Entrepreneurship 1

Entrepreneurship: A Field—
And An Activity

LAB University of Applied Sciences

2022
 A Definition
Entrepreneurship seeks to
understand how opportunities to
create something new arise and are
discovered or created by specific
persons who then use various
means to exploit or develop them,
thus producing a wide range of
effects.

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 What is an Entrepreneur?
• An Entrepreneur is a person who
organizes and manages a business
undertaking, assuming the risk for
the sake of profit. Any person (any
age) who starts and operates a
business is an entrepreneur.

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EntreComp model of
entrepreneurship

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 Three Aspects of
Entrepreneurship
• 1. The identification/recognition of
market opportunity and the
generation of a business idea
(product or service) to address the
opportunity

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 Business Ideas can be
based on…
• Product innovations
• Service innovations
• Marketing innovations
• Production innovation

- > a different (e.g. more effective)

way to serve the customer
- > examples…?
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 Excellent business ideas:
• Mention some great new business
ideas that you’ve bumped into (or
heard of) during the last couple of
years!

https://answergarden.ch/2559744

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 Three Aspects of
Entrepreneurship
• 2. The marshalling and commitment
of resources in the face of risk to
pursue the opportunity

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 Three Aspects of
Entrepreneurship
• 3. The creation of an operating
business organization to implement
the opportunity-motivated business
idea

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 Key Activities
• Identifying an opportunity
• Exploiting or developing this
opportunity
• Running a new business
successfully

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 The Entrepreneurial Process

• Recognition of an opportunity
• Deciding to proceed and
assembling resources
• Launching a new venture
• Building success
• Harvesting the rewards

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 New Businesses
Entrepreneurs who create new
businesses primarily focus on
• New products and services
• New markets

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New vs. Established Firms
• Entrepreneurs founding new firms
are usually the ones to introduce
new products and services.
• Established firms are usually the
ones to introduce new production
processes and ways of organizing.

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 Competence Destroying
Change
Large Companies Small Companies
• Locked into old ways • Can think in new
of thinking ways
• Must cannibalize • No concerns with
existing business existing business
• Hindered by • Can form new
established routines routines easily
• Must seek to satisfy • No existing customer
existing customers base to satisfy

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 Capital Questions
• How much money do I
need?
• Where should I get that
money?
• What type of
arrangements do I
need to make to obtain
that capital?

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 Start-Up Capital
How much do you need?
• 60% of all new ventures require less
than 5,000€ of capital to get started
• Only 3% require more than
100,000€

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 Startup Costs
• All costs incurred to get the
business off the ground
• Determine the capital you need
• Determine what you’ll do with the
capital once you get it

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 Business Plan
• A formal, written expression of the
entrepreneur’s vision for converting
ideas into a profitable, going
business
• The entry card for serious
consideration by venture capitalists,
banks, and other sources of funding

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 A Living Document
• A business plan changes often as a
new business develops.
• Do just enough business planning to
get the new company started.
• Refine the plan with information
gathered from running the new
venture.

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 Model of Successful
Business Planning

Prepare a Continue to
Start the Refine the
relatively grow the
business business plan
simple plan business

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Business Plan Components
• What is the basic idea?
• Why is the new product appealing—
and to whom?
• How will the idea be realized?
• Who are the entrepreneurs?
• How much funding is needed? What
type of funding? How will it be used?
How will you realize a return?

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 Background, Product, and
Purpose
• What is the nature of the idea
driving your company and how did it
arise?
• What does the product have to
offer?
• What is the basic nature of the
company?
• What is the company’s mission?

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 Seven Deadly Sins
• Plan is poorly prepared
• Plan looks too slick
• Executive summary is too long
• Development stage of product is unclear
• Fails to answer “Why would anyone ever want
to buy one?”
• Doesn’t state management qualifications
• Financial projections are wishful thinking
- > after this 10 questions your BP
should answer…

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 Intrepreneurs
Persons who create
something new, but inside an
existing company rather than
through a new venture.

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 Trend toward
Entrepreneurship
• Media accounts of success
• Change in “employment contract”
• Change in basic values

• https://oma.yrityssuomi.fi/yrittajatesti

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 Foundations in Other
Disciplines
• Economics
• Technology
• Psychology, cognitive science
• Behavioral science
• Business and finance
• Law
• Sociology
• Political science

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 Macro and Micro
• Micro perspective—focuses on the
behavior and thoughts of
individuals
• Macro perspective—focuses
primarily on environmental factors
• Both are key in understanding the
entrepreneurial process

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A Confluence of Factors

Social
Change

New Economic
Opportunity
Markets Change

Technology

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 Principals!
“There are three principal means of
acquiring knowledge: observation,
reflection and experimentation.
Observation collects facts; reflection
combines them; experimentation
verifies the result of that
combination…”
--Diderot

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 To Do Good
• Entrepreneur’s products and
services improve the lives of
countless millions of persons
• Entrepreneurs are often extremely
generous in their donations to
worthy causes

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 Basic model of…
(24)
• What kind of steps are there
normally in the process of becoming
an entrepreneur?

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Entrepreneurship 2

Uncovering Opportunities:
Understanding Entrepreneurial
Opportunities and Industry Analysis
Better Opportunities
• Some industries are more
favorable to new firms than
others
• Some types of
opportunities are better
than others for new firms to
pursue

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 Changes Make It Possible…

• To make new products

• To develop new production
processes
• To organize in new ways
• To open up new markets
• To use new raw materials

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Opportunities from Information

• Entrepreneurial opportunities exist

because people have different
information.
• Different information leads to
different decisions.
• Superior information leads to better
decisions.

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Opportunities from Change
Truly valuable entrepreneurial
opportunities come from an external
change that either
• Makes it possible to do things that
had not been done before.
• Makes it possible to do something in
a more valuable way.

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Change Leads to Potential
• New technology
• Political and regulatory
shifts
• Social and
demographic change

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Technological Change
• Makes it possible for
people to do things in
new and more
productive ways.
• Larger technological
changes are a greater
source of opportunity.

