Entrepreneurship Combined Booklet

TABLE OF CONTENTS PART I: THE ENTREPRENEURIAL PERSPECTIVE 1. Entrepreneurship and the Entrepreneurial Mind-Set 2. Entrepreneurial Intentions and Corporate Entrepreneurship 3. Entrepreneurial Strategy: Generating and Exploiting New Entries PART II: FROM IDEA TO THE OPPORTUNITY 4. Creativity and the Business Idea 5. Identifying and Analyzing Domestic and International Opportunities 6. Protecting the Idea and Other Legal Issues for the Entrepreneur PART III: FROM THE OPPORTUNITY TO THE BUSINESS PLAN 7. The Business Plan: Creating and Starting the Venture 8. The Marketing Plan 9. The Organizational Plan 10. The Financial Plan PART IV: FROM THE BUSINESS PLAN TO FUNDING THE VENTURE 11. Sources of Capital 12. Informal Risk Capital, Venture Capital, and Going Public PART V: FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE 13. Strategies for Growth and Managing the Implications of Growth 14. Accessing Resources for Growth from External Sources 15. Succession Planning and Strategies for Harvesting and Ending the Venture PART VI: CASES

Management 51: Entrepreneurial Management 1 Textbook Reference: Entrepreneurship, 8th edition by R.H. Hisrich, M.P. Peters and D.A. Shepherd, Mc Graw Hill Irwin, Copyright 2010. Chapter 1: Entrepreneurship and the Entrepreneurial Mind-Set NATURE & DEVELOPMENT OF ENTREPRENEURSHIP Entrepreneurship is the process of creating something new with value by devoting the necessary time and effort; assuming the accompanying financial, psychic, and social risks and uncertainties; and receiving the resulting rewards of monetary and personal satisfaction. Entrepreneur = Individual who takes risks and starts something new. Creation Process  Creating something new of value.  Must have value to the entrepreneur.  Must have value to the audience for which it is developed.  Devotion of the necessary time and effort.  Part of the reward is independence followed by personal satisfaction. Entrepreneurial Action Refers to behavior in response to a judgmental decision under uncertainty about a possible opportunity for profit. Inventor An individual who creates something new. ENTREPRENEURIAL PROCESS The process of pursuing a new venture, whether it is new products into existing markets, existing products into new markets, and/or the creation of a new organization. 1. Opportunity Identification. The process by which an entrepreneur comes up with the opportunity for a new venture. Most entrepreneurs do not have a formal mechanism but use their network of resources to identify trends.  Window of Opportunity. The time period available for creating the new venture.  Opportunity versus personal skills and goals.  Creation and length of opportunity.  Competitive environment. 2. Develop a Business Plan. The description of the future direction of the business.  Marketing & Financial Plan.  Description of the business and industry.  Organization Plan.  Operational Plan

3. Determining the Resources Required.  Appraisal of the entrepreneur’s present resources.  Resources that are critical need to be differentiated from those that are just helpful.  Care must be taken not to underestimate the amount a variety of resources needed.  Asses the downside risks associated with insufficient or inappropriate resources.  Strive to maintain control while acquiring financial resources.  Identifying alternative suppliers enables you to acquire resources at the lowest possible costs.  This is a constant function throughout the life of the organization. 4. Manage the Enterprise.  Examining the operational problems of the growing venture.  Determine the key available resources.  Implementing a management style and structure.  A control system must be implemented.  Some entrepreneurs have difficulty managing and growing the venture they have created. 5. Types of Start-Ups.  Lifestyle Firms. A small venture that supports the owners and usually does not grow.  Foundation Company. The type of company formed from research and development that usually does not go public.  High Potential Venture. A venture that has high growth potential and therefore receives great investor interest.  Gazelles. Very high growth ventures. HOW ENTREPRENEURS THINK Effectuation 1. Causation is the focus on the means to generate the out come and does not focus on the desired outcome. 2. Effectuation Process is the process that starts with what one has (who they are, what they know, and whom they know) and selects among possible outcomes. 3. Patchwork Quilt Principle. Means driven action that emphasizes the creation of something new with existing means rather than discovering new ways to achieve given goals. 4. Affordable Loss Principle. Prescribes committing in advance to what one is willing to lose rather that investing in calculations about expected returns to the project. 5. The Bird in Hand Principle. Involves negotiating with any and all stakeholders who are willing to make actual commitments to the project: determines the goals of the project. 6. Lemonade Principle. Prescribes leveraging surprises for benefits rather than trying to avoid them, overcome them, or adapt to them. This uses unexpected situations as an opportunity instead of dealing with them. 7. The Pilot in the Plane Principle. Urges relying on and working with people as the prime driver of opportunity and not limiting entrepreneurial efforts to exploiting factors, external to the individual. They will focus on aspects of the future you can control; they do not need to predict the future.

8. Entrepreneurial Mindset. Involve the ability to rapidly sense, act, and to mobilize, even under uncertain conditions. Cognitive Adaptability Definition: Describes the extent to which entrepreneurs are dynamic, flexible, self-regulating, Engaged in the process of generating multiple decision frameworks focused on sensing and processing changes in their environment. Then acting on them! We can achieve this by asking ourselves a series of questions that relate to: 1. Comprehension Questions. Designed to increase entrepreneur’s understanding of the nature of the environment. 2. Connection Tasks. Tasks designed to stimulate entrepreneurs to think about the current situation in terms of similarities and differences with situation previously faced and solved. 3. Strategic Tasks. Designed to stimulate entrepreneurs to think about which strategies are appropriate for solving the problem or pursuing an opportunity. 4. Reflection Tasks. Designed to think about their understanding and feelings as they progress through the entrepreneurial process. HOW SMART ENTREPRENEURS HARNESS THE POWER OF PARANOIA Learning from Business Failure  Businesses fail.  Common because of the newness and inexperience of the venture.  There are benefits to take risks even if the potential is failure.  Other businesses can learn from an entrepreneur’s failure.  Some businesses are an extension of the owner’s personal creativity and it is difficult for them to be objective.  Family businesses have an emotional core that makes it difficult to be objective.  Grief is a negative emotional response a person feels from the loss of something important.  Grief can interfere with the person’s ability to learn from the failure.  Grief can interfere with the allocation of attention in the processing of information. Grief Recovery Process 1. Loss Orientation. Working through some aspect of the loss breaking the emotional bonds to the object loss. 2. Restoration Orientation. An approach based on both avoidance and proactiveness toward secondary sources of stress arising from a major loss.  It also applies how a person attends to their aspects of their life.  This enables a person to distract themselves from thinking about the loss while simultaneously maintaining essential activities necessary for restructuring aspects of their lives. Dual Process for Grief  Moving between the two grief processes.  Enables a person to obtain the benefits of each while minimizing the cost of maintaining one to long.

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Feelings and reactions being experienced are normal. There are both psychological & physiological “symptoms” of grief. The feelings will diminish as the process moves through the steps.

ROLE OF ENTREPRENEURSHIP IN ECONOMIC DEVELOPMENT 1. Product Evolution Process. The process for developing and commercializing an innovation. 2. Iterative Synthesis. The intersection of knowledge and social need that starts the product development process. 3. Ordinary Innovations. New products with little technological changes. 4. Technological Innovations. New products with significant technological advancement. 5. Breakthrough Innovations. New products with some technological change. Government as an Innovator  A government active in commercializing technology.  Technology transfer is commercializing the technology in the laboratories into new products.  Federal labs have required the commercialization of their research and have implemented entrepreneurial training. Corporate Entrepreneurship  Within an existing business can bridge the gap between science and the marketplace.  Existing businesses have the resources, skills, and marketing and distribution systems in place.  There is a need for fostering creativity and innovation establishes an entrepreneurial spirit within companies. Independent Entrepreneurship  Entrepreneurs often do not know how to interact with all the necessary entities.  They may lack resources or managerial skills.  Yet, this is the most effective method to bridge the gap between science and the marketplace.  Entrepreneurial activities significantly impact the economy by building the economic base and creating jobs. THE FUTURE OF ENTREPRENEURSHIP  Risk taking, rewards, independence, and creativity will continue to be the driving force.  We live in an age where this is supported by education and governmental units.  Entrepreneurial education throughout the world is growing.  Increase in course offerings is accompanied by increases in research.  Governments understand that innovation is the only way to improve economic bases and create jobs.  Society supports entrepreneurs and tends to hold them in reverence in public.  These trends will continue.

