Chapter 1 – Introduction to Entrepreneurship
Introduction to entrepreneurship
-there is tremendous interest in entrepreneurship around the world → there is evidence supporting it, some of
which is provided by the Global Entrepreneurship Monitor (GEM) → tracks entrepreneurship in 112 countries
> highest rates of entrepreneurial start-up activities occur in low-income countries, where good jobs are not
plentiful, the rates are also impressive in high-income countries
> the majority of people across the countries the GEM study follows are drawn to entrepreneurship to take
advantage of attractive opportunities, rather than starting out of necessity → in fact, in countries with a strong
inclination for innovation the number of people who start businesses to pursue an opportunity outnumber the
people who are starting a business out of necessity
-one criticism of entrepreneurship, which is often repeated in the press, is that the majority of new businesses
fail → it simply isn’t true, and the percentage of firms that do fail shows that a motivation to start and run a
business isn’t enough; indeed, motivation must be coupled with a solid business idea, good financial
management, and effective execution to maximize chances for success
What is entrepreneurship and why is it important?
-entrepreneurship is the process by which individuals pursue opportunities without regard to resources they
currently control for the purpose of exploiting future goods and services → trying to identify opportunities and
putting useful ideas into practice which takes creativity, drive, and a willingness to take risks
-a specific application of entrepreneurship, called corporate entrepreneurship, is the conceptualization of
entrepreneurship at the organizational level → established firms behave entrepreneurially and the level is
indicated by entrepreneurial intensity
-entrepreneurial firms are proactive, innovative, and risk taking – in contrast, conservative firms take a more
“wait and see” posture, are less innovative, and are risk averse
Why do people become entrepreneurs?
-3 primary reasons people decide to become entrepreneurs and start their own firms:
1. To be their own boss
2. To pursue their own ideas
3. To pursue financial rewards
→ the desire to be one’s own boss or manager is the driving force of most individuals’ decision to become an
entrepreneur – while important, the desire to reap financial rewards from one’s entrepreneurial endeavors is
secondary to the other two reasons people decide to launch their own firm
Characteristics of successful entrepreneurs
-4 primary characteristics of successful entrepreneurs
1. Passion for the business
2. Product/customer focus
3. Tenacity despite failure
4. Execution intelligence
→ of these four, being passionate about the firm the entrepreneur intends to launch is the most common
characteristic shared among successful entrepreneurs – commonly, the entrepreneur’s passion is demonstrated
by a belief that her/his firm will make a difference in people’s lives
-5 reasons why passion is important
1. The ability to learn and iterate
2. A willingness to work hard for an extended period of time
3. Ability to overcome setbacks and no’s
4. The ability to listen to feedback on the limitations of your organization and yourself
5. Perseverance and persistence when the going gets tough
-always concentrating on the product or service as a means of satisfying a customer need, being tenacious in
pursuing an entrepreneurial opportunity, and the ability to craft a business idea into a viable business operation
are the other key characteristics associated with successful entrepreneurs
> incubators: organizations that provide start-ups with shared operating space and with access to networking
opportunities, mentors, and shared equipment
> accelerators: are mostly for-profit organizations that offer a small amount of seed funding in exchange for
small equity positions in the companies that participate in their programs
Common myths about entrepreneurs
-5 most common myths regarding entrepreneurship:
1. Entrepreneurs are born, not made – but there are common traits and characteristics:
2. Entrepreneurs are gamblers – are actually moderate risk takers
3. Entrepreneurs are motivated primarily by money
4. Entrepreneurs should be young and energetic
5. Entrepreneurs love the spotlight
→ the issue with myths is that, if unchecked, they can affect an individual’s orientation toward and subsequent
behaviors as an entrepreneur – the challenge for entrepreneurs is to carefully examine myths and prevent each of
them from negatively affecting their approach to entrepreneurship
Types of start-up firms
-3 types of start-up firms:
1. Entrepreneurial firms bring new products and services to market by recognizing and seizing opportunities
regardless of the resources they currently control → stress innovation, which is not the case for salary-substitute
and lifestyle firms
→ the essence of entrepreneurship is creating value and then disseminating that value to customers – in this
context, value refers to worth, importance, or utility → the entrepreneurs leading companies of this type create
products and services that have worth, are important to their customers, and provide a measure of usefulness to
their customers that they wouldn’t have otherwise
→ one characteristic of entrepreneurial firms, which we explore throughout this book, is that they partner with
other firms and organizations, often to obtain the boost they need to realize their full potential
2. In the case of a salary-substitute firm, the entrepreneur seeks to earn an amount of income that is similar or
identical to what she or he can earn by working as an employee for another company
3. Lifestyle firms are ones through which an entrepreneur can pursue a desire to experience a certain lifestyle
(e.g., as a hunting trip guide) and earn a sufficient amount of income while doing so
Changing demographics of entrepreneurs
-the demographic makeup of those launching entrepreneurial firms is changing in the United States and around
the world → there is growing evidence that an increasing number of women, minorities, seniors, and millennials
are becoming actively involved in the entrepreneurial process & evidence suggests that these groups are capable
of appropriately using the entrepreneurial process as a foundation for developing a successful entrepreneurial
venture
The positive effects of entrepreneurship and entrepreneurial firms
-there is strong evidence that entrepreneurship and the entrepreneurial behavior associated with it have
significantly positive impacts on society and on the stability and strength of economies throughout the world →
new products and technologies are developed that over time make current products and technologies obsolete:
creative destruction → stimulates economic activity and productivity of all elements of society
-areas in which entrepreneurial firms contribute the most are innovation and job creation
› Innovation: the process of creating something new – central to the entrepreneurial process
› Job creation: a substantial number of net new jobs are created
-entrepreneurial behavior also has a dramatic impact on society → it’s easy to think of new products and
services that have helped make our lives easier, that have made us more productive at work, that have improved
our health, and that have entertained us in new ways
-in addition, entrepreneurial firms have a positive impact on the effectiveness of larger firms → many
entrepreneurial firms have built their entire business models around producing products and services that help
larger firms increase their efficiency and effectiveness
The entrepreneurial process
-four distinct elements of the entrepreneurial process
1. Deciding to become an entrepreneur
> often a triggering event
> or lifestyle issues
2. Developing successful business ideas
> opportunity recognition and idea generation
> feasibility analysis
> developing an effective business model
> industry and competitor analysis
> writing a business plan
3. Moving from an idea to establishing an entrepreneurial firm
> 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
4. Managing and growing an entrepreneurial firm
> unique marketing issues
> the importance of intellectual property
> preparing for and evaluating the challenges of growth
> strategies for firm growth
> franchising
→ each of these elements plays a critical role in entrepreneurial success
Developing skills for your career
-after studying this book, some readers will decide they do not want to become entrepreneurs, others will
conclude that becoming an entrepreneur at some point is desirable, while still others will decide to launch an
entrepreneurial venture as quickly as possible – but, for all readers though, the tools, techniques, and concepts
discussed in this book will further develop some of your “employability skills”:
 Business ethics and social responsibility
 Critical thinking
 Collaboration
 Data literacy
Chapter 2 – Recognizing Opportunities and Generating Ideas
The differences between opportunities and ideas
-while ideas are interesting and can intrigue us as possibilities, not every idea is in fact the source of an
opportunity for an entrepreneur to pursue
> idea: a thought, an impression, or a notion – may or may not meet the criteria of an opportunity → critical
point because many entrepreneurial ventures fail not because the entrepreneurs that launched them did work
hard, but rather because there was no real opportunity to begin with
> opportunity: a favorable set of circumstances that creates a need for a new product, service, or business →
externally stimulated or internally stimulated (problem/opportunity gap) – and has 4 qualities:
1. Attractive
2. Durable
3. Timely
4. Anchored in a product or service that creates value for its buyers or end-users
-once an opportunity is recognized, a window opens, and the market to fill the opportunity grows → as the
market grows, firms enter and try to establish a profitable positions → at some point, the market matures and
becomes saturated with competitors, and the window of opportunity closes
Three ways to identify opportunities
-3 approaches entrepreneurs use to identify an opportunity
1. Observing trends and study how they create opportunities – carefully observing people and the actions they
take is an excellent way to find problems that, when solved, would create value for a customer
 Economic trends
 Social trends
 Technological advances
 Political action and regulatory changes
→ it’s important to distinguish between fads and trends
→ trends are interconnected and should be considered simultaneously
2.
Solving a problem – entrepreneurs identify problems that they and others encounter in various parts of their
lives and then go about developing a good or service that is intended to solve the identified problem
3.
Finding gaps in the marketplace – typically, the way this works is that an entrepreneur recognizes that some
people are interested in buying more specialized product
Personal characteristics of the entrepreneur
-over time, research results and observations of entrepreneurs in action indicate that some people are better at
recognizing opportunities than others: the process of perceiving the possibility of a profitable new business until
it’s recognized
 Prior industry experience – working in an industry is the most significant way to gain insights about a
particular industry’s characteristics

Cognitive factors – an innate skill or sixth sense that is called entrepreneurial alertness, which is the ability
to notice things without engaging in deliberate search

Social networks – people who build a substantial network of social and professional contacts will be
exposed to more opportunities and ideas than people with sparse networks, which can lead to new business
starts
→ network entrepreneurs identify significantly more opportunities than solo entrepreneurs
→ it is more likely that an entrepreneur will get a business idea through a weak-tie relationship than through a
strong-tie relationship because strong-tie relationships tend to reinforce insights and ideas the individuals
already have

