of their physical assets, such as land, buildings, and equipment, as their most important assets.

Increasingly, however, a company‘s intellectual assets are the most valuable.

A. Determining What Intellectual Property to Legally Protect 1. There are two primary rules of thumb for determining whether intellectual property protection should be pursued for a particular intellectual asset. a. First, a firm should determine whether the

intellectual property in question is directly related to its competitive advantage. b. Second, a firm should determine whether the intellectual property has value in the marketplace.

B. The Four Key Forms of Intellectual Property 1. Patents, trademarks, copyrights, and trade secrets are the four key forms of intellectual property.

2. Intellectual property laws exist to encourage creativity and innovation by granting to individuals who risk their time and money in creative endeavors exclusive rights to the fruits of their labor for a period of time.

II.

Patents

•

A patent is a grant from the federal government conferring the rights to exclude others from making, selling, or using an invention for the term of the patent.

•

Patent protection has deep roots in U.S. history and is the only form of intellectual property right expressly mentioned in the original articles of the U.S. Constitution.

•

Since the first patent was granted in 1790, the U.S. Patent and Trademark Office has granted more than six million patents. There is an increasing interest in patents, as shown in Table 12.2, as advances in technology spawn new inventions.

A. Types of Patents 1. Utility Patents. Utility patents are the most common type of patent and cover what we generally think of as new inventions. Patents in this category may be granted to anyone who ―invents or discovers any new and useful improvement thereof.‖ a. There are three basic requirements for utility patents: the invention must be useful, it must be novel in relation to prior arts in the field, and it must not be obvious to a person of ordinary skill in the field.

b. The term of a utility patent is 20 years from the date of the initial application.

2. Design Patents. Design patents are the second most common type of patent and cover the invention of new, original, and ornamental designs for manufactured products. a. A design patent is good for 14 years from the grant date. b. Whereas a utility patent protects the way an invention is used and works, a design patent protects the way it looks.

3. Plant Patents. Plant patents protect new varieties of plants that can be reproduced asexually. Such plants are reproduced by grafting or crossbreeding rather than by planting seeds.

B. Who Can Apply for a Patent?

1. Only the inventor of a product can apply for a patent. If two or more people make an invention jointly, they must apply for the patent together.

2. There are notable exceptions to this rule. First, if an invention is made during the course of the inventor‘s employment, the employer typically is assigned the right to apply for the patent through an assignment of invention agreement signed by the employee as part of the employment agreement. The second exception is that the right to apply for an invention can be sold.

C. The Process of Obtaining a Patent 1. Obtaining a patent is a six-step process, as illustrated in Figure 12.3 in the textbook.

D. Patent Infringement III. Trademarks •

A trademark is any word, name, symbol, or device used to identify the source or origin of products or services and to distinguish those products or services from others.

•

As is the case with patents, trademarks have a rich history. Archaeologists have found evidence that as far back as 3,500 years ago, potters made distinctive marks on their articles of pottery to distinguish their work from others.

A. The Four Types of Trademarks 1. Trademarks include any word, name, symbol, or device used to identify and distinguish one company‘s products from another‘s. Trademarks are used in the advertising and promotion of tangible products, such as Google for software and Electronic Arts for video games.

2. Service marks are similar to ordinary trademarks, but they are used to identify the services or intangible activities of a business rather than a business‘s physical product. Service marks include Princeton Review for test prep services, eBay for online auctions, and Verizon for cell phone service.

3. Collective marks are trademarks or service marks used by the members of a cooperative, association, or other collective group. The American Bar Association and The International Franchise Association are examples of collective marks.

4. Certification marks are marks, words, names, symbols, or devices used by a person other than its owner to certify a particular quality about a product or service. An example is the Good Housekeeping Seal of Approval.

B. What Is Protected Under Trademark Law? 1. Trademark law protects the following items: a. Words b. Numbers and letters c. Designs or logos d. Sounds e. Fragrances (as long as the product is not known for its fragrance) f. Shapes g. Colors (as long as the color is not functional) h. Trade dress C. Exclusions from Trademark Protection

1. There are notable exclusions from trademark protection that are set forth in the U.S. Trademark Act: a. Immoral or scandalous material b. Deceptive matter c. Descriptive marks d. Surnames D. The Process of Obtaining a Trademark 1. As illustrated in Figure 12.4 in the textbook, selecting and registering a trademark is a threestep process.

2. Once a trademark has been used in interstate commerce, it can be registered with the U.S. Patent and Trademark Office for a renewable term of 10 years and can theoretically remain registered forever as long as the trademark stays in use.

3. There are three steps in selecting and registering a trademark: a. Select an appropriate mark. b. Perform a trademark search. c. Create rights in the trademark.

E. Trademark Infringement 

IV. •

A trademark is infringed when an unauthorized use is done in a manner to cause confusion. The key here is to prove that confusion is caused. As the text says, the name Acebook is confusingly similar to Facebook and so Facebook may legitimately object.

Copyrights A copyright is a form of intellectual property protection that grants to the owner of a work of authorship the legal right to determine how the work is used and to obtain the economic benefits from the work.

•

The work must be in tangible form, such as a book, operating manual, magazine article, musical score, or computer software program. If something is not in a tangible form, copyright law does not protect it.

•

Businesses typically possess a treasure trove of copyrightable material, as illustrated earlier in Table 12.1 in the textbook.

A. What Is Protected by a Copyright?

1. Copyright laws protect ―original works of authorship‖ that are fixed in a tangible form of expression. The primary categories of material that can be copyrighted follow: a. Literary works b. Musical compositions c. Computer software d. Dramatic works e. Pantomimes and choreographic works f. Pictorial, graphic, and sculptural works B. Exclusions from Copyright Protection 1. There are exclusions from copyright protection. The main exclusion is that copyright laws cannot protect ideas. The legal principle describing this concept is called the idea-expression dichotomy. An idea is not copyrightable, but the specific expression of an idea is.

C. How to Obtain a Copyright 1. First, copyright protection can be enhanced for anything written by attaching the copyright notice, or ―copyright bug‖ as it is sometimes called (i.e., ©).

2. Second, further protection can be obtained by registering a work with the U.S. Copyright Office.

Filing a simple form and depositing one or two samples of the work with the U.S. Copyright Office completes the registration process.

D. Copyright Infringement 1. Copyright infringement occurs when one work derives from another or is an exact copy or shows substantial similarity to the original work.

2. To prove infringement, a copyright owner is required to show that the alleged infringer had prior access to the copyrighted work and that the work is substantially similar to his or her own.

3. One of the most famous copyright infringement cases involved Napster, the company that was launched by then 18-year-old Shawn Fanning and his partner, Sean Parker.

E. Copyright and the Internet 1. Every day, vast quantities of material are posted on the Internet and can be downloaded or copied by anyone with a computer. Because this information is stored somewhere on a computer or Internet server, it is in tangible form and probably qualifies for copyright protection.

2. Copyright laws, particularly as they apply to the Internet, are sometimes difficult to follow, and it is easy for people to dismiss them as contrary to common sense. Still, entrepreneurs should guard themselves against taking too lax of an attitude regarding copyright laws and the Internet.

V. Trade Secrets •

A trade secret is any formula, pattern, physical device, idea, process, or other information that provides the owner of the information with a competitive advantage in the marketplace.

•

Trade secrets include marketing plans, product formulas, financial forecasts, employee rosters, and logs of sales calls.

•

The Federal Economic Espionage Act, passed in 1996, criminalizes the theft of trade secrets.

A. What Qualifies for Trade Secret Protection?

1. Not all information qualifies for trade secret protection. In general, information that is known to the public or that competitors can discover through legal means doesn‘t qualify for trade secret protection.

2. The general philosophy of trade secret legislation

is that the law will not protect a trade secret unless its owner protects it first.

3. Companies can maintain protection for their trade secrets if they take reasonable steps to keep the information confidential.

B. Trade Secret Disputes 1. Trade secret disputes arise most frequently when an employee leaves a firm to join a competitor and is accused of taking confidential information with him or her.

2. A company damaged by trade secret theft can initiate a civil action for damages in court. The action should be taken as soon after the discovery of the theft as possible.

C. Trade Secret Protection Methods 1. Aggressive protection of trade secrets is necessary to prevent intentional or unintentional disclosure.

2. In addition, one of the key factors in determining whether something constitutes a trade secret is the extent of the efforts to keep it secret. Companies protect trade secrets through physical measures and written agreements.

VI. •

Conducting an Intellectual Property Audit The first step a firm should take to protect its intellectual property is to complete an intellectual property audit. An intellectual property audit is completed to determine the intellectual property a company owns.

A. Why Conduct an Intellectual Property Audit?

1. There are two primary reasons for conducting an intellectual property audit. a. First, it is prudent for a company to periodically determine whether its intellectual property is being properly protected. b. The second reason for a company to conduct an intellectual property audit is to remain prepared to justify its value in the event of a merger or

acquisition. Larger companies purchase many small, entrepreneurial firms primarily because the larger company wants the small firm‘s intellectual property. The small firm should be ready to justify its valuation when a larger company comes calling.

B. The Process of Conducting an Intellectual Property Audit 1. The first step in conducting an intellectual property audit is to develop an inventory of a firm‘s existing intellectual property.

2. The second step is to identify works in progress to ensure that they are being documented in a systematic, orderly manner.

BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING What Went Wrong?

David Conquers Goliath in Three Trademark Disputes 1.

What is your reaction to each case? Were you surprised at how they turned out? Do you think each case turned out the way the trademark law intended it to?

Answer: Students will vary in their answers to this question. Most students will come down on the side of the Davids, the underdogs. A t-shirt maker goes up against a large chain, Chick-fil-A, and wins. So does a small pet food maker against a large department store chain, Saks. The trademark law comes into play to prevent confusion. ―Eat More Kale‖ is in no way going to cause confusion about eating more chicken. Students shouldn‘t be surprised at how these verdicts turned out.

2.

Which of the three smaller companies profiled – Eat More Kale, Xoom, or Snacks 5th Avenchew – do you think had the strongest case in defending the name it was using? Which company do you think had the weakest case?

Answer: While students‘ opinions may differ, one could argue that Saks Fifth Avenue is an upscale department store, while Snacks 5th Avenchew is a brand of dog treats. The two are entirely different and so is quite unlikely to cause confusion. In all likelihood, Motorola had the weakest case because their name

matches exactly with the money service Xoom.

3.

Why do you think Bo Muller-Moore was able to elicit such passion and support in his trademark dispute with Chick-fil-A? Answer: The Bo Muller-Moore case is a classic story of an individual going up against a large system. In addition, all he was doing is to simply sell t-shirts with a catchy slogan. Students should able to identify with both Muller-Moore and the product.

4.

To what degree do you think these cases should embolden small firms so they won‘t always have to give in to larger firms in intellectual property disputes if they think the law is on their side?

Answer: There are two factors at play here. First, businesses take their intellectual property seriously, so be careful to not infringe on the intellectual property of others. Second, be careful to not engage in activities that will take you away from what should be your primary focus—building a successful company. That said, small companies should not just give in when they confront large firms in such cases. As the examples in the boxed feature point out, sometimes they can prevail.

Savvy Entrepreneurial Firm Knowing the Ins and Outs of Filing a Provisional Patent Application 1.

Briefly describe the difference between a provisional patent application and a utility patent application. If successful, which of the two applications awards an inventor a patent?

Answer: A provisional patent application includes specifications (i.e., a description and drawings of an invention), but does not reqire formal claims, inventors‘ oaths or declarations, or any information disclosure statement. Its purpose is to establish a ―priority‖ filing date for an invention. A utility patent application, which is what awards an inventor a patent, includes formal claims and a host of other required information. It is assigned to a patent examiner, and a judgment is subsequently made regarding prior art and the patentability of the invention.

2.

Can a provisional patent application be filed for a

design patent? Document your research to arrive at the correct answer to this question.

Answer: No. According to the U.S. Patent and Trademark Office Web site, “Provisional applications may not be filed for design patents.”

3.

Under what circumstances would you (1) suggest to an inventor that he or she could file a provisional patent application without a patent attorney or (2) suggest to an inventor that he or she needs to hire a patent attorney to file the provisional patent application?

Answer: In most cases, it is advisable to hire an attorney to file a provisional patent application. As substantiated by the example of Amy and her new type of tennis racket, the stakes are just too high for an inventor to not hire an attorney who is acquainted with what the USPTO is looking for when filing a provisional application for a patent.

4.

Spend some time studying the USPTO official Web site, or do some Internet research on patents. Inventor‘s Digest (www.inventorsdigest.com) is another good resource for learning about patents. Discuss one fact about patents or the application process you find interesting and isn‘t included in the material in this chapter.

Answer: This is a good question for an invidiual or a group assignment.

Partnering for Success How the Maker Movement is Bringing Individual Inventors and Large Firms Together 1.

Identify the makerspace, FabLab, or TechShop that is located nearest you. Describe the equipment that is available and the program the facility offers.

Answer: This is a good assignment for a group or an individual research project. Students can go to https://www.fablab.com/ and in the ―Search for makerspaces‖ box, put in their zip code, city, or state

to find a location.

2.

Why do you think companies are increasingly open to ideas from independent inventors?

Answer: Many companies want to tap into the creative potential of independent inventors. This way, the company gains competitively from an innovation. The company can buy the invention for a one-time fee or license the product for an upfront fee and recurring royalty payments. Either way, the company gets the benefit of an innovation.

3.

Find an idea submission site for a company not mentioned in the feature. Describe how to submit an invention to the company. What appear to be the keys to getting an idea accepted by the company?

Answer: This is a good question for an individual or group assignment.

4.

In most cases, do you think inventors and entrepreneurs get a fair shake when they sell or license a product to a large company? What steps should entrepreneurs take to make sure they are getting a fair deal?

Answer: Most students will probably guess that the larger company usually has the upper hand, and they may be right. But it‘s our sense that if an entrepreneur‘s idea is compelling enough most companies will operate in good faith, particularly if the entrepreneur has an experienced attorney representing his or her interests.

There are two steps that an entrepreneur should take to make sure he or she is getting a good deal. First, hire an attorney as mentioned above. Second, check around with other investors or licensees to see what they‘re getting on a similar product.

Posting queries in the chat rooms and discussion forums of the entrepreneurship-focused social networks talked about in this book is a good place to start.

REVIEW QUESTIONS 121.

What distinguishes intellectual property from other types of property, such as land, buildings, and inventory?

MyLab Question.

122.

What are the two primary rules for determining whether intellectual property protection should be pursued for a particular intellectual asset?

Answer: There are two primary rules for determining whether intellectual property should be pursued for a particular intellectual asset:  

123.

First, an entrepreneur should determine whether the intellectual property in question is directly related to its competitive advantages.

Second, a firm should determine whether its intellectual property has value in the marketplace.

Search the USPTO database and find three patents issued to Donald E. Weder of Highland Park, Illinois.

Describe the patents. In what areas are most of Mr. Weder‘s patents?

Answer: By typing in the name Donald E. Weder on the USPTO Web site, you can see patents awarded to Mr. Weder. All of his patents have something to do with flowers. A more user-friendly patent search engine is provided by Google at http://www.google.com/patents.

124.

What are the major differences between utility patents and design patents? Provide an example of each.

Answer: A utility patent is the most common type of patent covering what we generally think of as new inventions that must be useful, must be novel in relation to prior arts in the field, and must not be obvious to a person of ordinary skill in the field.

In contrast, a design patent covers the invention of new, original, and ornamental designs for manufactured products. In short, a utility patent covers what something does, whereas a design patent covers how it looks.

125.

What is a business method patent? Provide an example of a business method patent. How can having such a patent provide a firm a competitive advantage in the marketplace?

Answer: A business method patent protects an invention that is or facilitates a method of doing business. An example of a business method patent is Amazon.com‘s one-click ordering system. Amazon‘s one-

click ordering system provides it a competitive advantage in the marketplace because it allows Amazon‘s Web site to ―check customers out‖ in a slightly more intuitive and simpler manner than competing Web sites.

126.

Give an example of a design patent. How can having a design patent provide a firm a competitive advantage in the marketplace?

Answer: The distinctive look of Apple Computer‘s iMac computer is protected by a design patent. The distinctive look of the iMac provides it a quality that is very attractive to some buyers. As a result, the distinctive look, which is protected by a design patent, gives the iMac a competitive advantage in the marketplace.

127.

What is the purpose of an assignment of invention agreement? Is it a good idea for firms to ask their employees to sign assignment of invention agreements?

Answer: An assignment of invention agreement is a document signed by an employee as part of the employment agreement that assigns the employer the right to apply for the patent of an invention made by the employee during the course of his or her employment. It is an excellent idea for firms to ask their employees to sign assignment of invention agreements. The agreement allows a firm to capture the intellectual property that is created by employees while they are on their jobs.

128.

What are the six steps in applying for a patent?

Answer: The six steps to apply for a patent are as follows:      

129.

Step 1: Make sure the invention is practical.

Step 2: Determine the type of application to file.

Step 3: Hire a patent attorney.

Step 4: Conduct a patent search.

Step 5: File a patent application.

Step 6: Obtain a decision from the U.S. Patent and Trademark Office.

What is a trademark? How can a trademark help a firm establish a competitive advantage in the marketplace?

Answer: A trademark is any word, name, symbol, or device used to identify the source or origin of products or services and to distinguish those products or services from others. An example of a trademark is GAP. Consumers know what to expect when they see a GAP store in a mall, which is an advantage of GAP (the trademark draws people into the store).

Think of how confusing it would be, and how little good it would do GAP to spend money building its trademark, if any retail store could use the name GAP. 1210.

What are the three steps involved in selecting and registering a trademark?

Answer: The steps involved in selecting and registering a trademark are as follows:   

1211.

Select an appropriate mark.

Perform a trademark search.

Create rights in the trademark.

What is meant by the term trade dress?

Answer: The manner in which a product is ―dressed up‖ to appeal to customers is protectable. This category includes the overall packaging, design, and configuration of a product. As a result, the overall look of a business is protected as its trade dress.

1212.

What is a copyright?

Answer: A copyright is a form of intellectual property protection that grants to the owner of a work of authorship the legal right to determine how the work is used and to obtain the economic benefits from the work.

1213.

In the context of copyright law, what is meant by the term derivative work?

Answer: Derivative works are works that are new renditions of something that is already copyrighted.

As a result of the derivative work provision, a musician who performs a unique rendition of a song written and copyrighted by Metallica can obtain a copyright on his or her efforts. Of course, Metallica would have to consent to the infringement on its copyright of the original song before the new song

could be used commercially, which is a common way that composers and musicians earn extra income.

1214.

If an entrepreneur has an idea for a themed restaurant based on television game shows, is the idea itself eligible for copyright protection? Why or why not?

MyLab Question.

1215.

What is a copyright bug? Where would one expect to find the bug, and how is it used?

Answer: Copyright protection can be enhanced for anything written by attaching the copyright notice, or ―copyright bug‖ as it is sometimes called. The bug—the letter ―c‖ inside a circle—typically appears in the following form: © [first year of publication][author or copyright owner].

1216.

What is meant by the phrase copyright infringement?

Would you characterize copyright infringement as a minor or as a major problem in the United States and in other countries? Explain.

Answer: Copyright infringement occurs when one work derives from another or is an exact copy or shows substantial similarity to the original work. In most sectors, copyright infringement is not a major problem in the United States. Book and magazine publishers, for example, don‘t have a lot of problems with people trying to infringe on the copyright of their work. Copyright infringement is a major problem for works placed in digital form (particularly music files), because they can be illegally copied and disseminated via the Internet.

1217.

What is a trade secret? Provide an example of a trade secret. How might the trade secret you identified help a firm establish a competitive advantage in the marketplace?

Answer: A trade secret is any formula, pattern, physical device, idea, process, or other information

that provides the owner of the information with a competitive advantage in the marketplace. Trade secrets include marketing plans, product formulas, financial forecasts, and employee rosters. There are many trade secrets that can provide a firm a competitive advantage in the marketplace. For example, if a firm has a well-developed prospect list for its product or service, that list could provide the firm a competitive advantage.