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 Political and Regulatory
Change
Makes it possible to develop
business ideas to use resources in
new ways that are either more
productive, or that redistribute
wealth from one person to another.

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 Opportunities from Political
and Regulatory Change
• Deregulation
• Regulations that support particular
types of business activities
• Regulations that increase demand
for particular activities or subsidize
firms that undertake them

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 Social and Demographic
Change
• Alters demand for products and
services
• Makes it possible to generate
solutions to customer needs that are
more productive than those
currently available

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 Success of New Firms
Industry differences influencing new
firm success:
• Knowledge conditions
• Demand conditions
• Industry lifecycles
• Industry structure

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 Knowledge Conditions
New firms do better in:
• Industries that have greater R&D
intensity
• Industries in which public sector
organizations produce most of the
new technology
• Industries in which small firms are
the better innovators

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 Demand Conditions
New firms do better in:
• Larger markets
• Rapidly growing markets
• More heavily segmented markets

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 Industry Life Cycles
New firms do better
• When industries are young
• Before a dominant design emerges

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 Industry Structure
New firms perform more poorly in
• Capital-intensive industries
• Advertising-intensive industries
• Concentrated industries (versus
fragmented industries)
• Industries composed of mostly large
firms

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 Advantages of Established
Firms
• The learning curve
• Established reputation
• Positive cash flow
• Economies of scale
• Complementary assets

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Advantages for New Firms
• Competence destroying change
• Discrete products and services
• Ideas embedded in human capital

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Entrepreneurship 3

Cognitive Foundations of
Entrepreneurship: Creativity and
Opportunity Recognition
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What means your crisis?

“When written in Chinese the word

crisis is composed of two
characters. One represents danger
and the other represents
opportunity.”
--John F. Kennedy, 1959

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Why are some successful?

Opportunities Individuals

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 Right Person, Right Place,
Right Time
• Better access to crucial information
—information helpful in recognizing
opportunities or formulating new
ideas
• Better able to utilize information—to
combine it or interpret in ways that
reveal the opportunities overlooked
by others

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 Three Key Processes
• Idea generation
• Creativity
• Opportunity recognition

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 A Cognitive Perspective
Human cognition—the mental
processes through which we
• Acquire information
• Enter it into storage
• Transform it
• Use it to accomplish a wide range of
tasks

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 Ideas
Occur when individuals use existing
knowledge they have gained (and
retained) from their experience to
generate something new—thoughts
they did not have before.

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 The Raw Materials
The raw materials for new ideas and
for recognizing opportunities are
present in the cognitive systems of
specific persons as a result of their
life experience.

Unique experience Knowledge Idea generation

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 Memory
• Working memory—holds limited
amount of information for brief
periods
• Long-term memory—retains vast
amounts of information for long
periods
• Procedural memory—automatic
knowledge gained through practice

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 Mental Frameworks
Mental scaffolds
help us to
understand new
information and to
integrate it (often
in original ways)—
with information
we already
possess

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 Creativity
Items or ideas produced are both
• Novel (original, unexpected)
• Appropriate or useful

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 Concepts
• Building blocks of creativity
• Internal mental structures developed
to organize information
• Categories for objects or events that
are somehow similar to each other in
certain respects

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 Human Intelligence
Individuals’ abilities to
• Understand complex ideas
• Adapt effectively to the world
• Learn from experience
• Engage in various forms of
reasoning
• Overcome a wide range of
obstacles
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 Kinds of Intelligence
• Analytic intelligence
• Creative intelligence
• Practical intelligence
• Social intelligence
• Successful intelligence

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Successful Intelligence

Practical
Intelligence

Analytic Successful
Intelligence Success
Intelligence

Creative
Intelligence

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 Confluence Approach
Creativity emerges from a confluence of
• Intellectual abilities
• Broad, rich knowledge base
• Appropriate style of thinking
• Personality attributes
• Task-focused motivation
• Environment supportive of creative ideas

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Broad, Rich Knowledge Base

• Having varied work

experience
• Having lived in many
different places
• Having a broad social
network

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 Opportunity Recognition
Some people are more likely to
recognize opportunities because
• They have better access to certain
kinds of information
• They are able to utilize the
information once they have it

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 Superior Utilization of
Information
• Richer and better-integrated stores
of knowledge
• Higher in intelligence
• Higher in practical intelligence
• Higher in creativity

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 Increasing Opportunity
Recognition
• Build a broad, rich knowledge base
• Organize your knowledge
• Increase your access to information
• Create connections between the
knowledge you have
• Build your practical intelligence
• Temper eagerness for hits with
wariness of false alarms
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Entrepreneurship 4

Acquiring Information: Why “Look

Before You Leap” Is Truly Good
Advice for Entrepreneurs
 Why Failure?
Many entrepreneurs who found new
ventures to develop products or
services do not do their homework:
they fail to acquire essential
information before beginning.

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Crucial Information
• Marketing information
• Government
regulations and
policies
• Laws

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 How it happens?
“We read advertisements…to
discover and enlarge our desires.
We are always ready…to discover,
from the announcement of a new
product, what we have all along
wanted without really knowing it.”
--Daniel J. Borstein, 1961

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 Marketing Information
• Who are the potential customers?
• How will potential customers react
to the new product of service?
• What can you learn about specific
markets or geographic areas?

