Entrepreneurship for MBA Students

1
Entrepreneurship for MBA Students

• Proving the Business Concept
• Lecture 4

2
Introduction

• The world of possibilities is unlimited but the
  world of ideas is even larger
• Some ideas are ready to be turned into a growing
  profitable business immediately. Some have to
  wait till critical technological problems are
  overcome
• Some ideas are practical while most of ideas are
  not.
• This lecture discusses the process of opportunity
  screening
• It discusses systematic ways of discarding
  unfeasible ideas, and identifying unfeasible
  aspects of otherwise practical ideas

3
Introduction

• This lecture will assist the entrepreneur of
  avoiding unfeasibility before committing
  him/herself to investing time needed to produce a
  complete business plan and long before the
  entrepreneur or anyone associated with him
  commits money or other significant resources into
  an attempt on the impossible

4
Introduction

• As part of this screening process, you will need
  to make projections of revenue and marketing
  expenses of your venture

5
SMECP

• The stylized map of the enterprise creation
  process

Idea
Project
Concept development
Plan evaluation
Plan Development
Problem
Commercial feasibility screen
Concept
Enterprise
The Innovation Track
6
Ideas

• Every innovation starts with an idea, but only a
  few ideas become innovations
• Some inventors are profoundly reluctant to allow
  their concept or prototypes to be examined in
  detail by experts as a broad generalization, an
  entrepreneur or investor who backs a product so
  secret that a reputable consulting engineer
  cannot be trusted to examine it and prepare a
  confidential report is putting their money at
  high risk

7
Screening for Practicability

• The starting point for every new enterprise is
  the problem and the idea for solving it
• Every idea is the product of humans imagination
  and some ideas are bound to stay there
• Ideas must be tested for fatal flaws before they
  can be set out as a concept
• A concept is a combination of an idea for
  resolving a problem and a practical proposal in
  an outline form at least, for delivering that
  solution
• A concept may address a real problem and be
  technical feasible and commercially unfeasible

8
Screening for Practicability

• Developing a complete business plan takes time
  and effort and it is disappointing to get to the
  end of the process and discover that the concept
  cannot be turned into a commercial proposition
• The less invested in a flawed idea, the less
  psychological pain involved in abandoning it

9
Points to be Pondered

• What is a Feasibility Study?
• What is a Business Plan?
• How do they differ?
• What Resources are available to help develop each?

10
What is a Feasibility Study?

• A feasibility study is an analysis of the
  viability of an idea through a disciplined and
  documented process of thinking through the idea
  from its logical beginning to its logical end.
• A feasibility study provides an Investigating
  function that helps answer Should we proceed
  with the proposed project idea? Is it a viable
  business venture?
• A feasibility study should be conducted to
  determine the viability of an idea BEFORE
  proceeding with the development of a business.

11
Levels of Feasibility Assessment

• A feasibility study of an idea is conducted at
  three levels
• Operational Feasibility
• Will it work?
• Technical Feasibility
• Can it be built?
• Economic Feasibility
• Will it make economic sense if it works and is
  built?
• Will it generate PROFITS?

12
Feasibility Study

• Fatal flaws are facts about an opportunity that
  make it impossible for a new enterprise based
  upon it to succeed

13
(No Transcript)
14
Strengths
Threats
Opportunities
SWOT Analysis
Weaknesses
15
Comparison Entrepreneurs and Traditional Managers
16
Project Management Process
Identify activities and resources
Define objectives
Establish sequences
Determine project completion date
Compare with objectives
Estimate time for activities
Determine additional resource requirements
17
Further Feasibility Studies

• If this list was routinely consulted before
  people put their time and money into a new
  venture, a lot of pain may be avoided
• Marketing feasibility does anyone want it? Has
  the product any features that would persuade
  someone to choose it ahead of currently available
  products?
• Fundamental legality is it legal?

