Keusahawanan

1-1©2006 Prentice Hall

Lecture Outline

Entrepreneurship: Successfully Launching

New Ventures, 1/eBruce R. Barringer

R. Duane Ireland


Chapter 1



R. Duane Ireland


Chapter Objectives(1 of 2)

1. Explain entrepreneurship and discuss its importance.

2. Describe corporate entrepreneurship and its use in established firms.

3. Discuss three main reasons that people become entrepreneurs.

4. Identify four main characteristics of successful entrepreneurs.

5. Explain the five common myths regarding entrepreneurs.



6. Discuss the economic impact of entrepreneurial firms.

• Discuss the impact of entrepreneurial firms on society.

• Identify ways in which large firms benefit from the presence of smaller entrepreneurial firms.

• Explain the entrepreneurial process.


Introduction to Entrepreneurship

There is tremendous interest in

entrepreneurship around the world.

According to the GEM2003 study, about 300

million people, or 12.5%,of the adults in the 40

countries surveyed, areinvolved in forming

new businesses.


What is Entrepreneurship?(1 of 3)

• Origin of the Word “Entrepreneur”– The word was originally used to describe people who “take

on the risk” between buyers and sellers or “undertake” a task such as starting a new venture.

– The “undertake” interpretation of the word has been central to its usage in English.

• Difference Between an Inventor(pncipta)and an Entrepreneur– An inventor creates something new.– An entrepreneur puts together all the resources needed—the

money, the people, the strategy, and the risk bearing ability to transform the invention into a viable business.



• Entrepreneurship Defined– Entrepreneurship is the process by which individuals

pursue opportunities without regard to the resources they currently control.

– The essence(intisari) of entrepreneurial behavior is identifying opportunities and putting useful ideas into practice.

– The set of tasks called for by this behavior can be accomplished by either an individual or a group and typically requires creativity, drive, and a willingness to take risks.



eBay Case

Pierre OmidyarFounder of eBay

All these qualities were exemplified by Pierre Omidyar, the founder of eBay. Omidayar saw an opportunity to create a marketplace where people could find each other online, he risked his career by quitting his job to work on eBay full time, and he worked hard to build a profitable company that delivers a creative and useful service to its customers.


Corporate Entrepreneurship(1 of 2)

• Corporate Entrepreneurship– Is the conceptualization of entrepreneurship at the firm

level.– All firms fall along a conceptual continuum that ranges

from highly conservative to highly entrepreneurial.– The position of a firm on this continuum is referred to as its

entrepreneurial intensive.


Corporate Entrepreneurship(2 of 2)

Entrepreneurial Firms Conservative(pdiriankolot) Firms

• Proactive

• Innovative

• Risk taking

• Take a more “wait and see”posture

• Less innovative

• Risk adverse


Why Become an Entrepreneur?

The three primary reasons that people become entrepreneurs and start their own firms

Desire to be their own boss

Financial rewards

Desire to pursue theirown ideas


Characteristics of Successful Entrepreneurs(1 of 2)

• Passion(pnuh semangat) for the Business– The number one characteristic shared by successful

entrepreneurs is a passion for the business.– This passion typically stems from the entrepreneur’s belief

that the business will positively influence people’s lives.

• Product/Customer Focus– A second defining characteristic of successful

entrepreneurs is a product/customer focus.– An entrepreneur’s keen focus on products and customers

typically stems from the fact that most entrepreneurs are, at heart, craftspeople.


Characteristics of Successful Entrepreneurs(2 of 2)

• Tenacity Despite Failure– Because entrepreneurs are typically trying something new,

the failure rate is naturally high.– A defining characteristic for successful entrepreneurs is

their ability to persevere through setbacks and failures.

• Execution Intelligence– The ability to fashion a solid business idea into a viable

business is a key characteristic of successful entrepreneurs.• The ability to translate thought, creativity, and imagination into

action and measurable results is the essence of execution intelligence.


Common Myths About Entrepreneurs(1 of 5)

• Myth 1: Entrepreneurs Are Born Not Made– This myth is based on the mistaken belief that some people

are genetically predisposed to be entrepreneurs.– The consensus of many studies is that no one is “born” to

be an entrepreneur; everyone has the potential to become one.

– Whether someone does or doesn’t become an entrepreneur, is a function of the environment, life experiences, and personal choices.



Although no one is “born” to be an entrepreneur, there are common personality traits and characteristics of successful entrepreneurs.



• Myth 2: Entrepreneurs Are Gamblers– A second myth about entrepreneurs is that they are

gamblers and take big risks. The truth is, most entrepreneurs are moderate risk takers.

– The idea that entrepreneurs are gamblers originates from two sources:

• Entrepreneurs typically have jobs that are less structured, and so they face a more uncertain set of possibilities than people in traditional jobs.

• Many entrepreneurs have a strong need to achieve and set challenging goals, a behavior that is often equated with risk taking.



• Myth 3: Entrepreneurs Are Motivated Primarily by Money.– While it is naïve to think that entrepreneurs don’t seek

financial rewards, money is rarely the reason entrepreneurs start new firms.

– In fact, some entrepreneurs warn that the pursuit of money can be distracting.



• Myth 4: Entrepreneurs Should Be Young And Energetic.– The average entrepreneur is 35 to 45 years old and has 10

or more years of experience in a large firm.– While it is important to be energetic, investors often cite

the strength of the entrepreneur as their most important criteria in making investment decisions.

• What makes an entrepreneur “strong” in the eyes of an investor is experience, maturity, a solid reputation, and a track record of success.

• These criteria often favor older rather than younger entrepreneurs.


Economic Impact of Entrepreneurial Firms(1 of 2)

• Innovation– Is the process of creating something new, which is central

to the entrepreneurial process.– Small entrepreneurial firms are responsible for over two-

thirds of all innovations in the U.S.

• Job Creation– In the past two decades, economic activity has moved in

the direction of smaller entrepreneurial firms, which may be due to their unique ability to innovate and focus on specialized tasks.


Economic Impact of Entrepreneurial Firms(2 of 2)

• Globalization– Today, over 97% of all U.S. exporters are small businesses

with fewer than 500 employees.– Export markets are vital to the U.S. economy and provide

outlets for the sale of U.S. produced products and services.


Entrepreneurial Firms’ Impact on Society and Larger Firms

• Impact on Society– The innovations of entrepreneurial firms have a dramatic

impact on society.– Think of all the new products and services that make our

lives easier, enhance our productivity at work, improve our health, and entertain us in new ways.

• Impact on Larger Firms– Many entrepreneurial firms have built their entire business

models around producing products and services that help larger firms become more efficient and effective.


The Entrepreneurial Process(1 of 1)

The Entrepreneurial Process Consists of Four Steps

Step 1: Deciding(mmutuskan ) to become an entrepreneur

Step 2: Developing successful business ideas

Step 3: Moving from an idea to an entrepreneurial firm

Step 4: Managing and growing the entrepreneurial firm


Chapter 2



R. Duane Ireland



1. Explain the difference between an opportunity and an idea.

2. Describe the two general approaches entrepreneurs use to identify opportunities.

3. Explain why it’s important to start a new firm when its “window of opportunity” is open.

4. Identify the four environmental trends that are most instrumental in creating business opportunities.

5. List the personal characteristics that make some people better at recognizing business opportunities than others.



6. Identify the five steps in the creative process.7. Describe the purpose of brainstorming and its use

as an idea generator.8. Describe how surveys are used to generate new

business ideas.9. Explain the purpose of maintaining an idea bank.10. Describe three steps for protecting ideas from being

lost or stolen.


What is an Opportunity?(1 of 2)

• Opportunity Defined– An opportunity is a favorable set of circumstances that

creates the need for a new product, service or business idea.– Most entrepreneurial firms are started in one of two ways:

• Some firms are internally stimulated. An entrepreneur decides to start a firm, searches for and recognizes an opportunity, then starts a business.

• Other firms are externally stimulated. An entrepreneur recognizes a problem or an opportunity gap and creates a business to fill it.


What is an Opportunity?(2 of 2)

An opportunity has four essential qualities.

buyandhold.com – an opportunity

• Attractive

• Durable

• Timely• Anchored in a product, service,or business that adds value forits buyer or end user


Difference Between an Idea and an Opportunity

• Idea– An idea is a thought, impression, or notion. It may or may

not meet the criteria of an opportunity.

• Difference Between an Idea and an Opportunity– Many businesses fail, not because the entrepreneurs that

started the businesses didn’t work hard—they fail because there was no real opportunity to begin with.

– Before getting excited about a business idea, it is crucial to understand whether the idea fills a need and meets the criteria for an opportunity.


Window of Opportunity

• Window of Opportunity– The term “window of opportunity” is a metaphor

describing the time period in which a firm can realistically enter a new market.

• Once the market for a new product is established, its window of opportunity opens, and new entrants flow in.

• At some point, the market matures, and the window of opportunity (for new entrants) closes.


Trend 1: Economic Forces

• Economic Forces– Economic forces affect consumers’ level of disposable

income.– When studying how economic forces affect opportunities,

it is important to evaluate who has money to spend and who is trying to cut costs.

• An increase in the number of women in the workforce and their related increase in disposable income was one of the factors that led the founders of buyandhold.com to target women.

• Many large firms are trying to cut costs. Entrepreneurs have taken advantage of this trend by starting firms that help other firms control costs.


Trend 2: Social Forces(1 of 2)

• Social Forces– Changes in social trends provide openings for new

businesses on an ongoing basis.– The continual proliferation of fast-food, for example, isn’t

happening because people love fast food. It is happening because people are busy, and have disposable income.

– Similarly, the Sony Walkman was developed not because consumers wanted smaller radios but because people wanted to listen to music while on the go.


Trend 2: Social Forces(2 of 2)

Examples of Social Forces That Allow For New Business Opportunities

• Family and work patterns

• The aging of the population

• The increasing diversity in the workplace

• The globalization of industry

• The increasing focus on health care and fitness

• The proliferation of computers and the Internet

• The increase in the number of cell phone users

• New forms of entertainment


Trend 3: Technological Advances

• Technological Advances– Given the rapid pace of technological change, it is vital that

entrepreneurs keep on top of how new technologies affect current and future business opportunities.

– Entire industries have emerged as the result of technological advances.

• Examples include the computer industry, the Internet, biotechnology, and digital photography.

– Once a technology is created, new firms form to take the technology to a higher level.

• For example, RealNetworks was started to add audio capability to the Internet.


Trend 4: Political Action and Regulatory Changes

• Political Action and Regulatory Changes– Political action and regulatory changes provide the basis

for new business opportunities.– For example, laws that protect the environment have

created opportunities for entrepreneurs to start firms that help other firms comply with environmental laws and regulations.


How Are Opportunities Identified?(1 of 1)

Second Approach: Solving a Problem

Sometimes identifyingopportunities simply

involves noticing a problemand finding a way to

solve it

These problems can bepinpointed through observing

trends and through more simplemeans, such as intuition,

serendipity, or chance

Some business ideas are clearlyinitiated to solve a problem

For example, Symantec Corp. created Norton antivirus

software to guard computersagainst viruses


Personal Characteristics of the Entrepreneur

Characteristics that tend to make some people better at recognizing opportunities than others

Prior Experience Social Networks

Cognitive Factors Creativity


Prior Industry Experience

• Prior Industry Experience– Several studies have shown that prior experience in an

industry helps an entrepreneur recognize business opportunities. There are several explanations for this.

• By working in an industry, an individual may spot a market nichethat is underserved.

• It is also possible that by working in an industry, an individual builds a network of social contacts who provide insights that lead to new opportunities.


Cognitive Factors

• Cognitive Factors– Studies have shown that opportunity recognition may be an

innate skill or cognitive process.– Some believe that entrepreneurs have a “sixth sense” that

allows them to see opportunities that others miss.– This “sixth sense” is called entrepreneurial alertness, which

is formally defined as the ability to notice things without engaging in deliberate search.


Social Networks(1 of 3)

• Social Networks– The extent and depth of an individual’s social network

affects opportunity recognition. – People who build a substantial network of social and

professional contacts will be exposed to more opportunities and ideas than people with sparse networks.

– In one survey of 65 start-ups, half the founders reported that they got their business idea through social contacts.

• Strong Tie vs. Weak Tie Relationships– All of us have relationships with other people that are

called “ties.” (See next slide.)



• Nature of Strong-Tie Vs. Weak Tie Relationships– Strong-tie relationship are characterized by frequent

interaction and form between coworkers, friends, and spouses.

– Weak-tie relationships are characterized by infrequent interaction and form between casual acquaintances(kenalanbiasa).

• Result– It is more likely that an entrepreneur will get new business

ideas through weak-tie rather than strong-tie relationships. (See next slide.)



Strong-Tie Relationships Weak-Tie Relationships

These relationships, which typically form between like minded individuals, tend to

reinforce insights and ideas that people already have

The relationships, which form between casual acquaintances,

are not as apt to be between like-minded individuals, so one person may say something to

another that sparks a completely new idea

Why weak-tie relationships lead to more new business ideas than strong-tie relationships


Creativity(1 of 1)

• Creativity– Creativity is the process of generating a novel or useful

idea.– Opportunity recognition may be, at least in part, a creative

process.– For an individual, the creative process can be broken down

into five stages, as shown on the next slide.


Techniques For Generating Ideas

Brainstorming Focus Groups

Surveys Other Techniques


Brainstorming(1 of 2)

• Brainstorming– Is a technique used to generate a large number of ideas and

solutions to problems quickly.– A brainstorming “session” typically involves a group of

people, and should be targeted to a specific topic.– Rules for a brainstorming session:

• No criticism• Freewheeling is encouraged• The session should move quickly• Leap-frogging is encouraged


Brainstorming(2 of 2)

• Brainstorming (continued)– There are two reasons brainstorming generates ideas that

might not arise(timbul) otherwise:• Because no criticism is allowed, people are more likely to offer

ideas than they would in a traditional setting.• Brainstorming sessions can generate more ideas than a traditional

meeting because brainstorming focuses on creativity rather than evaluation.

– In most meeting, one person suggests an idea, and immediately the rest of the group begins evaluating it. This happens because most people are better at criticizing ideas than they are at suggesting new ones.


Focus Group

• Focus Group– A focus group is a gathering of five to ten people, who

have been selected based on their common characteristics relative to the issues being discussed.

– These groups are led by a trained moderator, who uses the internal dynamics of the group environment to gain insight into why people feel they way they do about a particular issue.

– Although focus groups are used for a variety of purposes, they can be used to help generate new business ideas.


Surveys(1 of 2)

• Survey– A survey is a method of gathering information from a

sample of individuals. The sample is usually just a fraction of the population being surveyed.

• The most effective surveys sample a “random” portion of the population, meaning that the sample is not selected haphazardly or only from people who volunteer to participate.

• The quality of survey data is determined largely by the purpose of the survey and how it is conducted.

– Surveys generate new product, service, and business ideas because they ask specific questions and get specific answers.


Surveys(2 of 2)

Example of a suspect survey technique

Self-Selected Opinion Poll Result

Most call-in television surveys or magazine write-in

polls are highly suspect because the participants

represent what’s called a self-selected opinion poll

Most people who take the time to participate in a self-selected

opinion poll do so because their have either strong

positive or strong negative feels about the a particular

product or topic


Other Techniques

• Customer Advisory Boards– Some companies set up customer advisory boards that meet

regularly to discuss needs, wants, and problems that may lead to new ideas.

• Day-In-The-Life Research– A type of anthropological research, where the employees of

a company spend a day with a customer.


Encouraging(mggalakan) New Ideas(1 of 1)

• Establishing(tubuhkan) a Focal Point for Ideas– Some firms meet the challenge of encouraging, collecting,

and evaluating ideas by designating a specific person to screen and track them—for if its everybody’s job, it may be no one’s responsibility.

– Another approach is to establish an idea bank (or vault), which is a physical or digital repository for storing ideas.