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 Direct Techniques
• Survey
• Perceptual mapping
• Focus groups

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 Customer Surveys
• Potential customers compare your
product with existing ones
• Target group rates different
dimensions of the product on a
scale from low to high
• Assumes you know the dimensions
customers use to evaluate products

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 Government Policies and
Regulations
• May make it harder or easier to start
and run a new venture
• Gather relevant information on the
government policies and regulations
that will affect a new business

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 Taxes

Reduction of Marginal Tax Rates

Growth of New Ventures

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 Legal Forms and Taxes
• Regular C corporation—profits and
losses remain in the company and
the corporation pays taxes
• Sub-Chapter S Corporation—profits
and losses flow through to
shareholders, and they pay taxes

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 Tax Incentives
• Depreciation
• Location in certain geographic
regions
• Renovation and improvement of
older buildings
• Tax credits

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 Health and Safety
Occupational Safety and Health Act
requires employers to
• Provide safe and healthy work
environment
• Comply with specific standards
• Keep records of occupational
injuries and illnesses

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 Discrimination
• The Civil Rights Act prohibits
employers from basing employment
decisions on race, color, religion,
sex, or national origin
• Disabilities Act prohibits
discrimination against persons with
disabilities

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 Forms of Discrimination
• Disparate treatment—people
belonging to protected groups are
treated differently because they
belong to these groups
• Adverse impact—the same
standard applies to all employees,
but that standard affects members
of a protected class more negatively

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 Disabilities Act

• Protects persons with

disabilities who are able to
perform the essential
functions of the job
• Requires employers to
provide reasonable
accommodation for such
persons

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 Group Decision Making
Pitfalls
• Implicit favorite—final decision is the one
favored by initial majority
• Group polarization—tendency to shift
toward more extreme views
• Groupthink—groups gathers around a
specific decision, rejecting contrary
information
• Ignoring unshared information—tendency
to consider only information shared by
more or all members

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Improving Group Decisions
• Use the devil’s advocate technique
• Ask group members to list all
pertinent information known to them
before beginning discussion
• Appoint individuals with technical or
business experience to a Board of
Advisors

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Entrepreneurship 5

Assembling the Team: Acquiring

and Utilizing Essential Human
Resources
 Human Resources
• Knowledge
• Skills
• Talents
• Abilities
• Of co-founders and
early employees are
key to success

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 The Appeal of Similarity
• Similarity leads to liking
• Almost any kind of similarity will do
—similarity with respect to attitudes
and values, demographic factors,
interests, etc.
• Such effects are both strong and
general

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The Value of Complementarity

• Avoids redundancy.
• Provides a wider range of
information, skills, aptitudes, and
abilities.
• The whole is greater than the sum
of its parts.

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 Value the diffrence
Don’t yield to the temptation to work
solely with people whose
background, training, and
experience is highly similar to your
own. Doing so will be easy and
pleasant in many ways, but it will
not provide the rich foundation of
human resources the new venture
needs.
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Your Personal Inventory
• Knowledge base
• Specific skills
• Motives
• Commitment
• Personal
attributes

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 Four Dimensions of
Personality
• Extraversion-Introversion
• Sensing-Intuition
• Thinking-Feeling
• Perciving-Judging

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Expanding Human Resources

Social networking allows

entrepreneurs to:
• Acquire human resources quickly
• Know people directly or indirectly
before hiring
• Integrate new employees more
easily into a loose structure

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 Is Bigger Better?
• On balance, the benefits of
increasing the number of employees
outweigh the costs.
• New ventures that start with more
employees have a greater chance
of surviving.
• Profitability is positively related to
size.

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 Temporary Employees
Advantages Disadvantages
• Reduced fixed • Lack commitment
costs and motivation
• Flexibility • Carry information
• Secure to competitors
specialized
knowledge

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Temporary or Permanent?

Flexibility and speed of

Temporary
acquiring new sets
employees
of knowledge

Commitment and Permanent

retention employees

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Entrepreneurship 6

Financing New Ventures

“Money, it turned out, was exactly
like sex; you thought of nothing else
if you didn’t have it and thought of
other things if you did.”
--James Baldwin
Nobody Knows My Name

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 Information Asymmetry
Problems
Entrepreneurs have information
about their business that investors
don’t have. This creates three
problems:
• Investors must make decisions on
limited information
• Entrepreneurs can take advantage
of investors
• Adverse selection

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 Uncertainty Problems
• Investors must make
judgments based on little
actual evidence
• Entrepreneurs and investors
disagree on value of new
venture
• Investors want collateral

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 Financial Analysis Tools
• List of startup costs and use of proceeds
• Proforma financial statements
• Cash flow statements
• Breakeven analysis

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 Proforma
• Project the financial condition of the
new venture
• Estimate profit and loss
• Show financial structure of the
business
• Allow investors to conduct ratio
analysis

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 CIMITYM

Cash is more important

than your mother.

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 Income to Cash Flow
• Take your net profit and add back
depreciation
• Subtract increases or add decreases in
accounts receivable
• Subtract increases or add decreases in
inventory
• Add increased or subtract decreases in
accounts payable
• Subtract increases or add increases in
notes/loans payable

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 Improve the Flow
• Minimize accounts receivable
• Reduce the raw material and
finished products inventory
• Control your spending
• Delay your accounts payable

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 Breakeven Analysis
• Calculate the amount of
sales you need to achieve
to cover your costs
• Determine the increase in
sales volume you need to
have in order to increase
fixed costs

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 Debt vs. Equity
• Debt—financial obligation to return
capital provided plus a scheduled
amount of interest
• Equity—a portion of ownership
receive in an organization in return
for money provided

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 Financing with Equity
New ventures tend to be financed
by equity because
• New ventures have no way to make
scheduled interest payments until
they have positive cash flow
• Debt financing at a fixed rate
encourages people to take risky
actions

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 Debt Financing
• Debt guaranteed by the
entrepreneur’s personal
assets or earning power
• Asset-based financing
• Supplier credit

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 Sources of Capital
• Savings • Banks
• Friends and family • Asset-based
• Business angels lenders
• Venture capitalists • Factors
• Corporations • Government
programs

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Criteria for Venture Capitalists

• Operate in high growth industry

• Have proprietary advantage
• Offer a product with a clear market
need
• Be run by experienced management
team
• Plan to go public

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 What Are Investors Looking
For?
An excellent venture team with
• Motivation
• Passion
• Honesty
• Experience

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 What Are Investors Looking
For?
An excellent business opportunity
with
• Large market
• Appropriate strategy
• Compelling product description
• Externally observable competitive
advantage

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 Due Diligence
Investigation of
• The business
• The legal entity
• The financial records

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 Staging of Financing
Staging of financing allows investors
to
• Minimize their risk
• Gather more information over time
• Manage the uncertainty of investing

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 Rate of Return

The main factor that

determines the rate of The stage of
return for new venture development
venture financing