18
Why doing a Feasibility Study?

• Provide a thorough examination of all issues and
  assessment of probability of business success
• Give focus to the project and outline
  alternatives
• Narrow business alternatives
• Surface new opportunities through the
  investigative process
• Identify reasons NOT to proceed
• Enhance the probability of success by addressing
  and mitigating factors early on that could affect
  the project
• Provide quality information for decision making
• Help to increase investment in the company
• Provide documentation that the business venture
  was thoroughly investigated
• Help in securing funding from lending
  institutions and other monetary sources

19
Data Sources for a Feasibility Assessment

• Data required for a feasibility study can come
  from primary or secondary sources
• Primary data can include formal interviews and
  surveys
• Collection of primary data can be expensive and
  time consuming
• Secondary data can include industry and trade
  publications, statistics of industry
  associations, and government agency reports

20
Is it legal?

• Visitors to Thailand may be surprised that there
  are no T-Shirts bearing caricatures of the King
• No one in Singapore publishes a popular newspaper
  of magazine disrespectful of the Prime Minister
• Americans dont like to make any misuse of the
  Stars and Stripes
• Some Americans are surprised at the bureaucratic
  hurdles in the way anyone wishing to sell or buy
  handguns in other countries
• There are many products that are freely available
  in some countries and strictly banned in others
• Many types of business may only be conducted in
  premises that have been approved by one of more
  levels of the government
• Very strict standards backed up by severe
  penalties apply in many countries to facilities
  where food is prepared or stored
• Appliances that are connected to the water, gas
  or electricity supplies, or to the
  telecommunications network, must meet strictly
  enforced standards
• If laws and regulations block an opportunity, the
  entrepreneur can plan to secure an exemption or
  lobby to have the regulations amended. In the
  absence of an exemption or deregulation, such a
  proposal is fatally flawed

21
Does anyone want it?

• Specialists and experts often fall into the trap
  of doing something because they can and assuming
  that other people will want the result while
  prospective users cant see the point at all.
• Marketing legends tell the tale of a pet food
  company in England, whose technicians discovered
  a new way to, process dog food. The product
  seemed to be a certain winner and the company
  invested in substantial advertising and
  negotiated extensive distribution. The first few
  days sales were fantastic the product walked
  off the shelves the company stepped up
  production and waited for the repeat orders, but
  none ever came. Dogs loathed the stuff!

22
Planning Spreadsheets

• Entrepreneurial businesses must be managed, often
  more carefully than established ones, since there
  is little room for error. There are, however, no
  historical records from which objectives can be
  derived. A planning spreadsheet may be used to
  generate, among other things, prof forma sales
  and cost projections which can serve two major
  purposes

23
Planning Spreadsheets

• They can provide a pseudo-historic base upon
  which objectives can be set and the performance
  of the organization in its early months monitored
• They can provide a tool which can be used to test
  the financial feasibility of a proposal and
  refine the marketing and organization plans of a
  feasible one, without going to the trouble of
  developing a full set of operating financial
  projections

24
Steps for an Economic Feasibility Study

• Identify and Estimate all Capital Expenditures
• Identify and Estimate all Variable Costs related
  to the Proposed Business Venture
• Identify People and Skills required to operate
• Determine Wages, Salaries, and Benefits
• Identify and Estimate Project Related Costs
• Infrastructure development or improvements
• Advertising and Promotion
• Legal Fees
• Municipal State Development taxes
• Identify and Estimate all Fixed Costs

25
Estimating Total Capital Requirements

• Estimate capital requirements for facilities,
  equipment and inventories
• Estimate working capital needs
• Estimate start-up capital needs until revenues
  are realized at full capacity
• Estimate other capital needs (constructions
  delays, technology malfunction, market access
  delays, etc.)
• Estimate other capital needs than those listed
  above

26
Equity and Credit

• Estimate Equity and Credit Needs
• Identify alternative equity sources and capital
  availability
• Producers, Local Investors, Venture Capitalists
• Identify and assess alternative credit sources
• Banks, Government, Grants, Local and State
  Economic Development Incentives
• Assess expected financing needs and alternative
  sources
• Interest Rates, Terms, Conditions, Etc.

