Growing and
Managing
a Small
Business
An Entrepreneurial
Perspective
Chapter 3
Starting a Business
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Learning Outcomes
• Describe the new venture creation process
• Compare and contrast business life cycles
with industry life cycles
• Explain how opportunity recognition occurs
• Discuss the critical components of a
business concept
• Describe the feasibility analysis process
• Explain bootstrapping as an entrepreneurial
strategy
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Chapter Outline
•
•
•
•
Start-Up Resources
The New Venture Creation Process
Launching a New Business
Feasibility Analysis
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THE NEW VENTURE
CREATION PROCESS
• The environment is the most comprehensive
component in the venture creation process.
• It includes all the factors that affect the
decision to start a business, for example,
government regulation, competitiveness, and
life cycle stage.
• Within specific industries and in specific
geographic regions, environmental variables
and the degree of their impact will differ.
• The new venture process begins with an idea
for a product, service, or business.
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Feasibility Analysis
•
The entrepreneur develops an idea into a business
opportunity or business concept that is then tested in
the market through a process of feasibility analysis.
•
Feasibility analysis is used to inform the entrepreneur
about the conditions required to move forward and
develop the business. This may involve market research.
•
Once the entrepreneur has determined that the concept is
feasible, a business plan is developed to detail how the
company will be structured and to describe its operation
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Viability
•
Testing the business concept in the real world is
what actually determines if the business has viability.
Thus, the business must actually be launched and
operated in the environment to determine viability.
•
In a business, the term viability is the point when
the company is able to generate sufficient cash flows
to allow the business to survive on its own without
cash infusions from outside sources such as the
entrepreneur's own resources, investors, or a bank
loan.
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The Five Stages of a Business’s Life Cycle
•
•
•
•
•
Pre Start-up
Start-up
Growth
Maturity
Rebirth or Decline
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Figure 3.1 The Life Cycle of the Company
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LAUNCHING A NEW BUSINESS
Three key issues in the pre-start-up phase:
1) Testing concept feasibility
2) Developing a business plan
3) Acquiring resources ($$$ and personnel)
Three key issues in the start-up phase:
1) Finding customers
2) Building a structure
3) Generating positive cash flows
Getty Images
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x
Opportunity Creation
Developing a product, service, process, or
niche that has not existed before. Opportunity
recognition requires high levels of creativity.
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Opportunity Creation
• Typically, opportunity creation involves
an invention process that is
characterized by four activities:
•
•
•
•
connection,
discovery,
invention, and
application
Getty Images
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Opportunity Creation
•
Connection occurs when two ideas are brought together that
normally are not juxtaposed, such as nature and machines,
which produced the field of nanotechnology or microscopic
machines that copy nature in the way that they operate.
•
Discovery happens once a connection has been made. It is
actually the result of the connection in the form of an idea.
•
Inventions are the product of turning an idea into a product or
service.
•
Application comes about when the inventor is able to apply the
invention to a number of different uses or applications in a
variety of industries and situations.
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Opportunity Recognition
The process of using creative
skills to identify a new
innovation --- (a product, service,
process, or marketing method) --which is often based on
something already existing in
the marketplace.
Getty Images
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How to recognize a business opportunity
• List all the ideas in no particular order.
• Eliminate those ideas that can’t generate a
profit and don’t fit the business model very
well.
• Review the remaining ideas and choose the
one that inspires the most passion and
enthusiasm
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The Initial Business Concept:
There are four essential elements required to test
whether or not a potential business idea is feasible:
•
What is the product and/or service that is the basis
for the business?
•
Who is the customer likely to be?
•
What is the benefit of your product/service to the
customer?
•
How will the benefit be delivered?
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Feasibility Analysis
The business concept (which is essentially a specific
product or service) is tested through a process of
feasibility analysis that answers three
fundamental questions:
1. Are there customers and a market of sufficient
size to make the concept feasible?
2. Do the capital requirements to start, based on
estimates of sales and expenses, make sense?
3. Can an appropriate start-up team be put
together to make it happen?
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Components of Feasibility Analysis
Thus, there are actually four areas which
are tested in the feasibility analysis:
–
–
–
–
The product/service
Industry/market/consumer
Founding team
Financials
See the feasibility questions in Table 3.1
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Table 3.1 Feasibility Analysis:
Key Questions
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Five Forces Analysis
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Goals of Market Research
To find out:
• Who is most likely to purchase the product or
service at market introduction?
• What do these customers typically buy, how
do they buy it, and how do they hear about
it?
• What is their buying pattern? How often do
they buy?
• What are the customers’ needs and how can
the new venture meet those needs?
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The Best Founders
Founders of successful companies have many
things in common. They are:
– A common vision
– Passion and a willingness to dedicate
themselves
– Experience in the industry
– Contacts for capital
– Experience in basic business functions
– Excellent credit ratings
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Bootstrappers
•
Bootstrappers are start-up
entrepreneurs who have no
financial resources beyond their
own savings.
•
They realize that to get what they
need to start their businesses—
location, equipment, money, and
perhaps employees—they must
possess a double dose of
ingenuity and supreme selfassuredness.
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Successful Bootstrappers
• John Schnatter founded Papa John’s
International, the $164+ million pizza
restaurant franchise, with $1,600 in personal
savings.
• Bill Gates and Paul Allen started Microsoft in
a cheap apartment in Albuquerque with
virtually no overhead, a borrowed computer,
and very little capital.
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The Bootstrap Business Location
•
Businesses that don’t require
a storefront location can
begin their development in a
spare room or a garage.
•
Negotiate free rent and lower
lease rates in buildings where
a lessor is having difficulty
releasing the space.
Getty Images
•
Lease a portion of a larger
company’s space and take
advantage of its reception
area and conference room.
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START-UP RESOURCES
Putting together sufficient resources to
start a business requires enormous
creativity and persistence, with the
ultimate reward being a company that is
able to reach critical mass and take
advantage of significantly more choices
for growth capital.
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Why are So Many Ventures Self-Funded?
Many new ventures are initially funded by the
entrepreneur, because:
•
No intellectual property rights or licenses to give
them a competitive advantage
•
Many lack a significant track record of success
•
Many ventures have not fully defined themselves in
the marketplace, which makes investment risky.
•
Investors see new ventures as too risky
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End of Chapter 3
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