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 Venture Capital Method
• Consider business plan’s forecasts
• Calculate price-earnings ratio
• Estimate terminal value
• Calculate new present value of
terminal value
• Specify portion of ownership by
dividing investment amount by net
present value of the terminal value
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 Encouraging Investors
• Use impression management
techniques
• Create a sense of urgency to
generate momentum
• Frame ideas to make them more
appealing
• Prepare a good business plan

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Entrepreneurship 7

Writing an Effective Business

Plan: Crafting a Roadmap
to Success
“There is real magic in enthusiasm. It
spells the difference between
mediocrity and accomplishment.”
--Norman Vincent Peale, 1961

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 A Successful Plan
• A serious document prepared by
serious people
• Orderly
• Laconic
• Persuasive

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 Executive Summary
• Your elevator pitch
• Provides a brief, clear, and
persuasive overview of the
new venture
• Target 2 to 3 pages

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 Business Plan Sections
• Background and • Financial
purpose information
• Marketing • Risk factors
• Competition • Harvest or exit
• Development, • Scheduling and
production, and milestones
location • Appendices
• Management

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 Market Analysis
• What have you done to identify the
market?
• How large is the market?
• How will products or services be
promoted?
• What do you know about competing
products and companies?
• How will the product or service be
priced?
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Development, Production, and
Location
• Where are the products or services
in the development process?
• What are the projected costs and
timetable for making the product or
delivering the service?
• What steps have been taken to
assure quality and safety?

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 Management Team
• Do team members have the
experience, expertise, skills, and
personal characteristics needed?
• Do team members having good
working relationships?

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Financial Plans and
Projections
• Proforma balance
sheet
• Proforma income
statement
• Cash flow statement
• Break-even analysis

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 Critical Risks
• Price cutting by competitors
• Unforeseen industry trends
• Sales projections not achieved
• Costs exceed estimates
• Schedules not met
• Difficulties raising financing
• Unforeseen trends

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 Harvest and Exit
• Management
succession
• Exit strategies

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Scheduling and Milestones
• Formal • Product displays
incorporation • Agreements
• Completion of • Moving into
design production
• Completion of • Receipt of orders
prototypes • First sales
• Hiring of initial
• Profitability
personnel

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 The Intangibles
• The extra “something”
• Pay attention to organization, clarity,
word choice, and style
• Have good writers read your plan
• Revise according to their suggestions

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 The Presentation
• Remember: This is important!
• Prepare, prepare, prepare
• Choose content carefully
• Persuade, don’t overwhelm
• Show enthusiasm tempered with reality
• Rehearse
• Don’t overlook the basics
• Respond positively to questions

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Entrepreneurship 8

The Legal Form of New Ventures—And

The Legal Environment in Which They
Operate
“The business of the law is to make
sense of the confusion of what we
call human life—to reduce it to order
but at the same time to give it
possibility, scope, even dignity.”
--Archibald MacLeish, 1978

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 Sole Proprietorship
• One company, one owner
• Require only license(s) to
open
• Low costs involved
• Owner has total control

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 Disadvantages of Sole
Proprietorship
• Unlimited personal liability
• Owner represents sum total of
management resources
• No shares to sell to investors
• Financial institutions may be
reluctant to assume risk of a loan

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Partnerships
• Association of two or
more people who co-
own a business for
the purpose of
making a profit
• Terms are spelled out
in a partnership
agreement or subject
to the Uniform
Partnership Act

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 Uniform Partnership Act
Each partner has a right to
• Share in management and
operations
• Share in profits
• Receive interest on advances
• Receive compensation for expenses
• Have access to books and records
• Receive formal accounting of affairs

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 Uniform Partnership Act
Each partner is obligated to
• Share in losses
• Work without salary
• Submit differences to a majority vote
or arbitration
• Give complete information about
business activities
• Provide formal accounting of
business activities
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 Partnership Advantages
• Easy and inexpensive to establish
• High level of flexibility
• Partners bring complementary skills
• Pool of financial resources is
expanded
• Income or losses are passed
through to partners

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Partnership Disadvantages
• Unlimited liability
• Difficult to continue if one
partner is unable to
participate
• Can’t sell shares; may
experience difficulties
raising capital

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 Limited Partnerships
• General partners
• Manage the business
• Have unlimited liability
• Limited partners
• Invest but forego right to manage
• Share in the profits according to the
limited partnership agreement
• Have limited liability

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Other Forms of Partnership
• Limited liability partnership
• All partners are limited partners
• Individuals pay taxes
• Master limited partnership
• Issue shares traded like stock
• Increased liquidity
• Most MLPs pay taxes

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“Corporation: An ingenious device
for obtaining individual profit without
individual responsibility.”
--Ambrose Bierce, 1881

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 Corporation
• Separate legal entity apart from
owners
• May engage in business, make
contracts, own property, pay taxes,
and sue and be sued
• “An artificial being, invisible,
intangible, and existing only in
contemplation of the law.” (Supreme
Court, 1819)

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 Types of Corporations
• Domestic corporation—does
business in the state in which it was
created
• Foreign corporation—does business
in another state
• Alien corporation—formed in other
country

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 Establishing a Corporation
• Registration
• Articles of incorporation
• Shareholders elect directors
• Directors appoint corporate officers

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 Advantages of Corporations

• Limited liability for stockholders

• Ability to attract capital
• Continue beyond lives of founders
• Shares are transferable
• Liquidity can be very high

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 Disadvantages of
Corporations
• Complex and expensive to start
• Profits subject to double taxation
• Subject to legal and financial
requirements
• Record and report decisions and
financial data
• Hold annual meetings
• Consult with board
• File reports with SEC

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 The S Corporation
• All profits and losses are passed
through to shareholders
• If assets that have appreciated in
value are sold, there is no tax to the
corporation
• Especially advantageous for
ventures showing large losses

1-151
 Disadvantages of S
Corporations
• Benefits paid to
shareholders owning
2% or more of stock
cannot be deducted as
expenses
• Marginal tax rate for
individuals is high than
for corporations

1-152
 Limited Liability Company
• Cross between a corporation and a
partnership
• Income flows through to owners
who pay taxes as individuals
• Can only offer two of the following:
• Limited liability
• Continuity of life
• Free transferability of interests
• Centralized management