1218.

What information does not qualify for trade secret protection? Make your answer as thorough as possible.

Answer: In general, information that is known to the public or that competitors can discover through legal means doesn‘t qualify for trade secret protection.

Similarly, if a secret is disclosed by mistake (or through carelessness on the part of a firm), it typically loses its trade secret status.

1219.

What types of physical measures do firms take to protect their trade secrets?

Answer: The following are examples of commonly used physical measures for protecting trade secrets:      

1220.

Restricting access Labeling documents (confidential, proprietary, secret) Password protecting confidential files Maintaining logbooks for visitors Maintaining logbooks for access to sensitive material Maintaining adequate overall security measures

What are the two primary purposes of conducting an intellectual property audit? What risks does a company run if it doesn‘t periodically conduct an intellectual property audit?

Answer: First, it is prudent for a company to periodically determine whether its intellectual property is being properly protected. Second, it is important that a firm have a good handle on the intellectual property it owns, to justify its value in the event of an acquisition or a merger. The risk of not conducting an intellectual property audit is that if the firm doesn‘t know what it owns, it cannot

take adequate safeguards to protect what it owns.

APPLICATION QUESTIONS 1221.

Imagine you are about to attend a one-day seminar dealing with intellectual property law, and you contact a friend of yours who is in the process of starting a business to urge her to attend the seminar with you. She says to you, ―I‘m really busy because I‘m just about to launch my start-up, so I‘ll have to pass. If they offer the same seminar next year, I‘ll go with you then.‖ How would you respond to your friend?

Answer: You should tell your friend that if she‘s about to launch her firm, it‘s important that she attend the seminar this year. According to the chapter, a patent will not be issued (by the U.S. Patent & Trademark Office) if an invention has been described in any printed publication anywhere in the world or was in public use or offered for sale anywhere in the United States for more than one year prior to the time an application for a U.S. patent is filed. As a result, if in the process of launching her business, your friend reveals something that is patentable, the one-year clock will start ticking. If she attends the seminar ―next year,‖ and doesn‘t get any help in the intervening period, it will be too late to file a patent application.

1222.

Access the USPTO Web site and look up U.S. Patent Number 5,433,036. Describe the purpose of the patent.

Do you think this patent describes an invention that has commercial potential? On a scale of 1 to 10 (10 is high), how significant do you think the potential is?

Answer: The title of U.S. Patent Number 5,443,036 is ―Method of Exercising a Cat.‖ The abstract for the patent reads as follows: ―A method for inducing cats to exercise consists of directing a beam of invisible light produced by a hand-held laser apparatus onto the floor or wall or other opaque surface in the vicinity of the cat, then moving the laser so as to cause the bright pattern of light to move in an irregular way fascinating to cats, and to any other animal with a chase instinct.‖ Most students will say

that the commercial potential for this invention is rather small, and will rate it toward the bottom of the 1–10 scale.

1223.

Tyler Simms just invented a new product that he is convinced is unique and will make him wealthy. The product is a toothbrush with a tube of toothpaste attached to the handle. Tyler is anxious to file a patent application on the product, but when he tells you about the idea, you say—―Whoa, let‘s do a preliminary patent application search first to see if someone else has already patented this idea.‖ What do you find when you help Tyler with the preliminary search?

Answer: As it turns out, the idea of creating a toothbrush with a tube of toothpaste attached has been thought of many times, and there are a number of existing patents that cover different versions of the idea. An example is United States Patent 6,895,976.

Another is United States Patent 6,390,103. The later patent can be easily found in the following manner:    

1224.

Go to the U.S. Patent and Trademark Web site at www.uspto.gov.

Select Patents and click on Advanced Search.

Type in the query box, using quotation marks, ―toothbrush toothpaste.‖ One of the results is U.S. Patent 6,390,103 titled ―Toothpaste Dispensing Toothbrush Having Floss Dispenser.‖

According to the chapter, a trademark registered with the USPTO can theoretically remain registered forever as long as it stays in use. Does the owner of a trademark have to take affirmative action to demonstrate to the USPTO office that a trademark is remaining in use? If so, what is the process that must be followed?

Answer: If a trademark is registered, it needs to be renewed (via the USPTO Web site) every 10 years, and can be renewed indefinitely as long as the trademark remains in use. The USPTO will not remind you of when it‘s time to renew. It is the responsibility of the owner of the trademark to meet the renewal deadlines.

1225.

Pam Tarver just opened an information technology consulting company and has thought for a long time

about what to name it. She finally settled on the fictitious name Infoxx. Search the USPTO database to determine if the name Infoxx is available. Is it? If it is available, describe how Pam would go about obtaining a trademark on Infoxx or any other name.

Answer: Infoxx appears to be available (as of October 2017). A search can be completed via the USPTO Web site (www.uspto.gov) by following the instructions under the Trademark tab on the Web site.

1226.

Ken and Jackie Smith just purchased a small winery in the Napa Valley of northern California. One thing they noticed when they were investigating the winery is that the owners never placed the ―100% Napa Valley‖ certification mark on their bottles. Now that they own the winery Ken and Jackie are looking into using the mark. Investigate what is required to place the ―100% Napa Valley‖ certification mark on a bottle of wine. If Ken and Jackie‘s winery qualifies, should they use the mark?

Answer: The mark can only be placed on a wine label if a full hundred percent of the wine contained is actually made from wine grapes produced and bottled in the Napa Valley. It‘s a voluntary add-on that‘s placed on the bottle by the winery. Ken and Jackie should use the mark, if they qualify, because it helps protect their brand (as being genuine Napa Valley) and provides a simple tool for consumers to quickly discern the origin of the wine in the bottle.

Applications to use the Napa Valley certification mark are made through Napa Valley Vinters (www.napavintners.com), a Napa Valley trade group.

YOU BE THE VC 12.1 Company: Flatiron School (www.flatironschool.com) Business Idea: Launch an elite programming school that teaches people to code in an accelerated period of time and helps them find good-paying jobs as developers.

You Be the VC Scorecard Flatiron School (www.flatironschool.com) Item

Score/Comments

Strength of NewVenture Team

Strength of the Opportunity

1

2

3

4

5

In 2012, Adam Enbar and Avi Flombaum cofounded Flatiron School. Since then, though, it appears (from Crunchbase) that there are four people who are currently on the top management team: Aditi Patil, Joan Soskin, David Gabeau, and Ruth Mesfun, each of whom has a background in either tech or media. The background of these four suggests that the team is quite strong.

1 2 3 4 5 The opportunity is larger than we would have imagined. Coding has become a vital job skill and Flatiron School‘s 12-week approach shortens the time off for a student. In addition, placing students at jobs of around $75,000 a year is a compelling value proposition.

Strength of the Industry

1

2

3

4

5

The industry here is the traditional university or community college system where a student can learn to program. This means the industry is large and Flatiron School is trying to disrupt the traditional education industry.

Strength of Business Model

1

2

3

4

5

With a 6 percent acceptance rate, clearly Flatiron School‘s value proposition is quite attractive. How scalable the business is remains to be seen. We don‘t know how well the web-based instruction model is working.

Average Score

3.5/5.0

Decision: While Flatiron School has a compelling value proposition and a great opportunity, we would not fund it

because we are not quite sure if they have a scalable model. It is one thing to offer intensive coding classes to an arguably small group of students in one location, but we don‘t know how well this can be scaled up or replicated.

Also, if they do scale up, can they continue to offer placement to their graduates?

YOU BE THE VC 12.2 Company: Kolibree (www.kolibree.com) Business Idea: Develop a smart toothbrush that can tell users if they are brushing well. Accompany the toothbrush with smartphone games in which good brushing is rewarded with high scores in the games.

You Be the VC Scorecard Kolibree (www.kolibree.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

Kolibree is a European start-up. It was co-founded by Matthieu Delporte and Thomas Serval. Both co-founders have entrepreneurial experience prior to launching Kolibree. They currently form the top management team.

Strength of the Opportunity

1

2

3

4

5

The opportunity is sizable. Dental hygiene is an important aspect of one‘s lifestyle and the children‘s market is even more promising.

Kolibree uses smartphone technology to make brushing teeth into a fun and effective activity.

Strength of the Industry

1

2

3

4

5

Consistent with the information provided above, this is an app-based

Strength of Business Model

hygiene device. There is a downside, however. The app market is crowded.

As a result, it‘s hard for a new app to get noticed, even if the app is connected to a device.

1 2 3 4 5 Kolibree‘s kid toothbrush sells at $149 on Amazon and so it is a premium priced product. It appears to be a traditional retail business, in that, the company reaches end users via retail stores and online stores.

Average Score

3.5/5.0

Decision: We would not fund Kolibree at this time, but are interested in following the firm and may become interested in offering funding at a later date. Kolibree is unproven at this point, so friends and family financing is appropriate. As it proves its concept, more traditional investors will become interested (or will not become interested, depending on how things go). We like the value proposition of combining effectiveness with fun. The question is whether the value proposition is adequate to justify the premium price.

CASES Case 12.1 GoldieBlox vs. Beastie Boys: The Type of Fight That No Start-Up Wants to Be a Part of DISCUSSION QUESTIONS 1231.

If the case hadn‘t been settled by GoldieBlox and the Beastie Boys and you had been asked to render a judgment in the case, would you have rendered a judgment in favor of GoldieBlox or the Beastie Boys?

Explain your decision.

Answer: Students will vary in their answers to this question. Most students will come down on the side of the Beastie Boys. If one watches the video that GoldieBlox produced (see instructions for finding the video on YouTube contained in the case), it‘s hard to accept GoldieBlox‘s argument that the video does not infringe on the Beastie Boys copyright for the song ―Girls‖ under the principal of fair use.

1232.

Briefly comment on how both sides handled the dispute.

Answer: Most students will say that both sides were civil and professional, although in retrospect GoldieBlox may regret having sued the Beastie Boys when the Beastie Boys first indicated that they were upset by GoldieBlox‘s adaptation of their song. Both sides were conciliatory when the dispute seemed to be coming to a head. The majority of students will say that the right argument prevailed—that GoldieBlox violated the Beastie Boys copyright on the song ―Girls.‖ Both sides seemed to accept the outcome andhave moved on.

1233.

What do we learn about fair use from the GoldieBlox– Beastie Boys dispute?

Answer: We learn that fair use has limits. The challenge is that what type of use of another person‘s or business‘s copyright is within the limits and what is not is a judgment call. Most people who watch GoldieBlox‘s rendition of ―Girls,‖ however, will say that it‘s clearly outside the intent of fair use.

1234.

What do we learn about the process of launching and growing a firm, in general, from the GoldieBlox– Beastie Boys dispute?

Answer: We learn two things. First, the businesses take their intellectual property seriously, so be careful to not infringe on the intellectual property of others. GoldieBlox tread upon the intellectual property of the Beastie Boys, and it cost them dearly in terms of time, money, and reputation. Second, be careful to not engage in activities that will take you away from what should be your primary focus—building a successful company. All the time that GoldieBlox devoted to the Beastie Boys dispute could have been spent improving their product, building their brand, servicing customers, and so on.

Case 12.2 You Make the Call: Can a Company Patent How It Makes a Peanut Butter and Jelly Sandwich?

DISCUSSION QUESTIONS 1235.

Go to the U.S. Patent & Trademark Office‘s Web site (www.uspto.gov) and look up Patent No. 6,004,596. Read the patent. After reading the patent are you more inclined or less inclined to side with the Smucker‘s

point of view?

Answer: After reading the patent, students will probably be divided on this issue. On the one hand, the description contained in the patent sounds just like the Uncrustable, so one has to at least give Smucker‘s that. On the other hand, it just doesn‘t make intuitive sense that someone could patent any version of a basic peanut and butter and jelly sandwich. This debate can lead to lively classroom discussion.

1236.

Type ―Uncrustables‖ into the Google search engine and look at the Uncrustables sandwich. Spend a little time reading about the Uncrustables on Smucker‘s Web site.

Again, after looking over the Web site, are you more inclined or less inclined to side with the Smucker‘s point of view?

Answer: Again, students will be divided on this issue.

1237.

In regard to the arguments espoused by the ―critics‖ of the U.S. patent system and the ―advocates‖ of the U.S. patent system, with which of the points of view do you agree? Thinking as an entrepreneur, use your own words to state why you think the critics or the advocates have a stronger point of view.

Answer: There are good arguments on both sides of this issue, as illustrated in the ―Broader Issues Involved‖ section of the case. Again, this issue can lead to lively classroom debate.

1238.

After using a search engine to discover how the court ruled, why do you think the court ruled as it did? Use materials in the chapter to explain and justify your thinking.

Answer: Smucker‘s didn‘t get its patent. The U.S. Court of Appeals upheld the lower court‘s ruling without providing a comment. The lower court had ruled that Smucker‘s could not patent its Uncrustables because the crimped edges are similar to a ravioli or pie crust. Students should be encouraged to use this verdict to find out why the court ruled the way it did.

CHAPTER 13 PREPARING FOR AND EVALUATING THE CHALLENGES OF GROWTH LEARNING OBJECTIVES 1.

2.

3.

4.

Describe how firms can properly prepare for growth.

Discuss the six most common reasons firms pursue growth.

Explain the importance of being able to manage the stages of growth.

Describe the challenges of firm growth, particularly those of adverse selection and moral hazard.

CHAPTER OVERVIEW This chapter focuses on the important topic of preparing for and evaluating the challenges of growth. It is the first of two chapters that focus on firm growth. The chapter begins with a section focused on preparing for growth, and includes sections on appreciating the nature of business growth, staying committed to a core strategy, and planning for growth. The chapter then focuses on the reasons for growth. The chapter transitions to a section on managing growth. The chapter ends with a discussion on challenges of growth, including a discussion of the managerial capacity problem and the day-to-day challenges of growing a firm.

CHAPTER OUTLINE I. Preparing for Growth A. Appreciating the Nature of Business Growth 1. Not All Businesses Have the Potential to Be Aggressive Growth Firms 2. A Business Can Grow Too Fast 3. Business Success Doesn‘t Always Scale B. Staying Committed to a Core Strategy C. Planning for Growth II. Reasons for Growth A. Capturing Economies of Scale B. Capturing Economies of Scope C. Market Leadership D. Influence, Power, and Survivability E. Need to Accommodate the Growth of Key Customers F. Ability to Attract and Retain Talented Employees III. Managing Growth A. Knowing and Managing the Stages of Growth

1. Introduction Stage 2. Early Growth Stage 3. Continuous Growth Stage 4. Maturity Stage 5. Decline Stage IV. Challenges of Growth A. Managerial Capacity B. Day-to-Day Challenges of Growing a Firm 1. Cash Flow Management 2. Price Stability 3. Quality Control 4. Capital Constraints CHAPTER NOTES I. Preparing for Growth •

Sustained growth is defined as growth in both revenues and profits over an extended period of time. Evidence shows that relatively few firms generate sustained growth.

•

Despite these numbers, most firms try to grow and see it as an important part of their ability to remain successful.

A. Appreciating the Nature of Business Growth 1. Not all businesses have the potential to be aggressive growth firms. a. The businesses that have the potential to grow the fastest over a sustained period of time are ones that solve significant problems or have a major impact on their customers‘ productivity or lives.

2. A business can grow too fast. a. Many businesses start fast and never let up, which stresses a business financially and can leave its owners emotionally drained.

3. Business success doesn‘t always scale. a. Unfortunately, the very thing that makes a business successful might suffer as the result of growth.

B. Staying Committed to a Core Strategy C. Planning for Growth II. Reasons for Growth A. Capturing Economies of Scale 1. Economies of scale are generated when increasing production lowers the average cost of each unit produced.

B. Capturing Economies of Scope 1. Economies of scope are similar to economies of scale, except the advantage comes through the scope (or range) of a firm‘s operations rather than from its scale of production.

C. Market Leadership 1. Market leadership occurs when a firm holds the number one or the number two position in an industry or niche market in terms of sales volume.

2. Many firms work hard to achieve market leadership, to realize economies of scale and economies of scope, and to be recognized as the brand leader.

D. Influence, Power, and Survivability 1. Larger businesses usually have more influence and power than smaller firms in regard to setting standards for an industry, getting ―a foot in the door‖ with major customers and suppliers, and garnering prestige.

E. Need to Accommodate the Growth of Key Customers 1. Sometimes firms are compelled to grow to accommodate the growth of a key customer.

F. Ability to Attract and Retain Talented Employees 1. It is natural for talented employees to want to work for a firm that can offer opportunities for promotion, higher salaries, and increased levels of responsibility.

2. Growth is a firm‘s primary mechanism to generate promotional opportunities for employees.

III. Managing Growth A. Knowing and Managing the Stages of Growth 1. Introduction Stage—This is the start-up phase where a business determines what its core strengths and capabilities are and starts selling its initial product or service. It‘s a very ―hands on‖ stage for the founder or founders.

2. Early Growth Stage—A business‘s early growth stage is generally characterized by increasing sales and heightened complexity. For a business to be successful in this stage, the founder must start transitioning from his or her role as the hands-on supervisor of every aspect of the business to a more managerial role, and increased formalization must take place.

3. Continuous Growth Stage—As a business moves beyond its early growth stage and its pace of growth accelerates, the need for structure and formalization increases. The toughest decisions are typically made in the continuous growth stage. One tough decision is whether the owner of the business and the current management team have the experience and ability to take the firm any further.

4. Maturity Stage—A firm enters the maturity stage when its growth slows. At this point, the firm typically focuses more intently on efficiently managing the products and services it has rather than expanding in new areas.

5. Decline Stage—It is not inevitable that a business enter the decline stage and deteriorate or die. Many American businesses have long histories and have thrived by adapting to environmental change and by selling products that remain important to customers.

IV.

Challenges of Growth

A. Managerial Capacity 1. Managerial Capacity Problem. Problem that arises when the growth of a firm is limited by the managerial capacity (i.e., personnel, expertise, and intellectual resources) that a firm has available to implement new business ideas.

2. The firm‘s administrative framework consists of two kinds of services that are important to a firm‘s growth—entrepreneurial services and managerial services.

3. Entrepreneurial services generate new market, product, and service ideas, whereas managerial services administer the routine functions of the firm and facilitate the profitable execution of new opportunities.

4. When a firm‘s managerial resources are insufficient to take advantage of its new product and service opportunities, the subsequent bottleneck is referred to as the managerial capacity problem.

5. As a firm grows, it is faced with the dual challenges of adverse selection and moral hazard. a. Adverse selection means that as the number of employees a firm needs increases, it becomes increasingly difficult for it to find the right employees, place them in appropriate positions, and provide adequate supervision. b. Moral hazard means that as a firm grows and adds personnel, the new hires typically do not have the same ownership incentives as the original founders, so the new hires may not be as motivated as the founders to put in long hours or may even try to avoid hard work.

B. Day-to-Day Challenges of Growing a Firm 1. Cash Flow Management. As discussed in Chapters 8 and 10, as a firm grows, it requires an increasing amount of cash to service its customers. Growth usually increases rather than decreases the challenges involved with cash flow management because an increase in sales means that more cash will be flowing into and out of the firm.

2. Price Stability. If firm growth comes at the expense of a competitor‘s market share, a price war can result.

3. Quality Control. Firm growth is typically accomplished by an increase in firm activity. This means that a firm must handle more service requests and paperwork and contend with more customers,

stakeholders, and vendors.

4. Capital Constraints. Capital constraints are an ever-present problem for growing firms.

BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING What Went Wrong?

Dishero: How Mediocre Success can Lead to Difficult Decisions 1.

If you were the owner or manager of a restaurant, would you have used Dishero‘s service? Why or why not?

Answer: This is an opinion question and so students‘ opinions may differ. It is important to consider what Dishero offers to a restaurant: photographs of menu items. In this day and age, photography is not a rare skill and most anybody can take a good photo using an error-proof device like a smartphone or a camera. What Dishero offered was a high-quality photograph. It is obvious that Dishero‘s service would appeal to only a select few restaurants. We don‘t know the price for Dishero‘s photographs; we have to be aware, though, that they are competing with a zero price alternative of d-i-y photography!