ETHICS AND SOCIAL RESPONSIBILITY OF ENTREPRENEURS Business Ethics = The study of behavior and morals in a business situation.  Entrepreneurship is not an easy lifestyle.  The daily stressful situations you must develop a balance between ethical issues and social responsibility.  Entrepreneurs tend to depend on their own personal value system because they do not have a support group.  The increase of internationally orientated business has impacted ethics in dealing with different cultures.  Individual morality and behavioral habits are related and identified as an essential quality of existence.  The central question is, “For whose benefit and at what expense should the firm be managed?” If resource deployment is not fair than a stakeholder in the firm may be exploited.  Think of the entrepreneurial process as a tool to achieve outcomes for the benefits of others rather than to the detriment of others. ETHICS: COMPANY’S CODE OF ETHICS A guide of principles designed to help professionals conduct business honestly and with integrity. A code of ethics document may outline the mission and values of the business or organization, how professionals are supposed to approach problems, the ethical principles based on the organization's core values and the standards to which the professional will be held. - http://www.investopedia.com/terms/c/code-of-ethics.asp#axzz1wzPe2Xdl

Management 51: Entrepreneurial Management 1 Textbook Reference: Entrepreneurship, 8th edition by R.H. Hisrich, M.P. Peters and D.A. Shepherd, Mc Graw Hill Irwin, Copyright 2010. Chapter 2: Entrepreneurial Intentions and Corporate Entrepreneurship THE INTENTION TO ACT ENTREPRENEURIALLY • Entrepreneurial Intentions. The motivational factors that influence individuals to pursue entrepreneurial out comes. • Entrepreneurial Self Efficacy. The conviction that on can successfully execute the entrepreneurial process. • Perceived Desirability. The degree to which an individual has a favorable or unfavorable evaluation of the potential entrepreneurial out comes. If the outcome is perceived as favorable, the stronger the intention to act entrepreneurially. ENTREPRENEUR BACKGROUND & CHARACTERISTICS Education  There are many who feel that many have made it with very little education. There are many examples.  Research proves that education is important in the upbringing of the entrepreneur.  Education will provide a good background for the venture.  The degree may not be in the same field as the venture.  The ability to communicate clearly with both written and spoken word is also important in any entrepreneurial activity.  Education is valuable because it facilitates the integration and accumulation of new knowledge. This will assist the entrepreneur in adapting to new situations.  If the individual believes their education makes entrepreneurial action more feasible, they are more likely to become entrepreneurs. Personal Values  Entrepreneurs tend to be effective leaders but this does not distinguish them from successful managers.  Entrepreneurs have a different attitude towards management and business in general.  Entrepreneurs focus on opportunity and individualism as opposed to the bureaucratic organization.  Very important to the entrepreneur is ethics and ethical behavior. Age   

Most initiate their entrepreneurial careers betweens the ages of 22 and 45. It can be done later if the person has the high energy needed to launch a new venture successfully. There are age milestones when entrepreneurs are inclined to start their venture; 25, 30, 35, 40 &45.

Work History  Plays a role in the growth and eventual success of the new venture.  Previous Technical and industry experience is important.  However, a lack of challenge or promotional opportunities is often the main motivators to launch the venture.

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As the venture grows, management and financial skills become increasingly important. Throughout your venture, you are exposed to many other new ventures. Previous start up experience is important to judge the feasible of the next venture.

ROLE MODELS & SUPPORT SYSTEMS  Role models are individuals influencing an entrepreneur’s career choice and style.  Role models can serve as a support and advisory system. Moral Support Network  Individuals who provide psychological support to the entrepreneur.  Play a critical role during the lonely and challenging times ahead.  They can provide encouragement, understanding and even assistance.  These are people that you can confide in without fear of criticism. Professional Support Network  Individuals who help the entrepreneur in business activities.  A mentor is a coach and advocate who is an expert in the field.  Good advice can be cultivated by establishing a network of business associates.  Suppliers are another important component in a professional network.  Trade associations can provide professional support.  Personal affiliations to groups whose mission matches your views.  It is important to recognize that entrepreneurial activity is embedded in networks of interpersonal relationships. MALE VERSUS FEMALE ENTREPRENEURS (Page 65 Table 3.1)  Women now start new ventures at a higher rate than men.  SBA reports that%28 of private companies are owned by women.  1/3 of women owned businesses are in the health care and social services field.  Men are motivated by the drive to control their own destiny.  Women tend to be motivated by the need to achievement arising from job frustration in being held back.  Departure Points. The activities occurring when the venture is needed.  For men the new venture is often an outgrowth of a present job.  Women are driven by enthusiasm for a new venture as opposed to practical experience. This makes the transition more difficult.  Men will find investors through bank loans and personal loans.  Women rely solely on personal assets or savings.  Men usually field ventures in manufacturing, finance or technical areas and tend to be inflexible.  Women will work more towards administrative activities and tend to be more tolerant and flexible.  Men will list business associates as their most important supporters.  Women will list spouse, and close friends as their important supporters. MINORITY ENTREPRENEURSHIP  Understanding the differences in the behavior of various ethnic groups is important.  Asians are #1, Hispanics #2, and African Americans #3 in startups.  One study found minority business owners tend to be younger and better educated and had family backgrounds similar to white business owners.

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One study found that minority business owners were the oldest child in a blue collar family. Some ethnic entrepreneurs have access to established community resources. Minority businesses from 1981 – 2002 have quadrupled.

ENTREPRENEURIAL INTENTIONS WITHIN EXISTING ENVIRONMENTS  Fostering entrepreneurship creates an environment that makes action both feasible and desirable. Causes 1. Social Level. Increased interest in “doing your own thing” and on your own terms. Frustration can make an individual less productive. 2. Cultural. When meaning for the job is not provided, the individual will often search for an institution that can provide it. 3. Business levels. It is a method of stimulating and then capitalizing on individuals in an organization who think that things can be done differently. Traditional Corporate Culture versus Entrepreneurial Culture - Page 71 Table 3.2   

Corporate Culture. The environment of a particular organization. Entrepreneurial Culture. The environment of an entrepreneurial orientated firm. Traditional Managers. Managers in a non-entrepreneurial organization.

Textbook Reference: Entrepreneurship, 8th edition by R.H. Hisrich, M.P. Peters and D.A. Shepherd, Mc Graw Hill Irwin, Copyright 2010. Chapter 3: Entrepreneurial Strategy: Generating and Exploiting New Entries NEW ENTRY  Offering a new product to an established or new market.  Offering an established product to a new market.  Creating a new organization. Entrepreneurial Strategy A set of decisions, actions, and reactions that first generate and then exploit over time a new entry. Three key stages; 1. The generation of a new entry opportunity. 2. The exploitation of a new entry opportunity. 3. A feedback loop from the culmination of the new entry and exploitation back to stage GENERATION OF A NEW ENTRY OPPORTUNITY 1. Resources as a Source of Competitive Advantage.  It is hoped the new entry will provide the firm with a sustainable competitive advantage.  Resources are the basic building blocks to a firm’s functioning and performance.  Valuable when it enables the firm to pursue opportunities, neutralize threats, and offer products and services that are valued by customers.  Rare when it is possessed by few competitors.  Inimitable when replication of this combination of resources would be difficult and costly for potential competitors. Creating a Resource Bundle that is Valuable, Rare and Inimitable  The ability to obtain and then recombine resources into a bundle that is valuable, rare, and inimitable (unique).  Knowledge is in itself valuable. The cumulative knowledge of the management team is difficult to duplicate.  This combination of experiences of the management team can lead to innovation.  Market knowledge is the possession of information that provides insight into the market and its customers.  Technological knowledge is the possession of information, technology, know how, and skills that provide insight into ways to create new knowledge.  Often, technology has been invented for a specific purpose.  Sometimes that specific purpose leads to a broader base of use. (Tang, freeze dried coffee, Velcro & Teflon created fro NASA space flights) ASSESSING THE ATTRACTIVENESS OF A NEW ENTRY OPPORTUNITY Information on a New Entry  Prior knowledge used to create a new venture can also benefit in assessing the attractiveness of a particular opportunity.  Knowledge can be increased by searching for information that will shed light on the attractiveness of the new entry.

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The search process is in itself a dilemma. The time it takes to properly search for information may allow for the opportunity to pass or someone else takes advantage of the venture.

Window of Opportunity  The period of time when the environment is favorable for entrepreneurs to exploit a particular new entry.  When the window is open the environment is favorable for entrepreneurs to exploit a new product. Comfort with Making a Decision under Uncertainty The trade-off of needing more information and the window of opportunity closing creates a dilemma. The dilemma is a choice of which error you prefer to commit; 1. Error of commission is creating an error by acting. 2. Error of omission is a negative outcome from not acting. ENTRY STRATEGY FOR NEW EXPLOITATION 1. First movers develop a cost advantage. 2. First movers face less competitive rivalry. 3. First movers can secure important channels for suppliers and distribution. 4. First movers are better positioned to satisfy customers because they have the chance to select the preferred segment and establish their product as the industry standard. 5. First movers gain expertise through participation in the market. Environmental Instability & First Mover (Dis)Advantages  Industries that have been newly formed and are growing.  Must determine the key factors for success.  Advantage is the entrepreneur being first means you have considerable freedom in how you achieve success.  Disadvantage would be that the demand is uncertain. Difficult to determine how fast the market will grow, and the key dimensions that make it grow.  Technology may be uncertain because its’ performance is not proven.  Customers may have difficulty assessing the products value to them.  Lead time is the grace period from the first entrepreneur entering the industry under conditions of limited competition. 1. Build customer loyalty. 2. Building switching costs is a mechanism which customer loyalty is enhanced through rewards programs. (Ex. Flyer miles, points toward cash, user discounts, etc.) 3. You must product your product uniqueness through patents, copyrights, trademarks, etc. 4. Develop exclusive relationships with key sources of supply will limit access to future competitors.

