Innovation: The Creative Pursuit of Ideas

CHAPTER 5
Innovation: The Creative

Pursuit of Ideas
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
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Opportunity Identification:
The Search for New Ideas
• Opportunity identification is central
to the domain of entrepreneurship and revolves
around the answers to the following:
 Why?
 When?
 How?
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5–2
Sources of Innovative Ideas
1. TRENDS
Societal Technology Economic Government
Trends Trends Trends Trends
Higher
Mobile (cell
Aging disposable Increased
phone)
demographics, incomes, dual regulations,
technology,
health and wage-earner petroleum
e-commerce,
fitness growth, families, prices,
Internet
senior living performance terrorism
advances
pressures
Table
5.1 Sources of Innovative Ideas
Source Examples
2.
Unexpected occurrences Unexpected success: Apple Computer (microcomputers)
Unexpected tragedy: 9/11 terrorist attack
3. Incongruities Overnight package delivery
4.
Process needs Sugar-free products
Caffeine-free coffee
Microwave ovens
5. Industry and market Health care industry: changing to home health care
changes
6. Demographic changes Retirement communities for older people
7. Perceptual changes Exercise (aerobics) and the growing concern for fitness
8. Knowledge-based concepts Mobile (cell phone) technology; pharmaceutical industry;
robotics
The Knowledge and Learning Process
Personal work
experience,
and education
Specific General
interest industry
knowledge knowledge
Distilling Ideas
into
Opportunities
Prior customer Prior market

understanding knowledge
Innovation and the Entrepreneur
• Innovation:
 Is the process by which entrepreneurs convert

opportunities (ideas) into marketable solutions.
 Is a combination of the vision to create a good idea and
the perseverance and dedication to remain with the
concept through implementation.
 Is a key function in the entrepreneurial process.

Is the specific function of entrepreneurship.
• Entrepreneurs blend imaginative and creative thinking
with a systematic, logical process ability. This combination
is a key to successful innovation.
Table
5.6 TYPES OF INNOVATION
Type Description Examples

Invention Totally new product, service, Wright brothers—airplane
or process Thomas Edison—light bulb
Alexander Graham Bell—telephone
Extension New use or different Ray Kroc—McDonald’s

application of an already Mark Zuckerberg—Facebook
existing product, service, or Barry Sternlicht—Starwood Hotels &
process Resorts
Duplication Creative replication of an Wal-Mart—department stores

existing concept but with own Gateway—personal computers
creative enhancement Pizza Hut—pizza parlor
Synthesis Combination of existing Fred Smith—Fed Ex

concepts and factors into a Howard Schultz—Starbucks
new formulation or use
CHAPTER 6
Assessment of Entrepreneurial
Opportunities
Components of New-Venture Motivation
1. The need for approval
2. The need for independence
3. The need for personal development
4. Welfare (philanthropic) considerations
5. Perception of wealth
6. Tax reduction and indirect benefits
7. Following role models
Reasons for Starting a Venture
Personal The The

Characteristics Environment Venture
Entrepreneurial
Motivations
Pitfalls in Selecting New Ventures
1. Lack of objective evaluation
2. No real insight into the market
3. Inadequate understanding of technical

requirements
4. Poor financial understanding
5. Lack of venture uniqueness
6. Ignorance of legal issues
Phases in New-Venture Start-ups
1. Prestart-up Phase
 Begins with an idea for the venture and ends when
the doors are opened for business.
2. Start-up Phase
 Commences with the initiation of sales activity and the
delivery of products and services, and ends when the
business is firmly established and beyond short-term
threats to survival.
3. Post start-up Phase
 Lasts until the venture is terminated or the surviving
organizational entity is no longer controlled by an
entrepreneur.
Critical Factors for
New-Venture Development
1. Uniqueness
 Range can be considerable, extending from fairly
routine to highly non routine; product differentiation
2. Investment
 Capital investment to start a new venture can vary
from some industries less than $100,000 to other
industries requiring millions of dollars.
3. Growth of Sales, 3 Classifications
 Lifestyle ventures
 Small profitable ventures
 High-growth ventures
Critical Factors for
New-Venture Development (cont’d)
4. Product Availability
 Availability of a salable good or service at the time
the venture opens its doors.
 Sometimes there is a problem because the product
or service is still in development and needs
further modification or testing.
5. Customer Availability
 A critical consideration is how long it will take to
determine who the customers are, as well as their
buying habits.
Why New Ventures Fail
• Product/Market Problems • Managerial Problems
 Poor timing  Concept of a team
 Product design problems approach
 Inappropriate distribution  Human resource problems
strategy
 Unclear business definition
 Overreliance on one
customer
• Financial Difficulties
 Initial undercapitalization
 Assuming debt too early
 Venture capital relationship
problems
CHAPTER 7
Pathways to Entrepreneurial
Ventures
The Pathways to New Ventures
for Entrepreneurs
Creating the Acquiring an

