CHAPTER 3 STARTING A NEW BUSINESS
المادة الدراسية:
CHAPTER OVERVIEW
The first of the three routes into entrepreneurship is described in this chapter, starting a business. The topics include innovation, sources of ideas, entry strategies, and the possibilities associated with partnerships.
LEARNING OBJECTIVES
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The idea for a new business can come from anywhere, but the most common source is the work experience of the entrepreneur.
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The advisability of entering an industry depends on how well the customers are being served by the companies already in the industry.
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The basic strategies that may be adopted by new firms are low cost, differentiation, and focus.
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The great majority of businesses in the United States are operated by one person, rather than some kind of partnership, despite some important advantages of multiple-person management.
CHAPTER OUTLINE
I. Innovation and Entrepreneurship
A. Cutting-Edge Technology and Failure
B. Success with Common Ideas
II. Sources of Ideas
A. The Inc. study
1. Forty-three percent of entrepreneurs get the idea on which they base their business from their work than from any other source.
2. Only about 7 percent of the entrepreneurs cited a “systematic search for business opportunities” as the source of their ideas.
3. About 5 percent said their ideas were the result of “a brainstorm.”
B. Inside‑Out
1. One way to develop an idea on which to base a business is to examine the talents, experience, etc., of the individual to determine which of them may have enough appeal in the market.
2. This approach to developing the basis for a business is called idea generation.
C. Outside‑In
1. Many businesses are started after the entrepreneur has noticed an economic opportunity that he or she can exploit.
2. This approach to developing the basis for a business is called opportunity recognition.
D. Serendipity
1. Sometimes businesses are started by people who had no real intention of going into business, but respond to an opportunity provided by fate.
2. The name given to such starts is serendipity.
III. The Rationale: Why the New Business Is Needed
A. The Customer
1. Because no business can serve every market it is important that the entrepreneur consider very carefully what segment or segments the business should pursue.
2. The possible bases for segmentation of a market include demographic, benefit, geographic, and socioeconomic.
3. Regardless of the type of segmentation used by the entrepreneur, the primary concern is how to best serve the typical customer.
IV. The Obstacles: Barriers to Entering an Industry
A. The attitudes and habits of customers can provide a difficult obstacle to any company seeking to enter a market.
B. For some products, going from one supplier to another can involve the expenditure of time and money as workers are retraining, new fixtures purchased or produced, and processes or procedures are changed.
C. Before entering a new market the entrepreneur must try to anticipate the response of the companies that already compete in the market.
V. The Method: How the New Business Will Be Established
A. The New Product Option
1. Some start-ups occur because the entrepreneur has a new product to bring to the market.
2. Conducting market research on an entirely new product is a very difficult undertaking because of the uncertainty inherent in getting people to indicate the behavior they will adopt given their current interest in the product.
3. The primary advantage of introducing a new product is that the market is wide open.
B. The Existing Product Option
1. While the existence of the market is not a problem here, the fact that there are already companies serving it is.
2. The three basic options for the strategy for a company to adopt are low cost, differentiation, and focus.
VI. The People: Who Will Be Involved?
A. Sole Proprietorships
1. Most entrepreneurs choose to go into business on their own. There are approximately 15 million sole proprietorships and about 1.5 million partnerships in existence in the U.S.
2. The primary appeal for entrepreneurs to go it alone is the independence of action it provides.
B. Partnerships
1. Having a partner may be regarded as a measure toward mistake prevention.
2. Another advantage of having a partner is that his/her strengths can be used to offset weaknesses of the entrepreneur.
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Finally, a partner provides additional time and energy.
SUGGESTED RESPONSES TO DISCUSSION QUESTIONS
1.
What role does past experience play in business start-ups? What advantages does it provide?
Past work experience was cited as the source of the idea for starting a business in 43 percent of the respondents in a recent survey. Past experience provides a certain degree of protection against errors, gives the founder a number of contacts in supplier and customer networks, and usually allows for a smoother start of the business.
