The Entrepreneurial Process Decision to Developing Successful Become an Developing BusinessSuccessful Ideas Business Ideas Entrepreneur Introduction to Recognizing entrepreneurship opportunities and generating CHAPTER 1 ideas Feasibility CHAPTER 2 analysis CHAPTER 3 Writing a business plan CHAPTER 4 Industry and competitor analysis Developing CHAPTER 5 an effective business model CHAPTER 6 Passion plus Managing and Moving from an Idea Growing an to an Entrepreneurial Firm Entrepreneurial Firm CHAPTER 11 Unique marketing issues CHAPTER 12 The importance of intellectual property CHAPTER 13 Preparing the Preparing for proper ethical and evaluating and legal the challenges foundation of growth Assessing a CHAPTER 14 CHAPTER 7 new venture’s financial Strategies strength and for firm viability growth Building a new- venture team Getting CHAPTER 8 financing or CHAPTER 15 funding CHAPTER 9 Franchising CHAPTER 10 Where a great idea meets a great process Entrepreneurship Successfully Launching New Ventures This page intentionally left blank Entrepreneurship Successfully Launching New Ventures FOURTH EDITION Bruce R. Barringer Oklahoma State University R. Duane Ireland Texas A&M University Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Editorial Director: Sally Yagan Senior Art Director: Kenny Beck Senior Acquisitions Editor: Kim Norbuta Interior and Cover Designer: LCI Design Director of Editorial Services: Ashley Cover Art: Pearson Image Photographer, Santora Shayle Keating; Pearson Image Specialist, Editorial Project Manager: Claudia Corin Skids; Chalkboard background, Fernandes Shutterstock/leedsn; GIVE water bottle Director of Marketing: Patrice Lumumba art © 2011 Burton Morris Jones Lead Media Project Manager: Lisa Rinaldi Executive Marketing Manager: Editorial Media Project Manager: Maggie Moylan Denise Vaughn Assistant Marketing Manager: Ian Gold Full-Service Project Management: Senior Managing Editor: Judy Leale Sharon Anderson/Bookmasters Production Project Manager: Ann Pulido Composition: Integra Senior Operations Supervisor: Arnold Vila Printer/Binder: Quebecor World Color/Versailles Operations Specialist: Cathleen Petersen Cover Printer: Lehigh-Phoenix Director of Design: Christy Mahon Color/Hagerstown Creative Art Director: Blair Brown Text Font: 10/12 Bookman Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on the appropriate page within text. Microsoft® and Windows® are registered trademarks of the Microsoft Corporation in the U.
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Includes bibliographical references and index. New business enterprises.1'1—dc23 2011025010 10 9 8 7 6 5 4 3 2 1 ISBN 10: 0-13-255552-2 ISBN 13: 978-0-13-255552-4 DEDICATION To my wife Jan. Thanks for your never-ending encouragement and support. Without you, this book would have never been possible.
Also, thanks to all the student entrepreneurs who contributed to the chapter opening features in the book. Your stories are both insightful and inspiring. Barringer To my family: I am so proud of each of you and so blessed by your perseverance and never-ending love and support. I know that sometimes it seems as though “we lose ourselves in work to do and bills to pay and that it’s a ride, ride, ride without much cover.” But you are always in my heart, a gift for which I remain deeply grateful.