• Encouraging Creativity at the Firm Level– Creativity is the raw material that goes into innovation.


Protecting Ideas From Being Lost or Stolen

• Step 1– The idea should be put in a tangible form such as entered

into a physical idea logbook or saved on a computer disk, and the date the idea was first thought of should be entered.

• Step 2– The idea should be secured. This may seem like an

obvious step, but is one that is often overlooked.• Step 2

– Avoid making an inadvertent or voluntary disclosure of an idea, in a manner that forfeits the right to claim exclusive rights to it.


Chapter 3



R. Duane Ireland



1. Explain what a feasibility analysis is and why it’s important.

2. Discuss the proper time to complete a feasibility analysis when developing a business venture.

3. Explain a concept statement and its contents.4. Describe the purpose of a product/service feasibility

analysis and the two primary issues that a proposed business should consider in this area.

5. Identify three primary purposes for concept testing.



6. Define the term usability testing and explain why it’s important.

7. Describe the purpose of industry/market feasibility analysis and the three primary issues to consider in this area.

8. Explain the difference between primary research and secondary research.

9. Describe the purpose of organizational feasibility analysis and list the two primary issues to consider in this area.

10. Explain the importance of financial feasibility analysis and list the most important issues to consider in this area.


What Is Feasibility Analysis?

• Feasibility(kebolehlaksanaan) Analysis– Feasibility analysis is the process of determining

whether(samada) a business idea is viable. – It is the preliminary evaluation of a business idea,

conducted for the purpose of determining whether the idea is worth pursuing.

– Feasibility analysis takes the guesswork (to a certain degree) out of a business launch, and provides an entrepreneur a more secure notion that a business idea is feasible or viable.


When To Conduct a Feasibility Analysis

• Timing of Feasibility Analysis– The proper time to conduct a feasibility analysis is early in

thinking through the prospects for a new business.– The thought is to screen ideas before a lot of resources are

spent on them.

• Components of a Properly(dgn btl) Conducted(dipandu) Feasibility Analysis– A properly conducted feasibility analysis includes four

separate components, as shown in Figure 3.1 on the next slide.


Preparing a Concept Statement(1 of 2)

• Concept Statement– Before a company undertakes a feasibility analysis, a

concept statement should be developed.– A concept statement is a one page description of a business,

that is distributed by a startup entrepreneur to people who are asked to provide feedback on the potential of the business idea.

– The feedback will hopefully provide the entrepreneur (1) a sense of the viability of the business idea; and (2) suggestions for how the idea can be strengthened or “tweaked” before proceeding further.


Preparing a Concept Statement(2 of 2)

• Information to Include– A description of the product or service being offered– The intended target market– The benefits of the product or service– A description of how the product will be positioned relative

to similar ones in the market– A description of how the product or service will be sold

and distributed– Information about the founder or founders of the firm


Four Forms of Feasibility Analysis

Product/Service FeasibilityAnalysis

Organizational FeasibilityAnalysis

Industry/Market FeasibilityAnalysis

Financial FeasibilityAnalysis


Product/Service Feasibility(1 of 5)

• Product/Service Feasibility Analysis– Is an assessment of the overall appeal of the product or

service being proposed.– The idea is that before a prospective firm rushes a product

or service into development, it should be confident that the product or service is what its prospective customers want.

– The two components of a product/service feasibility analysis are:

• Concept testing• Usability(yg blh dign) testing



• Concept Testing– A concept test involves showing a representation of the

product or service to prospective users to gauge customer interest, desirability, and purchase intent.

– A concept test is different from a concept statement (discussed earlier). A concept test is limited to testing the feasibility of a specific product or service idea. A concept statement is a preliminary(pndahuluan) evaluation of an entire business idea.



Three purposes of conducting a concept test

Purpose How it is accomplished

Validate the underlying premises of a product or

service idea

This can be accomplished via phone interviews, personal interviews, and focus groups and simply by watching

people perform relevant tasks.

Help develop an idea

A firm may show a product idea to a prospective customer, get feedback, and tweak the idea. Then, in an iterative

manner, they’ll show the idea to more potential customers, get feedback and tweak the idea some more, and so on.

Estimate the potential market share the product or service might command

Some type of buying intention question appears in almost every concept test, usually in the form of a survey

questionnaire.



• Usability Testing– Is the method by which users of a product are asked to

perform certain tasks in order to measure the product’s ease-of-use and the user’s perception of the experience.

– Usability tests are sometimes called user tests, beta tests, or field trials, depending on the circumstances involved.

• While it is temping to rush a new product or service to market, conducting a usability test is a good investment of an entrepreneur’s or firm’s resources.

• Many products that consumers find frustrating to work with have been brought to market too quickly.



Forms of usability testing (this is not an exhaustive list)

Form of usability test Explanation

Basic prototypeSome entrepreneurs, with limited budgets, develop a fairly basic prototype and ask friends and colleagues to use the

product, then complete an evaluation form or give feedback.

Elaborate usability test

Better funded companies have more elaborate usability tests. For example, in Intuit’s usability-testing lab participants are

asked to work with software programs that are being developed, while “loggers” record usability problems.

Hybrid testsThere are a number of “hybrid” tests, that provide a

entrepreneur a sense of a potential usability problem with a product or service. An example is Intuit’s follow-me-home

testing methodology.


Industry/Market Feasibility Analysis(1 of 6)

• Industry/Market Feasibility Analysis– Is an assessment of the overall appeal of the market for the

product or service being proposed.– For industry/market feasibility analysis, there are three

primary issues that a proposed business should consider:• Industry attractiveness, market timeliness, and the identification of

a niche market.

• Industry Attractiveness– A primary determinant of a new venture’s feasibility is the

attractiveness of the industry it chooses.



Characteristics of attractive industries for new ventures

• Are large and growing (with growth being more important than size)

• Are important to the customer

• Are fairly young rather than older and more mature

• Have high rather than low operating margins

• Are not crowded



• Industry Attractiveness– Although the criteria shown on the proceeding slide is an

ideal list, the extent to which a new business’s proposed industry’s growth possibilities satisfy these criteria should be taken seriously.

– In addition to evaluating an industry’s growth potential, a new venture will want to know more about the industry it plans to enter.

– This can be accomplished through both primary and secondary research, as explained in the next slide.



Role of Primary and Secondary Research in Investigating Industry Attractiveness

Type of Research How it is conducted

Primary research

Secondary research

This is research that is original and is collected by the entrepreneur. In assessing the attractiveness of a new

market, this typically involves an entrepreneur talking to potential customers and key industry participants.

This is research that probes data that are already collected. Examples of where this data might come from are:

industry-related publications, government statistics, competitor’s Web sites, and industry reports from research

firms like Forrester Research.



Market Timeliness Considerations

Nature of product or service introduction

Improvement on something already

available in the marketplace

Breakthrough new product or service,

which should establish a new market segment

Major Considerations

• Is the window of opportunity open or closed?• Is now a good time for a new market entrant (i.e.,

are customers buying, are industry incumbentsmaking money?)

• Should we try to capture a first-mover advantage?



• Identification of a Niche Market– A niche market is a place within a larger market segment

that represents a narrower group of customers with similar interests.

– For a new firm, selling to a niche market makes sense for at least two reasons.

• It allows a firm to establish itself within an industry without competing against major competitors head on.

• A niche strategy allows a firm to focus on serving a specializedmarket very well instead of trying to be everything to everybody in a broad market, which is nearly impossible for a new entrant.


Organizational Feasibility Analysis(1 of 4)

• Organizational Feasibility– Is concerned with determining whether the business itself

has sufficient skills and resources to bring a particular product or service idea to market successfully.

– There are two primary issues to consider in this area:• Management prowess• Resource sufficiency



• Management Prowess– A firm should candidly evaluate the prowess, or ability, of

its management team to satisfy itself that management has the requisite passion and expertise to launch the venture.

– Two of the most important factors in this area are:• The passion that the solo entrepreneur or the founding team has for

the business idea.• The extent to which sole entrepreneur or the founding team

understands the markets in which the firm will participate. – Sole entrepreneurs or founding teams with established

social and professional networks also have an advantage.



• Resource Sufficiency– This topic pertains to an assessment of whether an

entrepreneur has sufficient resources to launch the proposed venture.

– The focus here should be on nonfinancial resources in that financial feasibility is considered separately.

– To test resource sufficiency, a firm should list the 6 to 12 most critical nonfinancial resources that will be needed to move the business idea forward successfully.

• If critical resources are not available in certain areas, it may be impractical to proceed with the business idea.



Examples of nonfinancial resources that may be critical to the successful launch of a new business

• Availability of affordable office or lab space

• Likelihood of local and state government support of the business

• Quality of the labor pool available

• Proximity to key suppliers and customers

• Willingness of high quality employees to join the firm

• Likelihood of establishing favorable strategic partnerships

• Proximity to similar firms for the purpose of sharing knowledge

• Possibility of obtaining intellectual property protection in key areas


Financial Feasibility Analysis(1 of 4)

• Financial Feasibility– For feasibility analysis, a quick financial assessment is

usually sufficient. – The most important issues to consider at this stage are:

• Capital requirements• Financial rate of return• Overall attractiveness of the investment



• Capital Requirements– In the feasibility analysis stage, it is important that an

entrepreneur have a sense of what the business’s initial capital requirements will be.

– The figure that is determined provides important information about the rate of return that can be anticipated from the business and about the type of financing or funding that will be needed.



• Financial Rate of Return– Although the estimate may be rough, an entrepreneur

should have a sense of the rate of return that the proposed business will produce.

– This figure can be determined in part by looking at the rate of return of similar businesses, and then adjusting upward or downward depending on the unique characteristics of the proposed business.



• Overall Attractiveness of the Investment– A number of other financial factors are associated with

promising business startups. – In the feasibility analysis stage, the extent to which a

business opportunity is positive relative to each factor is based on an estimate rather than actual performance.

– Table 3.5 on the next slide lists the factors that pertain to the overall attractiveness of the financial feasibility of the business idea.


Chapter 4



R. Duane Ireland



1. Explain the purpose of an industry analysis.2. Identify the five competitive forces that determine

industry profitability.3. Explain the role of “barriers to entry” in creating

disincentives for firms to enter an industry.4. Identify the nontraditional barriers to entry that are

especially associated with entrepreneurial firms.5. List the four industry-related questions to ask

before pursuing the idea for a firm.



6. Identify the five primary industry types and the opportunities they offer.

7. Explain the purpose of a competitor analysis.8. Identify the three groups of competitors a new firm will

face.9. Describe ways a firm can ethically obtain information

about its competitors.10. Describe the reasons for completing a competitive

analysis grid.


What is Industry Analysis?

• Industry– An industry is a group of firms producing a similar product

or service, such as airlines, fitness drinks, or electronic games.

• Industry Analysis– Is business research that focuses on the potential of an

industry.


Why is Industry Analysis Important?

• Why is This Topic Important?– Once it is determined that a new venture is feasible in

regard to the industry and market in which it will compete, a more in-depth analysis is needed to learn the ins and outs of the industry the firm plans to enter.

– This analysis helps a firm determine if the niche markets it identified during feasibility analysis are accessible and which ones represent the best point of entry for a new firm.


Three Key Questions

When studying an industry, an entrepreneur must answer three questions before pursuing the idea of starting a firm.

Is the industryaccessible—in otherwords, is it a realistic

place for a new venture to enter?

Are there positions in theindustry that will avoidsome of the negative

attributes of the industry as a whole?

Does the industrycontain markets that

are ripe for innovationor are underserved?

Question 1 Question 3Question 2


Industry—vs Firm—Specific Factors

• Firm Level Factors– Include a firm’s assets, products, culture, teamwork among

its employees, reputation, and other resources.

• Industry Level Factors– Include threat of new entrants, rivalry among existing

firms, bargaining power of buyers, and related factors.

• Conclusion– In various studies, researchers have found that from 8% to

30% of the variation in profitability is directly attributable to the industry in which a firm competes.


The Five Competitive Forces That Determine Industry Profitability

(1 of 3)

• Explanation of the Five Forces Model– The five competitive forces model is a framework for

understanding the structure of an industry.– The model is composed of the forces that determine

industry profitability.– The forces—the threat of substitutes, the threat of new

entrants, rivalry among existing firms, the bargaining power of suppliers, and the bargaining power of buyers,determine the average rate of return for the firms in an industry.



(2 of 3)

• Explanation of the Five Forces Model (continued)– Each of the five-forces impacts the average rate of return

for the firms in an industry by applying pressure on industry profitability.

– Well managed firms try to position their firms in a way that avoids or diminishes these forces—in an attempt to beat the average rate of return of the industry.



(3 of 3)

• Explanation of the Five Forces Model (continued)– Each of the five-forces impacts the average rate of return

for the firms in an industry by applying pressure on industry profitability.

– Well managed firms try to position their firms in a way that avoids or diminishes these forces—in an attempt to beat the average rate of return of the industry.


Threat of Substitutes(1 of 2)

• Threat of Substitutes– The price that consumers are willing to pay for a product

depends in part on the availability of substitute products.– For example, there are few if any substitutes for

prescription medicines, which is one of the reasons the pharmaceutical industry is so profitable.

– In contrast, when close substitutes for a product exist, industry profitability is suppressed, because consumers will opt out if the price gets too high.


Threat of Substitutes(2 of 2)

• Threat of Substitutes (continued)– The extent to which substitutes suppress the profitability of

an industry depends on the propensity for buyers to substitute between alternatives.

– This is why firms in an industry often offer their customers amenities to reduce the likelihood that they will switch to a substitute product, even in light of a price increase.


Threat of New Entrants(1 of 6)

• Threat of New Entrants– If the firms in an industry are highly profitable, the industry

becomes a magnet to new entrants.– Unless something is done to stop this, the competition in

the industry will increase, and average industry profitability will decline.

– Firms in an industry try to keep the number of new entrants low, by erecting barriers to entry.

• A barrier to entry is a condition that creates a disincentive for a new firm to enter an industry.



Barrier to Entry Explanation

Economies of Scale

Product differentiation

Capital requirements

Industries that are characterized by large economies of scale are difficult for new firms to enter, unless they are willing to

accept a cost disadvantage.

Industries such as the soft drink industry that are characterized by firms with strong brands are difficult to

break into without spending heavily on advertising.

The need to invest large amounts of money to gain entrance to an industry is another barrier to entry. For example, it

now takes about two years and $4 million to develop an electronic game. Many new firms do not have the capital to

compete at this level.

Barriers to Entry




Cost advantages independent of size

Access to distribution channels

Government and legal barriers

Entrenched competitors may have cost advantages not related to size. For example, the existing competitors in an industry may have purchased property when it was much

cheaper than a new entrant would have to pay.

Distribution channels are often hard to crack. This is particularly true in crowded markets, such as the convenience store market. For a new sports drink to be placed on the shelf,

it has to displace a product that is already there.

In knowledge intensive industries, such as biotechnology and software, patents, trademarks, and copyrights form major barriers to entry. Other industries, such as broadcasting,

require the granting of a license by a public authority.

Barriers to Entry (continued)



• Nontraditional Barriers to Entry– It is difficult for start-ups to execute barriers to entry that

are expensive, such as economies of scale, because money is usually tight.

– Start-ups have to rely on nontraditional barriers to entry to discourage new entrants, such as assembling a world-class management team that would be difficult for another company to replicate.




Strength of management team

If a start-up puts together a world-class management team, it may give potential rivals pause in taking on the start-up in

its chosen industry.

First-mover advantageIf a start-up pioneers an industry or a new concept within an

existing industry, the name recognition the start-up establishes may create a formable barrier to entry.

Passion of the management team and

employees

If the employees of a start-up are highly motivated by the unique culture of a start-up, and anticipate large financial rewards through stock options, this is a combination that

cannot be replicated by larger firms. Think of the employees of a biotech firms trying to find a cure for a disease.