RISK REDUCTION STRATEGIES FOR NEW ENTRY EXPLOITATION 1. Scope is a choice by the entrepreneur about which customers groups to serve and how to serve them. 2. Narrow Scope Strategy  Produce customized products with localized business operations and high level of craftsmanship.  Focus on special group of customers that can build specialized expertise and knowledge.  The high end of the market typically represents a highly profitable niche that is well suited to those firms that can produce customized products. 3. Broad Scope Strategy  Offering a range of products across many different market segments.  Open the firm to increased exposure of competition.  Must develop a broader knowledge base to understand your customers. Imitation Strategies  Copying the practices of other firms.  It is easier to imitate than go through the long process of developing new strategies.  It may help the entrepreneur to practice already successful skills.  You will be perceived by the customer as well established. Managing Newness  New firms face costs in learning new tasks.  It will take new people time to develop skills and assume responsibilities.  New firms sometimes have difficult developing communication channels.  New firms do not have the stigma of “old habits” and are more flexible to attempt new ways of conducting business.

Textbook Reference: Entrepreneurship, 8th edition by R.H. Hisrich, M.P. Peters and D.A. Shepherd, Mc Graw Hill Irwin, Copyright 2010. Chapter 4: Creativity and the Business Idea Sources of New Ideas 1. Consumers & Current Customers. 2. Existing Products and Services. 3. Distribution Channels. 4. Government. ƒ U. S. Patent Office, Official Gazette, lists all patents available for license or sale. ƒ New product ideas can come in response to government regulations. 5. Research & Development METHODS OF GENERATING IDEAS Focus Groups ƒ Groups of consumers provide information in a structured format. ƒ A moderator leads the group (8-14 people) through an open discussion to solicit participant response about new products. ƒ This is also an excellent method to initially screen ideas and concepts. Brainstorming ƒ A group method for obtaining new ideas and solutions. ƒ Allows people to be stimulated to greater creativity by meeting with others and participating with the following rules; 1. No criticism is allowed and no negative comments. 2. Freewheeling is encouraged-the wilder the idea the better. 3. Quantity of ideas is desired. The greater the number the greater the likelihood of useful ideas. 4. Combinations and improvements of ideas are encouraged. Problem Inventory Analysis ƒ A method of obtaining new ideas and solutions by focusing on problems. ƒ Usually the focus is on a general product category that has a particular problem. ƒ Results must be carefully evaluated as they may not actually reflect a new business opportunity. CREATIVE PROBLEM SOLVING 1. Brainstorming. 2. Reverse Brainstorming if focusing on the negative. 3. Brain writing provides time for participants to think about the idea. It is a silent written generation of ideas by a group of people. 4. Gordon Method. ƒ Participants are now aware of the exact nature of the problem. ƒ A general concept associated with the problem is presented and the group responds expressing a number of ideas. ƒ Prevents preconceived ideas and behavioral pattern. 5. Checklist Method. ƒ New idea is developed through a list of related issues or suggestions.

ƒ The entrepreneur guides the direction of developing new ideas through the list. ƒ The checklist may take any form and be of any length. 6. Free Association is developing new ideas through a chain of word association. 7. Forced Relationships. Creating new ideas by looking at product combinations. ƒ Isolate the elements of the problem. ƒ Find the relationships between these elements. ƒ Record the relationships in an orderly form. ƒ Analyze the resulting relationships to find ideas or patterns. ƒ Develop new ideas from these patterns. 8. Collective Notebook Method. ƒ Carry a small notebook with the problem written down. ƒ Consider the problem and record ideas and possible solutions 1-3 times per day. ƒ By the end of the week you should have a list of ideas along with suggestions. ƒ A central coordinator will organize each notebook and puts ideas in order of frequency mentioned. 9. Attribute Listing. ƒ List the attributes of the item or problem. ƒ Look at each from a variety of viewpoints. ƒ Originally unrelated objects can be brought together to form new combinations. 10. Big Dream Approach. ƒ Think without constraints. ƒ Think big! ƒ Every possibility should be recorded and investigated without regard to negatives involved or resources required. ƒ Ideas should be conceptualized without constraints until an idea is developed into a workable form. 11. Parameter Analysis. ƒ Analyze variables in the situation to determine their relative importance. ƒ The relationships between the parameters that described the underlying issues are examined. ƒ Through this evaluation one or more solutions are developed and this called creative synthesis. INNOVATION This is the key to the economic development of any company. Types of Innovation 1. Breakthrough Innovation. Create extremely unique innovation that establishes the platform on which future items in this area are developed. (Ex. Dr. Liu) 2. Technological Innovation. Occurs more frequently and is not at the same level of scientific discovery. They are meaningful innovations and need to be protected. (Ex. Laptop Computers) 3. Ordinary Innovation. Occur more frequently and usually extend technological innovation into a better product or service. Ex. Sara Blakely inventing Spanx) Defining a New Innovation ƒ Identifying what is new or unique in an idea is a dilemma. ( New fashion jeans) ƒ It may be called new when only slight modifications have been made.

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To expand sales volume, some companies add products already marketed by other companies and market them as new. Firms are always looking for new markets to exploit in order to increase profits and make more effective use of their resources.

Classification of New Products ƒ May be classified from the viewpoint of the consumer or the firm. ƒ Consumer: 1. Some viewed according to how much behavioral change or new learning is required by the consumer to use the product. 2. Most new products fall into the “continuous innovations” continuum. (Ex would be automobiles model.) 3. “Dynamically Continuous” portion of the continuum would be items like the iPod. 4. “Discontinuous Innovations” are rare. Require a great deal of new learning by the consumer and perform a previously unfulfilled function. Example would be the internet. ƒ Firm’s Viewpoint 1. Must recognize what the consumer perceives as new. 2. New Product Classification System 3. New technology and new markets is the most complex. 4. The firm will need new carefully planned marketing strategies. 5. The difficulty level will depend on the firms experience with similar products.

OPPORTUNITY RECOGNITION ƒ Fundamental to the entrepreneurial process is recognizing business opportunity. ƒ The opportunity represents a possibility for the entrepreneur to successfully fill a large enough unsatisfied needs that enough sales and profits result. ƒ Recognition comes from the knowledge and experience of the individual entrepreneur. ƒ The entrepreneur needs to be aware of this knowledge and experience and have the desire to understand and make use of it. ƒ Must have entrepreneurial alertness and entrepreneurial networks. Opportunity Analysis Plan 1. A description of the idea and its competition. 2. An assessment of the domestic market and international market for the idea. 3. An assessment of the entrepreneur and the team. 4. A discussion of the steps needed to make the idea the basis for a variable business venture. PRODUCT PLANNING & DEVELOPMENT PROCESS 1. The product life cycle is the stages each product goes through from introduction to decline. 2. The development process is the steps in bringing a new product to market. 3. The new idea should have synergy with existing management capabilities and marketing strategies. 4. The proposed product should be able to be supported by and contribute to the company’s financial well being. 5. The new product should be compatible with existing plant, machinery and personnel.

6. Concerns regarding ethics and ethical behavior when dealing with competition frequently arise and should be assessed. Stages 1. Idea Stage. The initial stage of development that identifies promising new ideas and eliminates impractical ones. Must determine the need for the new idea and its value to the firm. 2. Concept Stage. The refined idea is tested to determine consumer acceptance. 3. Product Development Stage. Reaction by the consumers to the product. Review for multiplicity in the market, risk analysis, level of repeat purchases, and intensity of preference. 4. Test Marketing Stage. Provides actual sales results which will indicate the acceptance level of the consumers. E-COMMERCE AND BUSINESS START-UP ƒ The role of e-commerce must be assessed. ƒ Offers the entrepreneur the opportunity to be creative and innovative. ƒ What would be the level of business to business and business to consumer sales? ƒ The acceptance of the internet as a business platform has increased the potential for this marketing. ƒ The interactive nature of the Internet will continue to expand the volume of e-commerce. Using E-Commerce Creatively ƒ Small firms can minimize marketing costs through internet while reaching larger markets. ƒ Support for servers and transaction must be maintained. ƒ You can outsource this process and eliminate payroll costs. ƒ Front end operations are encompassed in the Web sites functionality. Must be interactive and easy to use. ƒ The back end operation is the seamless integration of customers orders and distribution channels. Web Sites ƒ The use of Web sites has been increasing at a significant rate. ƒ However, a majority of small business owners and entrepreneurs do not believe they have the technical capability to create and maintain a site. ƒ Focus on your core competencies and outsource the non-core activities. ƒ The key to a good site is ease of use. Speed! Speed! Speed! ƒ A Web site is a communication vehicle and should address; 1. Who is the audience? 2. What are the objectives of the site? 3. What do you want consumers to do upon entering the site? 4. Is the site an integral part of the firms overall communication program? ƒ The material should be interactive to engage the consumer. ƒ It should be easy to find information about the product and firm. ƒ This requires that the material be fresh with new material added daily. ƒ Need a shopping cart. ƒ Secure server connection for customer privacy. ƒ Need to be able to accept credit cards. ƒ Need a customer feedback feature. ƒ Email response system to keep customers aware of their orders, thank you, and keep informed of new occurrences. ƒ Needs to track customer information.