2.

What, if anything, could Dishero‘s cofounders have done in advance of launching the company to discern the level of sales to expect? Do you think Dishero had achieved product-market fit prior to trying to grow the firm?

Answer: One of the things that Dishero could have done as part of the validation process is to find out if there was a value for its service. For example, how important was a good photograph of a menu item to convince the customer to ask for the item? How discernably superior would Dishero‘s picture quality be? How much would a restaurant be willing to pay for this benefit? One is not sure if Dishero achieved product-market fit, given their value proposition. It is not clear what the pain point is with respect to menu picture quality.

3.

Do you think Dishero‘s cofounders made the right decision to pick Option C – which was to shut down the firm? Explain your answer.

Answer: If you are bringing in $9,000 a month in revenues while spending $100,000 in expenses, you have to consider your business model. As the case points out, this wide disparity between revenue and cost is not unusual in start-ups. The question for Dishero was did they see an upward trend in revenues or was it trending downward? The case says revenues were up and down and this may have driven the founders to go for Option C. 4.

What can entrepreneurial firms learn about the dynamics of growing a firm via Dishero‘s experience?

Answer: The problem with Dishero was not so much about growing a firm and the challenges associated with it as in getting the unit economics correct and in addressing the strength of its value proposition. Dishero failed because their business model did not have a compelling value proposition and their cost of customer acquisition was very high. Entrepreneurial firms should validate their business model and see if it is robust enough to scale up.

Savvy Entrepreneurial Firm Salesforce.com Crosses the Chasm 1.

Select at least two other firms that you believe have crossed the chasm. Briefly summarize how the firms rolled out their products (or services) and what you believe their key steps were in successfully crossing the chasm.

Answer: This is a good question for an individual or a group assignment. An example of a company, not mentioned in the chapter, which has crossed the chasm is YouTube. YouTube targeted technology enthusiasts initially, which constituted its early adopters. Its growth among early adopters caught the attention of Sequoia Venture Capital, which provided it sufficient funding to reach out to more mainstream markets. Based on the marketing it did, the functionality of the site, and buzz that had been created by its service, YouTube crossed the chasm and appealed to mainstream markets.

2.

In contrast to question #1, list at least two start-ups with which you are familiar that produced products or services that you believe never crossed the chasm.

Briefly describe why you believe they never crossed the chasm.

Answer: This is another good question for an individual or group assignment. There are several notable examples of start-ups that never crossed the chasm. These examples include Second Life/Linden Labs, Digg, Segway, and MySpace. MySpace initially challenged Facebook but was never able to get the traction to appeal to the mainstream.

3.

Do you believe consumer products cross the chasm (or fail to cross the chasm) much like technology products?

Answer: Most students will say that they believe that consumer products cross the chasm much like technology products. An example of a consumer product that has crossed the chasm is running shoes. Running shoes were originally designed for serious runners, but they are now worn by almost everyone.

4.

In regard to adopting technology products, do you see yourself as an early adopter or as part of the early majority? How does your answer affect the manner in which you buy technology products?

Answer: This is a good question for an individual assignment.

Partnering for Success Three Choices for Fulfilling Orders for an Online Company 1.

If a company sold a product that was trendy, such as teenage fashions, which of the fulfillment approaches would be the best choice? Explain your answer.

Answer: If what the company sells is a trendy product, such as teenage fashions, the company has to maintain flexibility. It has to have the ability to quickly move away from existing products and invest in new designs.

In short, it has to have the ability to pivot.

Dropshipping is a better option than having its own warehouses or even partnering with a fulfillment company. This way, they don‘t have to invest in an activity that calls for significant pivots. In dropshipping, the ownership of the product rests with the manufacturer and not with the selling firm.

2.

If a company wanted to focus all of its energy on its core business, such as product sales and R&D, which of the approaches to order fulfillment would be

appropriate?

Answer: Options 1 and 2 listed in the case – dropshipping and working with a fulfillment company – are good options for a company that wants to focus on its core activities of product sales and R&D. This way, the firm doesn‘t have to invest in a non-core activity such as distribution.

3.

RedStag Fulfillment (www.redstagfulfillment) is a start-up fulfillment service that maintains fulfillment locations in several U.S. cities. Spend some time studying RedStag‘s website. Describe the fulfillment services that RedStag could offer an online company that sells running shoes and apparel.

Answer: This is a good question for an individual or group assignment. The website has a 2-minute video that introduces the company and the various features of its services. The ―What We Do‖ tab at the top scrolls down to describe its three types of fulfillment services.

4.

Skip ahead to Chapter 14 and read the ―Opening Profile‖ feature, which focuses on FilterEasy. According to the feature, is FilterEasy a dropshipper, does it use a fulfillment service, or does it maintain warehouses and fulfill its own orders? Explain why you think FilterEasy made the choice it did regarding fulfillment and shipping.

Answer: The second-to-last paragraph of the case indicates that FilterEasy purchased two small filter delivery services. This obviously increases its subscriber base, giving it more orders to fulfill.

While the feature does not explicitly say so, order fulfillment (in this case, timely order fulfillment) is FilterEasy‘s core business and so it does it in-house.

REVIEW QUESTIONS 131.

What is sustained growth? Why is it important?

Answer: Sustained growth is defined as growth in both revenues and profits over an extended period of time.

Sustained growth is important for a number of reasons. Depending on a firm‘s individual circumstances, growth may be important for one or more of the following reasons:

     

132.

Economies of scale Economies of scope Market leadership Influence, power, and survivability Need to accommodate the growth of key customers Ability to attract and retain talented employees

Can most firms be classified as rapid-growth firms?

Explain your answer.

Answer: No. Evidence shows that relatively few firms generate sustained, profitable growth.

133.

What are the potential downsides to firm growth?

Answer: Growth is a double-edged sword. It can threaten the stability of a firm‘s operations in every area, from human resources to finance, if it is not managed properly.

134.

Do all firms have the potential to be aggressive rapid-growth firms? Why or why not?

Answer: No, not all firms have the potential to be rapid-growth firms. The businesses that have the potential to grow the fastest over a sustained period of time are firms that solve a significant problem or have a major impact on their customers‘ productivity or lives. Not all businesses fit this profile.

135.

Is it possible for a firm to grow too fast? If so, what are the potential downsides?

Answer: Yes, a firm can grow too fast. Growing too fast stresses a business financially and can leave its owners emotionally and financially drained. It can also create too hectic a pace of activity.

136.

Why is it difficult for some firms to grow or scale their operations?

Answer: The very thing that makes a business successful might suffer as the result of growth.

137.

What are the benefits of planning for growth?

Answer: Approaching growth in a prepared, purposeful

manner. Also, achieving a pace of growth that is consistent with the personal goals and aspirations of the founders of a firm.

138.

What are the economies of scale and economies of scope and why are these important to entrepreneurial firms?

Answer: MyLab Question.

139.

Why might firms work hard to achieve a market leadership position?

1310.

Answer: (1) To facilitate growth in general; (2) to realize economies of scale in production; and (3) to be recognized as a brand leader.

How does a firm‘s growth rate affect its ability to attract and retain talented employees?

Answer: It is natural for talented employees to want to work for a firm that can offer opportunities for promotion, higher salaries, and increased levels of responsibility. Growth is a firm‘s primary mechanism to generate promotional opportunities for employees, while failing to retain key employees can be very damaging to a firm‘s growth efforts.

1311.

What are the five stages in the organizational life cycle?

MyLab Question.

1312.

What is the managerial capacity problem?

Answer: The managerial capacity problem deals with the problem that arises when the growth of a firm is limited by the managerial capacity (i.e., personnel, expertise, and intellectual resources) that a firm has available to implement new business ideas.

1313.

What is adverse selection and how might it affect entrepreneurial firms?

Answer: Adverse selection means that as the number of employees a firm needs increases, it becomes increasingly difficult for it to find the right employees, place them in appropriate positions, and provide adequate supervision.

13-

What is moral hazard and how might it affect

14.

entrepreneurial firms?

Answer: Moral hazard means that as a firm grows and adds personnel, the new hires typically do not have the same ownership incentives as the original founders, so the new hires may not be as motivated as the founders to put in long hours or may even try to avoid hard work.

1315.

Why is cash flow management such an important issue for a firm entering a period of rapid growth?

Answer: As a firm grows, it requires an increasing amount of cash to service its customers. The challenge involved with raising and managing cash is normally heightened rather than relieved by entering a period of rapid growth.

1316.

How do rapid growth firms deal with potential cash flow shortfalls?

Answer: Some firms deal with potential cash flow shortfalls by establishing a line of credit at a bank or by raising investment capital. Other firms deliberately restrict the pace of their growth to avoid cash flow challenges.

1317.

Why is price stability such an important issue for a firm entering a period of rapid growth?

Answer: If firm growth comes at the expense of a competitor‘s market share, a price war can result.

Normally, no one benefits from a price war other than the customer.

1318.

According to the chapter, one of the most difficult challenges involved with rapid growth is quality control. Why is this so?

Answer: Firm growth is typically accomplished by an increase in firm activity. This means that a firm must handle more service requests and paperwork and contend with more customers, stakeholders, and vendors. If a firm can‘t build its infrastructure fast enough to handle the increased activity, quality control will usually suffer.

1319.

In what stage or stages of the organizational life cycle are capital constraints most prevalent?

Answer: The need for capital is typically the most prevalent in the early growth and continuous growth stages of the organizational life cycle.

1320.

What are the differences between entrepreneurial services and managerial services?

Answer: Entrepreneurial services generate new market, product, and service ideas, whereas managerial services administer the routine functions of the firm and facilitate the profitable execution of new opportunities.

APPLICATION QUESTIONS 1321.

Pete Martin just purchased a copy of Inc. magazine‘s annual issue that ranks the top 500 fastest-growing privately owned companies in America. Pete was amazed by some of the stories that were told in different articles appearing in the magazine and as a result, is more encouraged than ever to start his own art restoration firm. Pete believes his firm can grow 100 percent or more per year. He is ready to cash out his savings and get started. Is Pete starting this venture with realistic expectations? If not, what should his expectations be?

Answer: Most students will say that Pete is not starting out with realistic expectations. The majority of firms do not grow at an accelerated pace.

As detailed in the chapter, it‘s important for Pete to realize (1) not all businesses have the potential to be aggressive growth firms and (2) business success doesn‘t always scale. Pete may have a profitable and excellent business, but it doesn‘t really solve a big problem (usually necessary for a business to grow quickly) and the individual attention that he and his craftsmen devote to restoring art pieces may make it unrealistic for the business to expand rapidly.

Pete should also be told that rapid growth is not always a desirable objective. Firms that grow at a steady, measured pace are often better off in the long run than firms that grow quickly from the outset, as explained throughout this chapter.

1322.

Seven months ago, Sam Peters launched a chain of kiosks located in malls that sell smartphone

accessories. His first kiosk was in a mall in Washington, D.C., and he is now expanding into Maryland, Virginia, and Pennsylvania. Sam‘s company has grown quickly from one kiosk to 142, and he hopes to add 200 kiosks per year over the next five years.

Recently, a Virginia business periodical ran an article on Sam‘s business, focused primarily on whether the business was growing too fast. Sam was upset when he read the article, and he called you to vent his irritation. After he calmed down he said to you, ―Tell me the truth. Is there something to what these guys are saying? I‘m opening new kiosks as fast as I can. Isn‘t that a good thing?‖ What would you say in response to Sam‘s questions?

Answer: Sam may be right—opening new kiosks as fast as he can may be the right thing to do. However, if this is the case, Sam‘s firm is the exception rather than the rule. Most firms struggle with the demands of growth, as explained throughout the chapter. Sam should also guard himself from being caught unawares if some of the challenges of growth (e.g., cash flow management, price stability, quality control, and capital constraints) catch up with him and start causing problems. As stated in the chapter, growth is a double-edged sword. It can threaten the stability of a firm‘s operations in every area, from human resources management to finance, if it is not managed correctly.

1323.

Patty Stone owns an industrial equipment company named Get Smart Industrial that sells three products in the oil services industry. Get Smart‘s products are sold via a direct sales force. Patty wants to grow the firm by adding new products but has run into resistance from her chief financial officer (CFO), who argues that adding new products will increase inventory costs and place a strain on the company‘s cash flow. While Patty is sensitive to her CFO‘s concerns, what arguments can she make in favor of adding new products as a way of effectively growing her firm?

Answer: Patty is trying to capture additional economies of scope. Economies of scope are similar to economies of scale, except the advantage comes through the scope (or range) of a firm‘s operations rather than its scale of production. For example, Patty‘s direct sales force may be able to sell 10 items more efficiently than 5, because the cost of

travel and the salesperson‘s salary are spread out over 10 products rather than 5. The company will also earn money through the sale of the additional products. What Patty and her CFO have to do is determine if the advantages captured by the additional economies of scope and the sale of additional products outweigh the added inventory costs.

1324.

Three years ago, Chris Dees launched a medical products company that specializes in providing products for people with diabetes. His company is number one in its industry. Recently, a couple of competitors have entered the picture, and Chris is wondering if it is worth the fight to remain number one. In terms of firm growth, what advantages are there to being the market leader?

Answer: Many firms work hard to achieve market leadership, to realize economies of scale in production, and to be recognized as the brand leader.

Being the market leader also permits a firm to use slogans such as ―Number 1 Diabetes Solutions Provider in America‖ in its promotions, helping a firm win customers and attract talented employees as well as business partners.

1325.

Kyle Simms just succeeded his father as the CEO of a consumer products firm in Mission Viejo, CA. Prior to returning to the family business, Kyle spent 11 years at Procter & Gamble in Cincinnati. Kyle‘s dad built a solid company, but over the past five years, its growth was flat. Kyle wants to grow the company, but at the same time doesn‘t want to disturb its healthy culture or overshoot its ability to manage its growth. Kyle‘s question to you is ―How do I manage this careful balance?‖ What would you tell him?

Answer: It is a careful balance. On the one hand, growth can be very stressful and disruptive, for all the reasons described in the chapter. Cash flow challenges, in particular, can place a lot of stress on a firm and its employees. On the other hand, growth is a firm‘s primary mechanism to generate promotional opportunities for employees, and instills a sense of vitality in a firm. As a result, if Kyle lets the business‘s growth continue to stall, it may cause employees to wonder where future promotional opportunities will come from, and whether the firm will make it in the long run. Kyle will have to do

his best to manage this careful balance. It‘s not easy.

1326.

Sarah Jeffers lives in Austin, Texas, where she has owned a graphics design company for three years. She spends 12 hours a day at work micromanaging every aspect of her business, yet she still can‘t get the business to grow. Using materials included in this chapter, what actions would you tell Sarah she needs to take in order for her business to move from the early growth stage to the continuous growth stage of its organizational life cycle?

Answer: Although Sarah obviously works hard and is committed to growing the firm, she may be the biggest obstacle to her firm‘s growth. Sarah needs to spend more time, as Michael E. Gerber would say, working ―on her business‖ rather than ―in her business.‖ Presently, because Sarah micromanages every aspect of her business, it can‘t grow beyond the number of hours per day that she can devote to it. Sarah needs to develop policies and procedures that allow others to run the business in her absence, and spend more time planning for growth and developing partnerships with other firms that can spur her company‘s growth.

1327.

Meredith Colella is a food products engineer who has developed an innovative approach for the packaging of meat. Her approach will extend the shelf life of most meat products by about 30 percent. Meredith is getting ready to try to sell the idea to investors.

What could Meredith tell the investors that would give them confidence that she is prepared to cope with the challenges of rapid growth?

Answer: This is an excellent thought question for students. First, Meredith should convey to investors that she has a keen awareness of the advantages and potential disadvantages associated with growth. Her growth strategy should have a clear rationale—she shouldn‘t give the impression that she wants to grow just for growth‘s sake alone. Second, Meredith should directly address how she will handle the day-to-day challenges of growth and manage the managerial capacity problem.

1328.

Tracy Gibbons owns a sports apparel company in Columbia, SC. She just attended a seminar, where one of the speakers said, ―Participating in business partnerships can help firms lessen the impact of the

managerial capacity problem.‖ Tracy‘s not sure what the speaker meant by that statement. Can you help Tracy understand how participating in business partnerships can help firms lessen the impact of the managerial capacity problem?

Answer: By participating in business partnerships, firms can in effect ―co-opt‖ a portion of their partners‘ resources and use them in place of having to obtain or develop those resources on their own.

1329.

Collin Ryan owns an electronics firm in central Michigan. As a result of some innovative new products that his company plans to roll out over the next two to three years, he expects a substantial increase in sales. To gear up for the increase in sales, Collin needs to hire 35 to 50 new employees. What hazards does a company such as Collin‘s run into when it needs to hire a large number of new employees quickly? What alternatives, if any, would Collin have to hiring a large number of new employees?

Answer: Collin may run into the problems referred to in the chapter as adverse selection and moral hazard.

Adverse selection means that as the number of employees of a firm increases, it becomes increasingly difficult for it to find the right employees, place them in appropriate positions, and provide adequate supervision. Moral hazard means that as a firm grows and adds personnel, the new hires typically do not have the same ownership incentives as the original founders. An alternative Collin may have to hiring new employees himself is to take on partners to perform part of the new tasks his firm will encounter or outsource some of the work.

YOU BE THE VC 13.1 Company: Double Robotics (www.doublerobotics.com) Business Idea: Design and manufacture a telepresence robot that allows someone to remotely inhabit the body of the robot and have the freedom to roam around an office building, school, or other facility even though the person inhabiting the body of the robot is hundreds or thousands of miles away.

You Be the VC Scorecard Double Robotics (www.doublerobotics.com)

Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

Double Robotics was founded by David Cann and Marc DeVidts. Cann is a former independent iOS developer for Disney, ABC News, and many start-ups.

Previously lead software developer at BattleBots, DeVidts is an electrical/embedded systems engineer.

He is a former product development engineer for Syntheon.

Double Robotics went through the Y Combinator accelerator program in 2012.

Strength of the Opportunity

1

2

3

4

5

The strength of Double Robotics‘ opportunity is hard to assess. It seems like an elegant solution to the exact problem it solves (as described in the pitch). But how many businesses would actually buy this solution is unknown. There are also emerging alternative products that solve the same problem that Double Robotics is trying to solve.

Videoconferencing platforms are now readily available for tablets and mobile devices. That makes videoconferencing more mobile and convenient than people sitting in a room talking to each other on a video screen via an application such as Skype. It‘s our sense that Double Robotics may find applications where its solution works best, but not at scale. As a result, we see it as a fairly small opportunity.

Strength of the Industry

1

2

3

4

5

The global robotics industry is growing at a rate of more than 10 percent per year. This includes robotics in all sectors, including manufacturing. It is not known how

fast the industry for personal robotics, such as the product build

by Double Robotics, is growing. The video conferencing industry is strong, which roughly solves the same problem that Double Robotics is trying to solve (but perhaps not as elegantly).

Strength of Business Model

1

2

3

4

5

Double Robotics has a strict retail business model. It sells its devices and as far as we can tell there are no additional revenue streams that it gleans from its customers.

Average Score

3.00/5.00

Decision: We would not fund this firm. Although the demo videos that Double Robotics has posted on its Web site are impressive, we see the company‘s opportunity as relatively small. Its management team is also fairly inexperienced.

The company‘s product may be the best solution in a specific setting, but video conferencing is now available on almost all platforms and the majority of use cases can be accommodated inexpensively via these options. We wish the Double Robotics folks well, but will not be investors.

YOU BE THE VC 13.2 Company: Savioke (www.savioke.com) Business Idea: Create a hotel delivery robot that will deliver snacks and amenities to hotel guests, freeing hotel staff to focus on other guest needs.

You Be the VC Scorecard Savioke (www.savioke.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

Steve Cousins is the founder and CEO

of Savioke. He has put together a formidable top management team that includes key people in engineering, robotics, operations, and finance.