New Venture Existing Venture
Pathways to New
Ventures
Obtaining a
Franchise
Creating New Ventures
Approaches to
New-New New-Old
Approach Creating a New Approach
Venture
Adapt an existing
product or service or to
Create a new and unique
extend an offering into
product or service.
an area wherein it is not
Ex: FB: frustrated by the
presently available.
lack of networking
Ex: Spotify
facilities on campus
Health App
Table
7.1 Trends in Creating Business Opportunities
Emerging Opportunities
Green Products Health Care Niche Consumables Home Automation and
Organic foods Healthy food Wine Media Storage
Organic fibers/textiles School and govt.- Chocolate Lighting control
Alternative Energy sponsored programs Burgers Security systems
Solar Exercise Coffee houses Energy management
Biofuel Yoga Exotic salads Comfort management
Fuel cells Niche gyms Entertainment systems
Energy conservation Children Networked kitchen
Nonmedical appliances
Pre-assisted living
Assisted living transition
services
Emerging Internet Opportunities

Mobile Advertising Virtual Economies
Cell phones “Online auctions”
PDAs Educational Tutoring
Concierge Services Human Resources Services
Niche Social Networks “Matchmaking”
Seniors “Virtual HR”
Music fans “Online Staffing”
Groups of local users
Pet owners
Dating groups
Source: adapted from Steve Cooper, Amanda C. Kooser, Kristin Ohlson, Karen E. Spaeder, Nichole L. Torres, and Sara Wilson, “2007 Hot List,” Entrepreneur
(December 2006): 80–93; and “The World’s 50 Most Innovative Companies,” Fast Company, (March, 2015).
Figure
7.1 Sources of New Business Ideas Among Men and Women
Source: William J. Dennis, A Small Business Primer (Washington DC., National Federation of Independent Business, 1993) 27. Reprinted with permission.
Examining the Financial Picture
When Creating New Ventures
• Upside gain and downside loss expectations
 The profits the business can make and the losses it
can suffer.
• How much money will the enterprise take in if all goes well?
• How much will it gross if operations run as expected?
• How much will it lose if operations do not work out well?
 keep in mind that the upside gain may be minimal,
whereas the downside loss may be great
• Risk vs. reward analysis
 Examining overall gains and losses to point out the
importance of getting an adequate return on the
amount of money risked.
Table
7.2 Checklist for Estimating Start-Up Expenses
Source: U.S. Small Business Administration, “Management Aids” MA. 2.025 (Washington, DC.: U.S. Government Printing Office.)
Table
7.2 Checklist for Estimating Start-Up Expenses (cont’d)
Source: U.S. Small Business Administration, “Management Aids” MA. 2.025 (Washington, DC.: U.S. Government Printing Office.)
Acquisition of an Established Business Venture
Personal
Preferences
Acquiring an
Examination of Established Evaluation of
Opportunities Entrepreneurial the Venture
Venture
Asking Key
Questions
Page 155
Advantages of Acquiring an
Ongoing Venture
Advantages of Acquiring an Ongoing Venture
Less fear about

Reduced time Purchasing at
successful future
and effort a good price
operation
Buying an
Ongoing Venture
Evaluation of the Selected Venture
Factors Affecting Sale