27
Cost-Benefit Analysis

• Utilize data collected to determine economic
  feasibility
• Estimate Expected Costs and Revenue
• Estimate the Profit Margin / Expected Net Profit
• Estimate the sales or usage needed to break-even
• Estimate the returns under various production,
  price and sales levels
• Benchmark against industry averages and/or
  competitors
• Identify limitations or constraints of the
  economic analysis
• Project expected cash flow during the start-up
  period
• Project income statement, balance sheet when
  reaching full operation

28
What Defines Feasibility?

• A feasible business venture is one where
• the business will generate adequate cash flow and
  profits,
• the business will withstand the risks it will
  encounter,
• the business will remain viable in the long-term,
  and
• the business will meet the goals of the founders.

29
What Next?

• After the feasibility study has been completed
  and presented to the leaders of the project, they
  should carefully study and analyze the
  conclusions and underlying assumptions
• Next they will decide which course of action to
  pursue
• Potential Courses of action include
• Developing a business plan and proceeding with
  creating and operating a business
• Identifying additional scenarios for further study

30
Developing a Business Plan
31
What is a Business Plan?

• A Business Plan summarizes the plan of action
  after a course of action has been determined
  through the Feasibility Study
• A Business Plan provides a Planning function
• A Business Plan outlines the actions needed to
  take the proposal from idea to reality
• A Business Plan tells How your business will be
  created and Why it will be successful
• A Business Plan provides a road map for
  strategic planning

32
Why Write a Business Plan?

• Put the Pieces TogetherDo the pieces fit
  together in a logical manner?
• Create a Blueprint for Action
• Focus Founders and/or Management Team
• Obtain Financing
• Attract Equity Investment
• Attract Key Managers and Employees
• Obtain Contracts
• Create Joint Ventures, Mergers, Acquisitions

33
What is included in a Business Plan?

• A Business Plan should be brief, concise
  straight to the point
• Main Requirements May Include
• Industry Description
• Market Size
• Customer Base
• Competitive Advantage
• Business Location
• Three years of Financial Projections
• Monthly Tracking of First Year Financials
• Management Experience and Profile
• Personal Statement of Affairs
• Other Sources of Cash, if any

34
How Effective Is the Business Plan?

• How effective a Business Plan is depends on how
  well the following questions are answered
• Who are we?
• What do we do?
• What do we have to offer?
• Why will someone pay for our products/service?
• What resources do we have?
• Where are we going?
• What do we need to get there?
• Why will we be successful?
• Why should someone participate or invest?
• How will we measure performance?

35
The Story a Business Plan Tells

• Business Plan should be tailored to the
  stakeholders
• Be aware of each potential stakeholders
  priorities
• Make sure all priorities are addressed in a
  balanced manner in the business plan
• If more than one version of a business plan is
  written, make sure each tells the SAME story only
  with difference emphasis

36
Feasibility Study vs. Business Plan

• Feasibility study answers the bottom line
  questionIs this venture going to make money?
• Feasibility study outlines and analyzes several
  alternatives or methods of achieving business
  success
• Feasibility study is conducted before a business
  plan
• Business plan is prepared only after the venture
  has been deemed to be feasible
• Business plan deals with only one alternative or
  scenario that is determined to be the best
  alternative
• Business plan considers the management sidegoals
  and objectives of the planned business venture

37
What resources are available to help develop each?

• Hired Business Consultants
• Make sure an accurate assessment is given
• Make sure someone is not paid to give the answer
  the group wants to hear
• Can be costly
• Third Party Unbiased
• Universities and Research Centres
• Centers for Economic Development
• Small Business Development Center

38
Consumer Benefits

• People do not buy products or services, they buy
  benefits
• Hence we make purchases not for the products
  themselves, but for the benefits of the problems
  they solve or the opportunities they offer

39
Consumer Benefits

• Consumers seek bundles of types of benefits
• Tangible benefits e.g., a watch keeps good time
  has leather band
• Intangible benefits e.g., the reliability
  reputation of the watch manufacturer the image
  of the watch wearer