Nontraditional Barriers to Entry




Unique Business Model

Inventing a new approach to an industry and executing the idea in

an exemplary fashion

If a start-up is able to construct a unique business model and establish a network of relationships that makes the business model work, this set of advantages create a barrier to entry.

If a start-up invents a new approach to an industry and executes it in an exemplary fashion, these factors create a

barrier to entry for potential imitators.

Nontraditional Barriers to Entry (continued)


Rivalry Among Existing Firms(1 of 3)

• Rivalry Among Existing Firms– In most industries, the major determinant of industry

profitability is the level of competition among existing firms.

– Some industries are fiercely competitive, to the point where prices are pushed below the level of costs, and industry-wide losses occur.

– In other industries, competition is much less intense and price competition is subdued.



Factors that determine the nature and intensity of the rivalry among existing firms in an industry

Number and balance of competitors

Degree of difference between

products

The more competitors there are, the more likely it is that one or more will try to gain customers by cutting its

price. Price-cutting occurs more often when all the competitors in an industry are about the same size and

when there is no clear market leader.

The degree to which products differ from one product to another affects industry rivalry. For example,

commodity industries such as paper products producers tend to compete on price because there is

little difference between the manufacturer’s products.



Factors that determine the nature and intensity of the rivalry among existing firms in an industry (continued)

Growth rate of an industry

Level of fixed costs

The competition among firms in a slow-growth industry is stronger than among those in fast-growth industries. Slow-growth industry firms must fight for market share, which may tempt them to lower price to gain market share. In fast-growth industries, there are enough customers to go

around, making price-cutting less likely.

Firms that have high fixed costs must sell a higher volume of their product to reach the break-even point than firms with low fixed costs. As a result, firms with

high fixed costs are anxious to fill their capacity, and this anxiety may lead to price cutting.


Bargaining Power of Suppliers(1 of 3)

• Bargaining Power of Suppliers– Suppliers can suppress the profitability of the industries to

which they sell by raising prices or reducing the quality of the components they provide.

– If a supplier reduces the quality of the components it supplies, the quality of the finished product will suffer, and the manufacturer will eventually have to lower its price.

– If the suppliers are powerful relative to the firms in the industry to which they sell, industry profitability can suffer.



Factors that have an impact on the ability of suppliers to exertpressure on buyers

Supplier concentration

Switching costs

Switching costs are the fixed costs that buyers encounter when switching or changing from one supplier to

another. If switching costs are high, a buyer will be less likely to switch suppliers.

When there are only a few suppliers that supply a critical product to a large number of buyers, the supplier has an

advantage.



Factors that have an impact on the ability of suppliers to exertpressure on buyers (continued)

Attractiveness of substitutes

Threat of forward integration

The power of a supplier is enhanced if there is a credible possibility that the supplier might enter the buyer’s

industry.

Supplier power is enhanced if there are no attractive substitutes for the product or services the supplier offers. For example, there is little the computer industry can do when Intel or Microsoft raise their prices, as there are

simply no practical substitutes for their products.


Bargaining Power of Buyers(1 of 3)

• Bargaining Power of Buyers– Buyers can suppress the profitability of the industries from

which they purchase by demanding price concessions or increases in quality.

– For example, the automobile industry is dominated by a handful of large companies that buy products from thousands of suppliers in different industries. This allows the automakers to suppress the profitability of the industries from which they buy by demanding price reductions.



Factors that have an impact on the ability of suppliers to exertpressure on buyers

Buyer group concentration

Buyer’s costs

The greater the importance of an item is to a buyer, the more sensitive the buyer will be to the price it pays. For

example, if the component sold by the supplier represents 50% of the cost of the buyer’s product, the buyer will bargain hard to get the best price for that component.

If the buyers are concentrated, meaning that there are only a few large buyers, and they buy from a large

number of suppliers, they can pressure the suppliers to lower costs and thus affect the profitability of the

industries from which they buy.



Factors that have an impact on the ability of suppliers to exertpressure on buyers (continued)

Degree of standardization of supplier’s products

Threat of backward integration

The power of buyers is enhanced if there is a credible threat that the buyer might enter the supplier’s industry.

The degree to which a supplier’s product differs from its competitors affects the buyer’s bargaining power. For example, a buyer who is purchasing a standard product like the corn syrup that goes into soft drinks, can play

one supplier against another until it gets the best combination of price and service.


The Value of the Five Forces Model(1 of 2)

• First Application of the Model– The five forces model can be used to assess the

attractiveness of an industry by determining the level of treat to industry profitability for each of the forces, as shown on the next slide.

– If a firm filled out the form shown on the next slide and several of the threats to industry profitability were high, the firm may want to reconsider entering the industry or think carefully about the position it would occupy.


The Value of the Five Forces Model(2 of 2)

• Second Application of the Model– The second way a new firm can apply the five forces model

to help determine whether it should enter an industry is by using the model to answer several key questions.

– The questions are shown in Figure 4.2 on the next slide, and help a firm project the potential success of a new venture in a particular industry.


Competitor Analysis

• What is a Competitor Analysis?– A competitor analysis is a detailed analysis of a

firm’s competition. – It helps a firm understand the positions of its major

competitors and the opportunities that are available.

– A competitive analysis grid is a tool for organizing the information a firm collects about its competitors.


Sources of Competitive Intelligence(1 of 2)

• Collecting Competitive Intelligence– To complete a competitive analysis grid, a firm

must first understand the strategies and behaviors of its competitors.

– The information that is gathered by a firm to learn about its competitors is referred to as competitive intelligence.

– A new venture should take care that it collects competitive intelligence in a professional and ethical manner.


Sources of Competitive Intelligence(2 of 2)

Ways that a firm can ethically obtain information about its competitors

• Attend conference and trade shows

• Read industry related book, magazines, and Web sites• Talk to customers about what motivated them to buy your product

as opposed to your competitors’• Purchase competitors’ products to understand their features,

benefits, and shortcomings

• Study competitors’ Web sites

• Study Web sites that provide information about companies


Completing a Competitive Analysis Grid(1 of 1)

• Competitive Analysis Grid– A tool for organizing the information a firm

collects about its competitors– It can help a firm see how it stakes up against its

competitors, provide ideas for markets to pursue, and identify its primary sources of competitive advantage.


Chapter 5



R. Duane Ireland



1. Describe a business model.2. Explain the concept of business model innovation.3. Discuss the importance of having a clearly

articulated business model.4. Discuss the concept of the value chain.5. Identify a business model’s two potential fatal

flaws.



6. Identify a business model’s four major components.7. Explain the meaning of the term “business concept

blind spot.”8. Define the term “core competency” and describe its

importance.9. Explain the concept of supply chain management.10. Devise the term “target market.”


What is a Business Model?

• Model– A model is a plan or diagram that’s used to make or

describe something.

• Business Model– A firm’s business model is its plan or diagram for how it

competes, uses its resources, structures its relationships, interfaces with customers, and creates value to sustain itself on the basis of the profits it generates.

– The term “business model” is used to include all the activities that define how a firm competes in the marketplace.


Dell’s Business Model(1 of 1)

It is important to understand that a firm’s business model takes it beyond its own boundaries.

Almost all firms partner with others to make their business

models work. In Dell’s case, it needs the cooperation of its

suppliers, shippers, customers and many others to make its business

model possible.


Business Models

• Timing of Business Model Development– The development of a firm’s business model follows the

feasibility analysis stage of launching a new venture but comes before writing a business plan.

– If a firm has conducted a successful feasibility analysis and knows that it has a product or service with potential, the business model stage addresses how to surround it with a core strategy, a partnership network, a customer interface, distinctive resources, and an approach to creating value that represents a viable business.


Importance of a Business ModelHaving a clearly articulated business model is

important because it does the following:

• Serves(bkerja) as an ongoing(brtrsan) extension(tmbhan) of feasibility analysis. A businessmodel continually asks the question, “Does this business make sense?”

• Focuses attention on how all the elements of a business fit together and constitute a working whole.

• Describes why the network of participants needed to make a business idea viable are willing to work together.

• Articulates(terang) a company’s core logic to all stakeholders, including the firm’s employees.


How Business Models Emerge (1 of 2)

• The Value Chain(rantai)– The value chain is the string of activities that moves a

product from the raw material stage, through manufacturing and distribution, and ultimately to the end user.

– By studying a product’s or service’s value chain, an organization can identify ways to create additional value and assess whether it has the means to do so.

– Value chain analysis is also helpful in identifying opportunities for new businesses and in understanding how business models emerge.


How Business Models Emerge (2 of 2)

• The Value Chain (continued)– Entrepreneurs look at the value chain of a product or a

service to pinpoint where the value chain can be made more effective or to spot where additional “value” can be added.

• This type of analysis may focus on (1) a single primary activity of the value chain (such as marketing and sales), (2) the interfacebetween one stage of the value chain and another (such as the interface between operations and outgoing logistics, or (3) one of the support activities (such as human resource management).

• Table 5.1 on the next slides provides examples of firms that were founded to enhance the value chain of a product or service in some meaningful way.


Potential Fatal Flaws in Business Models

• Fatal Flaws(kcctan)– Two fatal flaws can render a business model untenable

from the beginning:• A complete misread of the customer• Utterly(dgn sm skali) unsound economics

Pets.com sported an unsound business model, and failed


Core Strategy(1 of 3)

• Core Strategy– The first component of a business model is the core

strategy, which describes how a firm competes relative to its competitors.

• Primary Elements of Core Strategy– Business mission– Product/market scope– Basis for differentiation



Primary Elements of Core Strategy

Business Mission

Product/Market Scope

A firm’s mission, or mission statement, describes why it exists and what its business model is supposed to accomplish. For

example, Southwest Airline’s Mission statement is as follows: “The mission of Southwest Airlines is dedication to the

highest level of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit.”

A company’s product/market scope defines the products and markets on which it will concentrate.

The choice of products has an important impact on a firm’s business model.



Primary Elements of Core Strategy

Basis of Differentiation

It is important that a new venture differentiate itself from its competitors in

some way that is important to its customers. If a new firm’s products or

services aren’t different from those of its competitors, why should anyone try them? Firms often differentiate them on the basis

of a cost leadership strategy or a differentiation strategy.


Strategic Resources(1 of 3)

• Strategic Resources– A firm is not able to implement a strategy without

resources, so the resources a firm has affects its business model substantially.

• For a new venture, its strategic resources may initially be limited to the competencies of its founders, the opportunity they have identified, and the unique way they plan to serve their market.

– The two most important strategic resources are:• A firm’s core competencies• Strategic assets



Primary Elements of Strategic Resources

Core Competencies

Strategic Assets

A core competency is a resource or capability that serves as a source of a firm’s competitive advantage over its rivals.

Examples are Sony’s competence in miniaturization, Dell’s competence in supply chain management, and 3M’s

competence in managing innovation.

Strategic assets are anything rare and valuable that a firm owns. They include plant and equipment, location, brands,

patents, customer data, a highly qualified staff, and distinctive partnerships.



• Importance of Strategic Resources– New ventures ultimately try to combine their core

competencies and strategic assets to create a sustainable competitive advantage.

– This factor is one that investors pay close attention to when evaluating a business.

– A sustainable competitive advantage is achieved by implementing a value-creating strategy that is unique and not easy to imitate.

– This type of advantage is achievable when a firm has strategic resources and the ability to use them.


Partnership Network(1 of 2)

• Partnership Network– A firm’s partnership network is the third component of a

business model. New ventures, in particular, typically do not have the resources to perform key roles.

– In most cases, a business does not want to do everything itself because the majority of tasks needed to build a product or deliver a service are not core to a company’s competitive advantage.

– A firm’s partnership network includes:• Suppliers• Other partners


Partnership Network(2 of 2)

Primary Elements of Partnership Network

Suppliers

Other Key Relationships

A supplier is a company that provides parts or services to another company. Intel is Dell’s suppler for computer chips,

for example. Firms are developing more collaborative relationships with their suppliers, and finding ways to

motivate them to perform at higher levels.

Along with suppliers, firms partner with other companies to make their business models work. An entrepreneur’s

ability to launch a firm that achieves a sustainable competitive advantage may hinge as much on the skills of the partners that are involved as the skills within the firm itself. The most common types of partnerships are shown

on the next slide.


Customer Interface(1 of 3)

• Customer Interface– The way a firm interacts with its customer hinges on how it

chooses to compete.• For example, Amazon.com sells books over the Internet while

Barnes & Noble sells through its traditional bookstores and online.• Dell sells strictly online while HP sells through retail stores.

– The three elements of a company’s customer interface are:• Target customer• Fulfillment and support• Pricing model



Primary Elements of Customer Interface

Target Market

Fulfillment and Support

A firm’s target market is the limited group of individuals or businesses that it goes after or tries to appeal to. The target

market a firm selects affects everything it does, from the strategic assets it acquires to the partnerships it forges to its

promotional campaigns.

Fulfillment and support describes the way a firm’s product or service “goes to market” or how it reaches it customers. It

also refers to the channels a company uses and what level of customer support it provides. All these issues impact the

shape and nature of a company’s business model.



Primary Elements of Customer Interface

Pricing Structure

The third element of a company’s customer interface is its pricing structure, a topic that will be discussed in

more detail in Chapter 11. Pricing models vary, depending on a firm’s target market and its pricing

philosophy.


Recap: The Importance of Business Models

• Business Models– It is very useful for a new venture to look at itself in a

holistic manner and understand that it must construct an effective “business model” to be successful.

– Everyone that does business with a firm, from its customers to its partners, does so on a voluntary basis. As a result, a firm must motivate its customers and its partners to play along.

– Close attention to each of the primary elements of a firm’s business model is essential for a new venture’s success.


Chapter 6



R. Duane Ireland



1. Identify the primary elements of a new venture team.

2. Explain the term “liabilities of newness.”3. Discuss the difference between heterogeneous and

homogenous founding teams.4. Identify the personal attributes that strengthen a

founder's chances of launching a successful new firm.

5. Explain the actions of an executive-search firm.



6. Identify the two primary ways in which the nonemployee members of a start-up’s new venture team help the firm.

7. Describe a board of directors and explain the differences between inside directors and outside directors.

8. Describe the concept of signaling and explain why it’s important.

9. Discuss the purpose of forming an advisory board.10. Explain why new venture firms use consultants for help

and advice.


New Venture Team

• New Venture Team– Is the group of founders, key employees, and advisers that

move a new venture from an idea to a fully functioning firm.

– Usually, the team doesn’t come together all at once. Instead, it is built as the new firm can afford to hire additional personnel.

– The team also involves more than paid employees.• Many firms have boards of directors, boards of advisers, and

professionals on whom they rely for direction and advice.


Overcoming Liabilities of Newness

• Liabilities of Newness– New ventures have a high propensity to fail.– The high failure rate is due in part to what researchers call

the liability of newness, which refers to the fact that companies often falter because the people who start the firms can’t adjust quickly enough to their new roles and because the firm lacks a “track record” with outside buyers and sellers.

– Assembling a talented and experienced new venture team is one path that firms can take to overcome these limitations.


The Founder or Founders(1 of 3)

• Founder or Founders– The characteristics of the founder or founders of a firm and

their early decisions have a significant impact on the manner in which the new venture team takes shape.

• Size of the Founding Team– Studies have shown that 50% to 70% of all new ventures

are started by more than one individual.– It is believed that new ventures started by a team rather

than a single entrepreneur have an advantage.



Waveset Founding Team

It is generally believed that new ventures started by a team have an advantage over those started by an individual because a team brings more talent, resources, ideas, and

professional contacts to a new venture than does a sole

entrepreneur. In addition, the psychological support that

cofounders of a new business can offer one another is an important elements in the firm’s success.



• Qualities of Founders– Several factors are thought to be significant to a founder’s

success.• Higher education• Prior entrepreneurial experience• Relevant industry experience• The ability to “network” effectively

– The importance of these attributes are described on the next two slides.