Textbook Reference: Entrepreneurship, 8th edition by R.H. Hisrich, M.P. Peters and D.A. Shepherd, Mc Graw Hill Irwin, Copyright 2010. Chapter 5: Identifying and Analyzing Domestic and International Opportunities Entrepreneurs find it difficult to both manage and expand the venture they created. To expand a venture, entrepreneurs need to: ▪ Identify opportunities for domestic and international expansion. ▪ Develop different management skills. ▪ Infuse new entrepreneurial spirit (intrapreneurship). Factors contributing to international expansion: ▪ Opening up of controlled economies to market-oriented enterprise. ▪ Self-interest of organizations as well as the impact of external events and forces. ▪ Developing countries need training and education as well as infrastructure to support their development and growth in the next century. Opportunity Recognition and the Opportunity Assessment Plan ▪ The key to successful domestic and international entrepreneurship is to develop an idea that has a market with a need for the product or service idea conceived. ▪ Opportunity assessment is often best accomplished by developing an opportunity assessment plan. ▪ An opportunity assessment plan is not a business plan. ▪ An opportunity assessment plan has four sections: ◦ The first section develops the idea, analyzes competitive products and companies, and identifies the unique selling propositions. ◦ The second section focuses on the market—its size, trends, characteristics, and growth rate. ◦ The third section focuses on the entrepreneur’s and management team’s skills and experience. ◦ The final section develops a time line indicating the steps to successfully launch the venture. Information Sources ▪ General Information ◦ SCORE is a nonprofit organization that provides free online and in-person assistance. ◦ Small Business Development Centers provides counseling, training, and technical assistance on all aspects of managing a new venture. ◦ The U.S. Chamber Small Business Center provides start-up assistance through Web-based tools and resources. ◦ Other valuable Web sites include: nasbic.org, nvca.org, nbia.org, www.fasttrac.org, activecapital.org, c-e-o.org, entre-ed.org, kauffman.org. ▪ Industry and Market Information ◦ Plunkett - Industry data, market research, trends, statistics on markets, and forecasts. ◦ Frost and Sullivan - Industry specific information. ◦ Euromonitor – Information on consumer market sizes, marketing parameters, companies, and brands. ◦ Gartner - Information on technology markets.

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Gale Directory Library - Industry statistics and information on nonprofit organizations and associations. Competitive Company and Product Information ◦ Business Source Complete - Provides company and industry information by scanning the Datamonitor reports. ◦ Hoovers - Provides information on both large and small companies with links to competitors in the same NAICS (North American Industrial Classification System) category. ◦ Mergent - Provides detailed company and product information on U.S. and international companies. Government Sources ◦ Census reports ◦ factfinder.census.gov ◦ www.census.gov/ipc/www/idb ◦ Export/import authority ◦ UN Comtrade ◦ www.business.gov/expand/import-export ◦ NAICS and Standard Industrial Classification codes ◦ www.naics.com/info.htm ◦ www.osha.gov/pls/imis/sic_manual.html Search Engines ◦ There are many key terms for searching the needed industry, market, and competitive information. Trade Associations ◦ Good source for country-specific industry data. Trade Publications ◦ Provide information and insights on trend, companies, and trade shows from a local perspective of the particular market and market conditions.

The Nature of International Entrepreneurship ▪ International entrepreneurship is the process of an entrepreneur conducting business activities across national boundaries. ◦ The activities necessary for ascertaining and satisfying the needs and wants of target consumers take place in more than one country. ▪ With a commercial history of only 300 years, the United States is a relative newcomer to the international business arena. The Importance of International Business to the Firm ▪ International business has become increasingly important to firms of all sizes. ▪ A successful entrepreneur must be able to: ◦ Fully understand the difference between domestic and international business. ◦ Respond accordingly thereby successfully “going global.” International versus Domestic Entrepreneurship ▪ Economics ◦ In a domestic business strategy, the entire country is organized under a single economic system and has the same currency. ◦ Creating a business strategy for a multicountry area means dealing with differences in: ∙ Levels of economic development.

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∙ Currency valuations. ∙ Government regulations. ∙ Banking, venture capital, marketing, and distribution systems. Stage of Economic Development ◦ Certain factors significantly impact a firm’s ability to successfully engage in international business such as: ∙ Fundamental infrastructures. ∙ Banking facilities and systems. ∙ Educational systems. ∙ Legal system. ∙ Business ethics and norms. Balance of Payments Current Account ◦ With the present system of flexible exchange rates, a country’s current account (the difference between the value of a country’s imports and exports over time) affects the valuation of its currency. ◦ The valuation of one country’s currency affects business transactions between countries. Type of System ◦ Difficulties in doing business in economies that are developing, or in transition. ◦ Use of barter or third-party arrangements in these countries to increase business activity. ∙ Barter - A method of payment using nonmoney items. ∙ Third-party arrangements - Paying for goods indirectly through another source. Political-Legal Environment ◦ Political risk analysis - An assessment of a country’s political policies and its stability prior to entry. ◦ Types of political risks: ∙ Operating risk. ∙ Transfer risk. ∙ Ownership risk . ∙ Conflict and changes in the solvency of the country. ◦ A country’s legal system regulates: ∙ Its business practices. ∙ The manner in which business transactions are executed. ∙ The rights and obligations involved in any business transaction between parties. ◦ Critical areas for every entrepreneur: ∙ Property rights. ∙ Contract law. ∙ Product safety. ∙ Product liability. Language ◦ One of the biggest problems for the entrepreneur is finding a translator. ◦ Significant problems can occur with careless translation. ◦ Care should be taken to hire a translator whose native tongue is the target language and whose expertise matches that of the original authors.

Technological Environment ▪ The variation and availability of technology are often surprising, particularly to an entrepreneur from a developed country. ▪ New products in a country are created based on the conditions and infrastructure operant in that country. Various Aspects of Culture CULTURE NORMS AND VALUE SYSTEM influences and is influenced by: ▪ Religion ▪ Economics and Economic Philosophy ▪ Social Structure ▪ Political Philosophy ▪ Language ▪ Manners and Customs ▪ Education Available Distribution Systems ▪ Factors to be considered in determining the distribution system for a country: ◦ Overall sales potential. ◦ Investment policies. ◦ Amount and type of ◦ Exchange rates and controls. competition. ◦ Level of political risk. ◦ Cost of the product. ◦ Overall marketing plan. ◦ Geographical size and density. Motivations to Go Global ▪ Profits. ▪ Competitive pressures. ▪ Unique product(s) or service(s). ▪ Excess production capacity. ▪ Declining home country sales.

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Unique market opportunity. Economies of scale. Technological advantage. Tax benefits.

Strategic Effects of Going Global ▪ Physical and psychological closeness to the international market affects the way business occurs. ▪ Cultural variables, language, and legal factors can make a foreign market that is geographically close seem psychologically distant. ▪ Issues involved in psychological distance: ◦ The distance envisioned by the entrepreneur may be based more on perception than reality. ◦ Closer psychological proximity makes it easier for an entrepreneurial firm to enter a market. ◦ There are more similarities than differences between individual entrepreneurs regardless of the country. Foreign Market Selection ▪ One good market selection model employs a five-step approach: ◦ Develop appropriate indicators. ◦ Collect data and convert into comparable indicators. ◦ Establish an appropriate weight for each indicator. ◦ Analyze the data. ◦ Select the appropriate market from the market rankings.

Entrepreneurial Entry Strategies ▪ Exporting ◦ Indirect exporting. ◦ Direct exporting. ▪ Nonequity Arrangements ◦ Licensing. ◦ Turn-key projects. ◦ Management contracts. ▪ Direct Foreign Investment ◦ Minority Interests.

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Joint Ventures. Majority Interest. Mergers: ∙ Horizontal merger. ∙ Vertical merger. ∙ Product extension merger. ∙ Market extension merger. ∙ Diversified activity merger.

Entrepreneurial Partnering ▪ Foreign entrepreneurs know the country and culture. ◦ They can facilitate business transactions and update the entrepreneur on business, economic, and political conditions. ▪ Good partners share the entrepreneur’s vision, are unlikely to exploit the partnership, and can help the entrepreneur achieve his or her goals. Barriers to International Trade ▪ General Agreement on Tariffs and Trade (GATT) ▪ Established in 1947 under U.S. leadership; includes over 100 nations. ▪ Objective - To liberalize trade by eliminating or reducing tariffs, subsidies, and import quotas. ▪ Increasing Protectionist Attitudes ◦ Support of GATT resulted in: ∙ Strain on the world trading system and the economic success of countries perceived as not playing by rules. ◦ Establishment of bilateral voluntary export restraints to circumvent GATT. ▪ Trade Blocs and Free Trade Areas ◦ Free Trade Area (FTA). ◦ North American Free Trade Agreement (NAFTA). ◦ Treaty of Asunción – Mercosur trade zone. ◦ European Community (EC). ▪ Entrepreneur’s Strategy and Trade Barriers ◦ Trade barriers increase entrepreneurs’ costs of exporting products or semifinished products to a country. ◦ Voluntary export restraints may limit entrepreneurs’ ability to sell products in a country from production facilities outside the country. ◦ Entrepreneurs may have to locate assembly or production facilities in a country to conform to local content regulations.