1-153
 The Joint Venture
• Resembles a partnership without
general or limited partners
• Purpose is very limited
• All participate in management and
decision making
• Taxed like a partnership

1-154
Professional Corporation
• Preferred by many
professionals
• All shareholders are
protected from
malpractice lawsuits
filed against the PC or
any shareholders

1-155
New Ventures and the Law
• Occupational Safety and Health Act
• Title VII of the Civil Rights Act of
1964
• Americans with Disabilities Act
• Immigration Reform and Control Act
of 1986

1-156
 Immigration Reform and
Control Act
• Discourages illegal immigration
• Requires Form I-9 for all new hires
• Strengthens national origin
provision of Title VII of the Civil
Rights Act
• Forbids discrimination against “foreign-
sounding” and “foreign-looking”
persons

1-157
 Business Contracts
• Promises that are enforceable by law
• Contract law—body of laws designed to
assure that parties entering into contracts
comply with their provisions

1-158
 Contracts In Writing
• Sale of real estate
• Paying someone else’s debt
• Contracts that require longer than
one year to perform
• Contracts that involve the sale of
goods with a value of $500 or more

1-159
 Elements of a Contract
• Legality—intended to accomplish a
legal purpose
• Agreement—includes a legitimate
offer and acceptance
• Consideration—some of value must
be exchanged
• Capacity—persons must have
capacity to enter into agreement

1-160
 Obligations Under Contracts

Breach of contract may result in

• Compensatory damages
• Specific performance

1-161
 Franchising
A system of distribution in which
legally independent business
owners (franchisees) pay fees and
royalties to a parent company
(franchisor) in return for the right to
• Use its trademark
• Sell its products or services
• Use the business model

1-162
Types of Franchising
• Trade-name
franchising—allows
sale of products under
franchisor’s name and
trademark
• Business format
franchising—provides
franchisee with a
complete business
system

1-163
 Benefits of Franchising
• Training and support
• Standardized products and services
• National advertising
• Buying power
• Financial assistance
• Site selection and territorial
protection
• Proven business model

1-164
 Drawbacks of Franchising
• Fees and royalties
• Enforced standardization
• Restricted freedom over purchasing
and product lines
• Poor training programs
• Market saturation

1-165
 Trends in Franchising
• Smaller outlets in nontraditional
locations
• Co-branding franchise
• International franchising
• Expansion of types of businesses
being franchised

1-166
Entrepreneurship 9

Marketing in a New Firm

“Try novelties for salesman’s bait, for
novelty wins everyone.”
--Goethe, Faust: Part I, 1808

1-168
 Real Need
• Successful products and services
are based on real customer needs.
• A real need exists when customers
have a problem that needs to be
solved and no existing products or
services can do this.

1-169
 Determining Need
• Look for a customer
problem.
• Define a true solution.
• Evaluate economics.
• Identify alternatives
offered by competitors.

1-170
 Assessing Customer
Preferences
• Evaluate target market.
• Determine the type of new product
or service you’re developing.
• Is your solution to customer needs
already understood? Or is it a novel
solution?

1-171
 For a Known Target
Market or Solution
Use traditional
market research
methods:
• Surveys
• Focus groups

1-172
 For Novel Markets
and Solutions
• Talk with industry experts
• Create future scenarios
• Extrapolate trends to determine
product and service features

1-173
For a New Market or Solution

When either the target market or

solution is known, but the other is
not, blend traditional market
research with futurist approaches.
• Anthropological expeditions
• In-depth interviews with early adopters
• Partnerships with customers to
develop products

1-174
 The Market Determines
Research Techniques
EXISTING NEW
MARKET MARKET
Philosophy Deductive Intuition
of market data analysis
research
Techniques Focus Industry
for groups, experts, trend
gathering surveys, mall extrapolation,
customer studies future
information scenarios
1-175
 The Entrepreneur’s
Disadvantage
When markets or new products are
known, existing companies have the
advantage with
• An existing customer base
• A large amount of information about
customer preferences

1-176
 The Entrepreneur’s
Advantage
When the market or solution is
novel, existing companies face
three major disadvantages:
• Core rigidities
• Tyranny of the current market
• User myopia

1-177
 The Lesson
Entrepreneurs do better when they
launch products based on novel
solutions to customer needs in new
markets.

1-178
 Conjoint Analysis
• Asks individuals to express their
preferences for various products
chosen to offer a systematic array of
features
• Determines the relative importance
of each dimension for consumers
• Uses a fractional factorial design
based on results of perceptual
mapping

1-179
 Market Dynamics
All markets are not equal. They
vary in
• Size
• Rate of growth
• Evolution (stage in life cycle)

1-180
 Market Size
The size of the market determines:
• Ease of recouping start-up costs
• Ability to go in “under the radar”

1-181
 Market Growth
The rate of market growth determines:
• Ease of capturing new customers
• Potential volume of customers
• Benefits of volume purchasing and
scale economies

1-182
 The S-Curve

Improvements
slow down
again

Improvements
come faster
Initially,
improvement
is slow

1-183
 Timing the Market
Implications of the S-Curve:
• Capital is required to sustain early
product development
• New product development is a
function of effort, not time
• Point of acceleration is critical for
future planning

1-184
 Adoption Patterns
• Innovators
• Early adopters
• Early majority
• Late majority
• Laggards

1-185
Typical New Product Adoption

• Insert Figure 9.5 from text

• Typical Pattern of Adoption for New
Products

1-186
 To Cross the Chasm
• Build a complete customer solution to
customer needs
• Focus on a single niche
• Communicate clearly to customers

1-187
 Choosing Target Customers

Customers have a compelling

reason to buy if the product or
service
• Improves their productivity
• Reduces their costs
• Gives them something they couldn’t
have before

1-188
 Dominant Design
• All companies producing a product
choose a common way of bringing
together the different parts of a product
or service.
• New firms have an advantage in periods
of radical breakthrough.