40
Customer Behavior

• There are three general classes of purchasing
  event in the life of the relationship between a
  supplier and a customer
• The customer makes the first purchase to initiate
  the relationship this may be indistinguishable
  from subsequent purchases, as when a new member
  joins a golf or other club and pays a joining
  premium
• There may be ongoing transactions, such as
  regular servicing of a motorcar or simply routine
  repurchasing of a consumer good or service
• There may be subsequent transactions such as the
  replacement of a motorcar after a period of use
  of the payment of annual renewal fees at a club
  or on an insurance policy
• Often a venture that would be marginal if it
  could only rely on one source of income from a
  customer relationship and becomes profitable if
  more than one can be brought into play. One of
  the most famous examples is King Gillettess
  launch of the safety razor, where Gillette
  offered the handles at an actual cash loss,
  relying on the extremely profitable sales of
  blades for the prosperity of his business

41
Parameters that you must estimate

• Marketing a new product (whether a good or
  service) involves asking people to pay for it.
  This introduces at least two constraints
• The perceived value to the buyer must exceed the
  price, which in turn must exceed the cost
• The targeted buyers must be able to afford the
  product

42
Parameters that you must estimate

• You are going to get very far with your planning
  if you have not developed a reasonable idea of
  your proposed price and associated direct costs
  the price then has two roles to play, in that
  your revenue is that the price of the product and
  the number of the sales, while your market is
  limited to those people who can afford your
  product.
• You will also need to estimate likely trends in
  prices and costs prices unless supported by
  other features and improved performance levels,
  generally tend downwards, while hourly labor
  costs tend up
• You need to estimate these effects in your
  planning and you will need to track the trends
  after your venture is launched to verify or
  adjust estimates

43
Defining the Market

• Failure is always distressing, but failure in the
  pursuit of an impossible objective can be worse
  you dont just feel disappointed, you feel stupid
  as well
• The most fundamental error anyone can make is to
  launch a product into a market that is simply too
  small to generate enough revenue to cover the
  ventures operating basic costs

44
Defining the market

• Modeling starts by quantifying the market the new
  venture intends to satisfy and the estimate of
  the size of the target market will become a key
  model parameter
• The market for this purpose consists of the
  people and the firms who could gain a net benefit
  from using the new product, have the means and
  will be offered the opportunity to buy it
• The market is not static but in constant change

45
Market Response Parameters

• It is difficult to accurately estimate how many
  potential customers the world holds for a new
  product
• It is even more difficult to estimate how many of
  these people or firms will become actual,
  revenue-generating customers
• And once they have become customers, how long
  will they maintain that state

46
Promotional Quality

• The most direct way of securing a trial is a
  sampling program or the equivalent
• When introducing a new packaged consumer good the
  supplier may engage a an advertising firm to
  distribute free samples of the product to
  shoppers in the target segments

47
Encouraging internal influence

• Internal influence is pure gold to entrepreneurs
  with satisfied users persuading potential ones to
  try the product without drawing a penny from the
  marketing budget
• Wal-Mart, the leading American retailer, brands
  its discount warehouses Sams Clubs to give its
  users a sense of being a part of the community
  rather than mere consumers

48
Consumer Decision-Making Process
Problem Recognition
Information Search
Evaluation of Alternatives
Purchase Decision
Postpurchase Evaluation
49
Stages in the New Product Adoption Process

• Adoption process
• the mental process through which an individual
  passes from first hearing about an innovation to
  final adoption
• Consists of 5 Stages (These are exactly as they
  indicate)
• Awareness
• Interest
• Evaluation
• Trial
• Adoption

50
New Product Adoption Rates
Figure 6-5
34 Early majority
34 Late majority
13.5
Early adopters
2.5 Innovators
16 Laggards
Time of adoption of innovations
Source reprinted with permission of the Free
Press, a Division of Simon Schuster, from
Diffusion of Innovations, Fourth Edition, by E.M.
Rugers, 1983.
51
Influences on the Rate of Adoption

• Relative advantage
• How much better than existing alternatives?
• Compatibility
• Fit current values and experiences?
• Complexity
• Ease of understanding?
• Communicability
• Can the innovation be observed and communicated?