Recruiting and Selecting Key Employees

• Recruiting Key Employees– Startups vary in terms of how quickly they need to add

personnel.– In some instances, the founders will work alone for a

period of time. In other instances, employees are hired immediately.

– Some founders draw upon their network of contacts to identify candidates for key positions (or go through placement offices like those at your college or university), and some rely on executive search firms.


The Roles of the Board of Directors(1 of 3)

• Board of Directors– If a new venture organizes as a corporation, it is legally

required to have a board of directors.– A board of directors is a panel of individuals who are

elected by a corporation’s shareholders to oversee the management of the firm.

– A board is typically made up of both inside directors and outside directors.

• An inside director is a person who is also an officer of the firm.• An outside director is someone who is not employed by the firm.



• Formal Responsibility of the Board– A board of directors has three formal responsibilities.

• Appoint the officers of the firm• Declare dividends• Oversee the affairs of the corporation

• Frequency of Meetings and Compensation– Most board of directors meet three to four times a year.– New ventures are more likely to pay their boards in

company stock or ask them to service on a voluntary basis, rather than pay a cash honorarium.



Function Importance of Function

Provide Guidance

Lend Legitimacy

Although a board of directors has formal governance responsibilities, its most useful role is to provide guidance and support to the firm’s managers. Many founders and CEOs interact with their board members frequently and

obtain important input and advice.

Another important function of a board of directors is to lend legitimacy to a firm. Well-known and respected board

members bring instant credibility to the firm.

Ways a Board of Directors Can Help a New Venture Get Off to a Good Start


Rounding Out the Team: The Role of Professional Advisors

Board of Advisors(pnnsht)

Lenders and Investors Other Professionals


Board of Advisors(1 of 4)

• Board of Advisors– A board of advisors is a panel of experts who are asked by

a firm’s managers to provide counsel and advice on an ongoing basis.

– Unlike a board of directors, an advisory board possesses no legal responsibility for the firm and gives nonbinding advice.

– An advisory board can be set up for general purposes or can be set up to address a specific issue or need.



• Board of Advisors (continued)– Many people are more willing to serve on a company’s

board of advisors than its board of directors because it requires less time and there is no potential legal liability involved.

– Like the members of a board of directors, the members of a company’s board of advisors provide guidance and lend credibility to the firm.

– An example of a board of advisors is shown on the next slide.



Board of Advisors of BeautyBuys.com

Name Profession Role on Advisory Board

ChazzPalminteri

Lawrence K. Fleischman

Kim Lockerbie

Dr. Helen Flamenbaum

KZS Advertising

Hollywood actor, writer, and director

A full-service advertising and marketing firm

President of a financial consulting firm

A medical doctor specializing in dermatology

VP of Business Development for an advertising firm

Adds legitimacy to the firm

Adds legitimacy and provides the firm advice on financial issues

Adds legitimacy and provides the firm advice on advertising related issues

Adds legitimacy and provides the firm advice on medical related issues

Adds legitimacy and provides the firm advice on advertising related issues



• Guidelines to Organizing a Board of Advisors– Advisors will become disillusioned if they don’t play a

meaningful role in the firm’s development and growth.– A firm should look for board members who are compatible

and complement one another in terms of experience and expertise.

– When inviting people to serve on its board of advisors, a company should carefully spell out to the individuals involved the rules in terms of access to confidential information.


Lenders and Investors(1 of 1)

• Lenders and Investors– Lenders and investors have a vested interest in the

companies they finance, often causing them to become very involved in helping the firms they fund.

– Like the other non-employee members of a firm’s new venture team, lenders and investors help new firms by providing guidance and lending advice.

– In addition, a firm’s lenders and investors assume the natural role of providing financial oversight.


Other Professionals

• Other Professionals– The other professionals that make up a firm’s new venture

team, which vary by firm, include attorneys, accountants, and business consultants.

• Business Consultants– A business consultant is an individual who gives

professional or expert advice.– Business consultants fall into two categories: paid

consultants and consultants who are available for free or at a reduced rate through a nonprofit or governmental agency.


Chapter 7



R. Duane Ireland



1. Explain the two functions of the financial management of a firm.

2. Identify the four main financial objectives of entrepreneurial firms.

3. Explain the difference between historical and pro forma financial statements.

4. Explain the purpose of an income statement.5. Explain the purpose of a balance sheet.



6. Explain the purpose of a statement of cash flows.7. Discuss how financial ratios are used to analyze and

interpret a firm’s financial statements.8. Discuss the role of forecasts in projecting a firm's future

income and expenses.9. Explain what a completely new firm bases its forecasts

on.10. Explain what is meant by the term “percent of sales

method.”


Financial Management(1 of 2)

• Financial Management– Financial management deals with two things: raising

money and managing a company’s finances in a way that achieves the highest rate of return.

– Chapter 10 focuses on raising money. This chapter focuses primarily on:

• How a new venture tracks its financial progress through preparing, analyzing, and maintaining past financial statements.

• How a new venture forecasts future income and expenses by preparing pro forma (or projected) financial statements.


Financial Management(2 of 2)

The financial management of a firm deals with questions such as the following on an ongoing basis:

• How are we doing? Are we making or losing money?

• How much cash do we have on hand?

• Do we have enough cash to meet our short-term obligations?

• How efficiently are we utilizing our assets?

• How does our growth and net profits compare to those our industry peers?

• Where will the funds we need for capital improvements come from?• Are there ways we can partner with other firms to share risk and reduce the

amount of cash we need?

• Overall, are we in good shape financially?


Financial Objectives of a Firm(1 of 2)

• Profitability– Is the ability to earn a profit.

• Many start-ups are not profitable during their first one to three years while they are training employees and building their brands.

• However, a firm must become profitable to remain viable and provide a return to its owners.

• Liquidity– Is a company’s ability to meet its short-term financial

obligations.• Even if a firm is profitable, it is often a challenge to keep enough

money in the bank to meet its routine obligations in a timely manner.


Financial Objectives of a Firm(2 of 2)

• Efficiency– Is how productively a firm utilizes its assets relative to its

revenue and its profits.• Southwest Airlines, for example, uses its assets very productively.

Its turnaround time, or the time its airplanes sit on the ground while they are being unloaded and reloaded, is the lowest in the airline industry.

• Stability– Is the strength and vigor of the firm’s overall financial

posture. • For a firm to be stable, it must not only earn a profit and remain

liquid but also keep its debt in check.


The Process of Financial Management(1 of 3)

• Importance of Financial Statements– To assess whether its financial objectives are being met,

firms rely heavily on analysis of financial statements.• A financial statement is a written report that quantitatively

describes a firm’s financial health. • The income statement, the balance sheet, and the statement of cash

flows are the financial statements entrepreneurs use most commonly.

• Forecasts– Are an estimate of a firm’s future income and expenses,

based on past performance, its current circumstances, and its future plans.



• Forecasts (continued)– New ventures typically base their forecasts on an estimate

of sales and then on industry averages or the experiences of similar start-ups regarding the cost of goods sold and on other expenses.

• Budgets– Are itemized forecasts of a company’s income, expenses,

and capital needs and are also an important tool for financial planning and control.



• Financial Ratios– Depict relationships between items on a firm’s financial

statements.– An analysis of its financial ratios helps a firm determine

whether it is meeting its financial objectives and how it stacks up against its industry peers.

• Importance of Financial Management– Many experienced entrepreneurs stress the importance of

keeping on top of the financial management of the firm.• In the competitive environment in which most firms exist, it’s

simply not good enough to shoot from the hip when making financial decisions.


Financial Statements

• Historical Financial Statements– Reflect past performance and are usually prepared on a

quarterly and annual basis.• Publicly traded firms are required by the SEC to prepare financial

statements and make them available to the public.

• Pro Forma Financial Statements– Are projections for future periods based on forecasts and

are typically completed for two to three years in the future.• Pro forma financial statements are strictly planning tools and are

not required by the SEC.


New Venture Fitness Drinks

• New Venture Fitness Drinks– To illustrate how financial statements are prepared, we

used New Venture Fitness Drinks, a fictitious sports drink company.

• New Venture Fitness Drinks has been in business for five years.• Targeting sports enthusiasts, the company sells a line of nutritional

fitness drinks.• It opened a single location in 1999, added a second location in

2004, and plans to add a third in 2005. • The company’s strategy is to place small restaurants, similar to

smoothie restaurants, near large outdoor sports complexes.• The company is profitable and is growing at a rate of 25% per year.


Historical Financial Statements(1 of 2)

Three types of historical financial statements

Financial statement Purpose

Income Statement

Balance Sheet

Statement of cash flows

The income statement reflects the results of the operations of a firm over a specified period of time. It records all the

revenues and expenses for the given period and shows whether the firm is making a profit or is experiencing a loss.

The balance sheet is a snapshot of a company’s assets, liabilities, and owners’ equity at a specific point in time.

The statement of cash flows summarizes the changes in a firm’s cash position for a specified period of time and

details why the change occurred. The statement of cash flows is similar to a month-end bank statement.


Historical Financial Statements(2 of 2)

• Ratio Analysis– The most practical way to interpret or make sense of a

firm’s historical financial statements is through ratio analysis, as shown in the next slide.

• Comparing a Firm’s Financial Results to Industry Norms– Comparing a firm’s financial results to industry norms

helps it determine how it stakes up against its competitors and if there are any financial “red flags” requiring attention.


Forecasts(1 of 3)

• Forecasts– The analysis of a firm’s historical financial statements are

followed by the preparation of forecasts. – Forecasts are predictions of a firm’s future sales, expenses,

income, and capital expenditures.• A firm’s forecasts provide the basis for its pro forma financial

statements.• A well-developed set of pro forma financial statements help a firm

create accurate budgets, build financial plans, and manage its finances in a proactive rather than a reactive manner.


Forecasts(2 of 3)

• Sales Forecast– A sales forecast is projection of a firm’s sales for a

specified period (such as a year).– It is the first forecast developed and is the basis for most of

the other forecasts. • A sales forecast for a new firm is based on a good-faith estimate of

sales and on industry averages or the experiences of similar start-ups.

• A sales forecast for an existing firm is based on (1) its record of past sales, (2) its current production capacity and product demand, and (3) any factors that will affect its future product capacity and product demand.


Forecasts(3 of 3)

• Forecast of Costs of Sales and Other Items– Once a firm has completed its sales forecast, it must

forecast its cost of sales (or cost of goods sold) and the other items on its income statement.

– The most common way to do this is to use the percentage-of-sales method, which is a method for expressing each expense item as a percentage of sales.

• If a firm determines that it can use the percent-of-sales method and it follows the procedures described in the textbook, then the net result is that each expense item on its income statement will grow at the same rate as sales (with the exception of items that can be individually forecast, such as depreciation).


Pro Forma Financial Statements(1 of 3)

• Pro Forma Financial Statements– A firm’s pro forma financial statements are similar to its

historical financial statements except that they look forward rather than track the past.

– The preparation of pro forma financial statements helps a firm rethink its strategies and make adjustments if necessary.

– The preparation of pro forma financials is also necessary if a firm is seeking funding or financing.



Three types of pro forma financial statements

Financial statement Purpose

Pro Forma Income Statement

Pro Forma Balance Sheet

Pro Forma Statement of Cash flows

Financial statement that shows the projected results of the operations of a firm over a specific period.

Financial statement that shows a projected snapshot of a company’s assets, liabilities, and owner’s equity at a specific

point in time.

Financial statement that shows the projected flow of cash into and out of a company for a specific period.



• Ratio Analysis– The same financial ratios used to evaluate a firm’s

historical financial statements should be used to evaluate the pro forma financial statements.

– This work is completed so the firm can get a sense of how its projected financial performance compares to its past performance and how its projected activities will affect its cash position and its overall financial soundness.


Chapter 8



R. Duane Ireland



1. Identify the two most important issues to consider when leaving an employer.

2. Discuss the importance of nondisclosure and noncompete agreements.

3. Explain the criteria important in selecting an attorney for a new firm.

4. Discuss the importance of a founders’ agreement.5. Provide several suggestions for how new firms can

avoid litigation.



6. Discuss techniques entrepreneurs use to promote high standards of business ethics in their firms.

7. Discuss the differences between sole proprietorships, partnerships, corporations, and limited liability companies.

8. Explain why most fast-growth entrepreneurial firms organize as corporations or limited liability companies rather than sole proprietorships or partnerships.

9. Explain double taxation.10. Explain the importance of the Electronic Signatures in

Global and International Commerce Act.


Initial Ethical and Legal Issues Facing a New Firm

Ethically departing a former employer Choosing a lawyer

Drafting a founders’agreement Avoiding litigation

Choosing a form of business ownership


Ethically Departing a Former Employer(1 of 2)

• Ethically Departing from an Employer– Behave in a Professional Manner(CARA/TNGKH LAKU)

• First, it is important that an employee give proper notice of an intention to quit and that the employee perform all assigned duties until the day of departure.

• If an employee is leaving a job to start a firm in the same industry, it is vital that he or she not take information that belongs to the current employer.

– Honor all Employment(PEKERJAAN) Agreements• Honor all nondisclosure and noncompete agreements entered into at

the time of employment. (see next slide)


Ethically Departing a Former Employer(2 of 2)

Noncompete Agreement

Prevents(HLGAN) an individual from

competing against a former(DHLU)

employer for a specified period of time

Nondisclosure Agreement

Is a promise made by an employee or another

party to not disclose(MBRITAHU)

the company’s trade secrets


Drafting a Founders’ Agreement(1 of 1)

• Founders’ Agreement– A founders’ agreement (or shareholders’ agreement) is a

written document that deals with issues such as the relative split of the equity among the founders of the firm, how individual founders will be compensated(BR GNTI RGI) for the cash or the “sweat equity” they put into the firm, and how long the founders will have to remain with the firm for their shares to fully vest.

– The items to include in the founders agreement are shown on the following slide.


Avoiding Legal Disputes(MPSOALKAN )

• Avoiding Legal Disputes– Most legal disputes are the result of misunderstandings,

sloppiness, or a simple lack of knowledge of the law. Getting bogged down in legal disputes is something an entrepreneur should work hard to avoid.

– There are several steps that an entrepreneur can take to avoid legal disputes:

• Meet all contractual obligations • Avoid undercapitalization• Get everything in writing• Promote business ethics


Promoting Business Ethics(1 of 3)

• Promoting Business Ethics in a New Venture– Code of Ethics

• A code of ethics describes the firm’s general value system, moral principles, and specific ethical rules that apply.

• The advantage of having a code of ethics is that it provides specific guidance to managers and employees regarding what is expected ofthem in terms of ethical behavior.

– Ethics Training Programs• Many organizations have formal ethics training programs that teach

employees how to respond to the types of ethical dilemmas that might arise on their jobs.



Most common types of ethical problems to guard against

Type of ethical problem Description

Human resource ethical problems

Conflicts of interest

These problems relate to the equitable and just treatment of current and prospective employees.

Unethical behavior here can range from asking an inappropriate question in a job interview to treating

people unfairly because of their gender, ethnic background, religion, and so on.

These problems relate to situations that divide the loyalty of employees. For example, it would be

inappropriate for an employee of a company to award a business contract to a friend or family member

because of their personal relationship rather than for legitimate business reasons.



Most common types of ethical problems to guard against (continued)

Type of ethical problem Description

Customer confidence

Inappropriate use of corporate resources

Problems in this area flare up when a company behaves in a way that shows a lack of respect for customers or a lack of concern with public safety.

Examples include misleading advertising and the sale of a product that a company knows is unsafe.

Problems in this area typically arise when a employees uses corporate resources for personal gain beyond

what is customary and reasonable. For example, an employees who spends two hours of every eight-hour workday surfing the Internet is guilty of excessive or

inappropriate use of corporate resources.