The team appears quite capable of driving growth in the firm.

Strength of the Opportunity

1

2

3

4

5

The opportunity is moderate to high.

Savioke‘s flagship product is Relay, the delivery robot. As the case points out, presently the opportunity is in the hotel industry, particularly in the area of room service. We don‘t know where else Relay can be used.

Strength of the Industry

Strength of Business Model

1

2

3

4

5

While industrial robotics is an established field, robotics at the intersection of businesses and consumers, such as the room service situation, is still emerging. It still remains to be seen if the price point is attractive enough for the product to be used for consumer interface.

1 2 3 4 5 As the case points out, 12 hotels in the San Francisco Bay area and Los Angeles use it and so far they have made over 12,000 successful deliveries. The adoption rate is still low, which means the jury is still out on the product‘s value proposition. Only the large hotels can afford Relay and large hotels often differentiate via customer service.

Average Score

4.0/5.0

Decision: We would not fund this firm at this point. While the product is intriguing, its acceptance by the market is still not confirmed. If we invest at this stage, we would

be an early stage investor with both tremendous upside but also tremendous risk.

CASES Case 13.1 Sir Kensington‘s: Pursuing a Measured, Yet Promising Path to Growth

DISCUSSION QUESTIONS 1334.

There is a discussion early in this chapter about the need to prepare for growth. What actions did Scott Norton and Mark Ramadan take that demonstrate their commitment to trying to fully understand growth and its ramifications for their firm?

Answer: As illustrated throughout the case, Norton and Ramadan focused intently on the three aspects of preparing for growth highlighted in the chapter: Appreciating the Nature of Business Growth, Staying Committed to a Core Strategy, and Planning for Growth.

In regard to appreciating the nature of growth, Sir Kensington grew deliberately, using the technology adoption life cycle as a guide. In regard to staying committed to a core strategy, Norton and Ramadan recognized Sir Kensington‘s competitive advantages, and made sure to maintain those advantages through the course of the company‘s growth. Finally, in regard to planning for growth, the case clearly emphasizes that Sir Kensington‘s growth was pursued in a thoughtful and conscientious manner.

1335.

We noted in this chapter that core competencies are essentially what a firm does particularly well. What are the core competencies of the firm Sir Kensington‘s? How sustainable are these core competencies?

Answer: Sir Kingston‘s core competencies are product quality, product positioning, branding, and bottle design and labeling. Most students will argue that these core competencies are sustainable.

13-

Look at Figure 13.2, which shows the organizational

36.

life cycle. In which of these stages is Sir Kensington‘s located? To what issues do Sir Kensington‘s founders need to be particularly sensitive in this stage?

Answer: Most students will argue that Sir Kensington‘s is in the continuous growth stage of the product life cycle. The major issues that the founders of Sir Kensington‘s need to be sensitive to in this stage are:       

1337.

The need for structure and more formal relationships The need for additional resources to fuel growth The need for additional products to expand into new markets The possibility of acquiring smaller firms Expanding in areas that leverage the business‘s core competencies Discerning whether the current management team is sufficient Developing more elaborate policies and procedures

What are four key lessons about growth potential entrepreneurs could learn by studying how Sir Kensington‘s has grown?

Answer: This is a good question for an individual or a group assignment.

Case 13.2 Airbnb: Passing through the Stage of Growth in an Exemplary Manner DISCUSSION QUESTIONS 1338.

Make a list of things that you think Airbnb did ―right‖ in growing its business.

Answer: Here is a list of things that Airbnb did ―right.‖ Students should be encouraged to add to the list:  They validated their idea by starting small and constantly getting feedback from customers.

  

1339.

They focused on their product first and only later on the company.

They were adaptable. They went from focusing on conventions to any kind of rental opportunity.

They were willing to listen – they listened and acted on the advice given by Y Combinator‘s Paul Graham.

Comment on the propensity of Airbnb‘s founders to solicit customer feedback. Based on the information in the case, do you think they did it too often, not often enough, or just right? Is there anything in their approach to obtaining feedback that you think you‘ll emulate if you start a business?

Answer: The founders did do a lot of customer surveys. They were intent on listening to their customers and acting on them. There is no evidence to suggest that they overdid it. While students may have different viewpoints on this, it seems that they did just the right amount of research. The key thing others can learn is that they went through the Airbnb experience as customers. This gave them great insight on the customer interface, i.e., their website.

1340.

1341.

To what degree did Airbnb pass through the introduction stage and the early growth stage of the organizational life cycle in a manner consistent with the recommended handling of each stage provided in the chapter?

Answer: As the book chapter states, in the introduction stage, the founders need to be very ―hands-on.‖ That‘s exactly what the Airbnb founders were in the company‘s introduction stage. They went through the customer experience and constantly adapted. They transitioned into the early growth stage by focusing externally on increasing their market share and internally on building the company.

In short, the founders managed Airbnb adroitly through both the introductory and the early growth stages.

To what degree do you think government regulations threaten Airbnb‘s continual growth? Do you think the company will be able to generate sufficient profits for new initiatives, like Experiences, to offset profits lost to stricter regulations?

Answer: For disruptive companies such as Uber and

Airbnb, government regulations are a big factor. The incumbents (taxi fleet owners in the case of Uber and hotel owners for Airbnb) are going to lobby hard to prevent these companies from encroaching on their turf. Strict regulations on who can rent out their space clearly threatens Airbnb‘s growth. The company is anticipating it and launching new initiatives that take off on their core product. Experiences is one such initiative. A local can not only host a renter on Airbnb, but now can offer sightseeing tours and other activities. This enhances the holiday experience of the renter and, at the same, the revenues of the landlord.

CHAPTER 14 STRATEGIES FOR FIRM GROWTH LEARNING OBJECTIVES 1.

2.

3.

4.

Identify and discuss the core internal growth strategy for entrepreneurial firms.

Describe additional internal product-growth strategies entrepreneurial firms can use.

Examine international expansion as a growth strategy.

Discuss different types of external growth strategies.

CHAPTER OVERVIEW This chapter focuses on the growth strategies that are available to entrepreneurial firms. The strategies are divided into internal growth strategies and external growth strategies. The internal growth strategies include new product development, other product-related strategies, and international expansion. The external growth strategies include mergers and acquisitions, licensing, strategic alliances and joint ventures, and franchising (which is discussed separately in Chapter 15).

Detailed tables are provided that explain the advantages and disadvantages of both internal and external growth strategies. A special emphasis is placed on the notion that a firm should be well informed regarding the specific challenges involved with the growth strategy or strategies it pursues.

CHAPTER OUTLINE I. Internal Growth Strategies A. New Product Development II Additional Internal Product-Growth Strategies A. Improving an Existing Product or Service B. Increasing the Market Penetration of an Existing Product or Service C. Extending Product Lines D. Geographic Expansion III. International Expansion A. Assessing a Firm‘s Suitability for Growth through International Markets B. Foreign Market Entry Strategies C. Selling Overseas IV. External Growth Strategies A. Mergers and Acquisitions 1. Finding an Appropriate Acquisition Candidate 2. Steps Involved in an Acquisition B. Licensing 1. Technology Licensing 2. Merchandise and Character Licensing C. Strategic Alliances and Joint Ventures 1. Strategic Alliances 2. Joint Ventures CHAPTER NOTES I. Internal Growth Strategies •

Internal growth strategies rely on efforts generated within the firm itself, such as new product development, other product-related strategies, and international expansion.

•

The distinctive attribute of internally generated growth is that a business relies on its own competencies, expertise, business practices, and employees. o Internally generated growth is often called organic growth because it does not rely on outside intervention.

A. New Product Development 1. New product development involves the creation and sale of new products (or services) as a means of

increasing firm revenues.

2. In many fast-paced industries, new product development is a competitive necessity. For example, the average product life cycle in the computer software industry is 14 to 16 months. Because of this, to remain competitive, software companies must always have new products in their pipelines.

3. The keys to effective new product and service development, which are consistent with the material on opportunity recognition and feasibility analysis in Chapters 2 and 3, follow: a. Find a need and fill it b. Develop products that add value c. Get quality right and pricing right d. Focus on a specific target market e. Conduct ongoing feasibility analysis II.

Additional Internal Product-Growth Strategies

A. Improving an Existing Product or Service. Often a business can increase its revenue by improving an existing product or service—enhancing quality, making it larger or smaller, making it more convenient to use, improving its durability, or making it more up to date.

B. Increasing the Market Penetration of an Existing Product or Service. A market penetration strategy seeks to increase the sales of a product or service through greater marketing efforts or through increased production capacity and efficiency.

C. Extending Product Lines. A product line extension strategy involves making additional versions of a product so that it will appeal to different clientele.

For example, a company may take a low-end product, make another version of it that is a little better, and then make another version of it that represents the top of the line.

D. Geographic Expansion. Geographic expansion is another internal growth strategy. Many entrepreneurial businesses grow by simply expanding from their original location to additional geographic sites. This type of expansion is most common in retail sites.

III. International Expansion

A. Assessing a Firm‘s Suitability for Growth through International Markets. Table 14.3 in the textbook provides a review of the issues that should be considered, including management/organizational issues, product and distribution issues, and financial and risk management issues, when a venture considers expanding into international markets.

B. Foreign Market Entry Strategies. The majority of entrepreneurial firms first enter foreign markets as exporters, but firms also use licensing, joint ventures, franchising, turnkey projects, and wholly owned subsidiaries. Those strategies are explained in Table 14.4 in the textbook.

C. Selling Overseas. Many entrepreneurial firms first start selling overseas by responding to an unsolicited inquiry from a foreign buyer. It is important to handle the inquiry appropriately and to observe protocols when trying to serve the needs of customers in foreign markets.

IV.

External Growth Strategies

•

External growth strategies rely on establishing relationships with third parties, such as mergers, acquisitions, strategic alliances, joint ventures, and franchising. We discuss franchising separately in Chapter 15.

•

An emphasis on external growth strategies results in a more fast-paced, collaborative approach toward growth than the slower-paced internal strategies.

A. Mergers and Acquisitions 1. Many entrepreneurial firms grow through mergers and acquisitions. a. A merger is the pooling of interests to combine two or more firms into one. An acquisition is the outright purchase of one firm by another. b. In an acquisition, the surviving firm is called the acquirer, and the firm that is acquired is called the target.

2. Acquiring another business can fulfill several of a company‘s needs, such as expanding its product line, gaining access to distribution channels, achieving

competitive economies of scale, or expanding the company‘s geographic reach.

3. Although it can be advantageous, the decision to grow the entrepreneurial firm through acquisitions should be approached with caution. Many firms have found that the process of assimilating another company into their current operation is not easy.

4. Finding an appropriate acquisition candidate. If a firm decides to grow through acquisition, it is extremely important for it to exercise extreme care in finding acquisition candidates.

5. Steps involved in an acquisition. Completing an acquisition is a nine-step process, as illustrated in Figure 14.2 in the textbook.

B. Licensing 1. Licensing is the granting of permission by one company to another company to use a specific form of its intellectual property under clearly defined conditions.

2. The terms of a license are spelled out through a licensing agreement, which is a formal contract between a licensor and a licensee. a. The licensor is the company that owns the intellectual property. The licensee is the company purchasing the right to use it. b. There are two principle types of licensing: technology licensing and merchandise and character licensing. i. Technology licensing is the licensing of a proprietary technology that the licensor typically controls by virtue of a utility patent. ii. Merchandise and Character Licensing.

Merchandise and character licensing is the licensing of a recognized trademark or brand that the licensor controls through a registered trademark or copyright.

C. Strategic Alliances and Joint Ventures 1. Strategic Alliances. A strategic alliance is a

partnership between two or more firms developed to achieve a specific goal. According to a recent survey, more than three-fourths of technology businesses are active in strategic alliances. a. Technological alliances feature cooperation in research and development, engineering, and manufacturing. b. Marketing alliances typically match a company with a distribution system with a company that has a product to sell in order to increase sales of a product or service.

2. Joint Ventures. A joint venture is an entity created when two or more firms pool a portion of their resources to create a separate, jointly owned organization. a. In a scale joint venture, the partners collaborate at a single point in the value chain to gain economies of scale in production or distribution. b. In a link joint venture, the position of the parties is not symmetrical, and the objectives of the parties may diverge. For example, many of the joint ventures between American and Canadian food companies provide the American partner with access to Canadian markets and distribution channels and the Canadian partner with the opportunity to add to its product line.

BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING What Went Wrong?

Lessons for Growth-Minded Start-Ups from Crumbs Bake Shop‘s Failure 1.

What are three lessons that other start-ups can learn from Crumbs‘ failure?

Answer: The three lessons that can be taken from the three reasons Crumbs failed: 

Lesson 1: Crowded markets are problematic. When a firm finds itself in a crowded market, it‘s important to diversify, so the ―crowded‖ portion of the market isn‘t the only thing the business





2.

relies upon. Crumbs was faced with an increasingly crowded market for gourmet cupcakes. It could have added additional product lines, such as cookies, ice cream, and other bakery products. By not doing so, it simply had to slug it out with a growing number of competitors in the gourmet cupcake industry.

Lesson 2: When customers start losing interest in your product, pay attention. The numbers were right in front of Crumbs. Its same-store sales were declining. Again, instead of reacting and adding additional product lines, Crumbs seemed to double-down on gourmet cupcakes by opening new stores. Obviously, the strategy didn‘t work.

Lesson 3: Don‘t get caught up in too fancy of real estate. Crumbs overspent on real estate. This is a hazard that every firm should be careful to avoid.

To what degree do you think Crumbs should have been able to anticipate a decline in interest in gourmet cupcakes?

Answer: Apparently the numbers were right in front of Crumbs. Its same-store sales were declining, which is a direct sign of a decline of interest in its product.

One also has to wonder if Crumbs did any market research during its decline. Certainly it could have better discerned the decline in appeal for its product.

3.

Why do you think Crumbs doggedly stuck to its singular focus on selling cupcakes, in light of declining samestore sales?

Answer: This is a good thought question for students.

Possibilities include: (1) hubris, which is excessive pride or self-confidence. The managers of Crumbs might have convinced themselves that the drop in interest in gourmet cupcakes was temporary and there was no reason to worry. (2) Cupcakes may have been what the management team at Crumbs was good at, and they didn‘t have sufficient expertise in other areas to effectively diversify. (3) Poor management—it seems clear that the management team at Crumbs could have done a better job avoiding Crumbs‘ failure.

4.

Was Crumbs‘ failure preventable? What, if anything, could have been done to save Crumbs? Based on the material in the chapter, what types of growth could Crumbs have pursued that it failed to pursue?

Answer: Most students will say that Crumbs‘ failure was preventable. Crumbs could have become a bakery with multiple products rather than relying strictly on gourmet cupcakes. Crumbs could have pursued internal growth, international expansion, and external growth alternatives. By not doing so, it risked everything on the gourmet cupcake market and came out the loser.

Savvy Entrepreneurial Firm Paint Nite: Growing via an Innovative Form of Licensing 1.

Why do you think Paint Nite has grown so quickly? What is it about the Paint Nite experience that attracts people?

Answer: Students may have different responses as to why Paint Nite has become popular – from helping express themselves via a self-portrait to facilitating socializing and networking. The key to Paint Nite‘s success is to enable people to get together to spend an enjoyable evening doing something that is harmless and fun and, at the same time, bring out the artist in all of us.

2.

Why do you think Paint Nite chose a licensing model rather than franchising or setting up company-owned Paint Nite operations in select cities? (You may wish to jump ahead and review the description of franchising in Chapter 15 to answer this question.)

Answer: As chapter 15 points out, franchising involves selling the rights to a business model or a process for a lumpsum fee plus recurring royalties. That may not be the best fit for what Paint Nite is trying to do. What they are selling is the concept – something that can be licensed. They are also appealing to artisticallyinclined people (whom they call ―creative entrepreneurs‖ ) who may not have the financial resources to pay a lumpsum fee. In return, they get back office support – ticket sales – and pay a 30 percent commission. The licensing model works best for the type of business that Paint Nite is in.

3.

Brainstorm a business idea for which you think a Paint Nite type of licensing model might be the best way to organize and grow the firm.

Answer: This is a good question for a group or individual assignment.

4.

Go to Paint Nite‘s website and locate a Paint Nite session close to where you live. Where is the session located? How much does it cost? Would you enjoy participating in a Paint Nite session? Why or why not?

Answer: The company‘s website is https://www.paintnite.com/. When the supplement author typed in ―Orlando, Florida‖ on November 4, 2017, 110 events within 20 miles of downtown Orlando popped up. A November 4th event, ―Downtown in Fall at Bar Louie‖ cost $45 a ticket.

Students should be encouraged to go to the website and find out about events near where they live.

Partnering for Success Three Steps to Alliance Success 1.

In what ways is it easy for a firm‘s founder to get caught up in the potential advantages of participating in alliances without remaining equally focused on the potential disadvantages?

Answer: Most students will say that firms often think they‘re moving forward and/or making progress when they‘re ―out there‖ engaging in partnerships and trying to make something happen. The problem is that engaging in partnerships, like alliances, has downsides along with upsides. Alliances also have somewhat of a ―halo effect‖ surrounding them. Most articles in magazines such as Entrepreneur and Inc. that focus on alliances relate stories of alliance successes rather than alliance failures. So it is easy to assume that all alliances are successes.

2.

Think about the partnership arrangements with which you have been involved, even if your experience has been limited to working with other students in team settings in classes. What are some of the challenges in making alliances work that are not mentioned in this feature?

Answer: This is a good question for an individual assignment.

3.

Do some Internet research and find an example of an alliance between a small firm and a large firm that seems to be working well. Briefly describe the nature of the alliance and explain its success.

Answer: This is a good question for an individual or group assignment. Good sources to use to find examples of alliances between small firms and large firms are entrepreneurship-focused magazines and blogs. A list of entrepreneurship-focused magazines and blogs is included in this Instructor‘s Manual.

4.

The ―You be the VC 14.2‖ feature focuses on Zero Motorcycles, a start-up that is building electric motorcycles that are lightweight, efficient, fast off the line, and fun to drive. Brainstorm three to five likely alliance partners for Zero Motorcycles. Explain how each partner can help Zero Motorcycles either increase its revenue or decrease its costs.

Answer: This is a good question for an individual or group assignment.

REVIEW QUESTIONS 141.

What is the difference between an internal and an external growth strategy?

Answer: Internal growth strategies rely on efforts generated with the firm itself, such as new product development, other product-related strategies, and international expansion. Each of these strategies contributes to firm growth by increasing the number, quality, or prevalence of the products that a firm sells or by increasing the geographic breadth of the area in which it sells. External growth strategies rely on establishing relationships with third parties, such as mergers, acquisitions, strategic alliances, joint ventures, licensing, and franchising. Again, each of these strategies helps a firm increase the number, quality, technological savvy, or prevalence of the products it sells or allows a firm to sell through additional distribution channels.

142.

What are the keys to a firm‘s effort to achieve success through new product and service development?

Answer: The keys to effective new product and service development include:

     143.

Find a need and fill it.

Develop products that add value.

Get quality and pricing right.

Focus on a specific target market.

Conduct ongoing feasibility analysis.

What are some of the common reasons new products fail?

Answer: There are a common set of reasons that new products fail. These include inadequate feasibility analysis, overestimation of market potential, bad timing, inadequate advertising and promotions, and poor service.

144.

What is a market penetration strategy? Provide an example of a market penetration strategy, and describe how using it effectively might increase a firm‘s sales.

Answer: A market penetration strategy seeks to increase the sales of a product or service through greater marketing efforts or through increased production capacity and efficiency. Consider Proactiv (https://www.proactiv.com/), the skin care company.

The company has been quite effective in using celebrity endorsers to draw positive attention to its products.

145.

What is a product line extension strategy? Provide an example of a product line extension strategy and describe how its effective use might increase a firm‘s sales.