Duane Ireland This page intentionally left blank BRIEF CONTENTS Preface xvii PART 1 Decision to Become an Entrepreneur 1 CHAPTER 1 Introduction to Entrepreneurship 3 PART 2 Developing Successful Business Ideas 39 CHAPTER 2 Recognizing Opportunities and Generating Ideas 41 CHAPTER 3 Feasibility Analysis 77 CHAPTER 4 Writing a Business Plan 111 CHAPTER 5 Industry and Competitor Analysis 147 CHAPTER 6 Developing an Effective Business Model 179 PART 3 Moving from an Idea to an Entrepreneurial Firm 211 CHAPTER 7 Preparing the Proper Ethical and Legal Foundation 213 CHAPTER 8 Assessing a New Venture’s Financial Strength and Viability 253 CHAPTER 9 Building a New-Venture Team 289 CHAPTER 10 Getting Financing or Funding 319 PART 4 Managing and Growing an Entrepreneurial Firm 355 CHAPTER 11 Unique Marketing Issues 357 CHAPTER 12 The Importance of Intellectual Property 393 CHAPTER 13 Preparing for and Evaluating the Challenges of Growth 431 CHAPTER 14 Strategies for Firm Growth 461 CHAPTER 15 Franchising 495 Glossary 535 Name Index 547 Company Index 551 Subject Index 557 vii CONTENTS Preface xvii PART 1 Decision to Become an Entrepreneur 1 CHAPTER 1 Introduction to Entrepreneurship 3 Opening Profile—GIFTZIP.COM: The Classic Entrepreneurial Story 3 INTRODUCTION TO ENTREPRENEURSHIP 4 What Is Entrepreneurship? 6 Why Become an Entrepreneur? 7 Characteristics of Successful Entrepreneurs 9 WHAT WENT WRONG? How a Lack of Passion and Too Few Customers Can Kill a Business 12 SAVVY ENTREPRENEURIAL FIRM: Angry Birds and Zeo 14 Common Myths About Entrepreneurs 15 Types of Start-Up Firms 17 CHANGING DEMOGRAPHICS OF ENTREPRENEURS 18 ENTREPRENEURSHIP’S IMPORTANCE 21 Economic Impact of Entrepreneurial Firms 21 Entrepreneurial Firms’ Impact on Society 22 Entrepreneurial Firms’ Impact on Larger Firms 22 PARTNERING FOR SUCCESS: Working Together: How Biotech Firms and Large Drug Companies Bring Pharmaceutical Products to Market 23 THE ENTREPRENEURIAL PROCESS 23 Decision to Become an Entrepreneur (Chapter 1) 24 Developing Successful Business Ideas (Chapters 2–6) 24 Moving from an Idea to an Entrepreneurial Firm (Chapters 7–10) 25 Managing and Growing an Entrepreneurial Firm (Chapters 11–15) 26 Chapter Summary 26 | Key Terms 27 | Review Questions 27 Application Questions 28 | You Be the VC 1.1 29 | You Be the VC 1.2 33 ENDNOTES 36 PART 2 Developing Successful Business Ideas 39 CHAPTER 2 Recognizing Opportunities and Generating Ideas 41 Opening Profile—BENCHPREP: Solving a Problem by Merging a Customer Pain with an Emerging Technology 41 IDENTIFYING AND RECOGNIZING OPPORTUNITIES 43 Observing Trends 44 Solving a Problem 50 SAVVY ENTREPRENEURIAL FIRM: Xhale and Vestagen: Solving the Same Problem in Different Ways 52 FINDING GAPS IN THE MARKETPLACE 53 Personal Characteristics of the Entrepreneur 55 WHAT WENT WRONG? Clearly Canadian: What Happens When You Don’t Deliver on Your Promises 56 TECHNIQUES FOR GENERATING IDEAS 59 Brainstorming 59 Focus Groups 60 viii CONTENTS ix Library and Internet Research 61 Other Techniques 61 PARTNERING FOR SUCCESS: Want Help Fine-Tuning a Business Idea? Find a Mentor 62 ENCOURAGING AND PROTECTING NEW IDEAS 62 Establishing a Focal Point for Ideas 63 Encouraging Creativity at the Firm Level 63 Protecting Ideas from Being Lost or Stolen 64 Chapter Summary 65 | Key Terms 65 | Review Questions 65 Application Questions 66 | You Be the VC 2.1 67 | You Be the VC 2.2 71 ENDNOTES 73 CHAPTER 3 Feasibility Analysis 77 Opening Profile—MORPHOLOGY: The Value of Validating a Business Idea 77 FEASIBILITY ANALYSIS 79 WHAT WENT WRONG? eBay Drop-Off Stores: How Feasible Were They? 80 Product/Service Feasibility Analysis 81 SAVVY ENTREPRENEURIAL FIRM: How Learning from Customers Caused a Successful Firm to Make a 180-Degree Turn on the Positioning of a Product 87 Industry/Target Market Feasibility Analysis 88 Organizational Feasibility Analysis 91 PARTNERING FOR SUCCESS: Finding the Right Business Partner 92 Financial