1-189
 Setting the Technical
Standard
• Discount prices when product is
introduced
• Build relationships with producers of
complementary products
• Get to the market quickly

1-190
 Personal Selling
• Generate customer
interest
• Identify customer
requirements
• Overcome customer
objections
• Close the sale

1-191
 Pricing New Products
• Determine fixed and variable costs
to set a price that generates a profit
• Assess market conditions to ensure
the price isn’t too high or low
• Understand how customers trade off
attributes and price
• Factor in hidden costs or
discounting

1-192
Entrepreneurship 10

Strategy: Planning for

Competitive Advantage
“What sets us against one another
is not our aims—they all come to
the same thing—but our methods,
which are the fruit of our varied
reasoning.”
--Saint-Exupery
Wind, Sand and Stars, 1939

1-194
 Competitive Advantage
• Precludes others from imitating the
business idea perfectly
• Allows the entrepreneur to capture
the profits from exploiting the
opportunity

1-195
 Barriers to Competition
• Maintain secrecy
• Control resources
• Establish legal barriers to imitation
• Exploit the idea on a large scale
• Establish a reputation
• Innovate

1-196
 It’s a Secret
• Trade secret—piece of
intellectual property
• Causal ambiguity—
knowing how to exploit the
opportunity
• Tacit knowledge—
knowledge that isn’t
codified

1-197
 Legal Monopolies
• Patents
• Government permits

1-198
 Opportunity Exploitation
• Licensing—contract to use a
business idea in return for a fee
• Franchising—right to provide an
existing firm’s product or service to
end customers

1-199
 Options for Exploitation
• Market-based mode
• Best when different parts of the
business are owned by different
entities and connected by contractual
relationships
• Hierarchical mode
• Best when one party owns all parts of
the operation

1-200
 Factors in Selecting a
Market-Based Mechanism

Cost Speed to market

Market-Based Mechanism

Capabilities Information

1-201
 Minimizing Cost
A market-based mode allows an
entrepreneur to
• Invest less capital in comparison to
hierarchical modes
• Tap franchisees as a source of
capital
• License ideas to finance
development

1-202
 Getting to Market
A market-based mode allows an
entrepreneur to
• Assemble the entire value chain in time
to exploit it
• Be the first mover
• Leverage network externalities

1-203
 Leveraging Capabilities
A market-based mode allows an
entrepreneur to
• Compensate for areas of weakness
• Increase performance by contracting with
partners who have stronger capabilities

1-204
 Managing Information
A market-based mode allows an
entrepreneur to
• Use patents to mitigate the
disclosure problem
• Codify a business idea in a contract

1-205
 Benefits of Market-Based
Methods
Contractual modes of opportunity
exploitation can protect
entrepreneurs from
• Adverse selection
• Shirking

1-206
 Hazards of Market-Based
Methods
• Free riding—attempt to benefit from
the work of another franchisee
• Hold-up—attempt to
opportunistically renegotiate the
terms of a contract

1-207
 Information Problems and
Modes of Exploitation
PROBLEM EXPLOITATION

Adverse selection of employees Market-based

Shirking by employees Market-based

Free riding by outlet operators Hierarchical

Hold-up of outlet operators Hierarchical

Disclosure of knowledge Hierarchical

Tacit business idea Hierarchical

1-208
 Managing Uncertainty and
Information Asymmetry
• Growth from small scale
• Forming alliances and partnerships with
established firms
• Creating legitimacy for the opportunity
and the new venture

1-209
 Starting Small
Uncertainty and information
asymmetry make it necessary for
entrepreneurs to start small
because
• Entrepreneurs must self-finance
• Investors don’t give large sums all
at once
• Entrepreneurs must minimize risk

1-210
 Finding Allies
Alliances and partnerships can
provide:
• The assets needed to pursue short-
lived opportunities
• The capital required to purchase
needed resources
• A brand name to give the business
idea value

1-211
 It’s Legit
Entrepreneurs demonstrate the
legitimacy of their ideas by
• Showing conformity to existing rules
and norms
• Imitating the routines and
procedures of existing firms
• Engaging in collective actions
• Obtaining certification
1-212
Entrepreneurship 11

Intellectual Property:
Protecting Your Ideas
“Every man with an idea has at least
two or three followers.”
--Brooks Atkinson
Once Around the Sun, 1951

1-214
 Intellectual Property
• The core ideas about
a new product or
service
• The only advantages
(most of the time)
entrepreneurs have
over established firms

1-215
 The Product Development
Process
• A difficult and uncertain process
• Solution must be produced and
marketed for less that the customer
is willing to pay
• May result in something different
than people set out to produce

1-216
 Established Firm Advantages

• Better at manufacturing
• Better access to capital
• Tacit knowledge from experience
• Economies of scale
• Better at marketing
• Established reputations
• Established customers

1-217
 New Firm Advantages
• Superior product development
• Develop new products more
cheaply and easily
• No bureaucratic structures and rules
in place
• Better incentives for employees
• Greater flexibility

1-218
 Why New Firms Lose at
Product Development
The typical unpatented process
innovation can be copied at less
than 50% of the cost of developing
the original innovation more than
40% of the time.
(Richard Levin)

1-219
 Why Is Imitation So Easy?
Competitors have a variety of
methods for imitating intellectual
property:
• Reverse engineering
• Hiring employees or suppliers from
the entrepreneur
• Assigning staff to copy the new
product

1-220
 Patents
To obtain a patent, an invention
must:
• Be novel
• Not be obvious to a person in the
field
• Be useful
• Be secret at the time of patent
application
1-221
 What Can You Patent?
YES NO
• Process • Business idea
• Machine • Something that
• Manufacture doesn’t work
• Chemical formula
• Design
• Piece of software
• Plants

1-222
 The Patent Process
• File a Provisional
Patent Application
• File an application
with the U.S.
Patent and
Trademark Office
• Determine prior
art
• Determine the set
of claims

1-223
 Advantages of Patents
• Helps to raise capital by
demonstrating competitive
advantage
• Raises the cost of imitation
• Provides a monopoly right
• Prevents a second party from using
the invention as a trade secret