Creativity – the process of generating novel or useful ideas which consists of 5 stages
→ main personal characteristics researchers have identified and that observation indicates tend to make some
people better at recognizing business opportunities than others
Techniques for generating ideas
-entrepreneurs use several techniques for the purpose of identifying ideas for new products and services:
› Brainstorming: a technique used to quickly generate a large number of ideas and solutions to problems –
one reason to conduct a brainstorming session is to generate ideas that might represent product, service, or
business opportunities
→ no criticism is allowed
→ freewheeling is encouraged
→ the session moves quickly
→ leapfrogging is encouraged
›
A focus group: a gathering of 5 to 10 people who have been selected on the basis of their common
characteristics relative to the issue being discussed – one reason to conduct a focus group is to generate
ideas that might represent product or business opportunities
›
Careful and extensive searches of a physical library’s holdings and of Internet sites are a third technique –
the entrepreneur uses an open mind to sort through large amounts of information and data to see if he or she
can identify a problem that could be solved by creating an innovative product or service
›
Other techniques- some companies set up customer advisory boards that meet regularly to discuss needs,
wants, and problems that may lead to new ideas & other companies conduct varying forms of
anthropological research (day-in-the-life research for example)
Chapter 3 – Feasibility Analysis
Feasibility analysis
-feasibility analysis: the process of determining whether a business idea is viable
→ consists of 4 components and if a business idea falls short on one or more, it should be dropped or rethought
→ a mental transition must be made when completing a feasibility analysis from thinking of a business idea as
just an idea to thinking of it as a business
→ it follows opportunity recognition but comes before the development of a business model and a business plan
→ failure to properly investigate the merits of a business idea before developing a business model and a
business plan is written runs the risk of blinding an entrepreneur to inherent risks associated with the potential
business and results in too positive of a plan
→ the proper time to conduct a feasibility analysis is early in thinking through the prospects for a new business
idea
→ requires primary research: research collected by the people completing the analysis
→ requires secondary research: probes data that is already collected
→ a feasibility analysis tests the merits of a specific idea, it allows ample opportunity for the idea to be revised,
altered, and changed as a result of the feedback that is obtained and the analysis that is conducted
Product/service feasibility analysis
-product/service feasibility analysis: an assessment of the overall appeal of the product or service being
proposed → 2 components of product/service feasibility analysis are
› Product desirability – affirm that the proposed product is desirable and serves a need in the marketplace
> concept test: involves showing a preliminary description of a product or service idea (concept statement)
to perspective customers and industry experts to solicit their feedback – the goal is to find a product/market
fit between the benefits offered and what the prospective customers need and require
→ description of the product
→ intended target market
→ benefits of the product
→ description of positioning relative to competitors
→ description of management team
> talking through ideas with perspective customers
> conduct focus groups
›
Product demand – 3 commonly used methods to determine if there is demand:
> talking face-to-face with potential customers
> utilizing online tools to assess demand
> library, Internet, and Gumshoe Research
Industry/target market feasibility analysis
-industry/market feasibility analysis: an assessment of the overall appeal of the market for the product or service
being proposed → a primary issue that a business should consider is the distinction between industry and target
market
> industry: a group of firms producing a similar product or service
> target market: the portion of the industry that it goes after or which it wants to appeal – a segment within a
larger market that represents a narrower group of customers with similar needs
→ most start-ups simply don’t have the resources needed to participate in a broad market, 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
-2 components to an industry/target market feasibility analysis
› Industry attractiveness – an attractive industry has several desirable characteristics for a new venture,
including those of being
(a) “young” rather than old or very well established
(b) in the early rather than the late stage of the product life cycle
(c) fragmented (where a large number of firms are competing, but no single firm has a dominant market
position) rather than highly concentrated (where a few large firms dominate competition)
(d) growing rather than shrinking
(e) selling products or services that customers “must have” rather than “want to have”
(f) not crowded
(g) high rather than low operating margins
(h) not highly dependent on the historically low price of a key raw material, like gasoline or flour, to remain
profitable
→ and a market that is structurally attractive (start-ups can enter the industry and compete effectively) –
some industries are characterized by such high barriers to entry / presence of dominant players that potential
new entrants are essentially shut out
›
Target market attractiveness – the challenge is to find a market that is large enough for the proposed
business but yet small enough to avoid attracting larger competitors, at least until the entrepreneurial
venture can get off a successful start
Organizational feasibility analysis
-organizational feasibility analysis: conducted to determine whether a proposed business has sufficient
management expertise, organizational competence, and resources to successfully launch its business → 2
primary issues to consider in this area:
› Management prowess – evaluate the ability of a proposed business’ initial management team, whether it’s a
sole entrepreneur or a larger group → important factors
> passion
> extent to which the markets are understood
›
Resource sufficiency – determine whether the proposed venture has or is capable of obtaining sufficient
resources to move forward
> the focus lies on nonfinancial resources → identify the most important nonfinancial resources and assess
their availability
> another key issue is the ability to obtain intellectual property protection on key aspects of the business →
doesn’t apply to all start-ups; but, it is critical for companies that have invented a new product or are
introducing a new business process that adds value to the way a product is manufactured or a service is
delivered
> sufficiency can be tested by listing 6-12 most critical nonfinancial resources that it will need to move its
business idea forward and determine if those are available
Financial feasibility analysis
-financial feasibility analysis: a preliminary financial analysis of whether a business idea is worth pursuing →
the most important areas to consider are
> total start-up cash needed to make a first sale – an actual budget should be prepared that lists all the
anticipated capital purchases and operating expenses needed to get the business up and running
> financial performance of similar businesses – estimating a proposed start-up’s potential financial performance
by comparing it to similar, already established businesses → several ways to do so:
→ substantial archival data, which offers detailed financial reports on thousands of individual firms, is available
online
→ identify a business that is similar to the one to be started – one that isn’t likely to be a direct competitor – and
it is perfectly acceptable to ask the owner or manager of the business to share sales and income data
→ simple observation and legwork to obtain sales data for similar businesses
> overall financial attractiveness of the proposed business – evaluations based primarily on a new venture’s
projected sales and rate of return → the projected rate of return should be weighed against the following factors
to assess whether the venture is financially feasible
→ amount of capital invested
→ risks assumed in launching the business
→ existing alternatives for the money being invested
→ the existing alternatives for the entrepreneur’s time and efforts
A feasibility analysis template
-First Screen is a template for completing a feasibility analysis and 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 – if a business cuts muster at this stage, the next step is to complete a business plan
→ It maps the 4 areas of feasibility analysis described in the chapter, accentuating the most important points in
each area – the final section of the worksheet, “Overall Potential,” includes a section that allows for suggested
revisions to a business idea to improve its potential or feasibility
Chapter 4 – Developing an Effective Business Model
-business model: a firm’s recipe for how it intends to create, deliver, and capture value for stakeholders –
foundational to a firm’s ability to succeed, both in the short and long term, especially when it is the first one to
introduce a new product or service to customers
-a business model represents the core aspects of its business and describes how they fit together and support one
another
-the quality of the business model a firm develops, as well as the quality of how that model is executed, affect
the firm’s performance in both the short and long term → how well the different parts or elements of a business
model fit together and are mutually supportive affects its quality
-the best business models are developed and executed in ways that are difficult for competitors to understand
and imitate & the greater the difference between a firm’s business model and those of its competitors, and
assuming that the model has been effectively developed, the stronger the likelihood a firm will be competitively
successful
→ an entrepreneurial firm wants to develop a business model that clearly specifies how the firm intends to be
uniquely different from its competitors and create value for stakeholders as a result
General categories of business models
-it is important for an entrepreneur to understand that no particular type of business model is inherently superior
to any other model – the “best” business model is the one that allows a firm to effectively describe the value it
intends to create for stakeholders and appropriately details the actions it will take to create that value – 2 general
categories:
›
Standard business models: depict or reveal plans or recipes firms can use to determine how they will create,
deliver, and capture value for stakeholders – used commonly by existing firms as well as those launching an
entrepreneurial venture
→ many of the standard models have been in existence for many years
→ when selecting a standard business model, an entrepreneurial venture believes that it can integrate the
elements of that model uniquely as a means of creating value while competing against rivals
→ there is no perfect model – each model has inherent strengths and weaknesses
›
Disruptive business models: are ones 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 in an
important segment or niche of an industry – 2 types exist
> new market disruption – finds a firm using a business model through which it is able to address a market
that wasn’t previously served
> low-end market disruption – possible when firms already competing in an industry are providing