52
The Total Product Concept

• Total product refers to the sum of benefits
  offered by a product, service, outlet, etc.
• Basic core bundle of utilitarian benefits (e.g.,
  design, features, etc.)
• Accessory ring added-value benefits with no
  apparent extra cost (e.g., store reputation,
  manufacturer prestige, convenient location, etc.)
• Psychological ring benefits resulting from the
  consumers feelings associated with owning/using
  the product (e.g., belonging, youthful, powerful,
  sexy, etc.)
• Time products/service this can be good or
  bad (e.g., fast food versus conventional
  restaurant)

53
Market Segmentation

• Market segmentation is the study of the
  marketplace in order to discover already existing
  viable groups of consumers who are similar or
  homogeneous in their approaches to choosing
  and/or consuming goods and services.

54
Segment Bounding

• Segment bounding is a means by which marketers
  differentiate among consumers and among market
  segments
• Determine the descriptors of the
  consumers/units in the segment (e.g.,
  demographics, psychographics, benefits sought,
  product usage rate, type of retail outlet, etc.)
• Determine specific geographic location of
  segment
• Bound segments in time to ensure that all data
  is relevant and up to date for the time of use.

55
Segment Viability

• Four factors are used to assess segment
  viability. Viable segments are
• Of sufficient size
• Measurable
• Differentiated
• Reachable

56
Segmentation Strategies

• Mass marketing (undifferentiated marketing)
  offering the same product to the entire consumer
  population
• Concentrated marketing (focused or niche
  marketing) selecting one market segment, even
  though the product may also appeal to others
• Differentiated marketing selecting two or more
  different segments

57
Segmentation in the Global Marketplace

• There are two approaches to market segmentation
• Localization treating each country as a separate
  market and seeking consumer segments accordingly
• Intermarket segmentation (also called
  standardization) selecting groups of consumers
  who exhibit similar consumption behavior across
  different countries
• Marketers emphasize similarities rather than
  differences across country markets

58
Consumer Benefits and Product Positioning

• Product positioning is the placement of a
  product, service, outlet, etc. in the mind of the
  consumer
• There are five ways used to position products,
  services, outlets, etc.
• On perceived benefits
• On image
• On attributes
• Against competitors
• Combination of two or more of the above
• Repositioning shifting position in the
  consumers mind through changes in important
  product, price, distribution, and promotional
  and/or personal selling benefits.

59
The Consumer Decision-Making Process

• A consumer decision model is a means of
  describing the processes that consumers go
  through before, during, and after making a
  purchase (choice).
• A model shows the causes or antecedents of a
  particular behavior and each of its results or
  consequences.

60
Engel, Kollat, and Blackwell (EKB) Model

• The five distinct parts of consumer decision
  making presented are
• Input, information processing, a decision
  process, decision process variables, and external
  influences

61
Input

• Input includes all kinds of stimuli from our
  contact with the world around us
• Our experiences, contact with others
• Marketer-controlled stimuli (e.g., advertising,
  store display, demonstrations)
• Other stimuli (e.g., personal recollections,
  conversations with friends)
• External search

62
Decision Process

• It is triggered at any time during information
  processing
• It consists of five steps
• Problem recognition
• Search
• Alternative evaluation
• Choice
• Outcomes (post-purchase evaluation and behavior)

63
Decision Process Variables

• Those individual qualities that make
  people/consumers unique.
• Decision process variables include
• Motives
• Beliefs
• Attitudes
• Lifestyles
• Intentions
• Evaluative criteria
• Normative compliance and informational influence
• Other aspects of self

64
External Influences

• Such influences are called Circles of Social
  Influence. They are culture, sub-culture
  (co-culture), social class, reference groups, and
  family or household influences