1-224
 Disadvantages of Patents
• Requires disclosure of the invention
• Provides only 20 year monopoly
• Can be circumvented
• Difficult and costly to defend
• Less effective for most types of
technology
• Can be irrelevant if technology is fast
moving
• Requires world-wide patent application

1-225
 Trade Secrets
• A piece of knowledge that confers an
advantage on a firm and is protected by
non-disclosure
• Protect a competitive advantage without
disclosing how an underlying technology
works

1-226
 Disadvantages of Trade
Secrets
• Must be kept hidden to remain
valuable
• Doesn’t provide a monopoly right
• To enforce and claim damages in
court, must show a loss of
competitive advantage

1-227
 Trademarks
• A word, phrase, symbol, design that
distinguishes the goods and
services of one company from those
of another
• Obtained by using the mark or filing
an application

1-228
 Copyrights
• A form of intellectual property
protection provided to the authors of
original works or authorship
• Protect the right to reproduce,
further derive, copy, or display the
protected item
• Extend 100 years after the death of
the author

1-229
 The Advantage of
Speed and Timing
• First mover
advantage
• Lead-time
advantage
• Learning curve
advantage

1-230
 First Mover Advantage
First movers have an advantage when
• They control scarce or intangible assets
• More customers result in increased value
• Customers pay a high cost for switching
products
• People are content with the status quo
• Reputations are important
• The learning curve for production is
proprietary

1-231
 Will a New Company Profit?

Three factors determine whether a

new company will profit from
introducing a new product:
• The ability to secure a strong patent
• The presence of absence of a
dominant design
• The presence of complementary
assets in marketing and distribution
(David Teece)

1-232
 Which Is Most Important?
Complementary Assets Are Being Innovative Is More
More Important… Important…
When patents are not very When patents are very
effective effective
When a dominant design Before a dominant design
exists exists
When learning curves are When learning curves are
shallow or not proprietary steep or proprietary
When knowledge is codified When knowledge is tacit

When products are When products are not

observable observable

1-233
Entrepreneurship 12

Essential Skills for Entrepreneurs: Enhancing

Social Competence, Creating Trust,
Managing Conflict, Exerting Influence, and
Dealing with Stress
“Marvelous is the power which can
be exercised, almost unconsciously,
over a company, or an individual, or
even upon a crowd by one gifted
person with good temper, good
digestion, good intellects, and good
looks.”
--Anthony Trollope, 1863

1-235
 Social Capital
An important asset that derives from
• Close relationships among
individuals in organizations or other
social structures
• Relationships characterized by
liking, mutual trust, and close
identification

1-236
 Social Competence
• Social perception
• Expressiveness
• Impression management
• Persuasion and
influence
• Social adaptability

1-237
Social Perception
• Accuracy in perceiving
others, including accurate
perceptions of motives,
traits, and intentions
• Skill in “reading” others

1-238
 Expressiveness
• Skill at expressing one’s own
reactions and emotions clearly so
that they can be readily understood
by others
• Key in generating enthusiasm in
others

1-239
 Impression Management
• Proficiency in the use of techniques
for inducing positive reactions in
others when we first meet
• Making a good first impression

1-240
Persuasion and Influence
Skill at using various
techniques for
changing others’
attitudes or behaviors
in desired directions

1-241
 Social Adaptability
The ability to
• Adapt to a wide range of social
situations
• Feel comfortable with individuals
from a wide variety of backgrounds

1-242
 Improving Your Social Skills

• Training programs
focused on social
skills
• Help from friends or
family
• Videotape and study
interactions

1-243
 Team Success
The benefits of a
team depend on
• Cooperative
working
relationships
• Ability to effectively
handle conflict

1-244
 Trust
• Calculus-based trust—based on
deterrence
• Identification-based trust—based on
relationship over time

1-245
 Two Kinds of Trust

Complies only
Calculus-based Expects when threatened
trust punishment With punishment

Complies without
Identification-
Believes in threat of
based
good will punishment or
trust
surveillance

1-246
 Building Identification-Based
Trust
• Act as you promise
• Follow agreed-upon procedures
• Practice organizational citizenship
• Understand motives and needs

1-247
 Conflict
Process in which
one party
perceives that
another party has
taken or will soon
take actions that
are incompatible
with its interests

1-248
 Types of Conflict
• Affective conflict
• Involves strong feelings of anger or
dislike toward the people involved
• Tends to be destructive
• Cognitive conflict
• Focuses on issues, not on the people
involved
• Tends to be constructive

1-249
Causes of Affective Conflict
• Pre-existing grudges
• Faulty attributions
• Belief that views of others are
biased
• Personal traits or characteristics

1-250
 Negotiating to Resolve
Conflict
To obtain a win-win
• Avoid win-lose tactics
• Uncover the real
issues
• Broaden the scope of
issues considered

1-251
 Tactics of Influence
• Rational • Exchange
persuasion • Personal appeal
• Inspiration appeal • Coalition building
• Consultation • Legitimating
• Ingratiation • Pressure

1-252
 Factors in Gaining
Compliance
• Friendship/liking
• Commitment/consistency
• Foot-in-the-door tactic
• Lowball
• Scarcity
• Playing hard to get
• Fast approaching deadline technique
• Reciprocity
• Door-in-the-face tactic
1-253
 Stress

Emotional
reactions

Demands Cognitive STRESS

of appraisal
life events

Physiological
states

1-254
 Sources of Stress
• Juggling different
roles
• Responsibility for
others
• Lack of needed
social support

1-255
 Effects of Stress
• Harmful to health
• Interferes with performance
• Desk rage
• Burnout

1-256
 Managing Stress
• Eat a healthy diet
• Exercise
• Curtail excessive worrying
• Consciously engage in an
incompatible reaction
• Take a step back
• Avoid awfulizing

1-257
Entrepreneurship 13

Building the New Venture’s Human

Resources: Recruiting, Motivating, and
Retaining High-Performance
Employees
“Surround yourself with the best
people you can find, delegate
authority, and don’t interfere.”
--Ronald Reagan, 1986

1-259
 Ultimate Success
Success for new ventures…
• derives from a smooth and orderly
shift…
• to a state in which the entrepreneur
has assembled a first-rate team of
employees…
• to whom she or he can delegate
many of the growing venture’s key
processes.