customers with products or services that exceed their expectations or desires →
this “performance oversupply” creates an opportunity for an entrepreneurial venture to enter an industry for
the purpose of providing customers with the product or service functionality that more closely approximates
what they want → low-cost business models are often used to create a low-end market disruption
The Barringer/ Ireland Business Model Template
-a successful business model has a common set of attributes which are often laid out in a visual framework so
it’s easy to see the individual and their interrelationships → comprehensive in scope, the Barringer/ Ireland
Business Model Template features 4 major categories and 12 individual parts
→ entrepreneurs can use this business model template to describe, project, revise, and pivot its intended actions
until they are convinced that the model’s elements are integrated in a way that will yield a viable business firm
-core strategy describes how the firm plans to compete relative to its competitors
› Business mission: describes why it exists and what its business model is supposed to accomplish – if
carefully written and used properly, it can articulate a business’ overarching priorities and act as its
financial and moral compass
→ define its “reason for being”
→ describe what makes the company different
→ be risky and challenging but achievable
→ use a tone that represents the company’s culture and values
→ convey passion and stick in the mind of the reader
→ be honest and not claim to be something that the company “isn’t”
›
Basis of differentiation: what causes consumers to pick one company’s products over another’s →
important that your points of differentiation refer to benefits rather than features is another important point
to remember when determining a firm’s basis of differentiation
›
Target market: a segment within a larger market that represent a narrower group of customers with similar
interests → very important to identify the target market in which the firm will compete as it helps in
fleshing out all elements of a firm’s business model
›
Product/marketing 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 → should project 3-5 years into the future in terms of anticipated expansion
-resources: the inputs a firm intends to use to sell, distribute, and service its product or service → a firm must
have a sufficient amount of resources to enable its business model to work
→ the most important resources must be difficult to imitate and hard to find a substitute for
→ resources are developed and accumulate over a period of time
›
Core competency: a specific factor or capability that supports a firm’s business model and differentiates it
from competitors – largely determines what a firm can do
›
Key assets, or the assets a firm owns that enable its business model to work: the critical resources a firm
needs to execute as called for by its chosen core strategy → can be physical, financial, intellectual, or
human
-financials: concerned with how the firm intends to earn money → is for most companies one of the most
fundamental aspects around which its business model is built
›
Revenue streams: the exact ways a firm earns revenue
→ one or multiple streams
→ different natures of money making
→ common streams
- advertising
- commissions
- download fee
- licensing
- matchmaking
- product sale
- renting/leasing
- service sale
- subscription service
→ nature and number of streams has a direct impact on the other elements of the model
›
Cost structure: the most important costs (both fixed and variable costs) the firm will incur to support the
execution of its business model → 3 goals:
1. Identify whether the business is cost-driven or value-driven
2. identify the nature of the business’ costs – fixed-cost or variable-cost structure
3. Identify the business’ major cost categories
›
Funding/ financing: dealing with how the firm will support or cover its costs – an approximation is
sufficient – 3 types of costs should be considered
1. Capital costs
2. One-time expenses
3. Provisions for ramp-up expenses
→ infusion of up-front capital
→ personal resources
→ funded by own profits
-operations: both integral to a firm’s overall business model and represent the day-to-day heartbeat of the firm
›
Product (or service) production: how a firm’s products and/or services are produced
›
Channels: how products or services will be delivered to customers
→ sell direct
→ sell through intermediaries
→ sell through a combination of both
›
Key partners’ part identifies others with whom the firm intends to collaborate as a means of supporting its
operations
→ start-ups, in particular, typically do not have sufficient resources (or funding) to perform all the tasks
needed to make their business models work, so they rely on partners to perform key roles
→ in most cases, a business does not want to do everything itself because the majority of tasks needed to
build a product or deliver a service are outside a business’ core competencies or areas of expertise
> supplier/vendor is a company that provides parts or services to another company → today, firms are
developing more cooperative relationships with suppliers as more and more managers are focusing on
supply chain management, which is the coordination of the flow of all information, money, and material
that moves through a product’s supply chain – the more efficiently an organization can manage its supply
chain, the more effectively its entire business model will work
> along with suppliers, firms partner with other companies to make their business models work → the
advantages of participating in partnerships include: gaining access to a particular resource, risk and cost
sharing, speed to market, and learning – but partnerships also have potential disadvantages which include:
loss of proprietary information, management complexities, and partial loss of decision autonomy
> one trend in partnering, utilized by all types of businesses, is to use freelancers to do jobs that are outside
a firm’s core competencies: an independent contractor who has skills in a certain area, such as software
development or website design
Chapter 5 – Industry and Competitor Analysis
Industry analysis
> industry analysis: business research that focuses on the potential of an industry
> industry: a group of firms producing a similar product or service
> competitor analysis: detailed evaluation of a firm’s competitors
-when studying an industry, an entrepreneur must answer 3 questions before pursuing the idea of starting a firm:
1. Is the industry accessible – is it a realistic place for a new venture to enter?
2. Does the industry contain markets that are ripe for innovation or are underserved?
3. Are there positions in the industry that will avoid some of the negative attributes of the industry as a whole?
-to compete successfully, a firm needs to understand the industry in which it intends to compete → the
knowledge gleaned from an industry analysis helps a firm decide whether to enter an industry and if it can carve
out a position in that industry that will provide it a competitive advantage
> position on company and service level
> knowing the competitive landscape
> evaluate attractiveness of an industry
-studying industry trends and using the five forces model al 2 techniques entrepreneurs have available for
assessing industry attractiveness
> environmental trends – the strength of an industry often surges or wanes not so much because of the
management skills of those leading firms in a particular industry, but because environmental trends shift in favor
or against the products or services sold by firms in the industry – include economic trends, social trends,
technological advances, and political and regulatory change & sometimes multiple forces are at work in the
same industry
> business trends: other business-related trends that aren’t environmental trends but are important to recognize
and understand
The five forces model
-firms use the “five forces model” to understand an industry’s structure, which consists of 5 forces that
determine industry profitability → they determine the average rate of return for the firms competing in a
particular industry or a particular segment of an industry
1. Threat of substitutes
> in general, industries are more attractive when the threat of substitutes is low → means that products or
services from other industries can’t easily serve as substitutes for the products or services being made and sold
in the focal firm’s industry
> the extent to which substitutes suppress the profitability of an industry depends on the propensity of buyers to
substitute alternatives → this is why the firms in an industry often offer their customers amenities to reduce the
likelihood they’ll switch to a substitute product, even in light of a price increase
2.
Threat of new entrants – in general, industries are more attractive when the threat of entry is low → means
that competitors cannot easily enter the industry and successfully copy what the industry incumbents are
doing to earn profits → there are a number of ways that help keep the nr of entrants low: barriers of entry –
conditions that create a disincentive for a new firm to enter an industry
> economies of scale – when mass producing a product results in lower average costs → difficult for new firms
to enter unless they are willing to accept a cost disadvantage
> product differentiation – industries that are characterized by firms with strong brands are difficult to break into
without spending heavily on advertising & product innovation is another way a firm can differentiate its good or
service from competitors’ offerings by not only keep existing customers and win new ones, but also to deter
competitors from making a big push to try to win market share
> 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 aren’t available to new entrants → commonly grounded in the firm’s history
> access to distribution channels – distribution channels are often hard to crack → particularly true for crowded
markets
> government and legal barriers – in knowledge-intensive industries patents, trademarks, and copyrights form
major barriers to entry / or require granting of a license by public authorities
-when start-ups create their own industries or create new niche markets within existing industries, they must
create barriers to entry of their own to reduce the threat of new entrants → but it is difficult for start-ups to
create barriers to entry that are expensive because money is usually tight
-the biggest threat to a new firm’s viability, particularly if it is creating a new market, is that larger, betterfunded firms will step in and copy what it is doing → then the ideal barrier to entry is a patent, trademark, or
copyright, which prevents another firm from duplicating what the start-up is doing – but in many instances
patents do not apply
-there is a category of barriers to entry called nontraditional barriers to entry, which are barriers particularly
suited to start-up firms → include factors such as
> the strength of a company’s management team
> a first-mover advantage, a unique business model
> passion of management team and employees
> unique business model
> internet domain name
> or inventing a new approach to an industry
3.
Rivalry among existing firms – in most industries the major determinant of industry profitability is the level
of competition among the firms already competing in the industry → 4 factors that determine that nature
and intensity of the rivalry
> nr and balance of competitors
> degree of difference between products
> growth rate of an industry
> level of fixed costs
4.
Bargaining power of suppliers – industries are more attractive when the bargaining power of suppliers is