Choosing a Form of Business Ownership

When a business is launched, a form of legal entity must be chosen. The most common legal entities are…

Sole Proprietorship

Corporation

Partnership

Limited LiabilityCompany


Issues to Consider in Choosing a Legal Form of Business Ownership

• The cost of setting up and maintaining the legal form of ownership.

• The extent to which an entrepreneur can shield his or her personal assets from the liabilities of the business.

• Tax considerations• The ease of raising capital


Sole Proprietorship(1 of 2)

• Sole Proprietorship – The simplest form of business entity is the sole

proprietorship.– A sole proprietorship is a form of business organization

involving one person, and the person and the business are essentially the same.

– A sole proprietorship is not a separate legal entity. The sole proprietor is responsible for all the liabilities of the business, and this is a significant drawback(klemhan)


Sole Proprietorship(2 of 2)

Advantages and disadvantages of sole proprietorship


Partnerships(1 of 2)

• Partnerships– If two or more people start a business, they must organize as a

partnership, corporation, or limited liability company.– Partnerships are organized as either general or limited partnerships.

• A general partnership is a form of business organization where two or more people pool(mgumpl) their skills, abilities, and resources to run a business.

• A limited partnership is a modified form of general partnership. The major difference between the two is that a limited partnership includes two classes of owners: general partners and limited partners. The general partners are liable for the debts and obligations of the partnership, but the limited partners are liable only up to the amount of their investment.


Partnerships(2 of 2)

Advantages and disadvantages of a general partnership


Corporations(1 of 5)

• Corporations– A corporation is a separate legal entity organized under the

authority of a state. – Corporations are organized as either C corporations or

subchapter S corporations. • C Corporations

– A C corporation is a separate legal entity that, in the eyes of the law, is separate from its owners.

– In most cases the corporation shields its owners, who are called shareholders, from personal liability for the debts of the corporation.



• C Corporations (continued)– A corporation is governed by a board of directors, which is

elected by the shareholders.– A corporation is formed by filing articles of incorporation

with the secretary of state’s office in the state of incorporation.

– A corporation is taxed as a separate legal entity. • A disadvantage of corporations is that they are subject to double-

taxation, which means that a corporation is taxed on its net income and, when the same income is distributed to shareholders in the form of dividends, is taxed again on shareholders’ personal tax returns.



Advantages and disadvantages of a C Corporation



• Subchapter S Corporation– A subchapter S corporation combines the advantages of a

partnership and a C corporation. It is similar to a partnership in that the profits and losses of the business are not subject to double taxation.

– The subchapter S corporation does not pay taxes; instead, the profits or losses of the business are passed through to the individual tax returns of the owners.

– It is similar to a corporation in that the owners are not subject to personal liability for the behavior of the business.



There are strict standards that a business must meet to qualify for status as a subchapter S corporation. The standards are shown below:


Limited Liability Company(1 of 2)

• Limited Liability Company– The limited liability company (LLC) is a form of business

organization that is rapidly gaining popularity in the U.S.– Along with the subchapter S corporation, it is a popular

choice for start-up firms.• As with partnerships and corporations, the profits of an LLC flow

through to the tax returns of the owners and are not subject to double taxation.

• The main advantage of the LLC is that all partners enjoy limitedliability.

– The LLC combines the limited liability advantage of the corporation with the tax advantages of the partnership.


Limited Liability Company(2 of 2)

Advantages and disadvantages of a Limited Liability Company


The Legal Environment of the Internet

• Legal Environment of the Internet– Most new businesses will utilize the Internet in their

business operations.– When the Internet was introduced in the early 1990s, many

businesses approached it with an “anything goes” attitude, believing it was alright to do almost anything online.

– As time goes on, however, the legal system is getting a better grip on the Internet, and more laws and regulations are being passed.


The World Wide Web(1 of 3)

Three Types of Web Sites

Type of Web Site Description Primary Legal Issues Involved

Shop-Window Web Site

This type of Web site provides information

about a company and its products but encourages

very little interaction.

• All content placed on the Web site should be original, unless permission has been obtained.

• Pricing information should be updatedfrequently.

• Misleading product descriptions cancause repercussions.

• Misleading advertising should be avoided.



Three Types of Web Sites (continued)


Contributed Content Web

Sites

Web sites that encourage visitors to

interact are exposed to several additional

forms of legal risks.

The most common problem in this area arises when sites encourage

visitors to interact by making discussion boards or chat rooms available. Reasonable measures

should be taken to control the material that appears on the Web site. These measures need to be addressed in a

Web site’s “terms and conditions” so that anyone viewing the Web site is aware of the steps taken to prevent

problems from occurring.



Three Types of Web Sites (continued)


Full E-Commerce Web Site

Full E-Commerce Web sites sell goods and

services via the Web.

New businesses that plan to sell products or services via the Web

should consult with an attorney to be sure they know all the current laws

and regulations that apply. An important caveat of selling online is to

make sure to form a legally binding contract with the purchaser. To do

this, many sites require their customers to scroll through a list of

terms and conditions and click on an “I accept” button before a purchase

can be completed.


Trademarks and Domain Names(1 of 3)

• Trademarks– The emergence of the Internet has led to a variety of issues

in trademark law and practice.– Because it is so easy to find a company with the same name

as your company’s name on the Internet, trademark disputes often arise.

• For example, in the past, a consulting firm in Michigan operating under the name Ivey Consulting may have never known that a similar firm in California operated under the same name. Now, its easy for the firms to stumble across one another surfing the Internet, which could result in a trademark infringement suit by the company that first registered the name.



• Domain Names– A domain name is a company’s Internet address (e.g.,

www.intel.com).– Most companies want their domain name to be the same as

their company’s name.– It is easy to register a domain name through an online

registration service (www.networksolutions.com).• Until recently, some people, called cybersquatters, registered the

domain names of companies and people for the sole purpose of trying to resell the names (for a substantial profit) to those companies or individuals. (Next slide)

http://www.intel.com/

http://www.networksolutions.com/



• Domain Names– To stop the practice of cybersquatting, Congress passed the

Anticybersquatting Consumer Protection Act in 1999.• Probably the most famous domain name dispute in the history of

the Internet involved the actress Julia Roberts. In June 2000, an international arbitration panel ruled that an accused cybersquatterwho registered the domain name (www.juliaroberts.com) had no legitimate interest in the name and registered it in bad faith. The panel awarded the name to Julia Roberts. In finding bad-faith intent, the arbitration panel cited evidence that the defendant had registered the names of several famous movie and sports figures and even tried to auction off the name Julia Robert’s domain name on eBay’s Web site.

http://www.juliaroberts.com/


Electronic Contracts and Digital Signatures

• Legally Binding Contracts Online– As a result of the Electronic Signatures in Global and

International Commerce Act, contracts negotiated online have the same legal standing as traditional legal contracts signed in ink.

– Online contracts are often signed with digital signatures.• A digital signature is a computer-generated block of text that

accurately identifies both the signer and the content, helping to ensure the authenticity and integrity of electronic documents.


Chapter 9



R. Duane Ireland



1. Explain the purpose of a business plan.2. Discuss how a business plan can be a dual-use

document.3. Explain how the process of writing a business plan

can be as important as the plan itself.4. Identify the advantages and disadvantages of using

software packages to assist in the preparation of a business plan.

5. Explain the difference between a summary business plan, a full business plan, and an operational business plan.



6. Explain why the executive summary may be the most important section of a business plan.

7. Describe a milestone and how milestones are used in business plans.

8. Explain the purpose of a “sources and uses of funds”statement.

9. Describe a liquidity event.10. Detail the parts of an oral presentation of a business

plan.


What is a Business Plan?

• Business Plan– A business plan is a written narrative, typically 25 to 35

pages long, that describes what a new business plans to accomplish.

• Dual-Use Document– For most new ventures, the business plan is a dual-purpose

document used both inside and outside the firm.• Inside the firm, the plan helps the company develop a “road map”

to follow in executing its strategies and plans.• Outside the firm, it introduces potential investors and other

stakeholders with the business opportunity the firm is pursuing and how it plans to pursue it.


Why Read the Business Plan—and What Are They Looking For?

There are two primary audience for a firm’s business plan.

Audience What They are Looking For

A Firm’s Employees

Investors and other external stakeholders

A clearly written business plan, which articulates the vision and future plans of the firm, helps the employees of a firm operate in sync and move forward in a consistent

and purposeful manner.

A firm’s business plan must make the case that the firm is a good use of an investor’s funds or the attention of other

external stakeholders. The key is to include facts generated through a properly conducted feasibility analysis. A

business plan rings hollow if it is based strictly on what an entrepreneur or team of founders “thinks” will happen.


Guidelines for Writing a Business Plan(1 of 3)

• Structure of the Business Plan– To make the best impression, a business plan should follow

a conventional structure, such as the outline for the business plan shown in the chapter.

– Although some entrepreneurs want to demonstrate creativity in everything they do, departing from the basic structure of the conventional business plan format is usually a mistake.

– Typically, investors are very busy people and want a plan where they can easily find critical information.



• Structure of the Business Plan (continued)– Software Packages

• There are many software packages available that employ an interactive, menu-driven approach to assist in the writing of a business plan.

• Some of these programs are very helpful. However, entrepreneursshould avoid a boilerplate plan that looks as though it came from a “canned” source.

– Sense of Excitement• Along with facts and figures, a business plan needs to project a

sense of anticipation and excitement about the possibilities that surround a new venture.



• Content of the Business Plan– The business plan should give clear and concise

information on all the important aspects of the proposed venture.

– It must be long enough to provide sufficient information yet short enough to maintain reader interest.

– For most plans, 25 to 35 pages is sufficient.

• Types of Business Plans– There are three types of business plans, which are shown

on the next slide.


Outline of Business Plan(1 of 1)

• Outline of Business Plan– A suggested outline of a business plan is shown on the next

several slides. – Most business plans do not include all the elements

introduced in the sample plan; we include them here for the purpose of completeness.

– Each entrepreneur must decide which elements to include in his or her plan.


Exploring Each Section of the Plan(1 of 10)

• Cover Page and Table of Contents– The cover page should include the name of the company,

its address, its phone number, the data, and contact information for the lead entrepreneur.

• The Executive Summary– The executive summary is a short overview of the entire

business plan; it provides a busy reader with everything that needs to be known about the new venture’s distinctive nature.

• In many instances, an investor will first ask for a copy of the executive summary and will request a copy of the full business plan only if the executive summary is sufficiently convincing.



• The Business– The most effective way to introduce the business is to

describe the opportunity the entrepreneur has identified–that is, the problem to solve or the need to be filled–and then describe how the business plans to address the issue.

– The description of the opportunity should be followed by a brief history of the company, along with the company’s mission statement and objectives.

– An explanation of the company’s competitive advantage and a brief description of the business model follow.



• Management Team– As mentioned earlier, one of the most important things

investors want to see when reviewing the viability of new ventures is the strength of its management team.

– If the team doesn’t “pass muster,” most investors won’t read further.

– The material in this section should include a brief summary of the qualifications of each member of the management team, including his or her relevant employment and professional experiences, significant accomplishments, and educational background.



• Company Structure, Ownership, and Intellectual Property– This section should begin by describing the structure of the new

venture, including the reporting relationships among the top management team members.

– The next part of the section should explain how the firm is legally structured.

– The third part of this section should discuss the intellectual property the firm owns, including patents, trademarks, and copyrights.

• This is a very important issue. Intellectual property forms the foundation for the valuation and competitive advantage of many entrepreneurial companies.



• Industry Analysis– This section should begin by discussing the major trends in

the industry in which the firm intends to compete along with important characteristics of the industry, such as its size, attractiveness, and profit potential.

– This section should also discuss how the firm will diminish or sidestep the forces that suppress its industry’s profitability.

– The firm’s target market should be discussed next, along with an analysis of how it will compete in that market.



• Marketing Plan– This marketing plan should immediately follow the

industry analysis and should provide details about the new firm’s products or services.

– After reading this section of the plan, an investor should be confident that the firm’s overall approach to its target market and its product strategy, pricing strategy, channels of distribution, and promotional strategy are in sync with one another and make sense.



• Operations Plan– This section of the plan deals with the day-to-day

operations of the company. – An overview of the manufacturing plan (or service delivery

plan) should be followed by a description of the network of suppliers, business partners, and service providers that will be necessary to build the product or produce the service the firm will sell.

– Any risks or regulations pertaining to the operations of the firm should be disclosed, such as nonroutine regulations regarding waste disposal and worker safety.



• Financial Plan– The financial section of the plan must demonstrate the

financial viability of the business. A careful reader of the plan will scrutinize this section.

– The financial plan should begin with an explanation of the funding that will be needed by the business during the next three to five years along with an explanation of how the funds will be used.

• This information is called a sources and uses of funds statement. – The next portion of this section includes financial

projections, which are intended to further demonstrate the financial viability of the business.



• Financial Plan (continued)– The financial projections should include three to five years

of pro forma income statements, balance sheets, and statements of cash flows, as described in Chapter 7.

– It is important to remember that the business plan should be based on realistic projections.

• If it is not and the company gets funding or financing, there will most certainly be a day of reckoning. Investors and bankers hold entrepreneurs accountable for the numbers in their projections.



• Critical Risk Factors– Although a variety of potential critical risks may exist, a

business should tailor this section to depict its truly criticalrisks.

• Appendix– Any material that does not easily fit into the body of a

business plan should appear in an appendix. Examples of materials that might appear in the Appendix include:

• Resumes of the top management team members, photos or diagrams of product or product prototypes, certain financial data, and market research projections.


Presenting the Business Plan to Investors(1 of 3)

• Making a Presentation to Investors– If the business plan successfully elicits the interest of

potential investors, the next step is to meet with the investor and present the plan in person.

– The first meeting with an investor is generally very short, about one hour. The investor will typically ask the firm to make a 20- to 30- minute presentation using PowerPointslides and use the rest of the time to respond to questions.

– If the investor is impressed and wants to learn more about the venture, the firm will be asked back for a second meeting.



• Tips on Making an Oral Presentation to Investors– When asked to meet with an investor, the founders or a

new venture should prepare a set of PowerPoint slides that will fill the time slot permitted.

– The presentation should be smooth and well rehearsed. The slides should be sharp and not cluttered with material.

• The first rule in making an oral presentation is to follow instructions. If an investor tells an entrepreneur that he or she has one hour and that the hour will consist of a 30-minute presentation and a 30-minute question-and-answer period, the presentation shouldn’t last more than 30 minutes.



The most important issues to cover in a PowerPoint presentation to investors(including recommendations for the number of slides to use for each topic)


Chapter 10



R. Duane Ireland



1. Explain why most new ventures need to raise money at some point during their early life.

2. Identify the three sources of personal financing available to entrepreneurs.

3. Provide examples of how entrepreneurs bootstrap to raise money or cut costs.

4. Identify the three steps involved in properly preparing to raise debt or equity financing.

5. Explain the role of an elevator speech in attracting financing for a firm.



6. Discuss the difference between equity funding and debt financing.

7. Describe the difference between a business angel and a venture capitalist.

8. Explain why an initial public offering is an important milestone for a firm.

9. Discuss the SBA Guaranteed Loan Program.10. Explain the advantages of leasing for an entrepreneurial

firm.


The Importance of Getting Financing or Funding

• Understanding the Alternatives for Financing or Funding– Few people deal with the process of raising investment

capital until they need to raise capital for their own firm.– As a result, many entrepreneurs go about raising capital

haphazardly because they lack experience.– To be successful in this area, it is important for

entrepreneurs to understand the role of investment capital in the success of a new businesses, and the options available to entrepreneurial firms for obtaining financing or funding.


Sources of Personal Financing(1 of 3)

• Sources of Personal Financing– Typically, the seed (or initial) money that gets a company

off the ground comes from the founders themselves—from their personal savings, mortgages(CAGARAN), and credit cards.

• All founders contribute sweat equity to their ventures, which represents the value of the time and effort that a founder puts into a new firm.

