Chapter 6
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Chapter 6






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Chapter 6 Chapter 6 Document Transcript

  • Chapter 6: Entrepreneurship and Business Planning Outline Introduction A. The Learning Goals of this chapter are to: 1. Identify the advantages and disadvantages of being an entrepreneur and creating a business. 2. Identify the market conditions that should be assessed before entering a market. 3. Explain how a new business can develop a competitive advantage. 4. Explain how to develop a business plan. 5. Identify the risks to which a business is exposed, and explain how they can be managed. B. This chapter describes how entrepreneurs can successfully approach the creation of a new business by assessing the market, determining their competitive advantage, developing a business plan, and managing the risk involved. I. Creating a New Business A. More than 99% of small businesses have fewer than 500 employees. B. Online Resources for Creating a Business include Yahoo!’s Small Business site (, American Express ( and the SBA at and Quicken’s site for small businesses C. Advantages of being an entrepreneur: 1. You may earn large profits on your business, higher than if you worked for another business 2. You can be your own boss 3. You are in control and don’t have to fear being mistreated or fired 4. You are directly rewarded for your work, which can bring about a feeling of satisfaction D. Disadvantages of being an entrepreneur: 1. You may possibly incur large losses 2. You are in control of the business and must make sure it functions properly at all times 3. Though no one will fire you, you could still lose your source of income if the business fails E. Entrepreneurial Profile 1. Risk tolerance 2. Creativity 1
  • 3. Initiative II. Assessing Market Conditions Before creating a new business for a particular market, the following conditions in that market should be considered: A. Demand: Changes in consumer demographics, consumer tastes and preferences, and other factors can cause the demand for the products of specific industries to perform much better (or worse) than demand for products of other industries. An increase in birth rates, for example, might spur an increase in the demand for baby furniture and clothes. An increase in the number of people reaching senior citizen status might bring about a significant increase in the demand for retirement homes and certain types of medical care. B. Competition: The number of firms and the intensity with which they compete varies considerably among industries. Firms in industries characterized by little competition tend to be more profitable for two reasons. First, a firm normally will have a larger market share in a less competitive market than in an industry with a larger number of firms. Second, in a less competitive market the firm may be able to charge a higher price without the risk of losing its customers. These factors suggest that firms earn higher total revenue (price times quantity) in less competitive markets than in markets characterized by strong competition. C. Labor Conditions: Labor costs are often a major expense for a business. Industries that require highly specialized labor may face much higher labor costs than industries that employ mostly unskilled labor. Industries that have workers represented by labor unions may also face higher labor costs, and a greater threat of strikes, than non-unionized industries. Managers must understand the labor environment facing their firm in order to estimate the labor costs their firm will face. D. Regulatory Conditions: All industries are subject to some degree of government regulation, but some industries are much more heavily regulated than others. The government imposes regulations for a variety of reasons. Some regulations are designed to protect the environment. Others are concerned with the types of services that an industry can provide. Another category of regulations concerns appropriate business behavior. For example, the government has laws against price-fixing and other forms of collusion. Firms must monitor the regulatory environment for their industry carefully, because regulations may change over time. III. Developing a Competitive Advantage Once a firm has identified and assessed its major competitors, it must develop a strategy to enable it to compete successfully against them. This involves developing a competitive advantage. A. Prepare products efficiently: A firm that can produce a product of similar quality to competitors, but do so at a lower cost, can charge a lower price and gain a larger market share at the expense of higher-cost producers. 2
  • B. Produce better quality products: If a firm can produce a better quality product without incurring excessive costs, it can create a competitive advantage over other firms in the same price range. Better quality can come in many forms. Ease of use, greater reliability, better customer service, and longer product life are all attributes that might lead customers to view a firm’s product as having better quality than competing goods. C. Using the Internet to Create a Competitive Advantage Advantages of a Web-based Business 1. A website may be able to replace a store and can provide personalized service 2. A website can be effective at reducing expenses, especially when it provides services in the form of information 3. A website can create opportunities for entrepreneurs who cannot afford to rent space 4. A website can reach additional customers and therefore increase revenue that the business generates Expenses of a Web-based business 1. The cost of developing a website and installing a shopping cart system on the site to accept orders 2. A firm is needed to screen credit card payments 3. Monthly fees paid to website firms to host the site 4. Marketing expenses to increase visibility to customers D. Using SWOT Analysis to Develop a Competitive Advantage 1. Analyze strengths, weaknesses, opportunities, and threats IV. Developing the Business Plan A. A business plan is a detailed description of the proposed business. It identifies the types of customers the business would attract, the competitive environment the firm would face, and the facilities the firm would need to produce the good or service. B. The business plan is not just for the entrepreneur. Potential creditors and investors want to see the specifics of a business plan before they provide financing for a business. A good business plan demonstrates that the entrepreneur has thought carefully about all aspects of starting a new business. C. Assessment of the Business Environment 1. The economic environment is concerned with the demand for the new product and how it may change in the future. The demand for some products is highly sensitive to changes in economic conditions. 2. The assessment of the business environment also includes an evaluation of the industry environment surrounding the business. The industry environment is concerned with the degree of competition. How many firms are selling products similar to the one envisioned by the new business? Does the firm possess a competitive advantage over its rivals in the market? 3