low as suppliers can suppress the profitability of industries to which they sell by raising prices or reducing
quality → ability is influenced by certain factors:
> supplier concentration
> switching costs
> attractiveness of substitutes
> threat of forward integration
5.
Bargaining power of buyers – industries are more attractive when the bargaining power of buyers is low as
they can suppress the profitability of industries from which they purchase by demanding price concessions
or increases in quality
> buyer group concentration
> buyer’s costs
> degree of standardization of a supplier’s products
> threat of backward integration
→ each force affects the average rate of return 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
The value of the five forces model
-besides helping a firm understand the dynamics of an industry the model can be used in 2 ways
1. To help a firm determine whether it should enter a particular industry
2. To help a firm determine whether it can carve out an attractive position in that industry
→ 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 forces
→ 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
-what entrepreneurs should understand is that each individual force has the potential to affect the ability of any
firm to earn profits while competing in the industry or a segment of an industry → the challenge is to find a
position within an industry or a segment of an industry in which the probability of the firm being negatively
affected by one or more of the five forces is reduced
-additionally, successfully examining an industry yields valuable information to those starting a business →
armed with the information it has collected, firms are prepared to consider four industry-related questions that
should be examined before deciding to enter an industry
Industry types and the opportunities they offer
-there are 5 primary industry types of entrepreneurial firms to consider when choosing the industry in which
they will compete → these industry types and the opportunities they offer are as follows:
1. Emerging industry: a new industry in which standard operating procedures have yet to be developed – the
firm that pioneers or takes the leadership often captures a first-mover advantage
2.
Fragmented industry: industry characterized by a large nr of firms of approximately equal size → primary
opportunity is to consolidate the industry and establish industry leadership as a result of doing so –
commonly done through a geographic roll-up strategy in which one firm start acquiring similar firms that
are located in different geographic areas
3.
Mature industry: industry that is experiencing slow or no increase in demand, has numerous repeat
customers, and has limited product innovation → emphasis on service and process innovation
4.
Declining industry: industry or part of an industry that is experiencing a reduction in demand→ 3 strategies
to employ
> leadership strategy – try to become the dominant player
> niche – focus on a narrow segment that might be encouraged to grow through product or process
innovation
> cost reduction strategy – accomplished through achieving lower costs than industry incumbents through
process innovations
5.
Global industry: industry that is experiencing significant international sales → 2 common strategies
> multidomestic strategy – compete for market share on a country-to-country basis and vary products or
service offerings to meet the demand of the local market
> global strategy – use the same basic approach in all foreign markets
→ the choice between these two strategies depends on how similar consumers’ tastes are from market to
market
→ the key to achieving success is gaining a clear understanding of customers’ needs and interests in each
market in which the firm intends to compete.21
Competitor analysis
-competitor analysis: a detailed analysis of a firm’s competition which 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
-there are 3 groups of competitors:
1. Direct competitors – businesses offering identical or similar products
2. Indirect competitors – businesses offering close substitute products
3. Future competitors – businesses that are not yet direct or indirect competitors but could be at any time
-there are a number of ways a firm can ethically obtain the information it seeks to have about its competitors
(competitive intelligence), including attending conferences and trade shows; purchasing competitors’ products;
studying competitors’ websites; setting up Google e-mail alerts; reading industry- related books, magazines, and
websites; and talking to customers about what motivated them to buy your product as opposed to your
competitor’s product.
-a competitive analysis grid is a tool for organizing the information a firm collects about its competitors as it can
help a firm see how it stacks up against its competitors, provide ideas for markets to pursue, and, perhaps most
importantly, identify its primary sources of competitive advantage
Chapter 6 – Writing a Business Plan
The business plan
-business plan: a written narrative that describes what a new business intends to accomplish and how it plans to
achieve its goals → for most new businesses, the business plan is a dual-purpose document that is used both
inside and outside the firm
> inside the firm, it helps the company develop a road map to follow in executing its strategies
> outside the firm, it acquaints potential investors and other stakeholders with the business opportunity the firm
is pursuing and describes how the business will pursue that opportunity
-the business plan must be substantive enough and have sufficient details about the merits of the new venture in
order to convince the reader that the new business is exciting and should receive support – much of this detail is
accumulated in the feasibility analysis stage of investigating the merits of a potential new venture
-2 primary reasons for writing a business plan:
1. It forces a firm to systematically think through each aspect of their new venture
2. To create a selling document for a company – mechanism of presentation
Who reads the business plan – and what are they looking for
-the 2 primary audiences for a firm’s business plan are
1. Its employees – a clearly written business plan, one that articulates a firm’s vision and future, is important
for both the management team and the rank-and-file employees as it synchronizes operations and
coordinates movement forwards in a consistent and purposeful manner
2.
Potential investors and other external stakeholders – provide them with business plan that is realistic and
not reflective of overconfidence on the firm’s part & clearly demonstrative that the business idea is viable
and offers potential investors financial returns greater than lower-risk investment alternatives
> investors vary in terms of reliance they place on formal business plans
> A firm must validate the feasibility of its business idea and have a good understanding of its competitive
environment prior to presenting its business plan to others.
> a business plan should disclose all resource limitations that the business must address before it is ready to
start earning revenues
Guidelines for writing a business plan
-adhering to writing guidelines increases the probability that an entrepreneur will develop an effective business
plan – and it’s important to take them into consideration as otherwise red flag may be raised when some parts
are insufficient or miss the mark
> founders with none of their own money at risk
> a poorly cited plan
> defining the market size too broadly
> overly aggressive financials
> sloppiness in any area
1. Structure – a conventional structure should be used to develop a business plan as it allows business investors
to focus on the parts of a plan that are critical to their decision-making process → but the plan still has to project
a sense of anticipation and excitement about the possibilities that surround a new venture
2. Content – a business plan should be concise and clear in its development and all important aspects of the
proposed venture should be included in the plan → once written, the plan should be checked for grammar errors,
spelling mistakes, and to verify that all vital information is in fact included
3. Style and format – the appearance should be carefully evaluated; however, it should be consistent with a
conventional structure and should not suggest to the potential investor that a great deal of money was spent to
prepare the plan itself
> a summary business plan is 10 to 15 pages and works best for companies in the early stages of development –
these companies lack the information needed for a full business plan but are able to develop a summary business
plan to see if potential investors are interested in their idea
> a full business plan, typically 25 to 35 pages, spells out a company’s operations and plans in much more detail
than a summary business plan and is the usual format for a business plan prepared for an investor
> an operational business plan – usually prepared for an internal audience and is 40 to 100 pages long and
provides a blueprint for a company’s operations
> sometimes investors ask for a PowerPoint deck or the executive summary
> a cover letter that briefly introduces the entrepreneur and clearly states why the business plan is being sent to
individual receiving it, should always accompany a business
4. Recognizing the elements of the plan may change – while its being written and as the business evolves →
new insights emerge while writing and from receiving feedback, which behooves entrepreneurs to remain alert
and open to new insights and ideas
Outline of the business plan
-a business plan has multiple parts:
› Cover page and table of contents
› Executive summary – a quick overview of the entire business plan and provides busy readers with
everything they need to know about the distinctive nature of the new venture
› Industry analysis
› Company description
› Market analysis
› The economics of the business
› Marketing plan
› Product/service design and development plan
› Operations plan
› Management team and company structure
› Overall schedule
› Financial projections
› Appendix
› Putting it all together
Presenting the business plan to investors
-if the business plan successfully elicits the interest of a potential investor, the next step is to meet with the
investor and present the plan in person → will typically want to meet with the firm’s founders → as investors
ultimately fund only a few ventures, the founders of a new firm should make as positive an impression on the
investor as possible
-the oral presentation of a business plan typically consists of 20 minutes of formal remarks, accompanied by
approximately 12 PowerPoint slides, and 40 minutes of questions and answers
> the presentation should be smooth and well-rehearsed
> the slides should be sharp and not cluttered with material
> the slides should include
- title slide
- problem
- solution
- opportunity and target market
- technology
- competition
- marketing and sales
- management team
- financial projections
- current status
- financing sought
- summary
-whether in the initial meeting or on subsequent occasions, an entrepreneur will be asked a host of questions by
potential investors → this question-and-answer period is extremely important as here investors are typically
looking for how well entrepreneurs think on their feet and how knowledgeable they are about the business
venture
Chapter 9 – Building a New Venture Team
Liability of Newness as a challenge
Liability of newness: companies often falter because the people who start them aren’t able to adjust quickly
enough to their new roles & because the firm lacks a “track record” with outside buyers and suppliers.
- Overcome by