• Love Money– Friends and family are the second source of funds for many

new ventures. This form of contribution is often called “love money.”



• Love Money (continued)– Love money can consist of outright gifts, loans, or

investments, but often comes in the form of forgone or delayed compensation or reduced or free rent.

• Bootstrapping– Another source of seed money for new ventures is

bootstrapping. • Bootstrapping is the use of creativity, ingenuity, and any means

possible to obtain resources other than borrowing money or raising capital from traditional sources.



There are many ways entrepreneurs bootstrap to raise money or cut costs. Some of the most common examples include the following:

• Minimizing personal expenses and putting all profits back into the

business

• Avoiding unnecessary expenses, such as lavish office space or furniture

• Establishing partnerships and sharing expenses with partners

• Leasing equipment rather than buying

• Sharing office space or employees with other businesses

• Utilizing the services or a university or community incubator• Buying items cheaply but prudently through discount outlets or onlineauctions, such as eBay, rather than at full-price stores


Preparing to Raise Debt or Equity Financing(1 of 1)

Two most common alternatives for raising money

Alternative Explanation

Equity funding

Debt financingDebt financing is getting a loan. The most common sources of debt financing are commercial banks and the Small Business

Administration (through its guaranteed loan program).

Equity funding means exchanging partial ownership in a firm, usually in the form of stock, for funding. Angel investors, private

placement, venture capital, and initial public offerings are themost common sources of equity funding. Equity funding is not a

loan—the money that is received is not paid back. Instead, equity investors become partial owners of a firm.


Preparing An Elevator Speech(1 of 1)

• Elevator Speech– An elevator speech is a brief, carefully constructed

statement that outlines the merits of a business opportunity.– Why is it called an elevator speech?

• If an entrepreneur stepped into an elevator on the 25th floor of a building and found that by a stroke of luck a potential investor was in the same elevator, the entrepreneur would have the time it takes to get from the 25th floor to the ground floor to try to get the investor interested in his or her opportunity. This type of chance encounter with an investor calls for a quick pitch of one’s business idea. This quick pitch has taken on the name “elevator speech.”

• Most elevator speeches are 45 seconds to two minutes long.


Sources of Equity Funding

Venture Capital Business Angels

Initial Public Offerings


Business Angels(1 of 2)

• Business Angels– Are individuals who invest their personal capital

directly in start-ups. – The prototypical business angel is about 50 years

old, has high income and wealth, is well educated, has succeeded as an entrepreneur, and is interested in the startup process.

– The number of angel investors in the U.S. has increased dramatically over the past decade.


Business Angels(2 of 2)

• Business Angels (continued)– Business angels are valuable because of their

willingness to make relatively small investments. • This gives access to equity funding to a start-up that

needs just $50,000 rather than the $1 million minimum investment that most venture capitalists require.

– Business angels are difficult to find. Most angels remain fairly anonymous and are matched up with entrepreneurs through referrals.


Venture Capital(1 of 3)

• Venture Capital– Is money that is invested by venture-capital firms in start-

ups and small businesses with exceptional growth potential. – There are about 650 venture-capital firms in the U.S. that

provide funding to about 3,000 to 4,000 firms per year.• Venture-capital firms are limited partnerships of money managers

who raise money in “funds” to invest in start-ups and growing firms. The funds, or pool of money, are raised from wealthy individuals, pension plans, university endowments, foreign investors, and similar sources. A typical fund is $75 million to $200 million and invests in 20 to 30 companies over a three- to five-year period.



• Venture Capital (continued)– The investment preferences of venture-capitalist are fairly

narrow. • For example, in 2002, 20% of all venture-capital investments were

in the software industry. Telecommunications, networking, computers and peripherals, semiconductors, medical devices, and biotechnology are other industries attracting funding from venture capitalists.

• Many entrepreneurs get discouraged when they are repeatedly rejected for venture capital funding, even though they may have an excellent business plan.

• Venture capitalists are looking for the “home run” and so reject the majority of the proposals they consider.



• Venture Capital (continued)– An important part of obtaining venture-capital funding is

going through the due diligence process, which refers to the process of investigating the merits of a potential venture and verifying the key claims made in the business plan.

– Venture capitalists invest money in start-ups in “stages,”meaning that not all the money that is invested is disbursed at the same time.

– Some venture capitalists also specialize in certain “stages”of funding.

• For example, some venture capital firm specialize in seed funding while others specialize in first-stage or second-stage funding.


Initial Public Offering(1 of 3)

• Initial Public Offering– An initial public offering (IPO) is a company’s first sale of

stock to the public. When a stock goes public, its stock is traded on one of the major stock exchanges.

– Most entrepreneurial firms that go public trade on the NASDAQ, which is weighted heavily toward technology, biotech, and small-company stocks.

– An IPO is an important milestone for a firm. Typically, a firm is not able to go public until it has demonstrated that it is viable and has a bright future.



Four reasons that motivate firms to go public

Reason 1

Is a way to raise equity capital to fund current and future operations

Reason 4

By going public, a firm creates

another form of currency that can be used to grow

the company

Reason 3

An IPO is a liquidity event that provides a means

for a company shareholders (including its

investors) to cash out their

investments

Reason 2

An IPO raises a firm’s public

profile, making it easier to attract

high-quality customers,

alliance partners, and employees



• Initial Public Offering (continued)– Although there are many advantages to going public, it is a

complicated and expensive process. • The first step in initiating a public offering is to hire an investment

bank. An investment bank is an institution, such as Credit Suisse First Boston, that acts as an advocate and adviser and walks a firm through the process of going public.

• As part of this process, the investment bank typically takes the firm’s top management team wanting to go public on a road show, which is a whirlwind tour that consists of meetings in key cities where the firm presents its business plan to groups of investors (in an effort to drum up interest in the IPO).


Sources of Debt Financing

Commercial Banks

SBA Guaranteed Loans


Commercial Banks

• Banks– Historically, commercial banks have not been viewed as

practical sources of financing for start-up firms. – This sentiment is not a knock against banks; it is just that

banks are risk adverse, and financing start-ups is a risky business.

• As shown in Table 10.1 (on a previous slide), banks are interested in firms that have a strong cash flow, low leverage, audited financials, good management, and a healthy balance sheet.

• Although many new ventures have good management, few have the other characteristics, at least initially.


SBA Guaranteed Loans(1 of 3)

• The SBA Offers Three Loan Programs– 7(a) Loan Guarantee, Microloan, and 504 Certified

Development Company Loan– The SBA does not currently have funding for direct loans

nor does it provide grants or low interest loans for business start-up or expansion.

• Philosophy Behind SBA Programs– The SBA provides loan guarantees to small businesses

unable to secure financing on reasonable terms through normal lending channels.



• Philosophy Behind SBA Programs – The programs operate through private-sector lenders that

provide loans which are, in turn, guaranteed by the SBA.• What Can the Loan Funds Be Used For?

– Working capital to expand an existing business or start a new one

– Real estate renovation, purchase or construction– Equipment purchases

• Who is Eligible– Almost all small businesses are eligible for the SBA

programs.



• Amount of Funds Available– The SBA can guarantee as much as 85% on loans of up to

$150,000 and 75% on loans of more than $150,000.– In most cases, the maximum guaranty is $1 million.

• Collateral– In most cases, the individual obtaining the loan must

pledge all his or her available collateral to obtain the loan.


Creative Sources of Financing or Funding

Small Business Innovation

Research Grants

Leasing Strategic Partners


Leasing(Slide 1 of 2)

• Leasing– A lease is a written agreement in which the owner of a

piece of property allows an individual or business to use the property for a specified period of time in exchange for payments.

– The major advantage of leasing is that it enables a company to acquire the use of assets with very little or no down payment.

• The two most common types of leases that new ventures enter intoare leases for facilities and leases for equipment.

• For example, many new businesses lease computers from Dell. The advantage for the new business is that it can gain access to the computers it needs with very little money invested up front.


Leasing(Slide 2 of 2)

• Leasing (continued)– Most leases involve a modest down payment and monthly

payments during the duration of the lease.– At the end of an equipment lease, the new venture typically

has the option to stop using the equipment, purchase it for fair market value, or renew the lease.

– Leasing is almost always more expensive than paying cash for an item, so most entrepreneurs think of leasing as an alternative to equity or debt financing.


Government Grants(1 of 3)

• SBIR and SBTT Programs– The Small Business Innovation Research (SBIR) and the

Small Business Technology Transfer (SBTT) programs are two important sources of early-stage funding for technology firms.

– These programs provide cash grants to entrepreneurs who are working on projects in specific areas.

• The main difference between the SBIR and the SBTT programs is that the SBTT program requires the participation of researchers working at universities or other research institutions.



• SBIR Program– The SBIR Program is a competitive grant program that

provides over $1 billion per year to small businesses in early-stage and development projects.

– Each year, 10 federal departments and agencies are required by the SBIR to reserve a portion of the R&D funds for awards to small businesses.

– Guidelines for how to apply for the grants are provided on each agency’s Web site.



• SBIR Program (continued)– The SBIR is a three phase program, meaning that firms that

qualify have the potential to receive more than one grant to fund a particular proposal.

– Historically, less than 15% of all phase I proposals are funded. The payoff for successful proposals, however, is high.

– The money is essentially free. It is a grant, meaning that it doesn’t have to be paid back and no equity in the firm is at stake.


Strategic Partners

• Strategic Partners– Strategic partners are another source of capital for new

ventures.• Biotechnology, for example, relies heavily on partners for financial

support. Biotech firms, which are typically small, often partner with larger drug companies to conduct clinical trials and bring products to market.

– Alliances also help firms round out their business models and conserve resources.

• As we discussed in Chapter 5, Dell can focus on its core competency of assembling computers because it has assembled a network of strategic partners that provides it critical support.


Chapter 11



R. Duane Ireland



1. Explain the purpose of market segmentation.2. Describe the importance of selecting a target

market. 3. Explain why it’s important for a start-up to

establish a unique position in its target market.4. Describe why it’s important to position a

company’s products on benefits rather than features.

5. Illustrate the two major ways in which a company builds a brand.



6. Identify the four components of the marketing mix.7. Explain the difference between a core product and an

actual product.8. Contrast cost-based pricing and value-based pricing.9. Explain the differences between advertising and public

relations.10. Weigh the advantages and disadvantages of selling

direct versus selling through intermediaries.


Selecting a Market and Establishing a Position

(1 of 1)

• Important Questions That All Startups Must Ask– In order to succeed, a new firm must address this important

issue: Who are our customers are how will we appeal to them?

– A well-managed start-up approaches this query by following a three-step process:

• Segmenting the market, selecting or developing a niche with a target market, and establishing a unique position in the target market.


Segmenting the Market

• Market Segmentation– The first step in selecting a target market is to study the

industry in which the firm intends to compete and determine the different target markets in that industry.

• This process is called market segmentation and is important because a new firm typically only has enough resources to target one market segment, at least initially.

• Markets can be segmented in a number of different ways, including product type, price point, and customers served.

• For example, the computer industry can be segmented by product type (i.e., handheld computers, laptops, PCs, microcomputers, and mainframes) or customers served (i.e., individuals, businesses, schools, and government).


Selecting a Target Market

• Target Market– Once a firm has segmented the market, the next step is to

select a target market. The market must be sufficiently attractive and the firm must have the capabilities to serve it.

– Typically, a firm doesn’t target an entire segment of a market because many market segments are too large to target successfully.

• Instead, most firms target a niche with the segment.• For example, one segment of the computer industry is handheld

computers. Within this segment, there are several smaller nichemarkets that represent a narrower group of customers with similar interests.


Establishing a Unique Position(1 of 2)

• Positioning– After selecting a target market, the firm’s next step is to

establish a “position” within it that differentiates it from its competitors.

– In a sense, a position is the part of a market or of a segment of the market the firm is claiming as its own.

– A firm establishes a unique position in its customers’ minds by consistently drawing attention to two or three of its product’s attributes that define the essence of what the product is and what separates it from its competitors.


Establishing a Unique Position(2 of 2)

• Positioning (continued)– Firms often develop a “tagline” to reinforce the position

they have staked out in their market, or a phrase that is used consistently in a company’s literature, advertisements, promotions, stationary, and even invoices and thus becomes associated with the company.

– An example is Nike’s familiar tagline, “Just do it.”• The beauty of this simple three-word expression is that it applies

equally to a 21-year-old triathlete and a 65-year-old mall walker.• This clever tagline, along with Nike’s positioning strategy, helped

it expand its product line beyond running shoes to athletic products for all age-groups.


Selling Benefits Rather Than Features(1 of 2)

• Selling Benefits Rather Than Features– Many entrepreneurs make the mistake of positioning their

company’s products or services on features rather than benefits.

– A positioning or marketing strategy that focuses on the features of a product, such as its technical merits, is usually much less effective than a campaign focusing on what the merits of the product can do.

– Consider the example of the following slide.


Selling Benefits Rather Than Features(2 of 2)

Two different approaches to promoting a cell phone

Approach Illustration

Selling Features

Selling Benefits

Conclusion

“Our cell phones are equipped with sufficient memory to store 100 phone numbers.”

“Our cell phones let you store up to 100 phone numbers, giving you the phone numbers of your family and your

friends at your fingertips.”

While features are nice, they typically don’t entice someone to buy a product. The first statement tells a prospect how many phone

numbers the cell phone will hold, but doesn’t tell the prospect why that’s important. The second statement tells a prospect why having

sufficient memory to store 100 phone numbers is important, and how buying the product will enhance his or her life.


Establishing a Brand(1 of 3)

• Establishing a Brand– A brand is the set of attributes—positive or negative—that

people associated with a company.• These attributes can be positive, such as trustworthy, dependable,

or easy to deal with.• Or they can be negative, such as cheap, unreliable, or difficult to

deal with.– The customer loyalty a company crates through its brand is

one of its most valuable assets.• Brand Management

– Some companies monitor the integrity of their brandsthrough a program called “brand management.”



• Establishing a Brand– So how does a firm establish a brand?

• On a philosophical level, a firm must have meaning in its customer’s lives. It must create value—something for which customers are willing to pay.

• On a more practical level, brands are built through a number of techniques, including advertising, public relations, sponsorships, support of social causes, and good performance.

• A firm’s name, logo, Web site design, and even its letterhead are part of its brand.

• It’s important for start-ups, particularly if they plan to sell to other businesses, to have a polished image immediately so that they have creditability when they approach their potential customers.



• Power of a Strong Brand– Ultimately, a strong brand can be a very powerful asset for

a firm.– Fifty-two percent of consumers say that a known and

trusted brand is a reason to buy a product.

• Cobranding– One technique that companies use to strengthen their

brands is to enter into a cobranding arrangements with other firms.

• Cobranding refers to a relationship between two or more firms where the firm’s brands promote each other.


The Four Ps of Marketing for New Ventures

Marketing Mix

Product Price

Promotion Place (or distribution)


Product(1 of 2)

• Product– A firm’s product, in the context of the marketing mix, is the

good or service it offers to its target market. – The initial rollout is one of the most critical times in the

marketing of a new product. • All new firms face the challenge that they are unknown and that it

takes a leap of faith for their first customers to buy their products.• Some start-ups meet this challenge by using reference accounts.• A reference account is an early user of a firm’s product or service

who is willing to give a testimonial regarding his or her experience with the product or service.


Product(2 of 2)

• Core Product vs. Actual Product– As a firm prepares to sell its product, an important

distinction should be made between the core product and the actual product.

– The core product is the product itself, such as a CD that contains an antivirus program.

– The actual product, which is what the customer buys, may have up to five attributes: a quality level, features, design, a brand name and packaging.


Price(1 of 2)

• Price– Price is the amount of money consumers pay to buy a

product. It is the only element of the marketing mix that produces revenue; all other elements represent a cost.

– The price a company charges for its products sends an important message to its target market.