The New Business Venture MGT 2230 Chapter 6 Intellectual Property & Other Legal Issues for Entrepreneurs Opening Profile: Steve Lipscomb, Page 169 & 70. Intellectual Property is any patent, trademarks, copyrights, or trade secrets held by the entrepreneur. These represent important assets to the entrepreneur and should be understood. Ignoring these important steps may cause a loss of these assets. Need for Lawyer The entrepreneur should be aware of all regulations that may affect the new venture. At different stages you will need legal advice. Most lawyers have developed a special expertise; the entrepreneur should carefully evaluate the need before hiring an attorney. You can save time and money knowing when you will need legal advice. HOW TO SELECT A LAWYER 1. Lawyers specialize in specific areas of the law. 2. A competent attorney is in better position to understand (and explain) all possible circumstances and outcomes related to any legal action. 3. In today’s environment, lawyers are much more up front about their fees. 4. You can pay for a retainer (stated amount each month) and have access to the attorney as needed without being charged hourly. 5. In many cases, there can be a one time fee for specific work to be completed. (Ex. Real Estate Closing) 6. The lawyer with whom you work should be someone you can relate to personally. You should meet and see if there is compatibility. LEGAL ISSUES IN SETTING UP THE ORGANIZATION Patents 1. Grants holder protection from others making, using, or selling similar ideas. 2. It is a contract between the government and inventor for exclusively using the invention over a period of time. 3. Utility Patents. Term of 20 years beginning on the date of filing with the patent office. Inventions requiring FDA approval extend the term of the patent to include the time it takes the FDA to review the patent. $790.00 filing fee. Additional fees may occur depending upon the amount of claims. Grants protection from anyone else making, using or selling the invention. Generally reflects protection of new, useful and unobvious processes that may enhance the product.

4. Design Patents. Covering the appearance of an object. 14year term. $200.00 filing fee. Renewed interest in these patents because Nike & Reebok protecting their ornamental designs. Molded plastic and container configuration businesses find these important. 5. Plant Patents. Issued under the same provisions as utility patents and are for varieties of new plants. Limited area of interest and very few are issued. 6. International Patents World Trade Organization (WTO) global free trade has been encouraged, thus needing protection internationally for patents. Patent Cooperation Treaty (PCT) has over 100 countries participating. Administered by the World Intellectual Property Organization (WIPO) in Switzerland will search whether the filing firm will face any possible infringements in any country. The Disclosure Statement A statement to the U.S. Patent Office and Trademark Office by the inventor disclosing intent to patent idea. This establishes a date of conception for the invention. It is important if two entrepreneurs have similar inventions. Must be a clear and concise description of the invention. The Disclosure Statement is held for two years and then destroyed if no patent application is filed. It is advisable to hire a patent attorney to conduct a patent search to see if this idea is patentable. The Patent Application 1. Introduction provides the background and advantages of the invention. 2. Description of the invention with drawings containing engineering specifications, materials, components and anything vital to making the invention. 3. Claims. The most difficult part of the application. Broad terms describing the invention but not to broad so that they hide the inventions’ uniqueness. Should refer to a patent attorney for this process. 4. Should contain an oath by the inventor that this is all an original idea. 5. A carefully written patent should provide protection and prevent competitors from working around it. Patent Infringement The entrepreneur should be sensitive whether he/she is infringing on another’s patent.

This is not the end of the idea because many businesses have been started by the results of improvements and modifications. Improving a product is not necessarily patent infringement. Page 176, Table 6.1. Business Method Patents The growth of the internet and software development has emerged the use of business method patents. Whether these types of patents will hold up over a long period is still being debated. Many firms holding these types of patents have used them to assault their competitors and create a steady stream of income through royalties or licensing fees. Trademarks A distinguishing word, name or symbol used to identify a product. The trademark can last indefinitely as long as the mark continues to perform its indicated function. Starting November 16, 1989, a trademark is given a ten year initial registration with ten year renewable terms. In the fifth to sixth year you must file an affidavit indicating the mark is currently in commercial use. Four categories; 1. Coined marks denote no relationship between the mark and the goods or services and afford the possibility of expansion to a wide range of products. (Ex. Mercedes, Kodak) 2. An arbitrary mark has another meaning in our language and is applied to a product. (Ex Apple) 3. A suggestive mark is used to suggest certain features or qualities of a product. ( Ex. Halo shampoo) 4. A descriptive mark must have become distinctive over a significant period of time and gained consumer recognition before it can be registered. The mark then is considered to have a secondary meaning, (Ex Rubberoid is applied to roofing materials containing rubber.) Copyrights The right given to prevent others from printing, copying, or publishing and original works of authorship. It does not protect the idea so the concept can be used by others. With the Internet, music and software downloads are major issues today. In 2005 the Supreme Court ruled that file sharing for music was a copyright violation. Copyrights are filed with the Library of Congress and do not require an attorney. Copyrights are also important to sculptures, maps, blueprints, board games, etc.

Trade Secrets Protection against others revealing or disclosing information that could be damaging to a business. Trade secrets are not covered under federal laws but by common law in each state. Employees working with a new idea might be asked to sign a confidential information agreement preventing them from passing the information outside the group while working for the firm and after leaving. (Page 182, Table 6.3) Sometimes it is difficult to share with employees but we now know that they will be more creative and effective if they share in the big picture. To protect from competitive information leaving the firm, use the following ideas; 1. Train employees to refer sensitive questions to one person. 2. Provide escorts for all office visits. 3. Avoid discussing business in public places. 4. Keep important travel plans secret. 5. Use simple security such as locked file cabinets, passwords on computers and shredders. 6. Have employees and consultants sign nondisclosure agreements. 7. Debrief departing employees on confidential information. 8. Avoid faxing sensitive information. 9. Mark documents confidential when needed. Licensing Contractual agreement giving rights to others to use intellectual property in return for a royalty or fee. Licensing has significant value as a marketing strategy. A patent license agreement specifies how the licensee would have access to the patent. Licensing a trademark usually requires a franchise agreement. Copyrights can be licensed. Product Safety & Liability Responsibility of a company to meet any legal specifications regarding a new product covered by the Consumer Product Safety Act. (Ex Lead paint in toys) There a strict guidelines for reporting product defects. Claims will under one of the following categories; 1. Negligence in how the product is presented to the consumer through the use of labeling, false advertising, etc. 2. Warranty is the coverage of the product for overstating the benefits or does not perform as stated. 3. Strict liability is when the product was found to be defective prior to the consumer receiving it. 4. Misrepresentation is when material facts concerning the character or quality of the product are not accurate. (Ex Minnesota Vikings taking diuretics)

Insurance Page 187 Table 6.4 Sarbanes-Oxley Act 2002 Created in response to Enron and Arthur Anderson misconduct. Mechanism for financial activities of companies as it relates to their public reporting. It has been argued the cost of compliance has limited many start ups. CEO’s are required to vouch personally for financial statements. Directors must meet background checks regarding internal auditing history. At present private companies are not included in this act. Contracts A legally binding agreement between two parties. Page 189, Table 6.5 HOMEWORK Answer the following questions; 1) Provide a real life example (you, or a friend or family member) for each of the following different types of product liability: a) Negligence. b) Warranty. c) Strict Liability. d) Misrepresentation. Report the details and the cost if known.

Textbook Reference: Entrepreneurship, 8th edition by R.H. Hisrich, M.P. Peters and D.A. Shepherd, Mc Graw Hill Irwin, Copyright 2010. Chapter 7: The Business Plan Creating and Starting the Venture What is the Business Plan? ▪ A written document describing all relevant internal and external elements and strategies for starting the new venture. ▪ Addresses the integration and coordination of effective business objectives and strategies. ▪ The business is the road map the entrepreneur needs to travel through the maze of issues. ▪ You can use software packages but you will need to personalize it to your particular situation. A cookie cutter approach will have a very negative result. Who Should Write the Plan? ▪ It should be prepared by the entrepreneur. ▪ You should consult with lawyers, accountants, bankers, marketing consultants, etc. ▪ Services can be found with SCORE & SBDC. ▪ Please check the table in the book under this chapter to see more of skill assessment. Value of the Plan ▪ The entrepreneur will clearly articulate what the venture is all about. ▪ Entrepreneurs must try to view the business from the perspective of the consumer. ▪ It helps determine the viability of the venture in a designated market. ▪ It provides guidance to the entrepreneur in organizing his or her planning activities. ▪ It serves as an important tool to obtain financing. ▪ It will provide a self-assessment of the entrepreneur. ▪ It provides ways to avoid obstacles. How do Potential Lenders Evaluate the Plan? ▪ As you become aware of who will read your plan, you will need to make ▪ appropriate changes. ▪ Suppliers may want to see the business plan. ▪ Suppliers of capital will want to see the business plan. ▪ Lenders are primarily interested in the ability of the new venture to pay back the ▪ debt including interest and fees within the designated time. ▪ Banks want facts with objective analysis of the opportunity and all the potential ▪ risks inherent in the venture. ▪ It is important that the entrepreneur develop a strong personal relationship with ▪ the loan officer of the bank. ▪ This relationship will enhance your ability to keep focused on the business plan ▪ objectives. Your regular contact will lead to discussions about objectives. ▪ Lenders focus on the four Cs of credit; 1. Character (Personal) 2. Cash Flow. (Ability to meet debt and interest payments) 3. Collateral. 4. Equity Contribution. (Personal funds put into venture=equity) ▪ This means that lenders want the entrepreneur to have a solid credit history.