assembling talented and experienced new- venture team → less likely novice mistakes → gain legitimacy

attending entrepreneurship-focused workshops and events

joining a start-up accelerator
Creating a new venture team
New venture team: group of people who move a new venture from an idea to a fully functioning firm
- consists of

company founders

key employees

the board of directors

lenders and investors
first decision most founders is to start the firm on their own or start a founding team
> heterogeneous founding team has members with diverse abilities and experiences
> homogeneous founding team has member who are similar to one another
Founders’ personal attributes that affect chances of launching a successful new firm

level of education

prior entrepreneurial experience

relevant industry experience

ability to network
> skills profile is a chart that depicts the most important skills that are needed in a new venture and where skills’
gaps exist – prioritize hiring needs
Four different sources of labor used by entrepreneurs to get work done:
1. employee = costly therefore usually brought on fairly slowly
2. intern: works as apprentice or trainee, through intern programs →recruiting tool
3. freelancer = in business for themselves, works on own times and uses own tools and equipment
4. virtual assistant = freelancer who provides administrative, technical or creative assistance from home office
Board of directors: panel of individuals elected by a corporation’s shareholders to oversee management of the
firm
> inside directors is a person who is also an officer of the firm
> outside director is someone who is not employed by the firm
- has three formal responsibilities:
1. appoint the firms key managers
2. declare dividends
3. oversee the affairs of the corporation
Signaling: when a high quality individual agrees to serve on a company’s board of directors → in essence
expressing an opinion that the firm has potential
Rounding Out the Team: The Role of Professional Advisers
Advisory board: panel of experts who are asked by a firm’s managers to provide ongoing counsel and advice
- preferred by more serving people > board of directors as it possesses no legal responsibility and gives
nonbinding advice
Several guidelines followed when organizing board of advisors
1. should not be organized just so a company can boast from it
2. members should be compatible and complement one another
3. rules in terms of access to confidential information carefully spelled out
4. caution advisors to disclose that they have a relationship with the venture before posting comments
about it
Other Professionals
Consultants: individual who gives professional or expert advice
- used for advice if task takes too much time → inappropriate to ask to board of advisors or directors
- two categories of consultants
1. paid consultants through large consulting firms – usually to expensive for start-ups
2. consultants for free or at reduced rate through nonprofit or government agency
Chapter 10 – Getting Financing or Funding
Why Most New Ventures Need Funding
3 reasons
1. cash flow challenges → lag between need to spend capital to generate revenue and time required to
earn positive returns from those investments
2. capital investment needs → founders usually able to fund initial capital investment needs but larger
investments required for growth which is the foundation for long term success
3. lengthy product development cycles
Sources of Personal Financing
3 sources
1. personal funds, usually sweat equity (time and effort of founder) due to lack of substantial amount of cash
2. friends and family
- request should be presented in a businesslike manner
- in case of loan → stipulate terms of loan in writing (promissory note)
- only from those who are in a legitimate position to offer assistance
3. bootstrapping: cutting cost or creative ways to raise money
Preparing to Raise Debt or Equity Financing
3 steps in properly preparing to raise debt or equity financing
1. determine precisely how much money the company needs
> don’t want to cut short & don’t want to pay for capital it doesn’t need
> poor impression on potential investors or lenders if uncertain about amount required
2.
determine the most appropriate type of financing or funding
2 most common alternatives for raising money
- equity financing: exchanging partial ownership of firm (usually stock) for funding
> some investors invest “for the long haul”, are content with receiving return through dividend
> more commonly, 3 to 5 year investment → expect to get money back with substantial capital gain through
liquidity event: converts some or all stock into cash
3 most common liquidity events:
- going public
- find a buyer
- merging with other company
- debt financing: getting a loan
> common source are commercial banks and Small Business Administration guaranteed loans (SBA)
> banks prefer minimizing risks as aren’t investors → difficult for starts- ups, they are too early in life cycle
3.
developing a strategy for engaging potential investors or bankers
3 steps to developing a strategy for engagement
- elevator pitch (speech): brief, carefully constructed statement that outlines merits of business opportunity
- identifying and contacting best prospects for investments
- be prepared to provide or present a completed business plan
Sources of Equity Funding
3 most common forms
1. business angels: individuals who invest personal capital
- difficult to attain due to low yield rate: percentage of business opportunities presented that result in an
investment
2. venture capital: come in later in life cycle of a company than angel investors
> money invested by money managers who raise money in funds
- investors who invest in venture capital funds are called limited partners
- the venture capitalists, who manage the fund, are called general partners
Venture capitalists’ managers earn money through
- annual management fee
- carry: percentage of the profits earned by the fund
- Investments in firms are made in rounds (stages) also referred to as follow-on funding table 10.4
- Due diligence: investigating the merits of a potential venture, done by venture capitalist as well as firm
- Corporate venture capital: money comes from corporations that invest in start-ups related to their area of
interest
3.
initial public offering (IPO): first sale of stock by a firm to the public
3 reasons
- raise equity to fund current and future operations
- raises a firm’s public profile as shows viability and bright future
- mechanism for stockholders to cash out investments
- creates another currency that can be used to grow the company
Requirements for report of going public stated in Sarbanes- Oxley Act (2002)
1st step: hire an Investment Bank – acts as an underwriter or agent for the firm
2nd step: issue a preliminary prospectus (red herring) by investment bank – describes the offering to the
general public
3rd step: final prospectus – after SEC has approved the offering (stets date and issuing price)
4th step: road show- tour consisting of meetings in key cities with investors, are also taped for the public
Private Placement: variation on IPO, direct sale of security issue to large institutional investor no public
offering or prospectus
Sources of Debt Financing
Two common types of loans
1. single- purpose loan: specific amount of money is borrowed that must be repaid in fixed amount of time
with interest
2. line of credit: borrowing cap is established, borrowers use credit at their discretion, periodic interest
payments
two advantages debt financing over equity
- none of the ownership is surrendered
- interest payments are tax deductible
Two disadvantages
- must be repaid, difficult due to focus on getting company of the ground
- lenders impose strict conditions on loans and insist on ample collateral to protect investment
-Commercial banks
> not viewed as practical sources due to two reasons
1. banks are risk averse and have internal controls and regulatory restrictions prohibiting high-risk loans
2. lending money to start-up firms is not as profitable as lending to large firms
- SBA Guaranteed Loans
> 7(A) Loan Guaranty Program most notable program available to small businesses
- Other Sources of Debt Financing
> peer- to- peer lenders: intermediaries between borrowers and individuals or institutional investors → watch
out for high annual percentage rate and is underwritten
> vendor credit: credit extended to a business, allows the business to buy its products now and pay later
> factoring: business sells its account receivable to a third party in exchange for cash
Creative Source of Financing and Funding
- crowdfunding: raising contributions from a large number of people through the internet
Two types of crowdfunding sites
1. rewards based crowd funding: raise money in exchange for some type of amenity or reward
2. equity based crowd funding: raise money through individuals and professional investors for equity in
the business
> formerly limited to accredited investors: person permitted to invest in high- risk start-ups (^ 1mil net)
> JOBS act → opened equity crowdfunding to individuals regardless of net worth or income
- leasing: written agreement in which owner of piece of property allows an individual or business to use
property in exchange for periodic payments
> most common for facilities or equipment
- SBIR and STTR Grant Programs – mainly for technology firms
> Small Business Innovation Research program: competitive grant program that provides funding by federal
departments and agencies in 3 phases:
1. phase: 6 months feasibility study for technical feasibility and proposed innovation – up to $150.000
2. phase: up to 2 years for successful phase 1 firms develop and test prototype – up to $1 million
3. phase: move from R&D lab to marketplace, no SBIR funding – private funding to commercialize
> Small Business Technological Transfer: variation of SBIR for collaborative research projects – main
difference is requirement of partnering research institute that is awarded 30% of the total grant fund
- strategic partners: deep pocketed strategic partners for small firms perform parts of the process
Chapter 11 – Unique Marketing Issues
Selecting a market and establishing a position
-to succeed, a new firm must know who its customers are and how to reach them – 3 step process to determine
this:
1. Segmenting the market
2. Selecting a target market
3. Crafting a unique position within the target market
> target market: the limited group of individuals or businesses to which it attempts to appeal → important to
choose the target market and its position inside it quickly, as virtually all of its marketing choices hinge on these
critical initial choices
-market segmentation: study of the industry in which the firm intends to compete and determine the different
potential target markets within that industry → markets can be segmented in a number of ways, including
product type, price point, distribution channels used, and customers served.
-requirements of successful market segmentation
 Homogeneity of needs and wants appears within the segment
 Heterogeneity of needs and wants exists between the segments
 Differences within the segment should be small compared to differences across segments
 The segment should be distinct enough so that its members can be easily identified
 It should be possible to determine the size of the segment
 The segment should be large enough for the firm to earn profits
-after markets are segmented, the firm selects its target market, or the group it intends to serve → a firm doesn’t
typically target an entire segment because many segments are too large to target successfully – instead they
target a niche market within the segment: a place within a market segment that represents a narrow group of
customers with similar interests
by focusing on a clearly defined 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
> synchronize with business model and background and skills of its founders
> continually monitor attractiveness of target market
-the next step is to establish a unique position in that market—one that differentiates the entrepreneurial firm
from its competitors → a firm’s position in the marketplace determines how it is situated relative to competitors
→ from a marketing perspective, this translates into the image of the way a firm wants to be perceived by its
customers → position answers the question, “Why should someone in our target market buy our product or
service instead of our competitor’s?”
-a firm’s market position is defined by its products or services & determining which position in a market to
occupy and in which to compete is a strategic call on the part of a company based on its mission, its overall
approach to the marketplace, and its competitive landscape
-also important to these three steps is the development of a product attribute map: illustrates a firm’s position in
its industry relative to its major rivals → used as a visual illustration of a firm’s positioning strategy and helps a
firm develop its marketing plan
-tagline: a catchy phrase that’s used consistently in a company’s literature, advertisement, stationery, and even
invoices – and thus becomes associated with that company → to reinforce the position it has staked out in the
market
Branding
-brand: a set of attributes that people associate with a company – can be positive or negative → the customer
loyalty a brand creates is one of its most valuable assets → and integrity of brands can be monitored through
brand management: a program used to protect the image and value of an organization’s brand in consumers’
minds
-one of the keys to effective branding is to create a strong personality for a firm, designed to appeal to the
chosen target market → want customers to strongly identify with the company which they will only do if they
perceive the company as being different from competitors in ways that create value for them
> on a philosophical level, a firm builds a brand by having it create meaning in customers’ lives – it must create
value; something for which customers are willing to pay
> on a more practical level, brands are built through advertising, public relations, sponsorships, supporting
social causes, and good performance – it must have a polished image immediately so that they have credibility
when they approach their potential customers
-most experts warn against placing an overreliance on advertising to build a firm’s brand → a more affordable
approach is to rely on word of mouth, the media, and ingenuity to create positive buzz about a company:
creating awareness and a sense of anticipation about a company and its offerings
-brand equity: the set of assets and liabilities that are linked to a brand and enable it to increase a firm’s
valuation → it is important for firms to understand brand equity and how to use it to create value – and although
the assets and liabilities that make up a firm’s brand equity will vary from context to context, they usually are
grouped into the following five categories:
 Brand loyalty
 Name recognition
 Perceived quality (of a firm’s products and services)
 Brand associations in addition to quality (e.g., good service)
 Other proprietary assets, such as patents, trademarks, and high-quality partnerships
-one aspect of branding that start-ups should be alert to is the possibility of forming co-branding relationships:
when two companies form a partnership to combine their brands → objective is to combine the strengths of the
brands
> can be short term, to promote a specific event or product launch
> or can be long term, such as opening co-branded stores.
The 4ps of marketing for new ventures
-a firm’s marketing mix: the set of controllable, tactical marketing tools that it uses to produce the response it
wants in its target market → most marketers organize their marketing mix around the 4Ps: product, price,
promotion, and place (or distribution
Product
-a product is a good or service the firm offers in the market it has chosen to serve → technically, a product is
something the firm sells that takes on a physical form, while a service is an activity or a benefit the firm
provides that does not take on a physical form → the most important attribute of the product a firm sells is its
ability to create value for customers
As the firm prepares to sell its product, an important distinction should be made between the core product and
the actual product. While the core product may be a CD that contains a tax preparation 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.16 For example, TurboTax is an actual product. Its name, features,
warranty, ability to upgrade, packaging, and other attributes have all been carefully combined to deliver the
benefits of the product: helping people prepare their federal and state tax returns while receiving the largest
refund possible. 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—the features, design,
packaging, and so on that constitute the collection of benefits that the customer ultimately buys. Anyone who
has ever tried to remove a product from a frustratingly rigid plastic container knows that the way a product is
packaged is part of the product itself. The quality of the product should not be compromised by missteps in
other areas.
-all new firms face the challenge that they are unknown and that it takes a leap of faith for their first customers
to buy their products. Some start- ups meet this challenge by using reference accounts: an early user of a firm’s
product who is willing to give a testimonial regarding his or her experience with the product
to obtain reference accounts, new firms must often offer their product to an initial group of customers
for free or at a reduced price in exchange for their willingness to try the product and for their feedback
Price
-price: the amount of money customers are willing to pay to purchase a product → entrepreneurs use one of two
methods to set the price of their product:
1. Cost-based pricing – the list price for a product is determined by adding a markup percentage to the
product’s cost (may be standard for the industry or may be arbitrarily determined by the entrepreneur)
> advantage of this method is that it is straightforward, and it is relatively easy to justify the price of a good or
service
> disadvantage is that it is not always easy to estimate what the costs of a product will be – and once a price is
set, it is difficult to raise it, even if a company’s costs increase in an unpredicted manner
> cost-based pricing is based on what a company thinks it should receive rather than on what the market thinks a
good or service is worth → it is becoming increasingly difficult for companies to dictate prices to their
customers, given customers’ ability to comparison shop on the Internet to find what they believe is the best
combination of a product’s features, including price, for them
2.
Value-based pricing – the firm determines the price of its product by estimating what consumers are
willing to pay for a product and then backing off a bit to provide a cushion → what a customer is
willing to pay is determined by the perceived value of the product and by the number of choices
available in the marketplace
a firm influences its customers’ perception of the value through positioning, branding, and the other
elements of the marketing mix
-most experts recommend value-based pricing because it hinges on the perceived value of a product or service
rather than cost plus pricing, which, as shown previously, is a formula that ignores the customer.
-most experts also warn entrepreneurs to resist the temptation to charge a low price for their products in the
hopes of capturing market share
> this approach can win a sale but generates little profit
> most consumers make a price-quality attribution when looking at the price of a product anyways: consumers
naturally assume that the higher-priced product is also the better-quality product
=> the price a company is able to charge is largely a function of (1) the objective quality of a product or service
and (2) the perception of value that is created in the minds of customers relative to competing products in the
marketplace
Promotion
-promotion: the actions the firm takes to communicate the merits of its product to its target market → goal is to
persuade people to buy the product – the most common actions used to promote their products:

›
›
Advertising: making people aware of a product in hopes of persuading them to buy it → major goals are to:
Raise customer awareness of a product
Explain a product’s comparative features and benefits
›
Create associations between a product and a certain lifestyle
-these goals can be accomplished through a number of media and the most effective ads tend to be those that are
memorable and support a product’s brand – but advertising has some major weaknesses, including the
following:
› Low credibility
› The possibility that a high percentage of the people who see the ad will not be interested
› Message clutter
› Relative costliness compared to other forms of promotions
› The perception that advertising is intrusive
-start-ups tend to be very frugal and selective in their advertising efforts or engage in hybrid promotional
campaigns that aren’t advertising per se, but are designed to promote a product or service
-many start-ups also advertise in trade journals or utilize highly focused pay-per-click advertising provided by
Google, Bing, or another online firm to economize the advertising dollars → pay-per-click advertising
represents a major innovation in advertising and has been embraced by firms of all sizes
-another medium for advertising, which is growing in popularity, is social media sites
-for start-up firms, advertisements are the most effective if they’re part of a coordinated marketing campaign
-6 steps in putting together an advertisement
 Public Relations: one of the most cost-effective ways to increase the awareness of the
products a company sells is through public relations, which are efforts to establish and maintain a company’s
image with the public – it is not paid for directly & the cost of public relations to a firm is the effort it expends
to network with journalists, blog authors, and other people to try to interest them in saying or writing good
things about the company and its products
-many start-ups emphasize public relations over advertising primarily because it’s cheaper and helps build the
firm’s credibility → a firm’s public relations effort can be oriented to telling the company’s story through a third
party
-there are many ways in which a start-up can enhance its chances of getting noticed by the press, a blogger, or
someone who is influential in social media → they want a human interest story about why a firm was started or
a story that focuses on something that is particularly unique about the start-up
-another technique is to prepare a press kit: a folder that contains background information about the company
and includes a list of its most recent accomplishments → is normally distributed to journalists and made
available online
-attending trade shows can also contribute to a firm’s visibility: an event at which the products or services in a
specific industry are exhibited and demonstrated → members of the media often attend trade shows to get the
latest industry news
 Social Media → consists primarily of blogging and establishing a presence and
connecting with customers and others through social networking sites such as Facebook, Twitter, Instagram, or
Snapchat
-the idea behind blogs is that they familiarize people with a business and help build an emotional bond between
a business and its customers → the key to maintaining a successful blog is to keep it fresh and make it
informative and fun & it should also engage its readers in the “industry” and “lifestyle” that a company
promotes as much as a company’s products
-social plug-ins: tools that websites can use to provide their users with personalized and social experiences
-businesses establish a presence on social media platforms to build a community around their products and
services → the benefits include brand building, engaging customers, and getting customer leads as well as
online sales
-in regard to engagement, many companies use social networks to strengthen their relationships with customers
by soliciting feedback, running contests, or posting fun games that pertain to a company’s product
 Other Promotion-Related Activities → there are many other activities that help a firm
promote and sell its products – like give away free samples of their products or offer free trials → to try to hook
potential customers by exposing them directly to the product or service
-viral marketing → facilitates and encourages people to pass along a marketing message about a particular
product – the success of viral marketing depends on the pass-along rate from person to person → the idea of
designing a promotional campaign that encourages a firm’s current customers to recommend its product to
future customers is well worth considering
-guerilla marketing: technique related to both viral marketing and creating buzz – is a low-budget approach to
marketing that relies on ingenuity, cleverness, and surprise rather than traditional techniques → the point is to
create awareness of a firm and its products, often in unconventional and memorable ways
Place
-place, or distribution, encompasses all the activities that move a firm’s product from its place of origin to the
consumer → distribution channel is the route a product takes from the place it is made to the customer who is
the end user
-the first choice a firm has to make regarding distribution is whether to sell its products directly to consumers or
through intermediaries → the decision typically depends on how a firm believes its target market wants to buy
its product
1. Selling Direct
→ being able to control the process of moving products from their place of
origin to the end user instead of relying on third parties is a major advantage of direct selling
→ 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, must maintain a sales force, and/or must support an e-commerce website
→ it must also find its own buyers rather than have distributors that are constantly looking for new outlets for
the firm’s products.
-the process of eliminating layers of middlemen, such as distributors and wholesalers, to sell directly to
customers is called disintermediation
2. Selling Through Intermediaries → firms selling through intermediaries typically pass off
their products to wholesalers or distributors that 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 avoids the cost of building and maintaining retail outlets
→ it can also rely on its wholesalers to manage its relationship with Best Buy and Walmart and to find other
retail outlets in which to sell its products – the
challenge to successfully using this approach
is to find wholesalers and distributors that
will represent a firm’s products
→ the disadvantage of selling through
intermediaries is that a firm loses a certain
amount of control of its product
→ selling via distributors and wholesalers can
also be expensive, so it is best to carefully
weigh all options
-some firms enter into exclusive distribution
arrangements with channel partners: give a
retailer or other intermediary the exclusive
rights to sell a company’s products →
advantage to giving out an exclusive
distribution agreement is to motivate a retailer
or other intermediary to make a concerted
effort to sell a firm’s products without having to worry about direct competitors.
-one choice that entrepreneurs face when selling through intermediaries is how many channels to sell through →
the more channels a firm sells through, the faster it can grow
but there are problems associated with selling through multiple channels, particularly early in the life of
a firm; firm can lose control of how its products are being sold
Sales process and related issues
-a firm’s sales process depicts the steps it goes through to identify leads and close sales → the seven-step sales
process includes the following:
-following a formal or structured process to generate and close sales benefits a firm in two ways
1. It enables a firm to fine-tune its approach to sales and build uniformity into the process
2. 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
-some firms implement their sales strategy by listing the seven steps in the process, and then writing procedures
for how each step will be implemented → some new ventures include this material in their business plan, to
provide the reader confidence that they’ve thought through how they’ll close sales
-mapping the sales process provides a standard method for a firm’s employees to use, and provides a starting
point for careful analysis and continuous improvement
Chapter 13 – Preparing for and Evaluating the Challenges of Growth
-sustained growth: growth in both revenues and profits over a sustained period of time → relatively few firms
generate sustained and outstanding, profitable growth
-a company’s growth typically follows one of several patterns:
(1) it might burst on the scene with years of expansion and then decelerate and decline
(2) it might grow in fits and starts, possibly in sync with the overall economy
(3) it might enjoy a brief boom and then plateau,
(4) it might achieve steady incremental growth repeated over time – the healthiest and the pattern that leads to
sustained growth
→ although challenging, most entrepreneurial ventures try to grow and see it as an important part of their ability
to remain successful
Preparing for Growth
-although there is some trial and error involved in starting and growing any business, the degree to which a firm
prepares for its future growth has a direct bearing on its level of success → 3 important things a business can do
to prepare for growth:
› Appreciating the Nature of Business Growth: growing a business successfully requires
preparation, good management, and an appreciation of the issues involved – the following are issues about
business growth that entrepreneurs should appreciate
> Not All Businesses Have the Potential to Be Aggressive Growth Firms – the businesses that have the potential
to grow the fastest over a sustained period of time are ones that solve a significant problem or have a major
impact on their customers’ productivity or lives
> A Business Can Grow Too Fast – many businesses start fast and never let up, which stresses a business
financially and can leave its owners emotionally drained & sometimes businesses grow at a measured pace and
then experience a sudden upswing in orders and have difficulty keeping up
> Business Success Doesn’t Always Scale – unfortunately, the very thing that makes a business successful
might suffer as the result of growth → businesses that are based on providing high levels of individualized
service or businesses that sell high-end or specialty products often do not grow well
› Staying Committed to a Core Strategy: an important part of a firm’s business model is its
core strategy, which defines how it competes relative to its rivals → is largely determined by its core
competencies, or what it does particularly well → it’s important that a business not lose sight of its core
strategy as it prepares for growth → if a business becomes distracted or starts pursuing every opportunity for
growth that presents itself, the business can easily stray into areas where it finds itself at a competitive
disadvantage
> the way most businesses typically evolve is to start by selling a product or service that is consistent with their
core strategy and then increase sales by incrementally moving into areas that are different from, but related to,
their strengths and core capabilities. This is how Zappos operates → the success of its new product lines will be
determined largely by whether the company’s existing core competencies are sufficient to profitably sell these
items → if they aren’t, a firm will have to develop or acquire additional core competencies, or it is likely to
struggle to effectively manage its growth
› Planning for Growth: involves a firm thinking ahead and anticipating the type and amount
of growth it wants to achieve.
> the process of writing a business plan greatly assists in developing growth-related plans, and even though a
business will undoubtedly change during its first three to five years, it’s still good to have a plan → many
businesses periodically revise their business plans as a foundation for helping them guide their growth-related
decisions
> it is also important for a business to determine, as early as possible, the strategies it will choose to employ as a
means of pursuing growth
> on a more personal level, a business owner should step back and measure the company’s growth plans against
his or her personal goals and aspirations – if a business has the potential to grow rapidly, the owner should know
what to expect if the fast-growth route is chosen
> but even if they make a conscientious effort to plan for growth, some firms fail because they simply cannot
generate enough growth to reach breakeven and make their ventures worthwhile
Reasons for Growth
-a firm’s pace of growth is the rate at which it is growing on an annual basis → although profitable growth is
almost always the result of deliberate intentions and careful planning, firms cannot always choose their pace of
growth → 6 primary reason firms try to grow to increase their profitability and valuation
1. Capturing Economies of Scale – economies of scale are generated when increasing
production lowers the average cost of each unit produced → occurs for two reasons
> if a company can get a discount by buying component parts in bulk, it can lower its variable costs per unit as it
grows larger: the costs a company incurs as it generates sales
> by increasing production, a company can spread its fixed costs over a larger number of units: costs that a
company incurs whether it sells something or not
> a related reason firms grow is to make use of unused resources such as labor capacity and a host of others
2. Capturing Economies of Scope – with economies of scope, the advantage a firm accrues
comes through the scope (or range) of a firm’s operations rather than from its scale of production
3. 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 → being the market leader permits a firm to use slogans
in its promotions, helping it win customers and attract talented employees as well as business partners
4. Influence, Power, and Survivability
> 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
> larger businesses can typically make a mistake yet survive more easily than entrepreneurial ventures
> reach and resources enable firms to go to bat more frequently, to take more swings, to experiment more, and
unlike a small company, they can miss on occasion and get to swing again
> a firm that stays small and relies on the efforts and motivation of its founder or a small group of people is
vulnerable if those people leave the firm or lose their passion for the business – as a firm grows and adds
employees, it’s normally not as vulnerable to the loss of a single person or a small group of people’s
participation or passion for the business
5.
Need to Accommodate the Growth of Key Customers
6. Ability to Attract and Retain Talented Employees – 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
Managing Growth
-a company must actively and carefully manage its growth for it to expand in a healthy and profitable manner:
as a business grows and becomes better known, there are normally more opportunities that present themselves,
but there are more things that can go wrong, too – but many potential problems and heartaches can be avoided
by prudently managing the growth process
-the organizational life cycle consists of 5 stages:
1. Introduction Stage: start-up phase where a business determines what its strengths and core
capabilities are and starts selling its initial product or service – main goal of the business is to get off to a good
start and to try to gain momentum in the marketplace
> make sure the initial product or service is right
> start laying the groundwork for building a larger organization
> important to not rush things
2. Early Growth Stage: phase generally characterized by increasing sales and heightened
Complexity → the business is normally still focused on its initial product or service but is trying to increase its
market share and might have related products in the works
> the founder or owner of the business must start transitioning from his or her role as the hands-on supervisor of
every aspect of the business to a more managerial role
> increased formalization must take place → the business has to start developing policies and procedures that
tell employees how to run it when the founders or other top managers aren’t present
3. Continuous Growth Stage: the need for structure and more formal relationships increases
as a business moves beyond its early growth stage and its pace of growth accelerates
> the resource requirements of the business are usually a major concern
> along with the ability of the owner and manager to take the firm to the next level
> 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
> the importance of developing policies and procedures increases during the continuous growth stage
> also important for a business to develop a formal organizational structure and determine clear lines of
delegation throughout the business
4. Maturity Stage: a business enters the maturity stage when its growth slows →
the firm typically focuses more intently on efficiently managing the products and services it has rather than
