Part 3 Developing the Entrepreneurial Plan CHAPTER 7

Part 3 Developing the Entrepreneurial Plan CHAPTER 7 Assessment of Entrepreneurial Opportunities Entrepreneurship Power. Point Presentation by Charlie Cook The University of West Alabama © 2007 Thomson/South-Western. All rights reserved. theory | process | practice Seventh edition Donald F. Kuratko • Richard M. Hodgetts

Chapter Objectives Studying this chapter should provide you with the entrepreneurial knowledge needed: 1. To explain the challenge of new-venture start-ups 2. To review common pitfalls in the selection of newventure ideas 3. To present critical factors involved in new-venture development 4. To examine why new ventures fail 5. To study certain factors that underlie venture success © 2007 Thomson/South-Western. All rights reserved. 7– 2 2

Chapter Objectives (cont’d) Studying this chapter should provide you with the entrepreneurial knowledge needed: 6. To analyze the evaluation process methods: profile analysis, feasibility criteria approach, and comprehensive feasibility method 7. To outline the specific activities involved in a comprehensive feasibility evaluation © 2007 Thomson/South-Western. All rights reserved. 7– 3 3

The Challenge of New-Venture Start-Ups 600, 000 new firms have emerged in the United States every year since the early 1990 s. The U. S. Patent Office currently reviews more than 375, 000 patent applications per year. © 2007 Thomson/South-Western. All rights reserved. 4

Figure 7. 1 The Elements Affecting New-Venture Performance Source: Arnold C. Cooper, “Challenges in Predicting New Firm Performance, ” Journal of Business Venturing (May 1993): 243. Reprinted with permission. © 2007 Thomson/South-Western. All rights reserved. 5

Pitfalls in Selecting New Ventures Lack of objective evaluation No real insight into the market Inadequate understanding of technical requirements Poor financial understanding Lack of venture uniqueness Ignorance of legal issues © 2007 Thomson/South-Western. All rights reserved. 6

Critical Factors for New-Venture Development Uniqueness Investment Sales growth Lifestyle ventures Ø Small profitable ventures Ø High-growth ventures Ø Product availability Customer availability © 2007 Thomson/South-Western. All rights reserved. 7

Table 7. 1 A New. Venture Idea Checklist Source: Karl H. Vesper, New Venture Strategies, copyright © 1990, 172. Adapted by permission of Prentice-Hall, Inc. , Englewood Cliffs, New Jersey. © 2007 Thomson/South-Western. All rights reserved. 8

Table 7. 1 A New. Venture Idea Checklist (cont’d) Source: Karl H. Vesper, New Venture Strategies, copyright © 1990, 172. Adapted by permission of Prentice-Hall, Inc. , Englewood Cliffs, New Jersey. © 2007 Thomson/South-Western. All rights reserved. 9

Table 7. 1 A New. Venture Idea Checklist (cont’d) Source: Karl H. Vesper, New Venture Strategies, copyright © 1990, 172. Adapted by permission of Prentice-Hall, Inc. , Englewood Cliffs, New Jersey. © 2007 Thomson/South-Western. All rights reserved. 10

Why New Ventures Fail Product/market problems Financial difficulties Managerial problems © 2007 Thomson/South-Western. All rights reserved. 11

Causes for Failure Product/Market Problems Ø Ø Ø Poor timing. Product design problems. Inappropriate distribution strategy. Unclear business definition. Overreliance on one customer. Managerial Problems Concept of a team approach Ø Human resource problems Ø Financial Difficulties Initial undercapitalization. Ø Assuming debt too early. Ø Venture capital relationship problems. Ø © 2007 Thomson/South-Western. All rights reserved. 12

Table 7. 2 Types and Classes of First-Year Problems Source: David E. Terpstra and Philip D. Olson, “Entrepreneurial Start-up and Growth: A Classification of Problems, ” Entrepreneurship Theory and Practice (spring 1993): 19. © 2007 Thomson/South-Western. All rights reserved. 13

Figure 7. 2 Internal and External Problems Experienced By Entrepreneurs Source: H. Robert Dodge, Sam Fullerton, and John E. Robbins, “Stage of Organizational Life Cycle and Competition as Mediators of Problem Perception for Small Businesses, ” Strategic Management Journal 15(1994): 129. Reprinted by permission of John Wiley & Sons, Ltd. © 2007 Thomson/South-Western. All rights reserved. 14

Figure 7. 2 Internal and External Problems Experienced By Entrepreneurs (cont’d) Source: H. Robert Dodge, Sam Fullerton, and John E. Robbins, “Stage of Organizational Life Cycle and Competition as Mediators of Problem Perception for Small Businesses, ” Strategic Management Journal 15(1994): 129. Reprinted by permission of John Wiley & Sons, Ltd. © 2007 Thomson/South-Western. All rights reserved. 15

Table 7. 3 Determinants of New-Venture Failures Source: Andrew L. Zacharakis, G. Dale Meyer, and Julio De. Castro, “Differing Perceptions of New Venture Failure: A Matched Exploratory Study of Venture Capitalists and Entrepreneurs, ” Journal of Small Business Management (July 1999): 8. © 2007 Thomson/South-Western. All rights reserved. 16