Answer: A product line extension strategy involves making additional versions of a product so that it will appeal to different clientele. For example, a company may take a low-end product, make another version of it that is a little better, and then make another version of it that represents the top of the line. This is a strategy that allows a firm to take one product and extend it into several products without incurring significant additional development expense.

146.

What is an international expansion strategy? What are the keys to implementing this strategy successfully in an entrepreneurial firm?

Answer: International expansion is when firms grow by expanding to international markets. The keys to an effective international expansion strategy are optimizing the issues highlighted in Table 14.3.

147.

What is an international new venture? Why might it be to the benefit of an entrepreneurial start-up to position itself as an international new venture from the outset?

MyLab Question.

148.

What are the six foreign market entry strategies and what are the key characteristics of each one?

Answer: The six foreign market entry strategies are laid out in Table 14.3. The six strategies are as follows: 











Exporting. The process of producing a product at home and shipping it to a foreign market. Most entrepreneurial firms begin their international involvement as exporters.

Licensing. A licensing agreement is an arrangement whereby a firm with the proprietary rights to a product grants permission to another firm to manufacture that product for specified royalties or other payments.

Joint venture. A joint venture involves the establishment of a firm that is jointly owned by two or more otherwise independent firms. FujiXerox, for example, is a joint venture between an American and a Japanese firm.

Franchising. A franchise is an agreement between a franchisor (the parent company that has a proprietary product, service, or business method) and a franchisee (an individual or firm that is willing to pay the franchisor a fee for the right to sell its product, service, and/or business method). U.S. firms can sell franchises in foreign markets.

Turnkey projects. In a turnkey project, a contractor from one country builds a facility in another country, trains the personnel that will operate the facility, and turns over the keys to the project when it is completed and ready to operate.

Wholly owned subsidiary. A firm that establishes a

wholly owned subsidiary in a foreign country has typically made the decision to manufacture in the foreign country and establish a permanent presence.

149.

What rules of thumb should an entrepreneurial venture follow to successfully sell its products overseas?

Answer: Several of the rules of thumb to follow for selling products overseas are as follows:  

    

1410.

Answer requests promptly and clearly.

Replies to foreign inquiries, other than e-mail or fax, should be communicated through some form of overnight delivery. Ground delivery is slow in some areas of the world.

A file should be set up to retain copies of all foreign inquiries.

Keep promises.

All correspondence should be personally signed.

Always be polite, courteous, friendly, and respectful.

For a personal meeting, always make sure to send an individual who is equal in rank to the person with whom he or she will be meeting.

What is the difference between a merger and an acquisition? How can acquisitions help firms fill their needs?

Answer: A merger is the pooling of interests to combine two or more firms into one. An acquisition is the outright purchase of one firm by another.

Acquiring another business can fulfill several of a company‘s needs, such as expanding its product line, gaining access to distribution channels, achieving competitive economies of scale, or expanding the company‘s geographic reach.

1411.

What characteristics are associated with a promising acquisition candidate?

MyLab Question.

1412.

What is the difference between a licensor and a licensee?

Answer: The licensor is the company that owns the intellectual property. The licensee is the company

purchasing the right to use it.

1413.

What is the meaning of the term licensing? How can licensing be used to increase a firm‘s revenues?

Answer: Licensing is the granting of permission by one company to another company to use a specific form of its intellectual property under clearly defined conditions. Licensing can increase revenues via recurring royalties.

1414.

What is the purpose of a licensing agreement? What is attractive about a licensing agreement for those leading an entrepreneurial venture?

Answer: The terms of a license are spelled out through a licensing agreement, which is a formal contract between a licensor and a licensee. The licensor is the company that owns the intellectual property. The licensee is the company purchasing the right to use it. A licensing agreement is attractive for those leading an entrepreneurial venture because it enables growth without a corresponding need for capital.

1415.

What is the difference between technology licensing and merchandise and character licensing? Provide examples of both types of licensing and how they can increase a firm‘s sales.

Answer: Technology licensing is the licensing of proprietary technology that the licensor typically controls by virtue of a utility patent. For example, Qualcomm invents and designs chips that are used in cell phones, and then licenses the chips to companies such as Motorola who produce the cell phones.

Merchandise and character licensing is the licensing of a recognized trademark or brand that the licensor typically controls through a registered trademark or copyright. For example, Harley-Davidson licenses its trademark to multiple companies that place the Harley trademark on T-shirts, jackets, and other apparel products.

1416.

Over the past several years, why have strategic alliances and joint ventures become increasingly prevalent growth strategies for entrepreneurial firms?

Answer: The increasing popularity of strategic

alliances and joint ventures has been driven largely by a growing awareness that firms can‘t ―go it alone‖ and succeed.

1417.

What is the difference between technological alliances and marketing alliances? Provide examples of both types of alliances and how they can increase a firm‘s sales.

Answer: A technology alliance is a business alliance that cooperates in R&D, engineering, and manufacturing. Technology alliances often bring together two or more firms to jointly develop a new product. For example, two drug firms may form an alliance for R&D to develop new drugs. Marketing alliances typically match a company with a distribution system with a company that has a product to sell in order to increase sales of a product or service. For example, an American food company may initiate an alliance with Nestle (a Swiss food company) to gain access to Nestle‘s distribution channels in Europe.

1418.

What is a joint venture?

Answer: A joint venture is an entity created when two or more firms pool a portion of their resources to create a separate, jointly owned organization.

1419.

How does a joint venture differ from a strategic alliance?

Answer: A joint venture is an entity created when two or more firms pool a portion of their resources to create a separate, jointly owned organization. A strategic alliance is a partnership between two or more organizations, but does not create a separate legal entity, and has no joint ownership involved.

1420.

What is the difference between a scale joint venture and a link joint venture? Provide examples of both types of joint ventures and how their effective use can increase a firm‘s sales.

Answer: In a scale joint venture, the partners collaborate at a single point in the value chain to gain economies of scale in production or distribution. For example, Pfizer, Microsoft, and IBM are partners in a joint venture that is developing software and services to handle administrative chores

for physicians‘ offices. In a link joint venture, the positions of the parties is not symmetrical, and the objectives of the partners may diverge. For example, many of the joint ventures between American and Canadian food companies provide the American partner with access to Canadian markets and distribution channels and the Canadian partner with the opportunity to add to its product line.

APPLICATION QUESTIONS 1421.

Spend some time studying Zero Motorcycles, the focus of the ―You Be the VC 14.2‖ feature. Is it more likely that Zero Motorcycles will grow through internal or external growth strategies? What internal growth strategies and/or external growth strategies make sense for this firm?

Answer: Answers to this question will vary. Some students will argue that Zero Motorcycles will grow primarily via internal growth strategies by adding new products (different types of bikes, accessories), increasing the market penetration of its existing products, and expanding internationally.

International expansion is another option. Other students will say that Zero Motorcycles is more likely to grow via external growth strategies, not so much by mergers and acquisitions, but more through strategic alliances, to get wider distribution of its products.

1422.

Jessica Martin, a classmate of yours, just returned from an entrepreneurship boot camp that your university‘s technology incubator sponsored. The boot camp consisted of three days of intense focus on how to successfully launch a firm. You overheard Jessica telling another classmate that the boot camp was extremely helpful and she‘s already signed up for another three-day boot camp that will focus on how to successfully grow a firm. The classmate looked at Jessica and said, ―How in the world can you spend three days talking about how to successfully grow a firm?‖ Jessica opened her notebook and showed the classmate the 10-item agenda for the upcoming threeday boot camp. What do you think the 10 items consist of? (Consider the material in Chapter 13 and this chapter in formulating your answer.)

Answer: This is a good question for an individual or

group assignment. The 10 items should basically mirror the material covered in Chapter 13 and in this chapter of the book.

1423.

Think of a company that you‘re familiar with that has grown via a product line extension strategy. Provide an overview of the company and how it‘s rolled out its product line extension strategy.

Answer: This is a good question for an individual or group assignment. An example of a company that has grown via a product line extension strategy is Apple.

Not only does it have several versions (i.e., product extensions) of each of its desktop and laptop computers, but also has several versions of its iPod, iPhone, and iPad, each with varying levels of memory and other capabilities.

1424.

Zynga is a social network game developer that develops browser-based games that work both as standalone games and as application widgets on social networking sites such as Facebook. What are the pluses and minuses of Zynga‘s approach to launching games that rely on another company‘s platform (i.e., Facebook) to reach its intended audience? Is Zynga growing primarily via internal or external growth strategies?

Answer: The obvious plus is that Zynga can piggyback on a popular platform. The big danger in building a business on top of another business‘s platform is that if the other business changes its approach, your business can be adversely affected. If Facebook decided to change the way it allows other businesses to utilize its platform, for example, Zynga could lose a large share of its business literally overnight. Zynga is utilizing primarily hybrid forms of growth. It makes most of its games in-house, but deploys them through alliances with external platforms, such as Facebook.

1425.

Cisco Systems, Microsoft, and IBM often acquire small, technology-based entrepreneurial firms. Why would Cisco Systems, Microsoft, and IBM, which each employ hundreds of product development specialists and engineers, buy other firms to acquire technology and add to their product lines, rather than developing the technology and new products in-house?

Answer: Because even Cisco Systems, Microsoft, and IBM, despite their technological prowess, don‘t have all the answers. There are many entrepreneurs working independently or as part of small companies that are innovating and creating exciting new technologies.

Because they are financially strong, Cisco Systems, Microsoft, and IBM are able to act opportunistically and snap up the small companies that they think have the most exciting technologies and represent a good fit for their company.

1426.

Google reportedly offered to buy Groupon for $5 billion to $6 billion in November 2010—an offer that Groupon turned down. Why do you think Google wanted to acquire Groupon, and why do you think Groupon declined Google‘s offer?

Answer: Google most likely wanted to acquire Groupon for two reasons: (1) to benefit from the momentum that Groupon has achieved in the flash sale market, and (2) to obtain Groupon‘s management team and its intellectual property. Groupon likely declined Google‘s offer because the company felt it was gaining substantial momentum on its own, and could benefit by remaining an entrepreneurial start-up, rather than folding itself into a larger organization.

1427.

Brian Brunner is an entrepreneur who has invented several devices that are used in the telecommunications industry. He has patented the devices and manufacturers them in a job shop in Oklahoma City. Brian sells the devices directly to AT&T and Verizon. Last week, Brian got a certified letter in the mail from Nokia, indicating that firm‘s interest in licensing the technology that is represented in one of his devices. Brian doesn‘t know anything about licensing and has turned to you for help. What would you tell Brian about licensing, and how would you suggest that he respond to Nokia‘s letter?

Answer: Brian should be told that licensing is the granting of permission by one company to another company to use a specific form of its intellectual property in exchange for an initial payment and an ongoing licensing fee. As a result, by licensing his technology to Nokia, Brian would probably receive a cash payment from Nokia plus a recurring licensing

fee. Although this sounds good, the downside of licensing is that by licensing his technology to Nokia, Brian will in effect teach Nokia how to use his technology (and Nokia may independently find ways to use the technology that Brian hasn‘t thought of).

When Nokia reaches the point where it thinks it knows as much about the technology (or the science behind the technology) as Brian does, it might come out with something just different enough from Brian‘s technology that it wouldn‘t infringe on Brian‘s patent. Nokia could then start going after some of Brian‘s other customers.

1428.

A friend of yours owns a chain of 25 fitness centers in Florida and Georgia. The fitness centers cater primarily to young professionals, ages 21 to 40. Your friend is worried because his centers have declined in terms of overall membership. Your friend told you that he‘s interested in pursuing strategic alliances to rev up the growth of his centers but is having trouble thinking about the types of companies he can partner with. What suggestions would you offer to your friend given his situation?

Answer: Your friend obviously wants to partner with companies that can drive business to his fitness centers. Suggestions include businesses such as weight loss centers, health food stores, and physical therapy centers, which are places for people who are trying to improve their health in some way, and may also be interested in improving their fitness via exercising.

1429.

Study the popular social networking site LinkedIn. What growth strategies has the company employed? What are the most appropriate growth strategies for this firm to use going forward? Why?

Answer: This is a good question for an individual or group assignment. LinkedIn is now a part of Microsoft.

YOU BE THE VC 14.1 Company: Farmers Business Network (https://farmersbusinessnetwork.com) Business Idea: Create a platform that allows farmers to share data on all of their farming practices. The data is then pooled with data from similar farms in order to create analytics that provide farmers insights about costs, the

best time to plant, the optimal amount of fertilizer to apply, the best time to harvest, the optimal time to market their grain, and other important factors.

You Be the VC Scorecard Farmers Business Network (https://farmersbusinessnetwork.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

According to Crunchbase, Amol Deshpande and Charles Baron founded Farmers Business Network (FBN) in 2014. Currently, it has a strong top management team who specializes in fields relevant to FBN such as data analytics and operations.

FBN has an active two-member advisory board. The advisors are both from venture capital firms, suggesting that they are in place to help in additional fund raising.

Strength of the Opportunity

1

2

3

4

5

The opportunity is strong. As the case points out, the fragmented nature of the farming business means that an individual farmer lacks two key things: access to best practices data and bargaining power to buy inputs. FBN takes care of both.

Strength of the Industry

1

2

3

4

5

Farming is a major industry in the United States and globally. Farming is largely a fragmented industry and given the rural nature of the business, most farmers are unconnected to other farmers. This hinders data sharing and collective negotiation. This means that FBN can provide real value.

Strength of Business

1

2

3

4

5

Model FBN is primarily a website that collects, analyzes, and disseminates data. It also connects farmers with input suppliers. Revenues are via membership fees and commissions from connecting farmers and suppliers.

Average Score

4.00/5.00

Decision: We would fund Farmers Business Network. We like the management team, the value proposition, and the industry that it is in. The business model would benefit from the network effect – each farmer sees value in joining the network and the network benefits from additional farmers (increased data and increased bargaining power with suppliers). As more farmers join the network, FBN will get more successful.

YOU BE THE VC 14.2 Company: Zero Motorcycles (www.zeromotorcycles.com) Business Idea: Build an electric motorcycle that is lightweight, efficient, quick off the line, and fun to drive.

You Be the VC Scorecard Zero Motorcycles (www.zeromotorcycles.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

Neil Saiki founded Zero Motorcycles in 2006. He appears to have left the company in 2011, at which time the company hired a top management team led by current CEO, Sam Paschel.

Paschel now has a team of operations and business people.

Invus, a venture capital firm, has invested several times (in several rounds) in the company.

Strength of the Opportunity

1

2

3

4

5

The opportunity appears to be big although it is hard to determine precisely. While Tesla has made significant headway in electric cars, the electric motorcycle business industry is still in its infancy.

Strength of the Industry

Strength of Business Model

Average Score

1

2

3

4

5

The electric motorcycle segment is a part of the overall motorcycle segment. This is a large market made up of brands such as Harley-Davidson.

There are formidable players going up against Zero Motorcycles – players such as BMW and Polaris.

1 2 3 4 5 Zero Motorcycles sells through power sport and cycle dealerships. This means they have a traditional retail model – company to dealer to end user. Their price point is roughly $10,000 at the higher end of the bike segment.

3.00/5.00

Decision: We would not fund this firm. Although Zero Motorcycles has a first mover advantage, big players such as BMW and Harley-Davidson already have their competing offerings. In addition, the founder has left the company and a new management team is in place. We don‘t believe Zero Motorcycles can compete effectively with the major players.

CASES Case 14.1 Warby Parker: Pursuing an Omni-Channel Strategy for Firm Growth DISCUSSION QUESTIONS 1434.

How is Warby Parker able to sell eyewear at such a low price?

Answer: As the case points out, eyewear costs a lot because Luxottica is a near monopoly with an 80 percent share of the market. They can charge a high price because there is not much choice for the customer. In addition, brand name owners such as Calvin Klein charge hefty royalties (15 percent) that add to the price customers pay. Warby Parker operates outside of the Luxottica ecosystem and also doesn‘t carry popular brands. The cost savings are passed on to customers.

1435.

Explain the rationale behind Warby Parker‘s omnichannel strategy. Provide an example of another company that is pursuing a similar strategy. On a scale of 1 to 10 (10 is high), how much potential does this strategy have for increasing Warby Parker‘s sales and profitability?

Answer: The key to an omnichannel strategy is that the various channels are complementary to one another and each channel does not cannibalize sales from the others. Warby Parker wants to do two things via its omnichannel strategy: one is to create awareness for its brand, and the other is to make its products accessible to those who do not want to shop for eyewear online. Crate & Barrel is an example of a company that uses such a strategy successfully. The potential for Warby Parker is high (perhaps a 9) because its target market (18-34 year olds) is comfortable shopping in many different channels.

1436.

In what markets, beyond eyewear, would Warby Parker‘s business model work? If Warby Parker decides to expand beyond eyewear, which market do you think it will tackle next?

Answer: Warby Parker disrupted a business that had a large monopolist – Luxottica. Given that they have gone into a business with high price points and succeeded with a low cost model, students should be encouraged to do research and come up with a list of industries that have similar features. This will set the stage to discuss where Warby Parker could go next.

1437.

In 2017, Warby Parker opened its first optical lab to cut and insert lenses into frames; this is the first step to becoming a vertically integrated company.

Does it make sense for Warby Parker to do its own manufacturing? What are the pluses and minuses of

moving in this direction?

Answer: We don‘t know how much of a $700 pair of glasses‘s price consists of the labor cost of cutting and inserting lenses. If the cost is large, it makes sense for Warby Parker to vertically integrate. If it is not, then there is no economic benefit for Warby Parker to do something that others can do more efficiently. The pluses are better quality control and speed of delivery; the minuses are inflexibility, greater capital investment in a non-core area, and higher costs.

1438.

Comment on the wisdom of Warby Parker‘s growth strategy.

Answer: This is a good question for an individual or a group research project and presentation.

Case 14.2 Justin‘s Nut Butter: Why do Large Companies Acquire StartUps and Why do Start-Ups Agree to be Acquired?

DISCUSSION QUESTIONS 1439.

Why do you think Hormel acquired Justin‘s to add to the strength of its peanut and nut butter offerings and to add a product to its portfolio that appealed to a younger, more health-conscious consumer rather than creating a similar product from scratch in its own R&D labs?

Answer: Hormel would find it difficult to create a brand that has the authenticity among its target market that Justin‘s does. It is hard for a large company to appear as a small and quirky brand. That is why Unilever acquired Ben and Jerry‘s.

1440.

Why do you think Justin‘s didn‘t try to raise additional funds to acquire more resources to manage its growth rather than selling itself to Hormel?

Answer: Funds are only one of several requirements for growth. To scale up, Justin‘s has to get the skilled manpower which may not be easy. In addition,

as the case says, they were in only 35 percent of the stores across America with a zero presence in convenience stores. Only a big company like Hormel could give them the market reach and the funds required for growth.

1441.

If you had been a loyal Justin‘s customer when the Hormel acquisition was announced, would you have reacted adversely to the acquisition? Why or why not?

Answer: This is a good question to pose to the class as this is a very personal decision. Some may feel that Justin‘s sold out while other may simply care for the product and not the ownership. The same issue arose when Honest Tea was sold to Coca-Cola.

1442.

What is a liquidity event? Why do firms that take money from investors strive to find a liquidity event within a 5-7-year time frame? In your judgment, did Justin‘s have a favorable exit (or liquidity event)?

Explain your answer.

Answer: A liquidity event takes place when owners cash out. For example, a company‘s IPO is a liquidity event because going public means the investors can convert all or part of their shares into cash.

Investors (unlike company founders) have limited patience. They view their investment in specific time horizons and 5-7 years is typical. Students‘ opinions may differ as to whether Justin‘s had a favorable exit or not, but from a financial point-of-view, all of Justin‘s investors, including its employees, did very well.

CHAPTER 15 FRANCHISING LEARNING OBJECTIVES 1.

2.

3.

4.

5.

Explain franchising and how this form of business ownership works.

Describe steps entrepreneurs can take to establish a franchise system.

Become familiar with the advantages and disadvantages of establishing a franchise system.

Describe actions and issues associated with a decision to buy a franchise.