expanding in new areas
> innovation slows
> formal policies and procedures, although important, can become an impediment if they are too rigid and strict
– important that the firm continues to adapt and that the founders, managers, and employees remain passionate
about the products and services that are being sold → if this doesn’t happen, a firm can easily slip into a nogrowth situation.
> if a company does grow organically while in the maturity stage, it normally focuses on the “next generation”
of products it already sells rather than investing in new or related products or services.
5. Decline Stage: it is not inevitable that a business enter the decline stage and either
deteriorate or die – eventually all businesses’ products or services will be threatened by more relevant and
innovative products → a business’ ability to avoid decline depends on the strength of its leadership and its
ability to appropriately respond
> a firm can also enter the decline stage if it loses its sense of purpose or spreads itself so thin that it no longer
has a competitive advantage in any of its markets – a firm’s management team should be aware of these
potential pitfalls and guard against allowing them to happen
-the technology adoption life cycle is suited primarily for technology firms that are introducing disruptive
innovations to the market → associated with the concept of “crossing the chasm,” which explains why some
technology products reach mainstream markets while others don’t
Challenges of growth
-there is a consistent set of challenges that affect all stages of a firm’s growth, which typically become more
acute as a business grows – but a business’ founder or founders and managers also become more savvy and
experienced with the passage of time
-as a business grows and takes market share from rival firms, there will be a certain amount of retaliation that
takes place, which normally increases as a business grows and becomes a larger threat to its rivals
1.
The managerial capacity problem: the bottleneck that follows when a firm’s managerial resources are
insufficient to take advantage of its new product and services opportunities,
> as a firm goes about its routine activities, the management team becomes better acquainted with the firm’s
resources and its markets → this knowledge leads to the expansion of a firm’s productive opportunity set: the
set of opportunities the firm feels it is capable of pursuing → the pursuit of these new opportunities causes a
firm to grow
> but there is a problem with the execution of this simple logic: the firm’s administrative framework consists of
two kinds of services that are important to a firm’s growth
(1) entrepreneurial services generate new market, product, and service ideas
(2) managerial services administer the routine functions of the firm and facilitate the profitable execution of new
opportunities
> but the introduction of new product and service ideas requires substantial managerial services/capacity to be
properly implemented and supervised → a complex problem because if a firm has insufficient managerial
services to properly implement its entrepreneurial ideas, it can’t quickly hire new managers to remedy the
shortfall
> it is expensive to hire new employees, and it takes time for new managers to be socialized into the firm’s
culture, acquire firm-specific skills and knowledge, and establish trusting relationships with other members of
their firms
→ as the entrepreneurial venture grows, it encounters 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
-the basic model of firm growth shows the essence of the growth-limiting managerial capacity problem →
indicates that the ability to increase managerial services is not friction free
2.
›
Four most common day-to-day challenges of growing a business:
Cash Flow Management: the challenge of continuously verifying that the firm has sufficient cash on hands
to meet its need
›
Price Stability: challenge that surfaces when a firm competes successfully against larger competitors who
respond by making the new venture compete on the basis of price, a competitive dimension on which it is at
a disadvantage compared to large, established competitors
›
Quality Control: with growth, the entrepreneurial venture may find it increasingly difficult to maintain the
quality of its product/service as demanded by customers
›
Capital Constraints: the challenge is to find the financial capital needed to support early and hopefully
continuous firm growth
Chapter 14 – Strategies for Firm Growth
Internal growth strategies
-internal growth strategies involve efforts taken within the firm itself for the purpose of increasing sales revenue
and profitability → the distinctive attribute of internally generated growth is that a business relies on its own
competencies, expertise, business practices, and employees → often called organic growth because it does not
rely on outside intervention
-effective though it can be, there are limits to internal growth: as a company enters the middle and later stages of
its life cycle, sustaining growth strictly through internal means becomes more challenging → the concern is that
a company will “hit the wall” in terms of growth and will experience flat or even declining sales – sometimes
companies face this challenge through no fault of their own
-advantages and disadvantages of internal growth:
-new product development involves designing, producing, and selling new products/services as a means of
increasing firm revenues and profitability → in many fast-paced industries, new product development is a
competitive necessity – for some companies, continually developing new products is the essence of their
existence
-it is also a high-risk strategy, and the key is developing innovative new products that aren’t simply “me-too”
products that are entering already crowded markets – but when properly executed, there is tremendous upside
potential to developing new products and/or services
> provide reliable revenue streams
> provide sufficient cash flow to fund a company’s operations and provide resources to support developing
additional new products
-the keys to effective new product and service development:
› 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
-a common set of reasons that new products fail:
1. The potential market was overestimated.
2. Customers saw the product as too expensive.
3. The product was poorly designed.
4. The product was no different than the competition’s (“me too” products). 5. The costs of developing the
product line were too high.
=> to achieve healthy growth, whether via the development of new products or another means, a firm must sell a
product or service that legitimately creates value and has the potential to generate profits along with sales
Additional internal product-growth strategies
> Improving an Existing Product or Service: increasing its value and price potential from the customer’s
perspective
→ a mistake many businesses make is not remaining vigilant enough regarding opportunities to improve
existing products and services – it is typically much less expensive for a firm to modify an existing product or
service and extend its life than to develop a new product or service from scratch
> Increasing the Market Penetration of an Existing Product or Service: actions taken to increase the sales of a
product or service through greater marketing efforts or through increased production capacity and efficiency
→ an increase in a product’s market share is typically accomplished by increasing advertising expenditures,
offering sales promotions, lowering the price, increasing the size of the sales force, or increasing a company’s
social media efforts
→ can also occur through increased capacity or efficiency, which permits a firm to have a greater volume of
product or service to sell
> Extending Product Lines: involves making additional versions of a product so that it will appeal to different
clientele or making related products to sell to the same clientele.
→ firms also pursue product extension strategies as a way of leveraging their core competencies into related
areas
> Geographic Expansion: many entrepreneurial businesses grow by simply expanding from their original
location to additional geographic sites – the keys to successful geographic expansion follow:
› Perform successfully in the initial location: additional locations can learn from the initial location’s success.
›
Establish the legitimacy of the business concept in the expansion locations: a mistake is to assume that if
something works in one community, it will automatically work in another
›
Don’t isolate the expansion location: it is a mistake to believe that an expansion location can excel without
the same amount of attention and nurturing that it took to build the business in the original location
=> product-related strategies work best when a company remains vigilant about making sure the product
remains in demand and consumer trends aren’t turning against it
International expansions
-international new ventures: businesses that, from inception, seek to derive competitive advantage by using their
resources to sell products or services in multiple countries → from the time they are started, these firms, which
are sometimes called “global start-ups” or “born globals,” view the world as their marketplace rather than
confining themselves to a single country
> becoming an international new venture can be intentional or can result from unsolicited orders from foreign
buyers
> although there is vast potential associated with selling overseas, it is a fairly complex form of firm growth →
the most important issues that entrepreneurial firms should consider in pursuing growth via international
expansion:
1. Assessing a Firm’s Suitability for Growth through International Markets
Depth of management commitment – a properly funded and executed international strategy requires top
management support
-
Depth of international experience – to be successful, an inexperienced entrepreneurial firm may have to hire
an export management company to familiarize itself with export documentation and other subtleties of the
export process → selling and servicing a product or service overseas is much different than doing so at
home
-
Interference with other firm initiatives – a firm should weigh the advantages of competing in international
markets against the time commitment involved and the potential interference with other firm initiatives
-
Product issues – a firm can’t simply “assume” that its products are salable and easily serviceable in foreign
countries
-
Distribution issues
-
Financing export operations
-
Foreign currency risk
→ if these issues can be addressed successfully, growth through international markets may be an excellent
choice for an entrepreneurial firm
→ the major impediment in this area is not fully appreciating the challenges involved.
2. Foreign Market Entry Strategies
3. Selling Overseas
-many entrepreneurial firms first start selling overseas by responding to an unsolicited inquiry from a foreign
buyer → important to handle the inquiry appropriately and to observe protocols when trying to serve the needs
of customers in foreign markets
› Answer requests promptly and clearly. Do not ignore a request just because it lacks grammatical clarity and
elegance. Individuals using a nonnative language to contact a business located outside their home nation
may be inexperienced with using a second language.
›
Replies to foreign inquires, other than e-mail or fax, should be communicated through some form of airmail
or overnight delivery. Ground delivery is too slow in some areas of the world.
›
A file should be set up to retain copies of all foreign inquiries. Even if an inquiry does not lead to an
immediate sale, the names of firms that have made inquiries will be valuable for future prospecting.
›
Keep promises. The biggest complaint from foreign buyers about U.S. businesses is failure to ship on time
(or as promised). The first order is the most important in that it sets the tone for the ongoing relationship.
›
All correspondence should be personally signed. Form letters are offensive in some cultures.
›
Be polite, courteous, friendly, and respectful. This is simple common sense, but politeness is particularly
important in some Asian cultures. In addition, avoid the use of business slang that is indigenous to the
United States, in that the slang terms lack meaning in many other cultures. Stated simply, be sensitive to
cultural norms and expectations.
›
For a personal meeting, always make sure to send an individual who is
of equal rank to the person with whom he or she will be meeting. In some cultures, it would be seen as
inappropriate for a salesperson from a U.S. company to meet with the vice president or president of a
foreign firm.
External growth strategies
-external growth strategies rely on establishing relationships with third parties → an emphasis on external
growth strategies typically results in a more fast-paced, collaborative approach toward growth than the slowerpaced internal strategies
-distinct advantages and disadvantages to emphasizing external growth strategies
 Mergers and acquisitions
> merger is the pooling of interests to combine two or more firms into one
> acquisition is the outright purchase of one firm by another – the surviving firm is called the acquirer, and the
firm that is acquired is called the target
→ acquiring another business can fulfill several of a company’s needs
→ in most cases, a firm acquires a competitor or a company that has a product line or a core competence that it
needs
→ 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 and can stretch finances to the brink
-it is very important to exercise extreme care in finding acquisition candidates → typically 2 steps involved in
finding an appropriate target firm:
1. Survey the marketplace and make a “short list” of promising candidates
2. Carefully screen each candidate to determine its suitability for acquisition
-the key areas to focus on in accomplishing these two steps are as follows:
› The target firm’s openness to the idea of being acquired and its ability to receive consent for its acquisition
from key third parties
›
The strength of the target firm’s management team, its industry, and its physical proximity to the acquiring
firm’s headquarters
›
The perceived compatibility of the target company’s top management team and corporate culture with the
acquiring firm’s top management team and corporate culture
›
The target firm’s past and projected financial performance
›
The likelihood the target firm will retain its key employees and customers if acquired
›
The identification of any legal complications that might impede the purchase of the target firm and the
extent to which patents, trademarks, and copyrights protect the firm’s intellectual property
›
The extent to which the acquiring firm understands the business and industry of the target firm
-completing an acquisition is a nine-step process:
Step 1 Schedule a meeting with the target firm’s executives
Step 2 Evaluate the feelings of the target firm’s executives about the acquisition
Step 3 Determine how to most appropriately finance the acquisition
Step 4 Actively negotiate with the target firm
Step 5 Make an offer if negotiations indicate that doing so is appropriate
Step 6 Develop a noncompete agreement with key target firm employees who will be retained.
Step 7 Hire an attorney to prepare the closing documents
Step 8 As soon as practical, meet with all employees to explain the acquisition
Step 9 Move forward with the plan for adding the acquired firm to the organization
→ along with acquiring other firms to accelerate their growth, entrepreneurial firms are often the targets of
larger firms that are looking to enter a new market or acquire proprietary technology
→ selling to a large firm is often the goal of an investor-backed company, as a way of creating a liquidity event
to allow investors to monetize their investment / as a way of accelerating their growth
 Licensing
-licensing: the granting of permission by one company to another company to use a specific form of its
intellectual property under clearly defined conditions → virtually any intellectual property a company owns that
is protected by a patent, trademark, or copyright can be licensed to a third party
-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 license can be exclusive, nonexclusive, for a specific purpose, and for a specific geographic area
-in almost all cases, the licensee pays the licensor an initial payment plus an ongoing royalty for the right to use
the intellectual property – but there is no set formula for determining the amount of the initial payment or the
royalties
-2 principal types of licensing:
1. Technology licensing: the licensing of proprietary technology that the licensor typically controls by virtue
of a utility patent
2.
Merchandise and character licensing: the licensing of a recognized trademark or brand that the licensor
typically controls through a registered trademark or copyright
-there are additional hybrid forms of licensing: many businesses use external forms of growth such as mergers
and acquisitions, strategic alliances and joint ventures, licensing, and franchising