of the Venture
The business Assets of the

environment venture
Profits, sales, and
operating ratios
Key Questions to Ask
• Why is this business being sold?
• What is the current physical condition of the business?
• What is the condition of the inventory?
• What is the state of the company’s other assets?
• How many employees will remain?
• What type of competition does the business face?
• What does financial picture of the business look like?
Franchising: The Hybrid
• Franchising
 Any arrangement in which the owner of a trademark,
trade name, or copyright has licensed others to use it
in selling goods or services
• Franchisee
 A purchaser of a franchise
• Franchisor
 The seller of the franchise
How Franchising Works
• Franchisee Obligations:
1. Make a financial investment in the operation.
2. Obtain and maintain a standardized inventory
and/or equipment package usually purchased
from the franchisor.
3. Maintain a specified quality of performance.
4. Follow a franchise fee as well as a percentage
of the gross revenues.
5. Engage in a continuing business relationship.
How Franchising Works (cont’d)
• Franchisor Provides:
1. The company name
2. Identifying symbols, logos, designs, and facilities
3. Professional management training for each
independent unit’s staff
4. Sale of merchandise necessary for the unit’s
operation, equipment to run the operation, and the
food or materials needed for the final product
5. Financial assistance, if needed
6. Continuing aid and guidance to ensure that
everything is done in accordance with the contract
Franchising
• Advantages • Disadvantages
 Training and guidance  Franchise fees
 Brand-name appeal  Franchisor control
 A proven track record  Unfulfilled promises
 Financial assistance of franchisor
Table
7.3 Some of the Most Recognized Franchises
• Burger King
• Dairy Queen
• Days Inn
• Denny’s
• Dunkin’ Donuts
• H&R Block (Tax Preparation)
• McDonald’s
• Meineke Car Care Centers
• Papa John’s Pizza
• 7-Eleven
• Snap-on Tools
• Sports Clips (Hair Salons)
• Subway
• UPS Store (Mail Boxes Etc.)
CHAPTER 8
Sources of Capital for

Entrepreneurial Ventures
Debt Versus Equity Financing
1. Debt Financing
 Secured financing of a new venture that involves a
payback of the funds plus a fee (interest for the use of
the money)
2. Equity Financing
 Involves the sale (exchange) of some of the
ownership interest in the venture in return for an
unsecured investment in the firm
Figure
8.1 Who Is Funding Entrepreneurial Start-Up Companies?
Source: “Successful Angel Investing,” Indiana Venture Center, March 2008; Revised January, 2015.
1. Debt Financing
 No relinquishment of  Regular (monthly)
ownership is required. interest payments are
 More borrowing allows required.
for potentially greater  Cash-flow problems
return on equity. can intensify because
 Low interest rates of payback
reduce the opportunity responsibilities.
cost of borrowing.  Heavy use of debt can
inhibit growth and
development.
1. Debt Financing
1.a. Commercial Banks
 Make 1–5 year intermediate-term loans secured by
collateral (receivables, inventories, or other assets)
 Questions in securing a loan:
1. What do you plan to do with the money?
2. How much do you need?
3. When do you need it?
4. How long will you need it?
5. How will you repay the loan?
1.b. Peer-to-Peer Lending (P2P)
• The practice of lending money to unrelated
individuals, or “peers,” without going through a
bank or traditional financial institution.
 Are often Internet-based sites that pool money from
investors willing to lend capital at agreed-upon rates.
 Fees are applied for brokering and servicing loans.
• Possible dangers
 Low funding success rate
 Business plan disclosure to the public
 No ongoing counseling relationship
 Potential tax liability
 Uncertain regulatory environment
2. Equity Financing
• Money invested in the venture with no legal
obligation for entrepreneurs to repay the principal
amount or pay interest on it
• Requires sharing the ownership and profits
with the funding source
• Much safer option for new ventures than debt
financing
• Owner must be willing to give up part of the
ownership in return for funding
Public Offering
• “Going public” refers to a corporation’s raising
capital through the sale of its securities on the
stock markets.
• Initial Public Offerings (IPOs): new issues of
common stock
 Size of capital amount  Costs
 Liquidity  Disclosure
 Value  Requirements
 Image  Shareholder pressure
Private Placements
 The SEC provides Regulation D, which allows smaller
firms to sell stock through what is referred to as direct
public offerings (DPOs). It eases the regulations for
the reports and statements required for selling stock
to private parties—friends, employees, customers,
relatives, and local professionals.
Other Sources of Capital for Entrepreneurs
1. Sophisticated Investors
 Wealthy individuals who invest regularly in new and
early- and late-stage ventures
 Knowledgeable about the technical and commercial
opportunities and risks of the business in which they
invest
2. Crowdfunding
 Seeks funding for a venture by raising monetary
contributions from a large number of people, usually
by the Internet
Retrieved from:
http://fintechnews.sg/20682/philippines/top-5-
crowdfunding-platforms-in-philippines-2018/
2. Crowdfunding (cont’d)
• Two distinct forms:
 Rewards crowdfunding—The entrepreneur seeks a
target amount of funding to launch a business concept
without incurring debt or sacrificing equity and in
return for the donation, the entrepreneur provides
some type of gift or incentive.
 Equity crowdfunding—The entrepreneur shares equity
in the venture, usually in its early stages, in exchange
for the money pledged.
The Venture Capital Market
• Venture Capitalists
 are professional investors who invest in business ventures, providing
capital for start-up, early stage, or expansion. Venture capitalists are
looking for a higher rate of return than would be given by more
traditional investments.
 Provide:
• Capital for start-ups and expansion
• Market research and strategy
• Management-consulting, audits and evaluation
• Contacts—customers, suppliers, and businesspeople
• Assistance in negotiating technical agreements
• Help in establishing management and accounting controls
• Help in employee recruitment and employee agreements
• Help in risk management and with insurance programs
• Counseling and guidance in complying with government
regulations
®
© 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8–46
Informal Risk Capital: Angel Financing
• Business Angel Financing
 Wealthy individuals who are looking for investment
opportunities.
• They are referred to as “business angels” or informal
risk capitalists.
• Types of Angel Investors
 Corporate angels
 Entrepreneurial angels
 Enthusiast angles
 Micromanagement angels
 Professional angels
Table
8.7 Pros and Cons of Dealing with Angel Investors
Pros Cons
1. Angels engage in smaller 1. Angels offer no additional
financial deals. investment money.
2. Angels prefer seed stage or 2. Angels cannot offer any national
start-up stage. image.
3. Angels invest in various industry 3. Angels lack important contacts
sectors. for future leverage.
4. Angels are located in local 4. Angels may want some decision
geographic areas. making with the entrepreneur.
5. Angels are genuinely interested 5. Angels are getting more
in the entrepreneur. sophisticated in their investment
decisions.
CHAPTER 9
Legal Challenges for