Operations Information Needs ▪ Location accessibility to customers and suppliers. ▪ Manufacturing Operations include needed machines and what will be subcontracted. ▪ Raw materials require solid performing suppliers. ▪ Equipment with coast should be listed. ▪ Labor skills should list number of employees as well as skill sets. ▪ Space needed to perform operations. ▪ Overhead are each item needed to support manufacturing or other operations. Financial Information Needs ▪ Prepare a budget of expenditures and sales for the first year. ▪ Forecast the revenue from market data identifying benchmarks in the industry. ▪ Operational expenses can be found through classified advertisements. ▪ Trade Associations publish data that can supplement financial statements. Writing the Business Plan – Please check the book. A table that guides you on how to write the business plan could be found. Measuring Plan Progress ▪ Inventory control can ensure maximum service to the customer. ▪ Production control compares the cost figures with the business plan. ▪ Quality control makes sure the product works performs satisfactorily. ▪ Sales control provides cash forecasting for the new venture. Effective collections for accounts receivable should be developed to limit bad debts. ▪ Disbursements controls the amount of money paid out. ▪ Web Site Control should make sure that it can handle the volume of sales and that it is meeting the company objectives. Why Some Business Plans Fail 1. Goals are unreasonable. 2. Goals are not measurable. 3. The entrepreneur has not made a total commitment to the new venture. 4. The entrepreneur has no sense of potential threats or weaknesses to the business. 5. The entrepreneur’s family must be supportive. 6. A lack of experience or preparation.

Textbook Reference: Entrepreneurship, 8th edition by R.H. Hisrich, M.P. Peters and D.A. Shepherd, Mc Graw Hill Irwin, Copyright 2010. Chapter 8: The Marketing Plan INDUSTRY ANALYSIS ▪ Provide sufficient knowledge of the national and local market that can affect marketing strategy decision making. ▪ Competitor Analysis is the documentation of the current strategy of each primary competitor. MARKETING RESEARCH FOR THE NEW VENTURE 1. Define the purpose and objectives. What is the information needed to prepare the marketing plan? ▪ How much would potential customers be willing to pay for the product or service? ▪ Where would potential customers prefer to purchase the product or service? ▪ Where would the customer expect to hear about or learn about such a product or service? 2. Gathering Data from Secondary Sources. ▪ Trade magazines, newspapers, government agencies, etc. ▪ Before paying for a company to do this, you should exhaust all these resources through the internet. ▪ A university library can usually provide access to all of these secondary database sources. 3. Gathering Information from Primary Sources. ▪ Interviewing, focus groups, networking, etc. ▪ Observation is the simplest approach. ▪ Interviewing or surveys are most common methods. Please see table in the book for samples/illustrations. ▪ Questions should be designed to fulfill the objectives. ▪ Focus groups should be led by an experienced monitor. 4. Analyzing and Interpreting the Results. ▪ You can hand tabulate results or enter on a spreadsheet. ▪ The evaluation should be based on the objectives of the venture. ▪ Can provide valuable insights regarding the segmentation of the market. Understanding the Marketing Plan 1. Where have we been? 2. Where do we want to go? 3. How do we get there? 4. Please see table illustration in the book that “Outlines the Marketing Plan.” Characteristics of a Marketing Plan ▪ Should provide a strategy for accomplishing the company mission and goal. ▪ It should be based on facts and valid assumptions. ▪ An appropriate organization must be described to implement the plan. ▪ It should provide continuity so that each annual plan can build upon it. ▪ It should be simple and short. ▪ The success of the plan may depend on flexibility. ▪ It should specify performance criteria that will be monitored and controlled.

Internal Variables of the Marketing Plan 1. Financial resources. 2. Management Team. 3. Suppliers. 4. Company Mission. STEPS IN PREPARING THE MARKETING PLAN 1. Define the business situation which analyzes past and present business achievements of the new venture. 2. Define the target market, opportunities and threats. A target market is a specific group of potential customers toward which the venture aims its marketing plan. 3. Market segmentation is the process of dividing a market into definable and measurable groups for purposes of targeting marketing strategy. 4. Considering Strength and Weaknesses in the target market. 5. Establish goals and objectives to measure the level of performance desired by the new venture. Defining Action Programs ▪ Specific activities to meet the ventures goals. ▪ Create a description of the new product or service in the new venture. ▪ Pricing will need to consider costs, margins or markups, and competition. ▪ Distribution makes the product convenient to the customer.

Textbook Reference: Entrepreneurship, 8th edition by R.H. Hisrich, M.P. Peters and D.A. Shepherd, Mc Graw Hill Irwin, Copyright 2010. Chapter 9: The Organizational Plan Developing the Management Team  Investors will often demand that the management team not attempt to operate the business as a sideline or while employed elsewhere.  It is assumed the management team is prepared to operate the business full time at a modest salary.  Taking a large salary out of a new venture will be looked upon by investors as a lack of psychological commitment.  The entrepreneur should consider the role of a Board of Directors in supporting management in the new venture. Legal Forms of Business  The entrepreneur needs to studies the alternatives regarding the legal form of the organization.  Each of these forms has important implications for taxes, liability, continuity, and financing the new venture.  Proprietorship is a form of business with a single owner who has unlimited liability, controls all decisions, and receives all profits. Most common.  Partnership is two or more individuals having unlimited liability who have pooled resources to own a business.  C Corporation is the most common form of corporation. It is regulated by statute and treated as a separate legal entity for liability and tax purposes.  Liability is one of the most critical reasons for establishing a corporation. Costs of Starting a Business  The more complex an organization the more expensive it will be to start.  Legal advice should be sought to determine which legal form of business is best for you.  Corporations are the most costly to start. Continuity of Business  The main concern of a new venture is what happens if one of the entrepreneurs dies or withdraws from the business.  Partnership agreements should detail this issue.  How do we add family members as time goes by?  How do we determine who should succeed the entrepreneur?  The ability to raise new capital will depend upon the format of the business.  The entrepreneurs will want to maintain as much management control as possible.  There should be a legal agreement to distribute profits and losses. TAX ATTRIBUTES OF FORMS OF BUSINESS 1. Proprietorship is treated as individuals by the IRS. 2. Partnerships are similar but their legal format serves as nontaxable conduits of income and deductions. 3. Since the Corporation is viewed as an entity, it has the advantage of being able to take many deductions and expenses that are not available to the other formats.

Designing the Organization The design of the organization will be the entrepreneur’s formal and explicit indication to the members of the organization as to what is expected from them. 1. Organizational structure defines the jobs and the relationship these jobs have with each other. 2. Planning, measurement and evaluation schemes reflect the goals of the organization. 3. Rewards should be provided in the form of promotions, bonuses, praise and son on. 4. Selection criteria will need to be set for selecting individuals for each position. 5. Training can be in the form of formal education or learning skills. BUILDING THE MANAGEMENT TEAM AND A SUCCESSFUL ORGANIZATIONAL CULTURE  The entrepreneur needs to assemble the right mix of people to assume the responsibilities.  The team must be able to accomplish three functions; 1. Execute the business plan. 2. Identify fundamental changes in the business as they occur. 3. Make adjustments to the plan based on changes in the environment and market that will maintain profitability. Organizational Culture  You will need to consider personality and character of each individual to create a viable organizational culture.  The organizational culture will be a blend of attitudes, behavior, and dress and communication styles.  The desired culture must be outlined in the business plan.  The leader of the organization must create a workplace where communication from the bottom up is encouraged.  The entrepreneur should be flexible enough to try different things,  It is necessary to spend extra time in the hiring process.  You need to remember that it is easier to change a person’s behavior than attitude.  A positive organizational culture is challenging but necessary to the organization’s success. THE ROLE OF THE BOARD OF DIRECTORS 1. Review operating and capital budgets. 2. Develop longer term strategic plans for growth and expansion. 3. Support daily activities. 4. Resolve conflicts among owners and shareholders. 5. Ensure the proper use of assets. 6. Develop a network of information sources for the entrepreneur. Directors Should be Chosen to Meet the Requirements of the Sarbanes-Oxley Act;  Select individuals who can work with a diverse group and commit to the ventures mission.  Select people who understand the market environment or can contribute important skills to the new ventures planning process.  Select candidates who show good judgment in business decision making.

Textbook Reference: Entrepreneurship, 8th edition by R.H. Hisrich, M.P. Peters and D.A. Shepherd, Mc Graw Hill Irwin, Copyright 2010. Chapter 10: The Financial Plan Operating & Capital Budgets  Complete a sales budget.  Then focus on the operating costs. List of fixed expenses; 1. Rent 2. Utilities 3. Salaries 4. Advertising 5. Depreciation 6. Insurance  Capital Budgets are intended to provide a basis for evaluating expenditures that will impact the business for more than one. Examples; 1. New Equipment. 2. Vehicles. 3. Computers. 4. A new facility. 5. It should also consider the cost of purchasing v. leasing. 6. Enlist the advice of an accountant in planning long term expense. Pro Forma Income Statements  Projected net profit calculated from projected revenue minus projected costs and expenses.  The Marketing Plan provides an estimate of sales.  First, calculate sales monthly.  Understand that sales are higher some months due to market needs.  Project all the operating expenses for each of the months during the first year understanding that they change during different times of the year.  Salaries and wages should reflect the number needed at different phases of the start up during the first year. Remember there are two months a year with three payrolls.  Increase selling expenses as revenues increase.  Forecast years 2 & 3 next.  Some items will remain stable and others will fluctuate with the market.  For internet companies most expenses will be consumed by equipment. Revenues will be delayed until the site is found. Pro Forma Cash Flow  Cash flow is not profit!  Profit is the result of subtracting expenses from revenue.  Cash flows only when actual payments are received or made.  Sales are not cash flow until payment is receiving.  Cash payments to reduce debt does not constitute a business expense but does reduce cash.  Profitable firms fail due to lack of cash.  The entrepreneur must make monthly estimation of cash as well as sales so you know if you have enough to meet your obligations.