The increase in the popularity of strategic alliances and joint ventures has been driven largely by a growing
awareness that firms can’t “go it alone” and succeed
> strategic alliance: a partnership between two or more firms that is developed to achieve a specific goal →
participation in alliances can boost a firm’s rate of patenting, product innovation, and foreign sales
→ alliances tend to be informal and do not involve the creation of a new entity
→ although engaging in alliances can be tremendously helpful for an entrepreneurial firm, setting up an alliance
and making it work can be tricky
(a) technological alliances – feature cooperation in research and development, engineering, and manufacturing
→ research-and-development alliances often bring together entrepreneurial firms with specific technical skills
and larger, more mature firms with experience in development and marketing → by pooling their
complementary assets, these firms can typically produce a product and bring it to market faster and cheaper than
either firm could alone
(b) marketing alliances – match a company that has a distribution system with a company that has a product to
sell in order to increase sales of a product or service → by finding more outlets for its products, the partner that
is supplying the product can increase its economies of scale and reduce its perunit cost & the partner that
supplies the distribution channel benefits by adding products to its product line, increasing its attractiveness to
those wanting to purchase a wide array of products from a single supplier
→ both alliances allow firms to focus on their specific area of expertise and partner with others to fill their
expertise gaps – attractive to entrepreneurial firms, which often lack the financial resources or time to develop
all the competencies they need to bring final products to market quickly
> joint venture: an entity created when two or more firms pool a portion of their resources to create a separate,
jointly owned organization
→ gaining access to a foreign market is a common reason for a firm to form a joint venture
→ joint ventures created for reasons other than foreign market entry are typically described as either scale or
link joint ventures
(a) scale joint venture: the partners collaborate at a single point in the value chain to gain economies of scale in
production or distribution – a good vehicle for developing new products or services
(b)link joint venture: the position of the parties is not symmetrical, and the objectives of the partners may
diverge
-a hybrid form of joint venture that some larger firms utilize is to take small equity stakes in promising young
companies: the large companies act in the role of corporate venture capitalists
→ firms typically make investments of this nature in companies with the potential to be suppliers, customers, or
acquisition targets in the future
→ the equity stake provides the large company a “say” in the development of the smaller firm
→ on occasion, the larger firm that has a small equity stake will acquire the smaller firm: spin-ins – the opposite
of a spin-in is a spin-out: occurs when a larger company divests itself of one of its smaller divisions and the
division becomes an independent company