• For example, Oakley positions its sunglasses as innovative, state-of-the-art products that are both high quality and visually appealing. This position in the market suggests a premium pricethat Oakley charges.

– Most entrepreneurs use one of two methods to set the price for their products, as shown on the next slide.


Price(2 of 2)

Cost-Based vs. Value-Based Pricing

Approach to Pricing

Description

Cost-Based Pricing

Value-Based Pricing

In cost-based pricing, the list price is determined by adding a markup percentage to a product’s cost. The advantage of this method is that it is straightforward, and it is relatively easy to

justify the price of a good or service. The disadvantage is that it is not always easy to estimate what the costs of a product will be.

In value-based pricing, the list price is determined by estimating what consumers are willing to pay for a product and then backingoff a bit to provide a cushion. What a consumer is willing to pay is determined by his or her perceived value of the product and by the number of choices available in the marketplace. Most experts

recommend value-based prices because it hinges on the consumer’s perception of what a product or service is worth.


Promotion(1 of 4)

• Promotion– Refers to the activities the firm takes to communicate the

merits of its product to its target market. – There are several common activities that entrepreneurs use

to promote their products and services.

• Advertising– Advertising is making people aware of a product or service

in hopes of persuading them to buy it.


Promotion(2 of 4)

• Advertising (continued)– Advertising’s major goals are to do the following:

• Raise customer awareness of a product• Explain a product’s comparative benefits• Create associations between a product and a certain lifestyle

– Advertising has some major weaknesses, including the following:• Low credibility• The possibility that a high percentage of the people who see the ad will not

be interested• Message clutter• Relatively costly compared to other forms of promotions• The perception that advertising is intrusive


Promotion(3 of 4)

• Public Relations– One of the most cost-effective ways to increase the

awareness of the company’s products is through public relations.

– Public relations refer to efforts to establish and maintain a company’s image with the public.

– The major difference between public relations and advertising is that public relations is not paid for—directly.

• The cost of public relations to a firm is the effort it makes tonetwork with journalists and other people to try to interest them in saying or writing good thing about the company and its products.


Promotion(4 of 4)

Techniques that are defined as public relations


Place (or Distribution)(1 of 2)

• Place– Place, or distribution, encompasses all the activities that

move a firm’s product from its place of origin to the consumer.

– The first choice a firm has to make regarding distribution is whether to sell its products directly to consumers or through intermediaries (such as wholesalers and retailers).

– Within most industries, both choices are available, so the decision typically depends on how a firm believes its target market wants to buy its product.


Place (or Distribution)(2 of 2)

Selling direct versus selling through intermediaries

Approach to Distribution

Description

Selling Direct

Selling Through

Intermediaries

Many firms sell direct to customers. Being able to control the process of moving their products from their place of origin to the end user instead of relying on third parties is a major advantage of selling direct. The disadvantage of selling direct is that a firm has more of its capital tied up because it must own or rent retail

outlets and must field a sales force.

Firms who sell through intermediaries pass off their products towholesalers who place them in retail outlets to be sold. An

advantage of this approach is that the firm does not need to ownas much of the distribution channel. The disadvantage of selling through intermediaries is that a firm loses control of its product.


Chapter 12



R. Duane Ireland



1. Define the term “intellectual property” and describe its importance.

2. Discuss the four major forms of intellectual property: patents, trademarks, copyrights, and trade secrets.

3. Specify the rules of thumb for determining whether a particular piece of intellectual property is worth the time and expense of protecting.

4. Describe the six-step process for obtaining a patent.5. Identify the four types of trademarks.



6. Identify the types of material that are eligible for copyright protection.

7. Discuss the legal environment that facilitates trade secret protection.

8. Identify the most common types of trade secret disputes.

9. Identify some of the physical measures that firms take to protect their trade secrets.

10. Explain the two primary reasons for conducting an intellectual property audit.


The Importance of Intellectual Property

• Intellectual Property– Is any product of human intellect that is intangible but has

value in the marketplace.– It is called “intellectual” property because it is the product

of human imagination, creativity, and inventiveness.

• Importance– Traditionally, businesses have thought of their physical

assets, such as land, buildings, and equipment as the most important.

– Increasingly, however, a company’s intellectual assets are the most important.


Determining What Intellectual Property to Protect

Criteria 1

Determine whether the intellectual property in

question is directly related to the firm’s

competitive advantage

Criteria 2

Decide whether the intellectual property in

question has value in the marketplace


The Four Key Forms of Intellectual Property

Patents

Copyrights

Trademarks

Trade Secrets


Patents(1 of 3)

• Patents– A patent is a grant from the federal government conferring

the rights to exclude others from making, selling, or using an invention for the term of the patent. (see the next slide)

• Increasing Interest in Patents– There is increasing interest in patents, as shown in Table

12.2.• Since Patent #1 was granted in 1790, the U.S. Patent & Trademark

Office has granted over six million patents.• The patent office is strained. It now takes an average of 27.7

months from the date of first filing to receive a U.S. patent.


Patents(2 of 3)

Proper Understanding of What a Patent Means

A patent does not give its owner the right to make, use or sell an invention: rather, the right granted is only to exclude others from doing so.

As a result, if an inventor obtains a patent for a new kind of computer chip, and the chip would infringe on a prior patent owned by Intel, the inventor has no right to make, use, or sell the chip.

To do so, the inventor would need to obtain permission from Intel. Intel may refuse permission, or ask that a licensing fee be paid for the rights to infringe on its patent.

While this system may seem odd, it is really the only way the system could work. Many inventions are improvements on existing inventions, and the system allows the improvements to be (patented) and sold, but only with the permission of the original inventors, who usually benefit by obtaining licensing income in exchange for their consent.


Patents(3 of 3)

• Business Method Patent– Recently, utility patent law has added business method

patents.– A business method patent is a patent that protects an

invention that is or facilitates a method of doing business.– The most notable business method patents that have been

awarded have been Amazon.com’s one-click ordering system, Priceline.com’s “name-your-price” business model and Netflix’s method for allowing customers to set up a rental list of movies to be mailed to them.


Trademarks(1 of 6)

A trademark is any word, name, symbol, or device used to

identify the source or origin of products or services and to

distinguish those products or services from others.

Trademarks also provide consumers with useful

information. For example, consumers know what to expect

when they log onto Yahoo! Think how confusing it would be if any Internet site was allowed

to call itself Yahoo!


Trademarks(2 of 6)

Illustration of the Multifaceted Nature of Trademark Protection

Name is trademarked

Symbol is trademarked

Slogan is trademarked

Cisco


Trademarks(3 of 6)

Trademark Law Protects the Following Items


Trademarks(4 of 6)

Trademark Law Protects the Following Items (continued)


Trademarks(5 of 6)

Exclusions From Trademark Protection


Additional Information About Trademarks(6 of 6)

• Duration– Once a trademark has been used in interstate commerce, it

can be registered with the U.S. Patent and Trademark Office for a renewable term of 10 years, and can theoretically be registered forever, as long as the trademark stays in use.

• Registering Trademarks– Technically, a trademark does not need to be registered to

receive protection. Once it is used, it is protected.• There are many advantages, however, to registering the market

with the U.S. Patent and Trademark Office.


Copyrights(1 of 5)

• Copyrights– A copyright is a form of intellectual property protection

that grants to the owner of a work of authorship the legal right to determine how the work is used and to obtain economic benefits from the work.

– A work does not have to have artistic merit to be eligible for copyright protection.

• As a result, things such as operating manuals are eligible for copyright protection.


Copyrights(2 of 5)

What is Protected by a Copyright?


Copyrights(3 of 5)

What is Protected by a Copyright? (continued)


Copyrights(4 of 5)

• Exclusions From Copyright Protection– The main exclusion is that copyright laws cannot protect

ideas.• For example, an entrepreneur may have the idea to open a soccer-

themed restaurant. The idea itself is not eligible for copyrightprotection. However, if the entrepreneur writes down specifically what his or her soccer-themed restaurant will look like and how it will operate, that description is copyrightable.

• The legal principle describing this concept is called the idea-expression dichotomy. An idea is not copyrightable, but the specific expression of an idea is.


Copyrights(5 of 5)

• How to Obtain a Copyright– Copyright law protects any work of authorship the moment

it assumes a tangible form. Technically, it is not necessary to provide a copyright notice or register work with the U.S. Copyright Office.

– The following steps can be taken, however, to enhance copyright protection.

• Copyright protection can be enhanced by attaching the copyright notice, or “copyright bug” to something.

• Further protection can be obtained by registering the work with the U.S. Copyright Office.

http://images.google.com/imgres?imgurl=www.aarstiderne.com/upload/2001120413421001-copyright.jpg&imgrefurl=http://www.aarstiderne.com/Copyright&h=154&w=150&prev=/images%3Fq%3Dcopyright%26svnum%3D10%26hl%3Den%26lr%3D%26ie%3DUTF-8


Trade Secrets(1 of 5)

• Trade Secrets– A trade secret is any formula, pattern, physical device, idea,

process, or other information that provides the owner of the information with a competitive advantage in the marketplace.

– Trade secrets include marketing plans, product formulas, financial forecasts, employee rosters, logs of sales calls, and similar types of proprietary information.

– The Federal Economic Espionage Act, passed in 1996, criminalizes the theft of trade secrets.



What Qualifies For Trade Secret Protection?



Trade Secret Protection MethodsPhysical Measures



Trade Secret Protection MethodsPhysical Measures (continued)



Trade Secret Protection MethodsWritten Agreements

It is important for a company’s employees to know that it is their duty to keep trade secrets and other

forms of confidential information secret. For the best protection, a firm should ask its employees to sign

nondisclosure and noncompete agreements, as discussed in Chapter 6.


Conducting an Intellectual Property Audit(1 of 2)

• Intellectual Property Audit– The first step a firm should take to protect its intellectual

property is to complete an intellectual property audit.– An intellectual property audit is conducted to determine the

intellectual property a firm owns.– There are two reasons for conducting an intellectual

property audit:• First, it is prudent for a company to periodically determine whether

its intellectual property is being properly protected.• Second, it is important for a firm to remain prepared to justify its

valuation in the event of a merger or acquisition.


Conducting an Intellectual Property Audit(2 of 2)

• The Process of Conducting an Intellectual Property Audit– The first step is to develop an inventory of a firm’s existing

intellectual property. The inventor should include the firm’s present registrations of patents, trademarks, and copyrights.

– The second step is to identify works in progress to ensure that they are being documented and protected in a systematic, orderly manner.


Chapter 13



R. Duane Ireland



1. Explain the term “sustained growth.”2. Describe the potential downsides to firm growth.3. Discuss the six most common reasons firms pursue

growth.4. Explain the advantages of having a scalable

business model.5. Describe the basic idea behind benchmarking and

how benchmarking can be used to help a firm execute a successful growth strategy.



6. Describe the managerial capacity problem and how it inhibits firm growth.

7. Discuss the day-to-day challenges of growing a firm.8. Identify the three myths that surround firm growth.9. Identify the most prevalent growth-related firm

attributes.10. Describe the importance of having a commitment to

growth.


Growth: A Double-Edge Sword(1 of 2)

• Nature of Firm Growth– Most entrepreneurial firms want to grow. Especially in the

short run, growth in sales revenue is an important indicator of an entrepreneurial venture’s potential to survive today and be successful in the future.

• Growth is exciting and fast-paced and for most firms is an indication of success.

– Growth, however, is a double-edge sword. It can threaten the stability of a firm’s operations in every area, from human resources to finance, if it is not managed properly.


Growth: A Double-Edge Sword(2 of 2)

• Nature of Firm Growth (continued)– Firms pursue growth deliberately. That is not to say,

however, that firms can always choose the pace of their growth.

– A firm’s pace of growth is the rate at which it is growing on an annual basis.

• Sometimes firms are forced into a high-growth mode sooner than they would like. For example, when a firm develops a product orservice that meets such a pervasive need that orders roll in very quickly, it must adjust quickly or risk faltering.


Reasons for Firm Growth(1 of 2)

Reasons for Firm Growth

Reason for Growth Why This Reason May Motivate a Firm to Grow

Capturing Economies of Scale

Executing a Scalable Business Model

Market Leadership

Economies of scale occur when increasing production lowers the average cost of each unit produced.

A scalable business model is one in which increased revenues cost less to deliver than current revenues, so profit margins increase as sales go up. This is typically found in companies that have large up-front costs but have products with small

per-unit variable costs.

Many firms work hard to achieve market leadership, to realize economics of scale in production, and be

recognized as the brand leader.


Reasons for Firm Growth(2 of 2)

Reasons for Firm Growth (continued)

Reason for Growth

Influence, Power, and Survivability

Need to Accommodate the Growth of Key

Customers

Ability to Attract and Retain Talented

Employees

Larger businesses usually have more influence and power than smaller firms in regard to setting standards for an

industry, getting a “foot in the door” with major customers and suppliers, and garnering prestige.

Why This Reason May Motivate a Firm to Grow

Sometimes firms are compelled to grow to accommodate the growth of a key customer.

Growth is a firm’s primary mechanism to generate promotional opportunities for employees.


Benchmarking Against Successful Growth Firms

(1 of 1)

• Benchmarking– The basic idea behind benchmarking is that a firm can

improve the quality of an activity by identifying and copying the methods of other firms that have been successful in that area.

• For example, if a small electronics firm in the Midwest decided to start exporting to Europe, it would be wise to identify other small electronics firms in the Midwest that export to Europe so it could study their methods and experiences.

• If the firm you try to “benchmark against” is not a direct or indirect competitor, it will usually be willing to help.


Managerial Capacity Problem(1 of 4)

• Managerial Capacity– In her thoughtful book, The Theory of the Growth of the

Firm, Edith T. Penrose argues that firms are collections of productive resources that are organized in an administrative framework.

– As a firm goes about its routine activities, it recognizes opportunities to grow.

– The problem with this is that firms are not always prepared or able to grow, because of limited “managerial capacity."



• A Firm’s Administrative Framework– A firm’s administrative framework consists of two kinds of

services that are important to firm growth.• Entrepreneurial services generate new market, product, and service

ideas, while managerial services administer the routine functions of the firm and facilitate the profitable execution of new opportunities.

• However, the introduction of new product and service ideas requires substantial managerial services (or managerial capacity) to be properly implemented and supervised.

• This is a complex problem because if a firm has insufficient managerial services to properly implement its entrepreneurial ideas, it can’t grow.



• A Firm’s Administrative Framework (continued)– Continuation From Previous Slide

• The reason a firm can’t quickly increase its managerial services to accommodate new product or service ideas, is that it is expensive to hire new employees, and it takes time for new managers to be socialized into the firm’s culture, acquire firm-specific skills and knowledge, and establish trusting relationships with other members of the firm.

• When a firm’s managerial resources are insufficient to take advantage of its new product and service opportunities, the subsequent bottleneck is referred to as the managerial capacity problem.



• Additional Challenges– As a firm grows, it is faced with the dual challenges of

adverse selection and moral hazard.• Adverse selection means that as the number of employees a firm

needs increases, it becomes increasingly difficult for it to find the right employees, place them in appropriate positions, and provide adequate supervision.

• Moral hazard means that as a firm grows and adds personnel, the new hires typically do not have the same ownership incentives asthe original founders, so the new hires may not be as motivated as the founders to put in long hours and may even try to avoid hardwork.


Typical Challenges of Growing a Firm(1 of 2)

Challenges

Challenge Explanation

Cash Flow Management

Price Stability

As discussed in Chapters 7 and 9, as a firm grows, it requires an increasing amount of cash to service its customers. Growth usually increases rather than decreases the challenges involved with cash flow management because an increase in sales means

that more cash will be flowing in and out of the firm.

If firm growth comes at the expense of a competitor’s market share, a price war can result. Because a price war typically helps

no one but the customer, any growth strategy should consider competitors’ responses and their effect on price stability.