Explain the steps an entrepreneur goes through to buy a franchise.

6.

7.

Identify and explain the various legal aspects associated with the franchise relationship.

Discuss two additional issues—franchise ethics and international franchising—entrepreneurs should think about when considering franchising.

CHAPTER OVERVIEW This chapter focuses on franchising. The chapter begins by discussing what franchising is and describes the steps entrepreneurs can take to establish a franchise system. The distinction between a product and trademark franchise and a business format franchise is explained. The different types of franchise agreements (e.g., individual franchise agreement, area franchise agreement, master franchise agreement) are also explained and discussed.

The middle portion of the chapter looks at franchising from both the franchisor and the franchisee‘s point of view. An emphasis is placed on when franchising represents an appropriate growth strategy and the steps to franchising a business. An emphasis is also placed on how an individual knows if franchising is a good choice for him or her. The common misconceptions about franchising are also discussed.

The chapter ends by talking about the legal aspects of franchising and the future of franchising in the United States and abroad. Also discussed are franchise ethics and international franchising.

CHAPTER OUTLINE XX. XXI.

XXII. XXIII.

XXIV. XXV.

What Is Franchising and How Does It Work?

A. What Is Franchising?

B. How Does Franchising Work?

Establishing a Franchise System A. When to Franchise B. Steps to Franchising a Business C. Selecting and Developing Effective Franchisees Advantages and Disadvantages of Establishing a Franchise System Buying a Franchise K. Is Franchising Right for You? L. The Cost of a Franchise M. Finding a Franchise N. Advantages and Disadvantages of Buying a Franchise Steps in Purchasing a Franchise I. Watch Out! Common Misconceptions about Franchising Legal Aspects of the Franchise Relationship

A. Federal Rules and Regulations B. State Rules and Regulations More About Franchising E. Franchise Ethics F. International Franchising G. The Future of Franchising

XXVI.

CHAPTER NOTES XI. 



What Is Franchising and How Does It Work?

Franchising is a form of business organization in which a firm that already has a successful product or service (franchisor) licenses its trademark and method of doing business to other businesses (franchisees) in exchange for an initial franchise fee and an ongoing royalty.

Some franchises are established firms; others are first-time enterprises that entrepreneurs are launching.

A. What Is Franchising? The word franchise comes from an old dialect of French and means ―privilege‖ or ―freedom.‖ Franchising has a long history.

1. Many of the most familiar franchises in the United States, including KFC (1952), McDonald‘s (1955), Burger King (1955), and H&R Block (1958), started in the post–World War II era of the 1940s and 1950s.

B. How Does Franchising Work? There is nothing magical about franchising. It is a form of growth that allows a business to get its products or services to market through the efforts of business partners or ―franchisees.‖ 1. There are two distinctly different types of franchise systems. A product and trademark franchise is an arrangement under which the franchisor grants to the franchisee the right to buy its products and use its trade name. This approach typically connects a single manufacturer with a network of dealers or distributors. Examples of product and trademark franchises are General Motors and Exxon Mobile. The second type is a business format franchise, which is the more popular of the two. In a business format franchise, the franchisor provides a formula for doing business to the franchisee along with

training, advertising, and other forms of assistance.

2. For both product and trademark franchises and business format franchises, the franchisor– franchisee relationship takes on one of three forms of a franchise agreement. i.

An individual franchise agreement involves the sale of a single franchise for a specific location.

ii.

An area franchise agreement allows a franchisee to own and operate a specific number of outlets in a particular geographic area.

iii.

A master franchise agreement is similar to an area franchise agreement, with one major difference. A master franchise, in addition to having the right to open and operate a specific number of locations in a particular area, also has the right to offer and sell the franchise to other people in the area. The people who buy franchises from master franchisees are called subfranchisees.

3. A person who owns and operates more than one outlet of the same franchisor is called a multiple-unit franchisee.

XII.

Establishing a Franchise System 

Establishing a franchise system should be approached carefully and deliberately. Franchising is a complicated business endeavor, which means that an entrepreneur must look closely at all of its aspects before deciding to franchise.

A. When to Franchise. There are at least two options firms have as a means of growth. Building companyowned outlets is one. Franchising is the other.

Franchising is appropriate when a firm has a strong or potentially strong trademark, a well-designed business model, and a desire to grow.

B.

Steps to Franchising a Business 1. The steps to franchising a business are shown in Figure 15.2 in the textbook. These steps include:

a. Step 1: Develop a franchise business plan. b. Step 2: Get professional advice. c. Step 3: Conduct an intellectual property audit. d. Step 4: Develop franchise documents. e. Step 5: Prepare operating manuals. f. Step 6: Plan an advertising strategy and a franchise training program. g. Step 7: Put together a team for opening new franchise units. h. Step 8: Plan a strategy for soliciting prospective franchisees. i. Step 9: Help franchisees with site selection and the grand openings of their franchise outlets.

C. Selecting and Developing Effective Franchisees 1. Table 15.2 in the textbook contains a list of the qualities that franchisors look for in prospective franchisees and the steps that franchisors can take to develop their franchisees‘ potential.

XIII. Advantages and Disadvantages of Establishing a Franchise System A. There are two primary advantages to franchising.

1. First, early in the life of an organization, capital is typically scarce, and rapid growth is needed to achieve brand recognition and economies of scale.

Franchising helps an organization grow quickly because franchisees provide the majority of the capital.

2. Second, a management concept called agency theory, which we discussed in Chapter 13, argues that for organizations with multiple units (such as restaurant chains), it is more effective for the units to be run by franchisees than by managers, who run company-owned stores.

B. Primary disadvantage of franchising.

1. The primary disadvantage of franchising is that an organization allows others to profit from its trademark and business method.

C. Table 15.3 in the textbook lists the primary advantages and disadvantages of franchising as a means of business expansion.

XIV. Buying a Franchise A. Is Franchising Right for You? 1. Purchasing a franchise should be weighed against the alternatives of buying an existing business or launching an entrepreneurial venture from scratch.

2. Answering the following questions will help determine whether franchising is a good fit for people thinking about starting their own business. a. Are you willing to take orders? b. Are you willing to be part of a franchise ―system‖ rather than be an independent businessperson? c. How will you react if you make a suggestion to your franchisor and your suggestion is rejected? d. What are you looking for in a business? e. How willing are you to put your money at risk?

B. The Cost of a Franchise 1. The initial cost of a business format franchise varies, depending on the franchise fee, the capital needed to start the business, and the strength of the franchisor.

2. Table 15.4 in the textbook shows the costs of buying into several franchise organizations.

3. The following costs are typically associated with buying a business format franchise: a. Initial franchise fee b. Capital requirements c. Continuing royalty payment d. Advertising fee e. Other fees C. Finding a Franchise 1. There are thousands of franchise opportunities available to prospective franchisees.

2. There are many periodicals, Web sites, and associations that provide information about franchise opportunities. Every Thursday and Saturday, for example, ads for franchise opportunities appear in special sections of The Wall

Street Journal. Similar ads appear every Wednesday in USA Today. Magazines featuring franchise organizations include Inc. and Entrepreneur.

D. Advantages and Disadvantages of Buying a Franchise 1. There are two primary advantages to buying a franchise over other forms of business ownership. a. First, franchising provides an entrepreneur the ability to own a business using tested and refined business methods. This attribute lessens the probability of business failure. b. Second, when an individual purchases a franchise, the franchisor typically provides training, technical expertise, and other forms of support.

2. The main disadvantage of buying a franchise is the cost involved.

3. Table 15.6 contains a list of the advantages and disadvantages of buying a franchise.

XV. 

Steps in Purchasing a Franchise Purchasing a franchise is a seven-step process, as illustrated in Figure 15.3 in the textbook.

A. Watch Out! Common Misconceptions about Franchising 1. The following is a list of misconceptions that franchisees often have about franchising: a. Franchising is a safe investment. b. A strong industry ensures franchise success. c. A franchise is a ―proven‖ business system. d. There is no need to hire a franchise attorney or an accountant. e. The best systems grow rapidly, and it is best to be a part of a rapid-growth system. f. I can operate my franchise outlet for less than the franchisor predicts. g. The franchisor is a nice person—he‘ll help me out if I need it.

XVI. Legal Aspects of the Franchise Relationship A. Federal Rules and Regulations

1. The offer and sale of a franchise is regulated at the federal level. According to Federal Trade Commission Rule 436, franchisors must furnish potential franchisees with written disclosures that provide information about the franchisor, the franchised business, and the franchise relationship.

2. In most cases, the disclosures are made through a lengthy document referred to as the Franchise Disclosure Document (FDD). The FDD contains 23 categories of information that give prospective franchisees a broad base of information about the background and financial health of the franchisor.

Note: The Franchise Disclosure Document used to be called the Uniform Franchise Disclosure Document.

3. The FDD requires the franchisor to attach a copy of the franchise agreement and any other related contractual documents to the circular. The franchise agreement, or contract, is the document that consummates the sale of the franchise.

B.

State Rules and Regulations 1. In addition to the FTC disclosure requirements, 15 states have laws providing additional protection to potential franchisees. (The states are listed in the textbook.)

2. In most of these states, a franchisor is required to file its FDD with a designated state agency, making the FDD public record.

XVII.

More About Franchising

A. Franchise Ethics 1. The majority of franchisors and franchisees are highly ethical individuals who are interested only in making a fair return on their investment.

2. There are certain features about franchising, however, that make it subject to ethical abuse. An understanding of these features can help franchisors and franchisees guard against making ethical mistakes. These features are as follows: a. The get-rich-quick mentality

b. The false assumption that buying a franchise is a guarantee of business success c. Conflicts of interest between franchisors and their franchisees B. International Franchising 1. International opportunities for franchising are becoming more prevalent as the markets for certain franchised products in the United States have become saturated.

2. Foreign firms are also taking advantage of the trend toward globalization and are offering franchises in the United States and other countries.

3. Steps to take before buying a franchise in a foreign country are listed in the textbook.

C. The Future of Franchising 1. The future of franchising appears bright. Franchise opportunities represent a larger and growing segment of the retail and service sectors of U.S. businesses and are in some cases replacing more traditional forms of small business ownership.

BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING What Went Wrong?

Down But Not Out: What Happened to Sbarro and Will It Make a Comeback?

1.

Why do you think Sbarro stuck with its strategy of operating out of food courts in malls, even when it was evident that mall foot traffic was declining?

Answer: In retrospect it seems obvious that a mallbased chain was vulnerable to a decline in mall traffic. Imagine in 2004 if somebody told Sbarro that, starting in a year‘s time, no new malls would be opened in the U.S.! 2004 was when Sbarro‘s hit its financial peak. When you have established a position as the go-to place in a mall (as the case says, people shopped at JCPenney, Gap, and Waldenbooks at the mall and then ate at Sbarro‘s), it is hard to change your strategy.

2.

What are three things that food franchisors and their franchisees can learn from Sbarro‘s experience?

Answer: One thing that franchisors should learn is adaptation in its offerings. This is extremely important in the food industry. The sight of greasy pizza, pre-made and sitting for a while under hot lights was something that the market had pretty much forsaken for fresher offerings. The second is adaptation in terms of format. Fast food is a product where the decision largely rests on whether the outlet is accessible. This means that food outlets should be where there is traffic. Mall traffic was declining and this affected Sbarro adversely. Third, one has to adapt to changing shopping behavior. Most Americans are comfortable with doing things online. A food franchisor has to augment its offerings by integrating the web, much like what Starbucks does in facilitating mobile payments that quicken the delivery.

3.

Was Slate.com justified in calling Sbarro ―America‘s least essential restaurant?‖ Answer: There is a strong case to be made for how Slate.com labeled Sbarro. It was least essential because it was where people were not (malls) and it offered something that people did not want (pre-cooked food).

4.

On a scale of 1 to 10 (10 is high), how likely is it that Sbarro will become a major pizza franchise again?

Explain your answer.

Answer: This is a good question for an individual or group assignment. Most students will say that Sbarro‘s time has passed, but some could argue that if they pivot by locating in non-mall high traffic areas and offer fresh food, they have a chance to succeed again.

Savvy Entrepreneurial Firm Wahoo‘s Fish Taco: A Moderate-Growth Yet Highly Successful Franchise Organization 1.

What are the advantages and disadvantages of Wahoo‘s Fish Taco‘s slow growth philosophy of franchise expansion?

Answer: The advantage of Wahoo‘s Fish Taco‘s slow growth philosophy of franchise expansion is that the company can deliberately and thoughtfully incorporate

everything it‘s learned from its previous locations into its new locations. It can also be selective in who it picks as franchisees and where its franchise outlets are located, because it‘s not moving at a rapid pace.

The disadvantage of slow growth is that the company may not be fully leveraging its expertise and brand. It may be in effect ―leaving money on the table‖ by not expanding its concept faster to different geographic locations.

2.

Spend some time looking at Wahoo‘s Fish Taco‘s Web site, focusing particularly on its menu and its store layout. Do you think the business is well positioned or poorly positioned to take advantage of current trends in the types of restaurants that are doing well and in light of today‘s food preferences? Explain your answer.

Answer: This is a good question for an individual or group assignment. In regard to Wahoo‘s menu, most students will say Wahoo‘s is well positioned to take advantage of the trend for healthier eating, given its emphasis on fish, chicken, salads, and vegetable dishes. It even has a tofu offering. It‘s more difficult to discern whether the company configures its stores in a manner that is consistent with current trends. Photos of exterior and interior shots of their stores, which can be accessed via Google Images, protray their stores as very modern and hip.

3.

To what degree do you think Wahoo‘s Fish Taco has been too conservative in its expansion?

Answer: This is a good thought question because there is not a single correct answer. On the one hand, Wahoo‘s has benefited from its measured pace of growth, as discussed in the answer to Question 1. On the other hand, it‘s clear that Wahoo‘s may be ―leaving money on the table‖ if it has more qualified franchisees than it‘s willing to accommodate.

4.

Spend some time studying the cost of becoming a Wahoo‘s Fish Tacho franchisee compared to similar franchise organizations. Is the cost of acquiring and owning a Wahoo‘s Fish Taco franchise on the high end, in the middle, or on the low end compared to its closest competitors? To what degree do you believe your answer has affected Wahoo‘s pace of growth?

Answer: Wahoo‘s is on par with similar restaurant franchises. It‘s initial investment is $540,000–

$715,000, its franchise fee is $25,000–$30,000, and its royalty is 5 percent of gross sales. By comparison, Qdoba Mexican Grill requires an initial investment of $594,000–$795,000, has a $30,000 franchise fee, and charges a 5 percent royalty. Some nationally branded restaurant chains have even higher fees. Taco Bell, for example, requires a $1 million to $2 million total investment, has a $45,000 franchise fee, and charges a 5.5 percent royalty. Based on these numbers, it‘s hard to argue that the costs of becoming a Wahoo‘s franchisee has affected the company‘s pace of growth, either positively or negatively.

Partnering for Success Franchises Partner with Nonprofits to Give Back 1.

Identify an ideal nonprofit for a fitness center franchise that caters to college students to partner with. Describe the rationale for your selection. You can pick a nonprofit that is local to your area or a nonprofit that has a national presence.

Answer: Students should be encouraged to think of ideas on their own. One possibility could be the Boys and Girls Club of America where the fitness center could encourage both its employees and customers (college students) to volunteer to be mentors or coaches. A second example would be Junior Achievement, to go into classrooms and teach impressionable young minds.

2.

If you worked for a home improvement or home repair franchise organization, to what degree would it enhance your commitment to the organization if they allowed you to donate a certain number of hours to a nonprofit such as Habitat for Humanity ―on the clock‖?

Answer: This is a question that asks students to share their feelings about doing volunteer work on the clock.

This is a good question for a classroom discussion.

3.

Do some Internet research and identify a partnership between a franchise organization and a nonprofit that is not mentioned in this feature. Describe the purpose of the partnership and how the franchise organization and the nonprofit both benefit.

Answer: This is a good question for an individual or a group assignment.

4.

Brainstorm a fourth potential rule-of-thumb that would facilitate a successful franchise organization/nonprofit partnership.

Answer: This is a good question for a classroom assignment.

REVIEW QUESTIONS 151.

What is franchising?

Answer: Franchising is a form of business organization in which a firm that already has a successful product or service (franchisor) licenses its trademark and method of doing business to other businesses (franchisees) in exchange for an initial franchisee fee and an ongoing royalty.

152.

How does franchising differ from other forms of business ownership?

MyLab Question.

153.

What are the differences between a product and trademark franchise and a business format franchise?

Provide at least two examples of both types of franchise arrangements.

Answer: A product and trademark franchise is an arrangement under which the franchisor grants to the franchisee the right to buy its products and use its trade name. This approach typically connects a single manufacturer with a network of dealers or distributors. Examples of this type of arrangement are automobile dealerships and soft drink franchises.

In a business format franchise, the franchisor provides a formula for doing business to the franchisee along with training, advertising, and other forms of assistance. Examples include fast-food restaurants and hotels.

154.

What are the differences among an individual franchise agreement, an area franchise agreement, and a master franchise agreement?

Answer: An individual franchise agreement involves the sale of a single franchise for a specific location. An area franchise agreement allows a franchisee to own and operate a specific number of outlets in a particular geographic area. A master franchise agreement is similar to an area franchise agreement, with one major difference. A master

franchise, in addition to having the right to open and operate a specific number of locations in a particular area, also has the right to offer and sell the franchise to other people in its area.

155.

Why is it important for a franchisor to develop detailed and thorough operating manuals?

Answer: So the franchisees can quickly learn the business methods and systems and procedures of the franchisor.

156.

What are the advantages and disadvantages of establishing a franchise system?

Answer: The advantages and disadvantages of establishing a franchise system are laid out in Table 15.3 in the chapter. The advantages and disadvantages include: Advantages of establishing a franchise system:      

Rapid, low-cost market expansion Income from franchise fees and royalties Franchisee motivation Access to ideas and suggestions Cost savings Increased buying power

Disadvantages of establishing a franchise system:       157.

Profit sharing Loss of control Friction with franchisees Managing growth Differences in required business skills Legal expenses

What are the rules of thumb for determining whether franchising is a good choice for a particular business?

Answer: The following criteria are helpful in determining whether franchising is a good choice for a particular business:

     158.

The uniqueness of its product or service (it should be unique along some dimension) The consistent profitability of the firm (the business should be consistently profitable) The firm‘s year-round profitability (the business should be profitable year-round) The degree of refinement of the firm‘s business systems (the systems and procedures for operating the business should be polished) The clarity of the business proposition (the business proposition should be crystal clear)

What is an example of a business that wouldn‘t be suitable for franchising?

Answer: A mundane business, such as a local café, that has no particular distinctiveness and is only sporadically profitable wouldn‘t be suitable for franchising. There is just no compelling reason to replicate the business in additional locations.

Similarly, a lawn and garden business in North Dakota, that offers no source of income for its franchisees during the long winter months, probably isn‘t suitable for franchising. The exception would be if the business is marketed as a seasonal business, and the franchisees had other sources of income during the winter months.

159.

What are some of the issues an entrepreneur should consider when answering the question, ―Is franchising a good choice for me?‖ MyLab Question.

1510.

What are the costs involved in purchasing a business format franchise? Are these costs similar across franchise systems, or do they vary widely? Which costs are one-time costs and which costs continue indefinitely?

Answer: The following costs are typically associated with buying a business unit franchise.    

Initial franchise fee Capital requirements Continuing royalty payment Advertising fee



Other fees

Costs vary widely across franchise systems (think of Burger King versus a new franchise organization), with the exception of the continuing royalty payment.

Royalty fees are usually around 5 percent of gross income. The only one-time costs are the initial franchise fee and the initial capital costs of getting the franchise up and running (such as buying property and constructing a building). The royalty payments continue indefinitely. Advertising and other fees are typically assessed periodically, but theoretically can continue indefinitely.

1511.

Typically, if an individual franchise unit is losing money, does it still have to pay a monthly royalty to the franchisor? Explain your answer.