  • 3. The global environment is assessed to determine how the demand for a product may be influenced by factors such as competition from foreign firms, changes in exchange rates, and changes in trade regulations. D. A complete business plan normally includes several components. The key components are summarized in Exhibit 6.4. The management plan focuses on the organizational structure and production concerns. 1. The organizational structure identifies the roles and responsibilities of the employees hired by the firm. This part of the plan should include a job description for each employee. Although the organizational structure may be very simple for a small new firm with few employees, the business plan should indicate how the structure would change as the firm grows. 2. The production section of the plan should describe the production process, focusing on site selection and plant layout and design. 3. The human resources section of the plan explains how employees will be motivated, monitored, and compensated to ensure that they are striving to maximize performance. E. The marketing plan will identify the target market and describe product characteristics, as well as strategies for pricing, distribution, and promotion. In order to define the target market, the plan should identify its customer profile, listing characteristics (such as gender, age, interests, etc.) of the typical customer. 1. The marketing plan should describe the product characteristics that will differentiate the new firm’s product from those of competitors. The plan should indicate why these characteristics would make the new product more desirable to customers in the target market than existing products. 2. The pricing strategy of the marketing plan can have a significant impact on the quantity of the good demanded. 3. The distribution strategy of the marketing plan identifies the way the product will be distributed to customers. Some firms sell directly to consumers, while others rely on middlemen. 4. Promotion is concerned with determining the ways of promoting the product to customers. The customer profile can help a firm determine the best advertising media and sales techniques to appeal to the target market. F. The financial plan indicates how the business will be financed and demonstrates the feasibility of the proposed business. 1. Plans for financing the business are concerned with how the firm will acquire the funds needed to support the company. Firms may require a large initial outlay to purchase plant and equipment. The financial plan should indicate how much of the financing will come from owners and how much from creditors. It should also indicate whether the firm intends to issue shares of stock to the general public. 2. The feasibility of a new firm is demonstrated by estimating the benefits and costs associated with operating the business, and showing that benefits exceed costs. 4
  • Forecasts of sales volume and product price are used to determine expected revenues. Cost estimates can be provided when the plans for organizational structure, location, design, and plant layout are established. Creditors will loan funds to a new business only if the creditors are convinced the company can successfully make payments on interest and principal. Owners will invest in the business only if the firm offers the owners an acceptable profit. G. Online resources for developing a business plan and business plan software can make the process much easier for business owners. The best plans incorporate the following capabilities: 1. Business Plan Outlines 3. Text Generation 4. Forecasting 5. Graphics 6. Supplementary Documents H. Assessing a Business Plan 1. Sometimes the completion of a business plan may cause the entrepreneur to conclude that the business is not as attractive as it seemed prior to the plan. The analysis contained in the plan may show that revenues are very uncertain, or that costs are likely to be higher than the entrepreneur is expected. These concerns may lead the entrepreneur to conclude that the firm’s expected earnings are too low to justify the risk, at least as initially planned. 2. Sometimes initially negative findings in the business plan can be overcome by modifying the proposed business. For example, a firm may be able to reduce its costs significantly by choosing a different, less expensive, location. However, the various elements of the firm’s business plan are interdependent, so if a change is made in one component, the entrepreneur must carefully consider how this will affect other aspects of the plan. V. Risk Management by Entrepreneurs A. Reliance on one customer: firms that rely on one customer have a high degree of business risk because their performance will decline substantially if the customer switches to a competitor. B. Reliance on one supplier: firms that rely on a single supplier for most of their supplies may be severely affected if that supplier does not fulfill their obligations. C. Reliance on a key employee: when a firm relies on a key employee for its business decisions, the death or resignation of that employee could have a severe impact on the firm’s performance. Firms can hedge against this by purchasing life insurance for their key employees. D. Exposure to E-risk: the illness or resignation of a key employee may also adversely affect the performance of a firm. 5