Typical Challenges of Growing a Firm(2 of 2)

Challenges

Challenge Explanation

Quality Control

Capital Constraints

Firm growth is typically accomplished by an increase in firm activity. This means that a firm must handle more service

requests and paperwork and contend with more customers and vendors. If a firm does not increase its resources to manage

growth, then product or service quality may decline.

Capital constraints are an ever-present problem for growing firms. Growth increases rather than decreases the challenges

in this area.


Myths About Growth(1 of 2)

Myth 1: Growth Companies are Predominately Technology and Health

Care Companies

Because so much attention has been paid to how quickly some well-

known technology and health-care companies have grown, it is easy to get the idea that growth companies

are primarily technology and health-care. This is not necessarily the case.

Myth 2: Rapid-Growth Firms Emerge Only In Rapid-Growth Industries

Of course, rapid-growth firms do exist in rapid-growth markets, but

there are many examples of firms in fairly ordinary industries that have maintained impressive growth rates.


Myths About Growth(2 of 2)

Myth 3: To Grow Quickly, You Must Have a First-Mover Advantage

As discussed in Chapter 3, a first-mover advantage is not always

advantageous. Many firms have grown quickly by capturing a first-mover advantage, but many firms

have also growth quickly by entering an industry later on.


Chapter 14



R. Duane Ireland



1. Explain the difference between internal and external growth strategies.

2. Identify the keys to effective new product development.

3. Explain the common reasons new products fail.4. Discuss a market penetration strategy.5. Explain the term “international new venture.”6. Explain the objectives a company can achieve by

acquiring another business.



7. Identify a promising acquisition candidate’s characteristics.

8. Explain the term “licensing” and how licensing can be used as a growth strategy.

9. Explain the term “strategic alliance” and describe the difference between technological alliances and marketing alliances.

10. Explain the term “joint venture” and describe the difference between a scale joint venture and a link joint venture.


Internal and External Growth Strategies(1 of 1)

Internal Growth Strategies

Rely on effects generated within the firm itself, such as new product development, other

product related strategies, and international expansion

External Growth Strategies

Rely on establishing relationships with third parties, such as

mergers, acquisitions, strategic alliances, joint ventures,

licensing, and franchising


Internal Growth Strategies

New Product Development

Other Product-Related Strategies

International Expansion


Advantages and Disadvantages of Internal Growth Strategies

Table 14.1Advantages and Disadvantages of Internal Growth Strategies

Advantages Disadvantages

• Incremental, even-paced growth

• Provides maximum control

• Preserves organizational culture

• Encourages internal entrepreneurship

• Allows firms to promote from within

• Slow form of growth

• Need to develop new resources• Investment in a failed internal growthstrategy can be difficult to recoup

• Adds to industry capacity


New Product Development(1 of 2)

• New Product Development– Involves the creation and sale of new products (or services)

as a means of increasing firm revenues.– In many fast-paced industries, new product development is

a competitive necessity.• For example, the average product life cycle in the computer

software industry is 14 to 16 months.• Because of this, to remain competitive, software companies must

always have new products in their pipeline.


New Product Development(2 of 2)

• Find a need and fill it

• Develop products that add value

• Get quality right and pricing right

• Focus on a specific target market

• Conduct ongoing feasibility analysis

Keys to Effective New Product and Service Development

• Inadequate feasibility analysis

• Overestimation of market potential

• Bad timing

• Inadequate feasibility analysis

• Inadequate promotions

• Poor service

Common Reasons That New Products Fail


Other Product Related Strategies(1 of 2)

Product Related Strategies

Product Strategy Description

Improving an Existing Product

or Service

Increasing the Market Penetration

of an Existing Product or Service

Often, a business can increase its revenue by improving an existing product or service—enhancing quality, making it

larger or smaller, making it more convenient to use, or making it more up-to-date.

A market penetration strategy seeks to increase the sales of a product or service through greater marketing efforts or

through increased production capacity and efficiency.


Other Product Related Strategies(2 of 2)

Product Related Strategies (continued)

Product Strategy Description

Extending Product Lines

Geographic Expansion

A product line extension strategy involves making additional versions of a product so that it will appeal to

different clientele.

Many entrepreneurial businesses grow by simply expanding from their original location to additional geographic sites.


International Expansion(1 of 1)

• International Expansion– Another common form of growth for entrepreneurial firms.– International new ventures are businesses that, from their

inception, seek to derive significant competitive advantage by using their resources to sell products or services in multiple countries.

– Although there is vast potential associated with selling overseas, it is a fairly complex form of growth.


External Growth Strategies

Licensing Mergers and Acquisitions

Strategic alliances and joint ventures

Franchising (covered in Chapter 15)


Advantages and Disadvantages of External Growth Strategies

Table 14.4Advantages and Disadvantages of External Growth Strategies


• Reducing competition

• Getting access to proprietary products• Gaining access to new products and

markets• Access to technical expertise• Access to an established brand name• Economies of scale• Diversification of business risk

• Incompatibility of top management

• Clash of corporate cultures

• Operational problems

• Increased business complexity

• Loss of organizational flexibility

• Antitrust implications


Mergers and Acquisitions(1 of 1)

• Mergers and Acquisitions– Many entrepreneurial firms grow through mergers and

acquisitions. • An acquisition is the outright purchase of one firm by another.• A merger is the pooling of interests to combine two or more firms

into one.

• Purpose of Acquisitions – Acquiring another business can fulfill several of a

company’s needs, such as expanding its product line, gaining access to distribution channels, achieving competitive economies of scale, or expanding the company’s geographic reach.


Licensing(1 of 2)

• Licensing– Is the granting of permission by one company to another

company to use a specific form of its intellectual property under clearly defined conditions.

– Virtually any intellectual property a company owns that is protected by a patent, trademark, or copyright can be licensed to a third party.

• Licensing Agreement– The terms of a license are spelled out by a licensing

agreement.


Licensing(2 of 2)

Types of Licensing

Type of Licensing Description

Technology Licensing

Merchandise and Character Licensing

Is the licensing of proprietary technology that the licensor typically controls by virtue of a

utility patent.

Is the licensing of a recognized trademark or brand that the licensor typically controls through a

registered trademark or copyright.


Strategic Alliances (1 of 2)

• Strategic Alliances– A strategic alliance is a partnership between two or more

firms developed to achieve a specific goal.– Alliances tend to be informal and do not involve the

creation of a new entity.– According to a recent survey, over three-fourths of

technology businesses are active in strategic alliances, with the typical participant active in seven alliances.


Strategic Alliances (2 of 2)

Types of Strategic Alliances

Type of Alliance Description

Technology Alliances

Marketing Alliances

Typically match a company with a distribution system with a company that has a product to sell in

order to increase sales of a product or service.

Feature cooperation in research and development, engineering, and manufacturing.


Joint Ventures (1 of 2)

• Joint Ventures– A joint venture is an entity created when two or more firms

pool a portion of their resources to create a separate, jointly owned organization.

– A common reason to form a joint venture is to gain access to a foreign market. In these cases, the joint venture typically consists of the firm trying to reach a foreign market and one or more local partners.


Joint Ventures (2 of 2)

Types of Joint Ventures

Type of Joint Venture Description

Scale Joint Venture

Link Joint VentureIn a link joint venture, the position of the parties is not

symmetrical, and the objectives of the partners may diverge. For example, many of the joint ventures between

food companies provide one partner with access to distribution channels and the partner more products to sell.

In a scale joint venture, the partners collaborate at a single point in the value chain to gain economies of scale in

production or distribution. This type of joint venture can be a good vehicle for developing new products or services.


Advantages and Disadvantages of Participating in Strategic Alliances and Joint Ventures


• Gain access to a particular resource

• Economies of scale

• Risk and cost sharing

• Gain access to a foreign market

• Learning

• Speed to market

• Neutralizing or blocking competitors

• Loss of proprietary information

• Management complexities

• Financial and organizational risks

• Risk becoming depending on a partner

• Partial loss of decision autonomy

• Partners’ cultures may clash

• Loss of organizational flexibility


Chapter 15



R. Duane Ireland



1. Explain what franchising is and how it differs from other forms of business ownership.

2. Describe the differences between a product and trademark franchise and a business format franchise.

3. Explain the differences among an individual franchise agreement, an area franchise agreement, and a master franchise agreement.

4. Describe the advantages of setting up a franchise system as a means of firm growth.

5. Identify the rules of thumb for determining when franchising is an appropriate form of growth for a particular business.



6. Discuss the factors to consider in determining whether owning a franchising is a good fit for a particular person.

7. Identify the costs associated with buying a franchise.8. Discuss the advantages and disadvantages of buying a

franchise.9. Identify the common mistakes franchise buyers make.10. Describe the purpose of the Uniform Franchise Offering

Circular.


Introduction to Franchising

• Introduction– Franchising is a popular method of business expansion and

is growing in popularity.– In 1950, fewer than 100 franchisors existed in the U.S.

Today, there are roughly 1,200. • The number of franchise systems grows by about 200 per year.

• History– The word “franchise” comes from an old dialect of French

and means privilege or freedom.


What is Franchising?

• Franchising– Franchising is a form of business organization in which a

firm that already has a successful product or service (franchisor) licenses its trademark and method of doing business to other business or individual (franchisee) in exchange for a franchise fee and an ongoing royalty payment.

– Some franchisors are established firms (like McDonald’s) while others are first-time enterprises being launched by entrepreneurs.


Types of Franchise Systems(1 of 2)

• Product and Trademark Franchise– An arrangement under which the franchisor grants to the

franchisee the right to buy its products and use its trade name.

– This approach typically connects a single manufacturer with a network of dealers or distributors.

• For example, General Motors has established a network of dealersthat sell GM cars and use the GM trademark in their advertising and promotions.

• Other examples of product and trademark franchisors include agricultural machinery dealers, soft drink bottlers, and beer distributorships.


Types of Franchise Systems(2 of 2)

• Business Format Franchise– An arrangement under which the franchisor provides a

formula for doing business to the franchisee along with training, advertising, and other forms of assistance.

– Fast-food restaurants, convenience stores, and motels are well-known examples of business format franchises.

• Business format franchises are by far the most popular form of franchising, particularly for entrepreneurial firms.

• Business format franchisors obtain the majority of their revenues from their franchisees in the form of royalties and franchise fees.


Types of Franchise Agreement

• Individual Franchise Agreement– The most common type of agreement—involves the sale of

a single franchise for a specific location.• Area Franchise Agreement

– Allows a franchisee to own and operate a specific number of outlets in a particular geographic area.

• Master Franchise Agreement– Similar to an area franchise agreement, with one major

difference.• In addition to having the right to operate a specific number of

locations in a particular area, a master franchisee has the right to offer and sell the franchise to other people in its area.


When to Franchise?(From the Franchisor’s Point of View)

(1 of 2)

• Approach Franchising With Caution and Care– Establishing a franchise system should be approached

carefully and deliberately. – Franchising is a complicated business endeavor, and an

entrepreneur must look closely at all its aspects before deciding to franchise.

• Regulations– An entrepreneur should also be aware that over the years a

number of fraudulent franchise organizations have come and gone and have left financially ruined franchise owners behind.

• As a result, franchising is a heavily regulated path to business growth.


When to Franchise?(2 of 2)

• When Is Franchising Most Appropriate?– Franchising is most appropriate when a firm has a strong or

potentially strong trademark, a well-designed business method, and a desire to grow.

– A franchise system will ultimately fail if the franchisee’s brand doesn’t add value for customers and its business method is flawed or poorly developed.


Advantages and Disadvantages of Franchising As a Method of Business Expansion


• Rapid, low-cost market expansion

• Income from franchise fees and royalties

• Franchisee motivation

• Access to ideas and suggestions

• Cost savings

• Increased buying power

• Profit sharing

• Loss of control

• Friction with franchisees

• Managing growth

• Differences in required business skills

• Legal expenses


Buying a Franchise(From the Franchisee’s Point of View)

(1 of 2)

• Buying a Franchise– Purchasing a franchise is an important business decision

involving a substantial financial commitment.– Potential franchise owners should strive to be as well

informed as possible before purchasing a franchise and should be well aware that it is often legally and financially difficult to exit a franchise relationship.

• Close scrutiny of a potential franchise opportunity includes activities such as meeting with the franchisor, reading the Uniform Franchise Offering Circular (explained later), soliciting legal and financial advice, and talking to present and former franchisees of the system you are interested in.


Buying a Franchise(2 of 2)

Answering the following questions will help determine if franchising is right for you.

• Are you willing to take orders? Franchisors are typically very particular about how outlets operate.

• Are you willing to be part of a franchise “system” rather than an independentbusinessperson?

• How will you react if you make a suggestion to your franchisor and your suggestion

is rejected?

• What are you looking for in a business? How hard do you want to work?

• How willing are you to put your money at risk?• How will you feel if your business is operating at a net loss but you still have to pay

royalties on your gross income?


The Cost of a Franchise(1 of 1)

Costs involved with purchasing and owning a franchise


Advantages and Disadvantages of Buying a Franchise


• A proven product or service within an established market

• An established trademark or business system

• Franchisor’s training, technical support,

and managerial experience

• An established marketing network

• Franchisor ongoing support

• Availability of financing (in some cases)

• Potential for business growth

• Cost of the franchise

• Restrictions on creativity

• Duration and nature of the commitment

• Risk of fraud, misunderstandings, or lack of

franchisor commitment

• Problems of termination or transfer• Poor performance on the part of other

franchisees

• Potential for failure


Watch Out! Common Misconceptions About Franchising

Common Misconceptions About Franchising

• Franchising is a safe investment• A strong industry ensures franchise success• A franchise is a “proven” business system• There is no need to hire a franchise attorney or an accountant• The best systems grow rapidly and it is best to be part of a rapid-growth system• I can operate my franchise outlet for less than the franchisor predicts• The franchisor is a nice person—he’ll help me out if I need it


Legal Aspects of the Franchise Relationship(1 of 2)

• Federal Rules and Regulations– The offer and sale of a franchise is regulated at the federal

level.• According to Federal Trade Commission (FTC) rule 436,

franchisors must furnish potential franchisees with written disclosures that provides information about the franchisor, the franchised business, and the franchise relationship.

• In most cases, the disclosures are made through a lengthy document referred to as the Uniform Franchise Offering Circular (UFOC).

• The UFOC contains 23 categories of information that give a prospective franchisee a broad base of information about the background and financial health of the franchisor.


Legal Aspects of the Franchise Relationship(2 of 2)

• State Rules and Regulations– In addition to the FTC disclosure requirements, 17 states

have laws providing additional protection to potential franchisees.

• The states include California, Florida, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Texas, Utah, Virginia, Washington and Wisconsin.

• In most of these states, a franchisor is required to file its UFOC with a designated state agency, making the UFOC public record.


More About Franchising(1 of 3)

• Franchise Associations– Many franchise systems have organized franchise associations to

represent the franchisees’ collective interests and to provide a forum for franchisees to communicate with each other.

• Franchise Ethics– The majority of franchisors and franchisees are highly ethical. There

are certain features of franchising, however, that make it subject to ethical abuse. These features are as follows:

• The get rich quick mentality, the false assumption that buying a franchise is a guarantee of business success, and conflicts of interest between franchisors and franchisees.



• International Franchising– International opportunities for franchising are becoming

more prevalent as the markets for certain franchised products in the U.S. have become saturated.

– For example, heavily franchised companies, such as McDonald’s and KFC, are experiencing much of their growth in international markets.

– Foreign firms are also taking advantage of the trend towards globalization and are offering franchises in the U.S.



For U.S. citizens, these are some of the steps to take before buying a franchise

• Consider the value of the franchisor’s name in the foreign country

• Get a good lawyer

• Determine whether the product or service is salable in the foreign country

• Uncover whether the franchisor has experience in international markets

• Find out how much training and support you will receive from the franchisor

• Evaluate currency restrictions

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