Answer: Yes. Franchisees pay royalties based on a percentage of gross rather than net income. This means that even if they are losing money (i.e., negative net income), they are still obligated to pay a royalty on their revenues.

1512.

What are some resources available to you as a prospective franchisee to identify franchise opportunities?

Answer: There are many periodicals, Web sites, and associations that provide information about franchise opportunities. Every Thursday and Saturday, for example, ads for franchise opportunities appear in special sections of The Wall Street Journal. Similar ads appear every Wednesday in USA Today. There are also franchise fairs held periodically in major cities across the United States where franchisors set up booths (in a trade show format) to display information about their opportunities to prospective franchisees. The U.S. Small Business Administration is another good source of franchise information.

1513.

What are the principal advantages and disadvantages of buying a franchise?

Answer: The principle advantages and disadvantages of buying a franchise are laid out in Table 15.5. The principle advantages and disadvantages are as follows: Principle advantages of buying a franchise:

      

A proven product or service within an established market An established trademark Franchisor‘s training, technical expertise, and managerial experience An established marketing network Franchisor ongoing support Availability of financing Potential for business growth

Principle disadvantages of buying a franchise:        1514.

Cost of the franchise Restrictions on creativity Duration and nature of the commitment Risk of fraud, misunderstandings, or lack of franchisor commitment Problems of termination or transfer Poor performance on the part of other franchisees Potential for failure

Why is it important for a prospective franchisee to retain his or her own franchise attorney?

Answer: To have someone whose specific role is to represent the franchisee‘s best interests in all negotiations leading to the signing of the franchise agreement.

1515.

―Franchising is a safe investment.‖ What would you think if you saw this statement in a magazine or on a blog?

Answer: Although franchising is often characterized as a ―safe‖ investment, even the success of the best franchise systems boils down to proper management and execution. So although a company such as McDonald‘s or Panera Bread may be ―safe‖ in terms of having a strong brand and an informed clientele, the success of an individual McDonald‘s or an individual Panera Bread still boils down to how effectively the franchisee runs that particular outlet.

1516.

What is the purpose of the Franchise Disclosure Document (FDD)? Are there any regulations regarding when the FDD must be provided to a prospective franchisee? If so, what are they?

Answer: The offer and sale of a franchise is regulated at the federal level. According to the Federal Trade Commission (FTC) Rule 436, franchisors must furnish potential franchisees with written disclosures that provide information about the franchisor, the franchised business, and the franchise relationship. These disclosures are made through a lengthy document referred to as the Franchise Disclosure Document (FDD), which is accepted in all 50 states and parts of Canada. The FDD must be supplied by the franchisor to the prospective franchisee at least 10 business days before the franchise agreement can be signed.

1517.

What is the purpose of a franchise agreement?

Answer: The franchise agreement, or contract, is the document that consummates the sale of the franchise.

Although franchise agreements vary, each agreement typically contains two sections: the purchase agreement and the franchise or license agreement.

1518.

What are some of the aspects of franchising that make it subject to ethical abuses?

Answer: There are at least three aspects of franchising that make it subject to ethical abuse.

These are:   

1519.

The get-rich-quick mentality The false assumption that buying a franchise is a guarantee of business success Conflicts of interest between franchisors and franchisees

For U.S. citizens, what are the main issues that should be considered before buying a franchise in a foreign country?

Answer: For U.S. citizens, some of the main issues to consider before buying a franchise in a foreign country are as follows:   

Consider the value of the franchisor‘s name in the foreign country.

Get a good lawyer.

Determine whether the product or service is saleable in a foreign country.

   1520.

Uncover whether the franchisor has experience in international markets.

Find out how much training and support you will receive from the franchisor.

Evaluate currency restrictions.

What are the main reasons that many U.S. franchise systems are expanding into global markets? Do you think this expansion will continue to gain momentum or decline over time?

Answer: There are several reasons that are motivating U.S. franchise systems to expand into global markets:   

The U.S. market for many franchised products is saturated.

The trend toward globalization is hastening the trend toward international franchising.

Regional initiatives, such as NAFTA, are making it increasingly attractive for U.S. firms to offer franchises for sale in foreign countries.

Challenge your students to find good examples of U.S. franchise systems that are expanding overseas.

APPLICATION QUESTIONS 1521.

A friend of yours heard her roommates talking about different kinds of franchises. Before she could ask questions, they left for a team meeting to work on a class project. Your friend knows that you are taking an entrepreneurship course. She asks you: ―What are the differences between a product and trademark franchise and a business format franchise?‖ For a first-time entrepreneur, she wonders, is there an advantage to one of these types of franchise arrangements compared to the other one? If so, which one is more advantageous for the first-time entrepreneur to pursue and why? What responses would you provide to your friend?

Answer: A product and trademark franchise is an arrangement under which the franchisor grants to the franchisee the right to buy its products and use its trade name. This approach typically connects a single manufacturer with a network of distributors. For example, General Motors has established a network of dealers that sell GM cars and use the GM trademark in

their advertising and promotions. In a business format franchise, the franchisor provides a formula for doing business to the franchisee along with training, advertising, and other forms of assistance.

Most students will argue that the business format franchise is the better choice for a first-time entrepreneur. It is much less expensive to become involved with, and the franchisor typically provides substantial training and support.

1522.

Identify a franchise location near where you live and ask to talk to the owner. Show the owner one of the two ―You Be the VC‖ features at the end of the chapter and ask the person whether he or she thinks the company will be successful. Write a brief summary of the owner‘s response.

Answer: This is a good question for an individual or a group assignment.

1523.

Bill Watts has decided to buy a sub shop franchise called Super Subs. He lives in Cedar Falls, Iowa, and will be the first Super Subs franchisee in the state.

Along with buying a Super Subs franchise, Bill would also like to purchase the rights to offer and sell Super Subs franchises to other people in the Cedar Falls area. What type of franchise agreement should Bill negotiate with Super Subs? For Bill, what are the advantages and disadvantages of this type of arrangement?

Answer: Bill should buy an area franchise agreement that gives him the right to own and operate a specific number of Super Sub franchises in Cedar Falls, Iowa. Sometimes area franchise agreements give the franchisee ―exclusive‖ rights to open franchise outlets within a certain geographic area and sometimes they don‘t. This is an issue that is typically part of the negotiations when an area franchise agreement is sold. For the franchisee, the advantage of owning an area franchise agreement is that he or she doesn‘t have to negotiate multiple individual franchise agreements. The disadvantage is that the franchisee deepens his or her commitment to a single franchise system.

1524.

A growing number of franchise organizations, including Wings Over, Great Harvest Bread Company, and Beef O‘ Brady‘s, are allowing their franchisees

to tweak their menus and change the appearances of their facilities, to better compete with local businesses. Do you think this is a good idea? What are the advantages and disadvantages of this approach?

Answer: Most students will think this is a good idea.

Although one of the staple concepts of franchising is to provide customers a consistent experience, in most cases allowing a few tweaks to accommodate local competitive conditions makes sense. The advantage of this is that it enables the generation of good ideas.

The disadvantage of this is that it reduced consistency.

1525.

Look at Table 15.4. If you were offered the opportunity to buy into any one of the franchise organizations listed in Table 15.4, which one would it be? Explain the rationale for your selection.

Answer: Students will vary in terms of their answers to this question.

1526.

A friend of yours owns a carpet and installation business, which is a full-time job. To increase his income, he‘s thinking about buying a 1-800-WaterDamage franchise, which is a franchise that helps homeowners and businesses restore property that has been damaged by a flood or water leak. His thinking is that he already has most of the equipment he needs to perform this type of service and has an experienced crew. Is your friend a good candidate for a 1-800-Water-Damage franchise? If not, what type of franchise could he buy that might be a good fit with his current business?

Answer: Most students will say that the individual referred to in the question is a good candidate for a 1-800-Water-Damage franchise. He has the equipment, expertise, and crew to complete the work that‘s required of a 1-800-Water-Damage franchisee. The only downside is that if it isn‘t his primary occupation, he may not prioritize 1-800-Water-Damage‘s jobs to the same degree that full-time 1-800-Water-Damage franchisees do. This could be a problem, because water damage is a problem that needs to be addressed quickly. Still, he represents a good candidate for a 1-800-Water-Damage franchisee. An increasing number of people just like the individual mentioned in the article are becoming franchisees of companies like 1-

800-Water-Damage to fill unused time and to better leverage the value of the equipment and expertise they already have.

1527.

Suppose you became interested in opening a School of Rock franchise (see Case 15.2 for more information about this company). You fly to Philadelphia and visit the company‘s headquarters. After learning more about the opportunity, you tell the School of Rock representatives that you‘re really interested and would like to move forward. If School of Rock follows the procedures it‘s supposed to in negotiating with you as a prospective franchisee, what should you expect from this point forward?

Answer: School of Rock should provide you a copy of their Franchise Disclosure Document, and notify you that you have 14 business days to review the document before you‘re required to sign a franchise agreement.

A copy of the franchise agreement should also be supplied. During the 14 business days you‘re reviewing the documents, School of Rock should be open to any inquiries you or your franchise attorney have about School of Rock in general or the terms of the franchise agreement.

YOU BE THE VC 15.1 Company: iLoveKickboxing.com (www.iLoveKickboxing.com) Business Idea: Create a workout studio franchise that allows patrons to strap on gloves and punch and kick their way to a healthier, happier, and fitter life.

You Be the VC Scorecard iLoveKickboxing.com (www.iLoveKickboxing.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

Michael Parella founded iLoveKickboxing in 2009. He comes with a fitness background. He has built a team of professionals

consisting of people well-versed in various business functions. The 12member executive staff seem quite capable of managing the company‘s growth.

Strength of the Opportunity

1

2

3

4

5

We believe the opportunity is moderately strong. Kickboxing has obvious benefits – as a fitness method, as a way to relieve stress, and as a way to develop self-defense skills. All this is accomplished in a communal setting. However, kickboxing is one of several fitness options and so it has to compete will all these options.

Strength of the Industry

1

2

3

4

5

The personal fitness market is a $28 billion market that is growing as more people realize the benefits of exercise. About 25 million Americans use fitness centers at least once a month. The industry is fragmented and consists of several distinct segments, of which kickboxing is one.

Strength of Business Model

1

2

3

4

5

The business model is sound. It does not cost a lot of money to be a franchisee ($120,000 to $312,000) and the 7 percent royalty fee (base plus ad) appears reasonable. There is minimal investment in the facility which makes it an attractive franchise. While the value proposition is sound, at the end of the day, kickboxing is one of many options.

Average Score

3.0/5.0

Decision: We would not fund this firm. It has strong management, is in a growing industry, and has a solid business model. However, we are not fully convinced that

kickboxing is more than a passing fad. There are several options to stay fit and kickboxing is one of them. This makes this firm a less attractive long-term proposition.

YOU BE THE VC 15.2 Company: IceBorn (www.ice-born.com) Business Idea: Develop a 24-hour-a-day, convenient, ondemand ice vending destination offering fresh, clean ice at a competitive price.

You Be the VC Scorecard IceBorn (www.ice-born.com) Item

Score/Comments

Strength of NewVenture Team

1

2

3

4

5

IceBorn is led by CEO Jeff Chiarugi.

Chiarugi has more than 30 years of experience in sales, manufacturing, and executive management. IceBorn and its parent company, IHA Holdings, were acquired in 2014 by Ulysses Management, a New York–based investment firm. Ulysses Management has substantial experience in providing management and operations oversight for its portfolio companies.

Strength of the Opportunity

1

2

3

4

5

We believe the opportunity is strong.

Almost everyone purchases packaged ice (at least occasionally), and ice is a consumable commodity, which means that it must be continually repurchased. The way IceBorn dispenses ice is also very appealing.

It‘s easy to sell the story that it‘s safer and fresher to buy IceBorn ice than ice from a traditional ice machine, a grocery store, or a gas station. The fact that ice is a $4 billion industry is attractive.

IceBorn currently has only a small sliver of the packaged ice market which provides it substantial upside potential.

Strength of the Industry

1

2

3

4

5

The bagged ice industry is a $4 billion industry and is growing. Ice vending represents only 4 percent of that market, giving IceBorn substantial upside potential. IceBorn is well positioned to capitalize on industry growth as a result of its strong brand and its proprietary method of dispensing ice. We also like the fact that the company has five patents on its ice vending technology, which means that no one will be able to dispense ice in the exact manner that IceBorn does.

Packaged ice is not a sexy industry, but it is a consumable product that nearly everyone uses.

Strength of Business Model

1

2

3

4

5

The business model is sound. IceBorn offers three different types of vending models, from the 6,000 pound bin capacity ICEBORN House to the smaller ICEBORN Express (which looks like a traditional vending machine).

The entry point for the ICEBORN express is $19,000, putting it within the reach of a large number of potential franchisees. ICEBORN units require minimal maintenance, meaning that people with jobs can purchase an ICEBORN franchise and manage the franchise in their spare time. We like the fact that the company is targeting veterans. Franchisees have a low COGS and high margins because the major input is water. The company offers franchisees access to financing, which expands the number of potential franchisees.

Average Score

4.5/5.0

Decision: We would fund this firm. It has strong management, is in a growing industry, and has a solid business model. We also like the fact that the company is targeting veterans. The ―story‖ the company has to sell is also very appealing. Almost everyone has had a bad experience purchasing packaged ice from a grocery store or gas station. The fact that IceBorn‘s ice is made on demand, and the first person to touch the ice is the customer, is an attractive idea to sell. Ice is obviously a consumable, which means that the franchisees will have repeat customers. The low price point of becoming a franchisee suggests that IceBorn has the potential to grow quickly.

CASES Case 15.1 Quiznos: Will It Regain a Leadership Position in the Sandwich and Sub Shop Franchise Industry?

DISCUSSION QUESTIONS 1532.

To what degree do you think Quiznos‘ brand has been permanently damaged by its missteps? Is Quiznos doing everything it can to repair its brand? What, if anything, would you do differently to revive Quiznos‘ brand if you were the company‘s CEO? Answer: There is no doubt that the Quiznos brand name no longer has the same cachet as in the past. It is hard to say if it is permanently damaged because the company is trying to make a comeback. But the company is now far behind both Subway and Jimmy John‘s in terms of number of outlets, which means it has a lot of catching up to do. The franchisee issues and leadership changes do not really affect how consumers perceive the brand. Inconsistent positioning and advertising do matter, though.

1533.

Why do you think Quiznos established the policies that caused so much angst among its franchisees?

Answer: It is very likely that the company wanted to grow rapidly and thought the way to do it was sell a lot of franchises quickly and also profit from

selling them ingredients. Corporate Quiznos wanted to grow and therefore came up with these policies.

1534.

At one time, Quiznos‘ major source of competitive advantage was the fact that it toasted its subs. What was the inherent danger in promoting toasted subs as the franchise chain‘s primary source of competitive advantage?

Answer: The problem with touting its toasted subs was that toasting is an easy to imitate activity. When others saw that the market responded to Quiznos‘ toasted sub, it was easy for, say, Subway to install ovens in their stores and take away Quiznos‘ advantage.

1535.

Of the four factors that caused Quiznos to lose market share, including identity crises, being at odds with franchisees, inconsistent advertising, and leadership changes, which factor do you think was the most damaging? Explain your answer.

Answer: One could make a case that while identity crisis was a major issue (that resulted in Quiznos being stuck-in-the-middle), it was probably the company‘s very poor relationship with its franchisees that was more serious. A franchise-based business is strong only when it has a robust franchisee network.

They are the ones who operate locally and implement the overall strategy. The parent Quiznos did not treat their franchisees well, which weakened the company‘s network and that ultimately resulted in deteriorating performance.

1536.

To what degree do you think Quiznos will be able to re-establish itself as a leader in the sandwich and sub shop franchise industry?

Answer: This is similar to the first question for this case, which talked about the value of the Quiznos brand. Quiznos‘ revival depends upon whether the company can articulate a clear message to the market and maintain good relationships with their franchisees. Although they are far behind the leader, Subway, they can at least be a viable company if they correctly implement their strategy.

Case 15.2 School of Rock: Filling a Gap in Music Education and Growing via Franchising

DISCUSSION QUESTIONS 1537.

What types of characteristics do you anticipate School of Rock looks for in franchisees?

Answer: Most students will say that School of Rock will principally look for franchisees that (1) have good music instruction skills, (2) enjoy and are good at working with kids in School of Rock‘s target market, and (3) have a network in the music industry.

The reason having a network is important is that it will enable the franchisee to recruit qualified instructors to staff the franchise.

1538.

Look at Table 15.2. Of the ways mentioned in this table for franchisors to develop franchisees, which ones are the most important for School of Rock to emphasize to support its franchisees?

Answer: Although most students will say all methods of support are important, the ones that jump out for School of Rock franchisees are: (1) keep operating manuals up-to-date; (2) keep product, services, and business systems up-to-date; and (3) maintain the franchise system‘s integrity. The instruction and creative side of the business will come from the franchisee. The best way the franchisor can help School of Rock franchisees is to assist them with the business side of the operation.

1539.

If you were to consider buying a School of Rock franchise, what issues would concern you the most about your ability to be successful as a franchisee for this company?

Answer: The answer to this question is similar to the answer to question 1. A School of Rock franchisee would need to be good at music instruction and enjoy working with young people. He or she would also need a strong network in the music industry. The network would be important to recruit instructors for the local franchise.

1540.

Over the next 10 years, what do you think lies ahead for School of Rock? What are some things that could go ―right‖ for the firm and some things that could go ―wrong‖ as the firm continues selling franchise locations as a means of growth?

Answer: Most students will say that School of Rock has a bright future. The things that could go right

include (1) the continual development of a strong brand, (2) satisfied students and parents who will tell others about the service, and (3) continued interest in music, which will motivate students to enroll in School of Rock programs. The things that could go wrong include: (1) franchisees that fail, which tarnishes the organization‘s brand; (2) dissatisfied students and parents, which will create negative buzz about the organization; and (3) a sour economy, which would limit the ability of students and parents to pay for School of Rock programs.

First Screen From ―Preparing Effective Business Plans‖ by Bruce R. Barringer

Part 1: Strength of Business Idea For each item, circle the most appropriate answer and make note of the (-1), (0), or (+1) score.

1. Extent to which the idea:  Takes advantage of an environmental trend  Solves a problem  Addresses an unfilled gap in the marketplace 2. Timeliness of entry to market 3. Extent to which the idea ―adds value‖ for its buyer

Low Potential (-1)

Moderate Potential (0)

High Potential (+1) Strong

Weak

Moderate

Not timely

Moderately timely

Very timely

Low

Medium

High

or end user

4. Extent to which the customer is satisfied by competing products that are already available 5. Degree to which the idea requires customers to change their basic practices or behaviors

Very satisfied

Moderately satisfied

Not very satisfied or ambivalent

Substantial changes required

Moderate changes required

Small to no changes required

Moderate Potential (0)

High Potential (+1) None

Part 2: Industry-Related Issues Low Potential (-1) 1. Number of competitors

Many

Few

2. Stage of industry life cycle 3. Growth rate of industry

Maturity phase or decline phase Little or no growth

Growth phase

Emergence phase

Moderate growth

Strong growth

4. Importance of industry‘s products and/or services to customers 5. Industry operating margins

―Ambivalent‖

―Would like to have‖

―Must have‖

Low

Moderate

High

Part 3: Target Market and Customer-Related Issues Low Potential Moderate (-1) Potential (0) 1. Identification of target market for the proposed new venture 2. Ability to create ―barriers to entry‖ for potential competitors 3. Purchasing power of customers 4. Ease of making customers aware of the new product or service 5. Growth potential of target market

High Potential (+1) Identified

Difficult to identify

May be able to identify

Unable to create

May or may not be able to create

Can create

Low

Moderate

High

Low

Moderate

High

Low

Moderate

High

Part 4: Founder- (or Founders-) Related Issues Low Potential Moderate (-1) Potential (0)

High Potential (+1)

1. Founder or founders experience in the industry 2. Founder or founders skills as they relate to the proposed new venture‘s product or service 3. Extent of the founder or founders professional and social networks in the relevant industry 4. Extent to which the proposed new venture meets the founder or founders personal goals and aspirations 5. Likelihood that a team can be put together to launch and grow the new venture

No experience

Moderate experience

Experienced

No skills

Moderate skills

Skilled

None

Moderate

Extensive

Weak

Moderate

Strong

Unlikely

Moderately likely

Very likely

Moderate Potential (0)

High Potential (+1) Low

Part 5: Financial Issues Low Potential (-1) 1. Initial capital investment 2. Number of revenue drivers (ways in which the company makes money)

High

Moderate

One

Two to three

More than three

3. Time to break even

More than two years

One to two years

Less than one year

4. Financial performance of similar businesses 5. Ability to fund initial product (or service) development and/or initial startup expenses from personal funds or via bootstrapping

Weak

Modest

Strong

Low

Moderate

High

Overall Potential Each part has five items. Scores will range from -5 to +5 for each part. The score is a guide—there is no established rule-of-thumb for the numerical score that equates to high potential, moderate potential, or low potential for each part. The ranking is a judgment call.