Pro Forma Balance Sheet  Summarizes the projected assets, liabilities and net worth of the new venture.  Assets are items owned or available to be used in the venture operations.  Liabilities are money owed to creditors.  Owner Equity is the amount the owners have invested and/or retained from the venture operation. Breakeven Analysis  Volume of sales where the venture neither makes a profit nor incurs a loss.  Software packages are essential in all money matters.

Textbook Reference: Entrepreneurship, 8th edition by R.H. Hisrich, M.P. Peters and D.A. Shepherd, Mc Graw Hill Irwin, Copyright 2010. Chapter 11: Sources of Capital One of the most difficult problems in the new venture creation process is obtaining financing. Debt Financing  Obtaining borrowed finds for the company.  It is usually an interest bearing instrument.  The payment is only indirectly related to sales & profit.  Typically it requires that some asset (car, house, machine, land, etc.) be used as collateral.  There is an additional fee called “points” for using the money.  Short term debt or one year debt is usually used to provide working capital to finance inventory, accounts receivable, or operations.  Long term debt or more than one year debt is used to purchase an asset. It will require collateral and only cover 50% to 80% of the value. The owner provides the difference.  The entrepreneur must be careful that the debt is not so large that repayment is difficult which will inhibit growth. Equity Financing  Obtaining funds for the company in exchange for ownership.  Does not require collateral and provides the investor with a portion of ownership and profits. Internal Funds  Most frequently generated funds.  Comes from several sources; 1. Profits. 2. Sales of assets. 3. Reduction in working capital. 4. Extended payment terms with a supplier. 5. Accounts receivable. 6. Reduction of inventory. External Funds  Alternative sources should be evaluated on three bases; 1. The length of time the funds are available. 2. The costs involved. 3. The amount of company control that is lost.  Most frequently used sources of funds: 1. Family & friends.  The amount may be small.  They may think they will have input.  Usually more patient that commercial lenders.  Write a loan agreement detailing time and control.  Consider the impact of this investment to a family member. 2. Commercial Banks.  Asset loans have tangible collateral valued at more than the amount borrowed.

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 Accounts Receivable Loans works if the customer base is trustworthy.  Inventory loans if the product is liquid and can be easily sold.  Equipment loans.  Real Estate Loans. Limited Partnerships. Government loan programs.  SBA provides a guarantee to a local bank.  Assists qualified small businesses to obtain financing when they cannot get a business loan through regular lending channels.  SBA can guarantee %85 up to $150,000.00 and %75 over $150,000.00. The owner is responsible for the difference.  The banks are guaranteed of their loan and are charged fees from the SBA. They pass the charges on to the entrepreneur. Grants. Venture capital. Personal funds.

Bank Lending Decisions  Banks are generally cautious and especially with new ventures.  Commercial loans are reviewed by the loan officer and loan committee who carefully review the borrower and the financial track record of the business.  These decisions are based both on quantifiable information and subjective judgments.  Based on the five C’s: 1. Character. The entrepreneur will always be scrutinized. 2. Capacity. Can this venture generate enough sales to justify the loan? 3. Capital. How much of the entrepreneur’s personal capital is involved? 4. Collateral. Assets that can be sold to recoup money not paid. 5. Conditions. What are the risks? What is the unique differential advantage in market growth?  Some of the concerns can be reduced by providing a good loan application.  Provide all information requested, three years of tax returns, spread sheet showing repayment, and a summary of the need for this loan and how it will help the venture grow.  The entrepreneur should evaluate several commercial banks. Choose the one that provided the most positive business experience.  The established protocol of the loan process should be understood and respected.  Generally, the entrepreneur should borrow the maximum amount that can possibly be repaid. Going back for more money will not be well accepted.  You must generate enough cash flow to repay the interest and principal according to the schedule.  You should investigate the track record of the bank through other entrepreneurs.  “Shopping” for banks will result in the needed funds at the most favorable rates. Government Grants  SBIR grants are U.S. grants for technology. Bootstrap Financing  Important in the early stages of the new venture.  Debt financing is extremely expensive and cash drain to the venture.  Raising capital is a long term process that takes a lot of time of the entrepreneur.

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You usually need capital when you have the least amount of time. Outside capital decreases a firm’s drive for sales and profits. The availability of capital increases the impulse to spend. Outside capital can decrease the firm’s flexibility. Outside capital can be disruptive in that it requires a return on investment before the new venture has an opportunity to stabilize. Use every available method to conserve cash. Seek discounts from suppliers. Ask for bulk packaging and volume will create savings. Use as little cash to initiate as possible. The drawback is operating without cash reserves.

Textbook Reference: Entrepreneurship, 8th edition by R.H. Hisrich, M.P. Peters and D.A. Shepherd, Mc Graw Hill Irwin, Copyright 2010. Chapter 12: Informal Risk Capital, Venture Capital, and Going Public Financing the Business  Acquisition financing is used to buy another company.  Risk capital markets provide debt and equity to non-secure financing situations.  Informal risk capital is a market consisting mainly of individuals.  Venture Capital Markets consist of formal companies.  Public Equity Markets is risk capital consisting of publicly owner stocks of companies.  Business Angels is named for individuals in the informal risk capital market.  Equity participation is taking an ownership position.  SBIC firms are small companies with some governmental money that invest on other companies. Venture Capital Process  The objective of the venture capital firm is to generate long term capital appreciation through debt and equity investments.  The venture capitalist is willing to make any changes or modification necessary in the investment which is often at odds with the entrepreneur.  The venture capital sometimes moves from start ups to late stage investment to reduce risk and increase profits.  The venture capitalist does not necessarily seek control but they want the entrepreneur to be in the more risk position.  Once the investment is made, the venture capitalist will do whatever is necessary to make the new venture work.  Since the venture capitalist is a long term investment (usually 5 years) there must be mutual trust and understanding between the venture group and the entrepreneur.  The Venture Capitalist expects a company to satisfy three general criteria: 1. The company must have a strong management team who individually must have solid experience and backgrounds  Have a strong commitment to the capabilities.  Capabilities in a specific area of expertise.  The ability to meet challenges.  The flexibility to scramble whenever necessary.  Each spouse of each management team member must also be committed to the new venture. 2. Is the product and/or market opportunity unique?  Will the venture have a differential advantage in a growing market?  Securing a unique market niche is essential.  This niche must be spelled out and is even stronger when it is protected by a patent or trade secret. 3. The business must have significant capital appreciation.  The venture capitalist generally expects a 40 to 60 percent return on investment in most situations.  This is both art (intuition) and science. (business plan)

Preliminary Venture Capital Screening  The screening is the initial evaluation of a deal.  Begins with the receipt of the business plan.  The plan must have clear cut mission, in depth industry study and a strong pro forma income statement and balance sheets.  The Executive Summary is critical to the Venture Capitalist because it will tell if this fits the firms meet the long term policy and short term need to balance a portfolio. Agreement on Principle Terms  The venture capitalist wants a basic understanding of the terms with the entrepreneur.  They want this prior to the time commitment it will take to complete “due diligence”. Detailed Review & Due Diligence  This is the longest stage and can last from 1-3 months.  The upside and risk potential are assessed.  Complete background of all management members is completed.  Thorough evaluation of the markets. Final Approval  A confidential internal investment memorandum is prepared.  Details the investment terms and conditions of the transaction.  This information is required to prepare the formal legal documents that will need to be signed for a binding contract. VALUING YOUR COMPANY  The problem confronting the entrepreneur in obtaining any investment is determining value of the company. Factors in Valuation 1. The nature and history of the business. Provides strength and diversity from the outset. 2. Examination of the financial data of the venture compared with that of other companies in the industry. Included are the outlook of the economy and the outlook of that particular industry. 3. The book value is the owner’s equity which is the acquisition cost (less depreciation) minus liabilities. This is built over time. 4. The future earning capacity of the company is the most important factor in valuation. 5. The dividend paying capacity of the venture. 6. The assessment of goodwill and other tangibles of the venture. 7. Assessing any previous sale of stock. 8. The market prices of the stocks of companies engaged in similar lines of business. Ratio Analysis  Control mechanisms to test the financial strength of the new venture.  Liquidity ratios measure assets v liabilities. (page 391)  Acid Test Ratio is short term liquidity because it eliminates inventory which is the least liquid asset.  Activity ratios show the average number of days it takes to convert accounts receivable into cash.

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Inventory Turnover measures the efficiency of the venture in managing and selling its inventory. Leverage Ratios assess the debt ratio to reveal the firm’s ability to meet all its obligations. Debt to Equity assesses the firm’s capital structure. Net Profit Margin translates the firm’s ability to translate sales into profit. Return on Investment measures the firm’s ability to manage its total investment in assets.