Entrepreneurial Ventures
Legal Components
• Three groups that can affect entrepreneurial
ventures.
 Those that related to the inception of the venture
 Those that relate to the ongoing venture
 Thos that relate to the growth and continuity of the
venture
Table
9.1 Major Legal Concepts and Entrepreneurial Ventures
I. Inception of an II. Ongoing Venture: III. Growth and Continuity

Entrepreneurial Venture Business Development of a Successful
and Transactions Entrepreneurial Venture
A. Laws governing A. Personnel Law A. Tax considerations
intellectual property 1. Hiring and firing 1. Federal, state, and local
1. Patents policies 2. Payroll
2. Copyrights 2. Equal Employment 3. Incentives
3. Trademarks Opportunity B. Governmental regulations
B. Forms of business Commission 1. Zoning (property)
organization 3. Collective bargaining 2. Administrative agencies
1. Sole proprietorship B. Contract Law (regulatory)
2. Partnership 1. Legal contracts 3. Consumer law
3. Corporation 2. Sales contracts C. Continuity of ownership rights
4. Franchise 3. Leases 1. Property laws and
C. Tax considerations ownership
D. Capital formation 2. Wills, trusts, and
E. Liability questions ownership
3. Bankruptcy
Table
9.2 Forms of Intellectual Property
Patent Copyright
DEFINITION A grant from the government that An intangible property right granted to authors and
gives an inventor exclusive rights to originators of a literary work or artistic production that
an invention. falls within specified categories.
REQUIREMENTS An invention must be: Literary or artistic works must be:
1. Novel. 1. Original.
2. Not obvious. 2. Fixed in a durable medium that can be perceived,
3. Useful. reproduced, or communicated.
3. Within a copyrightable category.
TYPES OR 1. Utility (general). 1. Literary works (including computer programs).
CATEGORIES 2. Design. 2. Musical works.
3. Plant (flowers, vegetables, and 3. Dramatic works.
so on). 4. Pantomime and choreographic works.
5. Pictorial, graphic, and sculptural works.
6. Films and audiovisual works.
7. Sound recordings.
HOW ACQUIRED By filing a patent application with Automatic (once in tangible form); to recover for
the U.S. Patent and Trademark infringement, the copyright must be registered with the
Office and receiving that office’s U.S. Copyright Office.
approval.
Source: Frank B. Cross and Roger LeRoy Miller, West’s Legal Environment of Business, 4th ed. C 2001 Cengage Learning; see also Roger LeRoy Miller and Frank B.
Cross, The Legal Environment Today: Business in Its Ethical, Regulatory, E-Commerce, and Global Setting, 8th ed. (Mason, OH: South-Western/Cengage, 2016).
Reprinted with permission.
Table
9.2 Forms of Intellectual Property (cont’d)
Trademarks
(Service Marks and Trade Dress) Trade Secrets
DEFINITION Any distinctive word, name, symbol, or device (image Any information (including formulas, patterns,
or appearance), or combination thereof, that an entity programs, devices, techniques, and processes) that
uses to identify and distinguish its goods or services a business possesses and that gives the business
from those of others. an advantage over competitors who do not know
the information or process.
REQUIREMENTS Trademarks, service marks, and trade dresses must Information and processes that have commercial
be sufficiently distinctive (or must have acquired a value, that are not known or easily ascertainable by
secondary meaning) to enable consumers and others the general public or others, and that are
to distinguish manufacturer’s, seller’s, or business reasonably protected from disclosure.
user’s products or services from those of competitors.
TYPES OR 1. Strong, distinctive marks (such as fanciful, 1. Literary works (including computer programs).