Table 7. 4 The Failure Process of a Newly Founded Firm Source: Erkki K. Laitinen, “Prediction of Failure of a Newly Founded Firm, ” Journal of Business Venturing (July 1992): 326– 328. Reprinted with permission. © 2007 Thomson/South-Western. All rights reserved. 17

The Evaluation Process Asking the Right Questions Ø Initial Competitive Advantage • Is it a new product/service idea? • Is it proprietary? Can it be patented or copyrighted? • Is it unique enough to get a significant head start on the competition before it can be imitated or copied? Ø Product Development • Has a prototype been tested by independent testers? • What are its weak points? Will it stand up? • What level of research and development should it receive over the next five years? • If it is a service, has it been tested on potential customers? © 2007 Thomson/South-Western. All rights reserved. 18

The Evaluation Process (cont’d) Asking the Right Questions (cont’d) Ø Marketing • What is the overall market? What are the market segments? Can the product penetrate these segments or exploit special niches? • Has market research been conducted? Who else is in the market? How big is the market? How fast is it growing? What are the trends? • Has it been taken to trade shows? If so, what reactions did it receive? Were any sales made? Has it been taken to distributors? Have they placed any orders? © 2007 Thomson/South-Western. All rights reserved. 19

The Evaluation Process (cont’d) Asking the Right Questions (cont’d) Ø Marketing (cont’d) • What is the projected life cycle of the product or service? What degree of penetration can be achieved? Are there any testimonials from customers and purchasing agents? What type of advertising and promotion plan will be used? Ø Distribution • What distribution and sales methods will be used? How will the product be transported? Ø Production • How will the product be made? How much will it cost? Will it be produced in-house or by others? Will production be by job shop or continuous process? What is the present capacity of company facilities? What is the breakeven point? © 2007 Thomson/South-Western. All rights reserved. 20

The Evaluation Process (cont’d) Asking the Right Questions (cont’d) Ø Expansion • Will the business concept be developed and licensed to others or developed and sold away? Ø Staffing • Can the company get—or has it already lined up—the necessary skills to operate the business venture? Who will be the workers? Are they dependable and competent? Ø Funding • How much capital will be needed now? How much more in the future? Have major stages in financing been developed? • Is the product or service easily understood by bankers, venture capitalists, accountants, lawyers, and insurance agents? © 2007 Thomson/South-Western. All rights reserved. 21

Feasibility Criteria Approach Assessing the viability of a venture: Ø Ø Ø Is it proprietary? Are the initial production costs realistic? Are the initial marketing costs realistic? Does the product have potential for very high margins? Is the time required to get to market and to reach the break-even point realistic? Is the potential market large? Is the product the first of a growing family? Does an initial customer exist? Are the development costs and calendar times realistic? Is this a growing industry? Can the product and the need for it be understood by the financial community? © 2007 Thomson/South-Western. All rights reserved. 22

Figure 7. 3 Key Areas for Assessing the Feasibility of a New Venture Source: Andrew L. Zacharakis, G. Dale Meyer, and Julio De. Castro, “Differing Perceptions of New Venture Failure: A Matched Exploratory Study of Venture Capitalists and Entrepreneurs, ” Journal of Small Business Management (July 1999): 8. © 2007 Thomson/South-Western. All rights reserved. 23

Table 7. 5 TECHNICAL FEASIBILITY ANALYSIS Crucial technical specifications Design Durability Reliability Product safety Standardization Engineering requirements Machines Tools Instruments Work flow Product development Blueprints Models Prototypes Product testing Lab testing Field testing Plant location Desirable characteristics of plant site (proximity to suppliers, customers), environmental regulations Specific Activities of Feasibility Analyses MARKET FEASIBILITY ANALYSIS Market potential Identification of potential customers and their dominant characteristics (e. g. , age, income level, buying habits) Potential market share (as affected by competitive situation) Potential sales volume Sales price projections Market testing Selection of test Actual market test Analysis of market Marketing planning issues Preferred channels of distribution, impact of promotional efforts, required distribution points (warehouses), packaging considerations, price differentiation FINANCIAL FEASIBILITY ANALYSIS Required financial resources for: Fixed assets Current assets Necessary working capital Available financial resources Required borrowing Potential sources for funds Cost of borrowing Repayment conditions Operation cost analysis Fixed costs Variable costs Projected cash flow Projected profitability ANALYSIS OF ORGANIZATIONAL CAPABILITIES Personnel requirements Required skill levels and other personal characteristics of potential employees Managerial requirements Determination of individual responsibilities Determination of required organizational relationships Potential organizational development Competitive analysis Source: Hans Schollhammer and Arthur H. Kuriloff, Entrepreneurship and Small Business Management (New York: John Wiley & Sons, 1979): 56. Copyright © 1979 by John Wiley & Sons, Inc. Reprinted by permission of John Wiley & Sons, Inc. © 2007 Thomson/South-Western. All rights reserved. COMPETITIVE ANALYSIS Existing competitors Size, financial resources, market entrenchment Potential reaction of competitors to newcomer by means of price cutting, aggressive advertising, introduction of new products, and other actions Potential new competitors 24

Key Terms and Concepts comprehensive feasibility approach critical factors customer availability external problems failure prediction model feasibility criteria approach growth of sales growth stage high-growth venture © 2007 Thomson/South-Western. All rights reserved. internal problems lifestyle venture marketability product availability small profitable venture start-up technical feasibility uniqueness 25