General Valuation Approaches 1. Methods to determine the worth of the company. 2. Present value of future cash flow is based on future sales and profits. 3. Replacement Value is the cost of replacing all assets of the company. 4. Book value is the indicated worth of the assets of the company. 5. Earnings Approach determines value by looking at present and future earnings. 6. Factor approach uses the major aspects of the company to determine its worth. 7. Liquidation value is the worth of the company based selling everything today.

Textbook Reference: Entrepreneurship, 8th edition by R.H. Hisrich, M.P. Peters and D.A. Shepherd, Mc Graw Hill Irwin, Copyright 2010. Chapter 13: Strategies for Growth & Managing the Implications of Growth GROWTH STRATEGIES 1. Penetration Strategies. Grow by encouraging existing customers to buy more of the firm’s current products. ▪ Marketing can be effective in encouraging more frequent purchases. ▪ This does not involve anything new and takes market share away from competitors. ▪ This strategy attempts to better exploit its original entry. 2. Market Development Strategies. Selling the firm’s existing products to new groups of customer. ▪ New Geographical Market. Same segments in different locations. ▪ New Demographic Market. Search for a different segment (different consumers) of the market. ▪ New Product Use. You might find that people use your product in a different way than the intended use. 3. Product Development Strategies. Sell new products to a group that already buys your current products. 4. Diversification Strategies. Sell anew product to a new market. ▪ Backward integration a step back in which a manufacturer also becomes a raw materials wholesaler. ▪ Forward integration steps forward meaning that the firm also becomes a finished goods wholesaler. It becomes its own buyer. ▪ Horizontal integration is a value added chain that involves different but complementary products. (Ex. Produce washing machines you may also manufacture detergent) ECONOMIC IMPLICATIONS OF GROWTH FOR THE FIRM 1. Pressures on Existing Financial Resources. ▪ Growth has a large appetite for cash. ▪ Resources highly stretched leave a company vulnerable to bankruptcy. 2. Pressures on Human Resources. Growth is fueled by employees. ▪ Current employees could be stretched thin and stress could damage attitudes. ▪ Hiring many people quickly will dilute the corporate culture. 3. Pressures on the Management of Employees. ▪ Growth tends to make managers change their styles. ▪ They change the way they deal with employees. ▪ The entrepreneur will have to consider some management changes. 4. Pressures on the Entrepreneur’s Time. ▪ “If only I had more time!’ is a common refrain in growth situations. ▪ Time is the most precious resource but it is very limited. ▪ You may be diverted from other activities and can cause problems.

OVERCOMING PRESSURES Financial Control ▪ Managing Cash Flow ▪ Managing Inventory. ▪ Managing Fixed Assets. ▪ Managing Costs and profits. ▪ Taxes. ▪ Record Keeping. Human Resources ▪ Generally do not have the luxury of a Human resources Department. Subcontract a personnel company. ▪ Decide which part of the workforce should be permanent and what jobs can be done part time or under contract. ▪ Fire incompetent employees. They cost you more than you know and create a series of problems. ▪ Maintain the corporate culture despite the influx of new employees. ▪ The entrepreneur must be the walking role model of the culture giving employees a clear vision of the acceptable culture. Management of Employees ▪ Involve employees and mid level managers in the decision making process. ▪ Establish a team Spirit believing that we are all in this together. ▪ Communicate with employees because it builds trust and diminishes fear. ◦ Provide feedback channels. ◦ Delegate some responsibility to others. ◦ Provide continuous training for employees. Entrepreneurs’ Time Time Management 1. Recognize that you need to change personal attitudes and habits regarding the allocation of time. 2. Be effective and focus only on the most important issues. 3. Understand where time is spent and where it is being inefficiently invested. 4. Acknowledge that most time is taken up others. So use this time to build team concepts. 5. Categorize tasks by their degree of importance and then allocate time accordingly. 6. Periodically review you process. 7. Maintain good health habits. Will provide the strength you will need to administer a growing new venture. A Categorization of Entrepreneurs and Their Firm’s Growth

Textbook Reference: Entrepreneurship, 8th edition by R.H. Hisrich, M.P. Peters and D.A. Shepherd, Mc Graw Hill Irwin, Copyright 2010. Chapter 14: Accessing Resources for Growth from External Sources Franchising is an arrangement whereby a franchisor gives exclusive rights of local distribution to a franchise in return for their payment of royalties and conformance to standardized operating procedures. Advantages to the Franchisee  Do not have the risks associated with creating a new business.  Product acceptance is already in place.  Management Expertise is provided to the franchisee.  The initial capital generally reflects a fee for the franchise, construction costs, and the purchase of equipment.  A financial contribution is usually based on the volume of sales. (Royalty Fee)  Knowledge of the market.  Operating and structural costs are functions that ensure quality as well as management controls. Advantages to the Franchisor  Expansion risk is reduced allowing the venture to expand quickly using little capital.  Cost advantages in the ability to buy supplies in large quantities.  Ability to commit more money into advertising and customer rewards programs. Disadvantages of Franchising  Problems between the franchisor and franchisee are common.  Problems usually center on the franchisor not able to provide services and advertising.  The franchisor could be bought out by another company.  The franchisor may find it difficult in finding qualified franchisees.  Poor management despite training systems can reflect negatively on the entire franchise system. Types of Franchises  Good Health  Time Saving or Convenience.  Environmental Consciousness.  The Second Baby Boom. INVESTING IN A FRANCHISE Factors that should be addressed before making final decision; 1. Unproven vs. Proven franchise. 2. Financial Stability of Franchise.  How many franchises are in the organization?  How successful is each of the members of the franchise organization?

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Are the profits of the franchise operation from selling franchises or from royalties based on profits of franchises?  Does the franchisor have management expertise in production, finance and marketing? (Background of Management Team) 3. Potential Market for new franchise still depends on the demographics and marketing research. 4. Profit Potential for a New Franchise. Please see book on information required in Disclosure Statement Joint Ventures 1. Two or more private sector companies combine to cut costs, share technology and research. 2. Industry – University Agreements. Purpose is in doing research. Drawbacks;  A profit firms will want ownership of tangible assets such as patents, copyrights, etc.  The University will want to retain proprietary rights for potential financial returns and professors wanting to publish research. 3. International Joint Ventures.  Increasing due to numerous advantages.  Share in earnings and growth.  Low cash requirement if the patent is capitalized upon.  Causes less of a drain on a company’s managerial resources. Factors in Joint Venture Success 1. The joint venture will work better of all the mangers can work well together. 2. A balance of symmetry for all parties. If one feels they put more in this can lead to bad feelings. 3. The expectations of the joint venture must be realistic. 4. The timing must be right. ACQUISITIONS This is the purchasing all or part of a company. Advantages 3. Established business creates instant cash flow and expanded customer base. 4. Location is already familiar to customers. 5. Established marketing structure so you can concentrate on growth. 6. Cost can be lower than other methods of expansion. 5. Existing employees are great asset. They have the skills, customer relationships and can re-assure everyone they know about the new ownership. 6. More opportunity to be creative because much of the start-up focus has been removed.

Disadvantages 1. Marginal Success record if the purchased business was having difficulty prior to sale. 2. Overconfidence in your ability could blind you to the limitations of the firm you are purchasing. 3. Key employee loss. This is common when a business is sold that the key people also leave searching for new opportunities. 4. Over evaluation. Paying to much for the firm will be difficult to over come. Synergy  The whole is greater than the sum of its parts.  The acquisition must positively impact the bottom line.  Synergy could be the vehicle to move forward on all goals.  Lack of synergy can be one of the main reasons the acquisition fails. Structuring the Deal  The structure includes the parties, the assets, the payment form, and the timing for payment.  Direct purchase is acquiring the firm’s entire stock or assets.  The bootstrap purchase is acquiring a small amount of the firm originally and buying the entire firm over time as cash becomes available. Locating Acquisition Candidates  Brokers are people who sell companies.  Accountants, attorneys, bankers, business associates and consultants.  Classified section of the paper.  The best method will take time and research. LEVERAGED BUYOUTS  Purchasing an existing venture by an employee group.  The owner is usually in a position to retire.  The owner may want to divest the business of a subsidiary that no longer fits into his/her plans.  The purchaser usually needs external funding due to lack of resources.  The price will depend on a reasonable asking price, the firm’s debt capacity and an appropriate financial package. Negotiating for More Resources 1. Distribution task is how the benefits of the relationship will be allocated between parties. 2. Integration task is exploring possible mutual benefits from the relationship. 3. Reservation price is an amount that the entrepreneur is indifferent about whether to accept the agreement or choose the alternative. 4. Bargaining zone is the range of outcomes between the entrepreneur’s reservation price and the reservation price of the other party.

Assessments 1. What will you do if an agreement is not reached? 2. What will the other party do if an agreement is not reached? 3. What are the underlying issues of the negotiation? 4. How important is the issues to you? 5. How important are the issues to the other party? Strategies for Current Negotiations 1. Build trust and share information. 2. Ask lots of questions. 3. Make multiple offers simultaneously. 4. Use differences to create trade-offs that are a source of mutually beneficial outcomes.