CATEGORIES arbitrary, or suggestive marks). 2. Musical works.
2. Marks that have acquired a secondary meaning 3. Dramatic works.
by use. 4. Pantomime and choreographic works.
3. Other types of marks, including certification marks 5. Pictorial, graphic, and sculptural works.
and collective marks. 6. Films and audiovisual works.
4. Trade dress (such as a distinctive decor, menu, 7. Sound recordings.
style, or type of service).
HOW ACQUIRED 1. At common law, ownership is created by use of Through the originality and development of
mark. information and processes that are unique to a
2. Registration (either with the U.S. Patent and business, that are unknown by others, and that
Trademark Office or with the appropriate state would be valuable to competitors if they knew of the
office) gives constructive notice of date of use. information and processes..
Table
Patent Copyright
RIGHTS An inventor has the right to make, use, sell, assign, or The author or originator has the exclusive
license the invention during the duration of the right to reproduce, distribute, display,
patent’s term. The first to invent has patent rights. license, or transfer a copyrighted work.
DURATION 20 years from the date of application; for design 1. For authors: the life of the author, plus 70 years.
patents, 14 years. 2. For publishers: 95 years after the date of
publication or 120 years after creation.
CIVIL REMEDIES Monetary damages, which include reasonable Actual damages, plus profits received by the
FOR royalties and lost profits, plus attorneys’ fees. infringer; or statutory damages of not less than
INFRINGEMENT (Treble damages are available for intentional $500 and not more than $20,000 ($100,000, if
infringement.) infringement is willful); plus costs and attorneys’
fees.
Table
Trademarks
(Service Marks and Trade Dress) Trade Secrets
RIGHTS The owner has the right to use the mark or trade The owner has the right to sole and exclusive use of
dress and to exclude others from using it. The right of the trade secrets and the right to use legal means to
use can be licensed or sold (assigned) to another. protect against misappropriation of the trade secrets
by others. The owner can license or assign a trade
secret.
DURATION Unlimited, as long as it is in use. To continue notice Unlimited, as long as not revealed to others.
by registration, the registration must be renewed by
filing.
CIVIL REMEDIES 1. Injunction prohibiting future use of mark. Monetary damages for misappropriation (the
FOR 2. Actual damages, plus profits received by the Uniform Trade Secrets Act permits punitive
INFRINGEMENT infringer (can be increased to three times the damages up to twice the amount of actual damages
actual damages under the Lanham Act). for willful and malicious misappropriation); plus
3. Impoundment and destruction of infringing costs and attorneys’ fees.
articles.
4. Plus costs and attorneys’ fees.

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CHAPTER 5

Innovation: The Creative

6. Demographic changes Retirement communities for older people

Prior customer Prior market

 Is the process by which entrepreneurs convert

Type Description Examples

Extension New use or different Ray Kroc—McDonald’s

Duplication Creative replication of an Wal-Mart—department stores

Synthesis Combination of existing Fred Smith—Fed Ex

Personal The The

2. No real insight into the market

3. Inadequate understanding of technical

5. Lack of venture uniqueness

6. Ignorance of legal issues

Creating the Acquiring an

Emerging Internet Opportunities

Less fear about

Factors Affecting Sale

The business Assets of the

Sources of Capital for

Legal Challenges for

I. Inception of an II. Ongoing Venture: III. Growth and Continuity

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