1-260
Attracting, Motivating, and
Retaining Employees
Why are these topics important?
• In the early stages, you perform
them.
• You can place your personal
“stamp” on these processes.
• When it’s time to delegate, you’ll
choose the best people for the job.

1-261
 Recruiting and Selection
The search for high-performance
employees begins with two
questions:
• Where should you search for high-
quality employees?
• What specific techniques should
you use to identify the best among
them?

1-262
 Knowing What You Need
• Job analysis—what
knowledge, skills, and
abilities are required?
• Job description—an
overview of what the job
involves

1-263
 Beginning the Search
• Social networks
• Trade journals, newspapers, etc.
• College and university employment
centers
• Internet sites
• Current customers
• Headhunters

1-264
 Selection
Selection tools and
techniques must be
• Reliable
• Valid
• Legal

1-265
 Employment Interviews
This selection technique is low in
validity because:
• Interviews are largely unstructured
• Interviewers may ask different
questions of applicants
• Interviewers may be biased
• Assessing others is more difficult
than most people realize
1-266
Improving Interviews
The validity of interviews
can be improved with
• Structured interviews
• Biodata
• Reference checks

1-267
 Motivation
Behavior that is energized by, and
directed toward, reaching some
desired target or objective

Arousal Direction Persistence GOAL

1-268
The Role of Goals in
Motivation
Goals must be
• Challenging
• Attainable
• Specific
• Accepted
• Reinforced with
feedback

1-269
 Expectancy Theory
People will be motivated when they
believe that
• Expending effort will improve
performance
• Good performance will be rewarded
• The rewards offered are the ones
they really value

1-270
 Maintaining Motivation
• Provide the training and resources
necessary to ensure that effort
leads to good performance
• Recognize and reward good
performance
• Provide the rewards employees
really value

1-271
 Fairness and Motivation
• Unfairness leads to a
strong drop in
motivation.
• Unfairness is perceived
when there’s an
imbalance between
contributions and
outcomes relative to
those of other persons.

1-272
 It’s Not Fair
• Distributive justice
• Procedural justice
• Interactional justice

1-273
 Playing Fair
• Link rewards closely to performance
• Establish fair procedures for
employee evaluations and rewards
• Treat employees with courtesy and
respect

1-274
 Making Jobs Motivating
Job design—structuring jobs so they
increase people’s interest
• Job enlargement
• Job enrichment

1-275
Retention Strategies
• Developing excellent
reward systems
• Building a high level
of commitment and
loyalty among
employees

1-276
 Pay for Performance
• Merit pay plans
• Bonuses, awards, and stock options
• Team-based incentives
• Profit sharing
• Employee stock ownership plans

1-277
Organizational Commitment

The extent to which an individual

identifies and is involved with his or
her organization and is, therefore,
unwilling to leave it

1-278
 Types of Commitment
• Continuance
commitment
• Affective
commitment
• Normative
commitment

1-279
 Phases of Company Growth

• Conception/existence
• Survival
• Profitability and stabilization
• Profitability and growth
• Take-off
• Maturity

1-280
 The Control Barrier

Entrepreneurs skills Delegation, recruiting,

and abilities and CONTROL motivation, and
essential to success BARRIER retention are crucial
factors

Phase Phase Phase Phase Phase Phase

One Two Three Four Five Six

1-281
Entrepreneurship 14

Exit Strategies for Entrepreneurs:

When—and How—To Harvest the
Rewards
“All things change…There is nothing
in the whole world which is
permanent. Everything flows
onward…the ages themselves glide
by in constant movement.”
--Ovid, 10 B.C.

1-283
 Exit Strategies
• Sell or transfer ownership to
insiders
• Sell or transfer ownership to
outsiders
• Take the company public through
an IPO

1-284
Sale or Transfer to Insiders
• Succession
• Leveraged buyout
• Employee stock
ownership plan

1-285
 All In the Family
• Share power
• Form a limited partnership
• Set up a trust

1-286
 Leveraged Buyouts
• Managers borrow money to pay the
owner an agreed-upon price.
• The new owners pledge their stock
as collateral, or…
• Lenders accept an equity position in
the company to cover part or all of
the funds.

1-287
Employee Stock Ownership
• Ordinary ESOP
• Leveraged plan
• Transfer ownership
plan

1-288
 Selling to Outsiders
• Sell at the right stage
• Sell when the business cycle is strong
• Compensate for loss of talent
• Identify and protect intellectual property
• Adopt transparent and conservative
accounting policies
• Resolve open questions that make it
difficult to estimate value

1-289
Factors in Terms of the Sale

• Valuation of the
company
• Negotiation
process

1-290
What’s It Worth?
• Balance sheet
methods
• Earnings
methods
• Market method

1-291
 Balance Sheet Methods
• Balance sheet method
Net worth = Assets – Liabilities
• Adjusted balance sheet method
Estimates market value of assets

1-292
 Earnings Methods
• Excess earnings method
• Capitalized earnings method
• Discounted future earnings method

1-293
 Advantages of IPOs
• Cash
• Aura of respectability
• Market provides continuing
valuation of worth
• Ability to use stock options for
employees
• Ability to use stock to acquire other
companies
1-294
 Disadvantages of IPOs
• A tremendously
expensive process
• Lock-up agreements
• Subject to careful
scrutiny

1-295
 Bargaining Tactics
• Beginning with an extreme initial
offer
• Using the “big lie” technique
• Convincing the other side you have
an “out”

1-296
Unethical Negotiation Tactics

• False promises
• Misrepresentation
• Inappropriate information gathering

1-297
 Reaching Integrative
Agreements
• Logrolling
• Nonspecific compensation
• Broadening the pie
• Cost-cutting
• Bridging

1-298
 Changes Over Time
• Physical appearance and energy
• Cognition and memory
• Intelligence
• Creativity

1-299
 Eras of Our Lives

• Age 30 transition
• Midlife transition
• Late-adult transition
• Consider your stage in life as you
consider your exit strategy

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