2. Describe the inside‑out, the outside‑in, and serendipity processes as they relate to establishing a new business.
The inside‑out approach is one in which the individual bases the business on his/her talents, skills, background, etc., in the hope or belief that there will be sufficient demand to support the business. The outside‑in process involves a search by the entrepreneur to determine opportunities, i.e., situations where the needs of the customer are not being adequately addressed. Occasionally people who did plan to enter small business will do so because an opportunity to do so arises in unexpected fashion. The term used for such developments is serendipity.
3. What are the primary bases for market segmentation?
One means of segmenting the market is demographics; it involves grouping individuals by age, race, gender, or some combination of such factors that have some bearing on their buying habits. Another means is based on the benefits customers are most interested in when they make a buying decision. Geographic segmentation, as its name suggests, focuses on place. This basis may segment the market into rural, urban, east coast, northern states, etc. Another of the major types of segmentation is socioeconomic; it is based on the fact that people at one level of affluence have different means and interests than people at a different level.
4. Distinguish between differentiation and focus strategies.
A strategy of differentiation is concerned with making the product of the company different from anything else on the market. The more important the difference in the eyes of customers, the greater the firm’s protection from competitors. A focus strategy is one in which the firm specializes in serving a particular kind of customer. The approach involves anticipating and responding to every need of the group.
5. What are the advantages of having a partnership as opposed to a single proprietorship management structure?
The partnership should provide some degree of protection against bad decisions because the biases and blind spots of one partner should be shown for what they are during discussions between partners. This is what is meant by the expression “two heads are better than one.” Furthermore, the presence of another means that more time and more energy are available for the task of establishing the firm. Finally, many partners find that the skills and interests of one are supplemented by those of the other. For example, one of the partners may be talented in technological matters whereas the other is good at dealing with people.
6. What are the biggest difficulties faced by firms as they enter new markets?
The entry into a new market requires getting customers to change buying habits, i.e., the customers the new firm needs to succeed are already being served somehow and they will therefore have to switch if the new entrant into the market is to survive. Getting the change requires a change in the habits of customers and, depending on the product, may require switching costs. Added to these difficulties are the reactions of the firms currently serving the industry. These reactions frequently take the form of strong measures, such as dropping prices to levels that make profits impossible to achieve.
LINK TO THE BUSINESS PLAN
As stated in this chapter, one of the most important questions that must be answered in the business plan is why the new business is needed. Bankers and investors need to be convinced that the new business will offer something to customers that is not currently offered. The business cannot just be “I can do this too.” It must be “I can do this better and here is how.” This information should be included in detail when completing the marketing section of the business plan. By answering the questions in the business plan about the competition, the competitive advantage of the proposed business, and the target market, the entrepreneur should convince readers of the plan that a real need for the business exists.
The business plan will require the entrepreneur to answer:
What is the business concept?
Who is your competition?
How is your business different from the ones that already exist?
Why will customers buy from you instead of the competition?
HELPFUL WEBSITES
http://www.sba.gov/starting_business/index.html
This is a useful site offered by the United States Small Business Administration. It includes business plan basics and overviews of financing, marketing, human resource management, legal aspects, and various special interest topics.
http://www.entrepreneur.com/bizstartups/0,4235,,00.html
This site provides a wide array of topics of interest and importance to someone considering starting a business. It includes links to sources covering legal basics, raising money, marketing, getting help, and finding the perfect business idea.
http://www.business.gov/phases/launching/
The official business link to the U.S. government, Business.gov provides descriptions of three tasks critical to launching a business: Exploring Whether You Are Ready?, Finding a Mentor, and Writing a Business Plan.
http://www.inc.com/guides/start_biz/
This is an excellent compilation of documents of interest to a prospective entrepreneur. Topics covered include writing a business plan (an expansive, easy-to-understand guide is provided), patents, raising start-up capital, setting up a home office, market research, etc.