Score (-5 to +1)

Overall Potential of the Business Idea Based on Each Part

Part 1: Strength of Business Idea

High potential Moderate potential Low potential

Part 2: IndustryRelated Issues

High potential Moderate potential Low potential

Part 3: Target Market and CustomerRelated Issues

High potential Moderate potential Low potential

Suggestions for Improving the Potential

Part 4: Founder- (or Founders-) Related Issues

High potential Moderate potential Low potential

Part 5: Financial Issues

High potential Moderate potential Low potential

Overall Assessment

High potential Moderate potential Low potential

Summary—briefly summarize your justification for your overall assessment:

PART 2

SAMPLE COURSE OUTLINES

Sample Weekly Schedule Entrepreneurship Based on 15-Week Semester (Class Meets Twice a Week)

Date

Topic

Assign ed Readin g

Week 1: Class 1 Week 1: Class 2

Introduction to Entrepreneurship

Chapter 1

Introduction to Entrepreneurship Case 1.1 or Case 1.2

Chapter 1

You Be the VC 1.1 or You Be the VC 1.2 Week 2: Class 1 Week 2: Class 2

Recognizing Opportunities and Generating Ideas Recognizing Opportunities and Generating Ideas Case 2.1 or Case 2.2

Chapter 2

Week 3: Class 1 Week 3: Class 2

Feasibility Analysis

Chapter 3

Feasibility Analysis You Be the VC 3.1 or You Be the VC 3.2

Chapter 3

Week 4: Class 1 Week 4: Class 2

Developing an Effective Business Model Developing an Effective Business Model Case 4.1 or Case 4.2

Chapter 4

Week 5: Class 1 Week 5: Class 2

Industry and Competitor Analysis

Chapter 5

Week 6: Class 1 Week 6: Class 2

Individual Exam #1

Chapters 1–5

Writing a Business Plan Case 6.1 or Case 6.2

Chapter 6

Week 7: Class 1 Week 7: Class 2

Preparing the Proper Ethical and Legal Foundation Preparing the Proper Ethical and Legal Foundation Case 7.1 You Be the VC 7.1 or You Be the VC 7.2

Chapter 7

Week 8: Class 1 Week 8: Class 2

Assessing a New Venture‘s Financial Strength and Viability Assessing a New Venture‘s Financial Strength and Viability Case 8.1 or Case 8.2 You Be the VC 8.1 or You Be the VC 8.2

Chapter 8

Chapter 2

Chapter 4

Guest Speaker—To discuss the topic of developing the importance of a firm‘s industry to its success; Local Successful Entrepreneur

Chapter 7

Chapter 8

Week 9: Class 1 Week 9: Class 2

Building a New-Venture Team

Chapter 9

Building a New-Venture Team Case 9.1 or Case 9.2

Chapter 9

Week 10: Class 1 Week 10: Class 2

Getting Financing or Funding

Chapter 10

Week 11: Class 1 Week 11: Class 2

Individual Exam #2

Week 12: Class 1 Week 12: Class 2

The Importance of Intellectual Property The Importance of Intellectual Property Case 12.1 or Case 12.2

Chapter 12

Week 13: Class 1 Week 13: Class 2

Preparing for and Evaluating the Challenges of Growth Preparing for and Evaluating the Challenges of Growth You Be the VC 13.1 or You Be the VC 13.2 Case 13.1

Chapter 13

Week 14: Class 1 Week 14: Class 2

Strategies for Firm Growth

Chapter 14

Strategies for Firm Growth Case 14.1 or Case 14.2

Chapter 14

Week 15: Class 1 Week 15: Class 2

Franchising

Chapter 15

Franchising Case 15.1 or Case 15.2

Chapter 15

Final Exam

Administered During Final Week

Chapters 11– 15 or comprehensiv e

Guest Speaker on Getting Funding or Financing; Local Venture Capitalist or Business Angel Case 10.1

Unique Marketing Issues Case 11.2

Chapters 6– 10 Chapter 11

Chapter 12

Chapter 13

Sample Weekly Schedule Entrepreneurship Based on 15-Week Semester (Class Meets Once a Week)

Date

Topic

Assign ed Readin g

Week 1

Introduction to Entrepreneurship Case 1.1 or Case 1.2 You Be the VC 1.1 or You Be the VC 1.2

Chapter 1

Week 2

Recognizing Opportunities and Generating Ideas Case 2.1 or Case 2.2

Chapter 2

Week 3

Feasibility Analysis Case 2 in the Case Appendix You Be the VC 3.1 or You Be the VC 3.2

Chapter 3

Week 4

Developing an Effective Business Model Case 4.1 or Case 4.2

Chapter 4

Week 5

Industry and Competitor Analysis Guest Speaker—To discuss the topic of developing the importance of a firm‘s industry to its success; Local Successful Entrepreneur

Chapter 5

Week 6

Individual Exam #1 Writing a Business Plan Case 6.1 or Case 6.2

Chapters 1–5 Chapter 6

Week 7

Preparing the Proper Ethical and Legal Foundation Case 7.1 You Be the VC 7.1 or You Be the VC 7.2

Chapter 7

Week 8

Assessing a New Venture‘s Financial Strength and Viability Case 8.1 or Case 8.2 You Be the VC 8.1 or You Be the VC 8.2

Chapter 8

Week 9

Building a New-Venture Team Case 9.1 or Case 9.2

Chapter 9

Week 10

Guest Speaker on Getting Financing or Funding; Local Venture Capitalist or Business Angel Case 10.1

Chapter 10

Week 11

Individual Exam #2

Chapters 6– 10 Chapter 11

Unique Marketing Issues Case 11.2

Week 12

The Importance of Intellectual Property Case 12.1 or Case 12.2

Chapter 12

Week 13

Preparing for and Evaluating the Challenges of Growth You Be the VC 13.1 or You Be the VC 13.2 Case 13.1

Chapter 13

Week 14

Strategies for Firm Growth Case 14.1 or Case 14.2

Chapter 14

Week 15

Franchising Case 15.1 or Case 15.2

Chapter 15

Final Exam

Administered During Final Week

Chapters 11– 15 or comprehensiv e

PART 3

STUDENT AND INSTRUCTOR RESOURCES This portion of the Instructor‘s Manual contains resources that may be helpful to you and your students throughout the course of the semester.

LIST OF USEFUL WEB SITES IN THE TEACHING OF ENTREPRENEURSHIP Entrepreneurship-Focused Periodicals Periodical

Bloomberg Businessweek Economist Entrepreneur Fast Company Harvard Business Review Home Business Journal Home Business Magazine Inc. Industry Week Minority Business Entrepreneur MIT Technology Review San Jose Mercury News Small Business Opportunities The Business Journals The Wall Street Journal Wired

Web Site Address www.businessweek.com http://www.economist.com/ www.entrepreneur.com www.fastcompany.com https://hbr.org www.homebusinessjournal.net www.homebusinessmag.com/ www.inc.com www.industryweek.com/ www.mbemag.com www.technologyreview.com www.mercurynews.com/ www.sbomag.com www.bizjournals.com www.wsj.com www.wired.com

Entrepreneurship-Focused Web Sites (general information)

Web Site

3 Day Startup All Business America‘s SBDC

Web Site Address http://3daystartup.org/ www.allbusiness.com http://americassbdc.org/

Austin Startup BizFilings BizStats.com Bloomberg Business Week Small Business Both Sides of the Table BusinessFinance.com CEO (Collegiate Entrepreneurs‘ Organization) College Startup Dorm Room Fund eCorner Entrepreneurship.org Entrepreneurship Education on the Web Escape From Cubicle Nation Global Entrepreneurship Monitor Global Student Entrepreneur Awards Growththink Hacker News Harvard Business School Entrepreneurs Idea Café Immpreneur Mixery Morebusiness National Association for the Self-Employed National Federation of Independent Business OnStartups Paul Graham‘s Essays Red Herring SEC Filings Small Business Advisor Small Business Labs Small Business Trends Startup Company Lawyer Startup Digest Startup Nation

http://austinstartup.com/ www.bizfilings.com www.bizstats.com www.businessweek.com/smallbiz http://www.bothsidesofthetabl e.com/ www.businessfinance.com http://www.c-e-o.org/ http://www.collegestartup.org http://dormroomfund.com http://ecorner.stanford.edu/ www.entrepreneurship.org/ http://eweb.slu.edu http://www.escapefromcubiclen ation.com/ www.gemconsortium.org www.gsea.org www.growththink.com https://news.ycombinator.com/ http://www.hbs.edu/entreprene urship/ www.businessownersideacafe.co m http://immpreneur.com www.mixery.com www.morebusiness.com http://www.nase.org/ www.nfib.com www.onstartups.com http://www.paulgraham.com/art icles.html www.redherring.com www.sec.gov/edgar.shtml www.isquare.com http://www.smallbizlabs.com/ www.smallbiztrends.com http://www.startupcompanylawy er.com/ https://www.startupdigest.com / http://www.startupnation.com/

Startup Weekend Steve Blank STVP Educators Corner (Stanford) TechCrunch The Franchise King The Lean Startup The Maverick CEO TheSelfEmployed Under30CEO UFunded U.S. Small Business Administration Venture Beat Venture Hacks Yahoo! Finance Young Upstarts

http://startupweekend.org/ www.steveblank.com http://edcorner.stanford.edu http://techcrunch.com/ http://www.thefranchiseking.c om/ http://theleanstartup.com/ http://maverick-ceo.com/ www.theselfemployed.com http://under30ceo.com/ www.ufunded.com www.sba.gov http://venturebeat.com/ http://venturehacks.com/ http://biz.yahoo.com/ic/index .html http://www.youngupstarts.com/

Entrepreneurship-Focused Web Sites (specific information) Web Site

Web Site Address

Angel Investor News AngelList BizPlanIt BizStats BPlans BusinessFinance.com Center for Business Planning Center for Rural Entrepreneurship Chic CEO Cool Business Ideas CollabFinder Collegiate Entrepreneurs Organization CrunchBase Duck Tape Marketing

www.angel-investor-news.com https://angel.co www.bizplanit.com www.bizstats.com www.bplans.com www.businessfinance.com www.businessplans.org http://www.energizingentrepre neurs.org/ http://www.chic-ceo.com/ www.coolbusinessideas.com www.collabfinder.com www.c-e-o.org

Dutiee (Social Startups) E2 Environmental Entrepreneurship EpicLaunch Evan Carmichael Fambiz.com (family business) FindLaw

www.crunchbase.com http://www.ducttapemarketing. com/ www.dutiee.com www.e2.org http://epiclaunch.com/ www.evancarmichael.com www.fambiz.com http://biz.findlaw.com

Fit Small Business FundersClub Franchise.com Franchise Direct Franchise Opportunities IRS—Small Business

Knowledge @ Wharton Ladies Who Launch Marketwatch From Dow Jones Microsoft Business Hub Money Tree Report NASDAQ National Business Incubation Association National Inventor Fraud Center National Venture Capital Association Quora Quirky ReadWrite RealTimeBoard SCORE SEC Edgar Database Service Corps of Retired Executives Small Business State Economic Profiles

Springwise Startup Lawyer The Capital Connection The Center for Venture Research VentureWell Unassumer U.S. Patent and Trademark Office Valuation Resources Yahoo! IPO News

http://fitsmallbusiness.com/ https://fundersclub.com/ www.franchise.com www.franchisedirect.com http://www.franchiseopportuni ties.com/ http://www.irs.gov/Businesses /Small-Businesses-&-SelfEmployed/Small-Business-andSelf-Employed-Tax-Center-1 http://knowledge.wharton.upen n.edu/ www.ladieswholaunch.com www.marketwatch.com http://www.microsoft.com/enus/business/ www.pwcmoneytree.com www.nasdaq.com www.nbia.org www.inventorfraud.com www.nvca.org www.quora.com www.quirky.com http://readwrite.com/ hppp://realtimeboard.com https://www.score.org/ www.sec.gov/edgar.shtml www.score.org https://www.sba.gov/category/ advocacy-navigationstructure/research-andstatistics/state-economicprofiles http://www.springwise.com/ www.startuplawyer.com www.capital-connection.com https://paulcollege.unh.edu/c vr www.venturewell.org www.unassumer.com www.uspto.gov/ www.valuationresources.com http://biz.yahoo.com/reports/

YEC

ipo.html http://yec.co

Entrepreneurship-Focused Blogs Blog

Web Site Address

A VC—Musings of a VC in NYC Ask the VC Be Excellent

http://avc.blogs.com http://www.askthevc.com/wp/ http://www.sixdisciplines.com /_blog/The_Six_Disciplines_Bl og http://casnocha.com/blog www.businessopportunity.com www.businessopportunities.biz http://canentrepreneur.blogsp ot.com/ http://dondodge.typepad.com/

Ben Casnocha Business Opportunity Blog Business Opportunities Weblog Canadian Entrepreneur Dan Dodge on the Next Big Thing David Cancel Dave McClure Entrepreneurs-Journey FeldThoughts For Entrepreneurs Guy Kawasaki‘s Blog Innovation Net John Battelle‘s Searchblog Jordan Cooper‘s Blog Pamela Slim Paul Allen Paul Graham Practice Trumps Theory Rajesh Setty Redeye VC Seth Godin Blog Signal vs. Noise Silicon Prairie News Small Business Ideas Blog Start Up Blog

http://davidcancel.com/ http://500hats.com/ www.entrepreneurs-journey.com www.feld.com http://www.forentrepreneurs.c om/ http://blog.guykawasaki.com/ http://venture2.typepad.com/i nnovationnet/ http://battellemedia.com http://jordancooper.wordpress .com/ http://pamelaslim.com/blog/ www.paulallen.net http://paulgraham.com/ http://practicetrumpstheory.c om/ http://www.rajeshsetty.com/ http://redeye.firstround.com www.sethgodin.com/sg/ https://signalvnoise.com/post s http://siliconprairienews.com / http://www.smallbusinessideas blog.com/ http://startupblog.wordpress.

Social Entrepreneurship Blog The Entrepreneurial Mind This Is Going To Be Big… Tony Wright VentureBeat VentureBlog YoungEntrepreneur Xconomy

com/ www.socialroi.com http://www.drjeffcornwall.com / http://www.thisisgoingtobebig .com/ http://www.tonywright.com/ www.venturebeat.com www.ventureblog.com www.youngentrepreneur.com/blo g http://www.xconomy.com/

Entrepreneurship-Focused Podcasts Podcast

Web Site Address

Entrepreneur on Fire

http://www.entrepreneuronfire .com/ www.gotinvention.com/ http://foundation.bz Access via iTunes www.mixergy.com Access via iTunes http://ecorner.stanford.edu/p odcasts.html http://www.startupsfortherest ofus.com/ http://thisweekinstartups.com /

Got Invention Radio Podcast Foundation HBR Idea Cast Mixergy PRI: Social Entrepreneurship Stanford Entrepreneurial Thought Leaders Startups for the Rest of Us This Week in Startups

Entrepreneurs and Organizations to Follow on Twitter Entrepreneur

Twitter Account

Altucher, James—Author and Blogger Baer, J—Austin, TX Entrepreneur Blank, Steve—Lean Startup Advocate Branson, Richard Conway, Ron—Angel Investor Creative Sandbox Cuban, Mark—Shark Tank Shark Dorsey, Jack—Co-founder of

@jaltucher @JoshuaBaer @sgblank @RichardBranson @RonConway @CreativeSandbox @mcuban @Jack

Twitter Entrepreneur Magazine Entrepreneurs Fast Company Feld, Brad—Venture Capitalist Ferris, Tim—Author of 4-Hour Workweek FOXBusiness Gerber, Michael—Author Gladwell, Malcolm—Author Godin, Seth—Author Google for Entrepreneurs Hsieh, Tony—CEO of Twitter Inc Magazine Innovation America Innovation LLC John, Daymond—Shark Tank Shark Kauffman Foundation Kawasaki, G—Entrepreneur and Author Khan Academy Kickstarter Lean Startup Circle Michaels, J—Fitness Guru Entrepreneur NFIB O‘Leary, Kevin—Shark Tank Shark Osterwalder, Alex—Author Ries, Eric—Lean Startup Advocate Start-Ups Co Suster, Mark—Venture Capitalist SXSW TED Talks Techstars The Lean Startup 3 Day Startup 30 Second MBA Shark Tank Startup America Startup Chronicle Under30CEO Venture Hacks Vaynerchuk, Gary—Entrepreneur VentureWell

@EntMagazine @EntrepreneursQ @FastCompany @bfeld @Tferris @FoxBusiness @MichaelEGerber @Gladwell @thisissethsblog @googleforentrepreneurs @tonyhsieh @Inc @Innovation Daily @innovation @TheSharkDaymond @KauffmanFDN @GuyKawasaki @khanacademy @kickstarter @LeanCircle @JillianMichaels @NFIB @kevinolearytv @AlexOsterwalder @ericries @Start_Ups_Co @msuster @sxsw @TEDTalks @techstars @leanstartup @3DayStartup @30SecMBA @ABCSharkTank @StartupAmerica @StartUpChron @Under30CEO @venturehacks @GaryVee @venturewell

WSJ WSJstartup Wired Women Entrepreneur YCombinator Startups YoungEntrepreneur YoungWorld Inventors

@wsj @WSJstartup @WIRED @WomenEnt @YCstartups @YoungTrep @YWInventors

Entrepreneurship-Focused Scholarly Journals

Journal

Web Site Address

Entrepreneurship & Regional Development

http://www.tandfonline.com/to c/TEPN20/current#.VJhzW4AGA

Entrepreneurship Theory & Practice

http://onlinelibrary.wiley.co m/journal/10.1111/(ISSN)15406520 http://www.babson.edu/Academi cs/centers/blankcenter/bcerc/Pages/frontiersof-entrepreneurshipresearch.aspx http://www.journals.elsevier. com/journal-of-businessventuring/ http://onlinelibrary.wiley.co m/journal/10.1111/(ISSN)1540627X http://smallbusinessinstitute .biz/page-1259165? http://www.springer.com/busin ess+%26+management/business+f or+professionals/journal/1118 7 http://onlinelibrary.wiley.co m/journal/10.1002/(ISSN)1932443X http://onlinelibrary.wiley.co m/journal/10.1111/(ISSN)15405885

Frontiers of Entrepreneurship Research

Journal of Business Venturing Journal of Small Business Management Journal of Small Business Strategy Small Business Economics

Strategic Entrepreneurship Journal The Journal of Product Innovation Management

Venture Capital—An International Journal of Entrepreneurial Finance

http://www.tandfonline.com/to c/tvec20/current#.VJhyA4AGA

Company Information Web Site

Annual Report Service CEO Express BRINT Business Wire Hoover‘s Online PR Newswire Thomas Register The Wall Street Journal

Web Site Address www.annualreportservice.com www.ceoexpress.com www.brint.com www.businesswire.com www.hoovers.com www.prnewswire.com http://www.thomasnet.com/ www.wsj.com