Feasibility Analysis 93 First Screen 95 Chapter Summary 96 | Key Terms 97 | Review Questions 97 Application Questions 97 | You Be the VC 3.1 99 | You Be the VC 3.2 108 CHAPTER 4 Writing a Business Plan 111 Opening Profile—LINCOLN&LEXI: Proceeding on the Strength of a Winning Business Plan 111 THE BUSINESS PLAN 113 Reasons for Writing a Business Plan 113 Who Reads the Business Plan—And What Are They Looking For? 115 Guidelines for Writing a Business Plan 116 OUTLINE OF THE BUSINESS PLAN 119 Exploring Each Section of the Plan 119 SAVVY ENTREPRENEURIAL FIRM: Know When to Hold Them, Know When to Fold Them 120 PARTNERING FOR SUCCESS: Types of Partnerships That Are Common in Business Plans 125 WHAT WENT WRONG? What StyleHop Learned About the Value of Planning the Hard Way 132 PRESENTING THE BUSINESS PLAN TO INVESTORS 133 The Oral Presentation of a Business Plan 133 Questions and Feedback to Expect from Investors 135 x CONTENTS Chapter Summary 135 | Key Terms 136 | Review Questions 136 Application Questions 137 | You Be the VC 4.1 138 | You Be the VC 4.2 142 ENDNOTES 145 CHAPTER 5 Industry and Competitor Analysis 147 Opening Profile—ELEMENT BARS: Occupying a Unique Position in a Difficult Industry—and Thriving 147 INDUSTRY ANALYSIS 149 Studying Industry Trends 150 PARTNERING FOR SUCCESS: Three Ts That Are Important for Becoming Active in an Industry: Trade Associations, Trade Shows, and Trade Journals 151 The Five Forces Model 152 The Value of the Five Forces Model 158 Industry Types and the Opportunities They Offer 160 WHAT WENT WRONG? Eclipse Aviation: Sometimes an Industry Can’t Be Revitalized 162 COMPETITOR ANALYSIS 163 Identifying Competitors 164 SAVVY ENTREPRENEURIAL FIRM: Thriving in a Crowded Industry by Creating Meaningful Value and Differentiation from Competitors 165 Sources of Competitive Intelligence 166 Completing a Competitive Analysis Grid 167 Chapter Summary 168 | Key Terms 169 | Review Questions 169 Application Questions 170 | You Be the VC 5.1 172 | You Be the VC 5.2 175 ENDNOTES 177 CHAPTER 6 Developing an Effective Business Model 179 Opening Profile—STROOME: Working to Find a Viable Business Model for an Exciting New Web-Based Service for Editing and Remixing Video 179 BUSINESS MODELS 181 The Importance and Diversity of Business Models 182 SAVVY ENTREPRENEURIAL FIRM: Three Industries, Three Business Model Innovators 183 How Business Models Emerge 186 Potential Fatal Flaws of Business Models 187 COMPONENTS OF AN EFFECTIVE BUSINESS MODEL 189 Core Strategy 189 WHAT WENT WRONG? Joost: Why It's Important to Be Sensitive to All Aspects of Your Business Model 190 Strategic Resources 192 Partnership Network 194 PARTNERING FOR SUCCESS: 99designs: Making Partnering with Freelancers the Essence of Its Disruptive Business Model 196 Customer Interface 197 Chapter Summary 199 | Key Terms 200 | Review Questions 200 Application Questions 200 | You Be the VC 6.1 202 | You Be the VC 6.2 206 ENDNOTES 208 CONTENTS xi PART 3 Moving from an Idea to an Entrepreneurial Firm 211 CHAPTER 7 Preparing the Proper Ethical and Legal Foundation 213 Opening Profile—XPLOSAFE: Proceeding on a Firm Legal Foundation 213 INITIAL ETHICAL AND LEGAL ISSUES FACING A NEW FIRM 215 Establishing a Strong Ethical Culture for a Firm 216 Choosing an Attorney for a Firm 220 Drafting a Founders’ Agreement 221 SAVVY ENTREPRENEURIAL FIRM: Vesting Ownership in Company Stock: A Sound Strategy for Start-Ups 222 Avoiding Legal Disputes 223 WHAT WENT WRONG? How Legal and Management Snafus Can Kill a Business 224 PARTNERING FOR SUCCESS: Patagonia and Build-A-Bear Workshop: Picking Trustworthy Partners 227 OBTAINING BUSINESS LICENSES AND PERMITS 228 Business Licenses 228 Business Permits 228 Choosing a Form of Business Organization 229 Sole Proprietorship 230 Partnerships 232 Corporations 233 Limited Liability Company 236 Chapter Summary 237 | Key Terms 238 | Review Questions 238 Application Questions 239 | You Be the VC 7.1 241 | You Be the VC 7.