A Primer in Entrepreneurship

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 creates 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.

• exit barriers
• industry concentration
• fixed costs / value added • industry growth
• intermittent overcapacity • product differences
• switching costs
• brand identity
• diversity of rivals
• • corporate stakes

In most industries, the major determinant of industry profitability is the level of competition among the firms already competing in the industry.

Some industries are fiercely (яростно) competitive to the point where prices are pushed below the level of costs. When this happens, the industry-wide losses occur.

There are four primary factors that determine the nature and intensity of the rivalry among existing firms in an industry.

• 1. number and balance of competitors
  • 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 then there is no clear market leader.
• 2. degree of difference between products
  • The degree to which products differ from one product to another affects industry rivalry. I.e., the firms in commodity industries (i.e. paper products) tend to compete on price because there is little difference between one manufacturer’s products and another’s.
• 3. growth rate of an industry
  • 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 prices. In fast-growth industries, there are enough customers to go around, making price-cutting less likely.
• 4. level of fixed costs
  • 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.

• supplier concentration
• importance of volume to supplier
• differentiation of inputs
• impact of inputs on cost or differentiation • switching costs of firms in the industry
• presence of substitute inputs
• threat (угроза) of forward integration
• cost relative to total purchases in industry

In some cases, 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.

• Attractiveness of Substitutes

  • Supplier power is enhanced (gestärkt) 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.

• 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 Concentration

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

• 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.

• bargaining leverage • buyer volume
• buyer information
• brand identity
• price sensitivity
• threat of backward integration
• product differentiation
• buyer concentration vs. industry
• substitutes available 
• buyers’ incentives

Buyers can suppress the profitability of the industries from which they purchase by demanding price concessions or increases in quality.

• Bargaining Power of Buyers - An Example
  • The automobile industry is dominated by a handful of large automakers that buy products from thousands of suppliers in different industries. This enables the automakers to suppress the profitability of the industries from which they buy by demanding price reductions.

• Buyer Group Concentration

  • 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.

• Buyer’s Costs

  • The greater the importance of an item is to a buyer, the more sensitive the buyer will be to the price they pay. 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.

• Degree of Standardization of Supplier’s Products

  • 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.

• 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.

Along with helping a firm understand the dynamics of the industry it plans to enter, the five forces model can be used in two ways to help a firm determine whether it should enter a particular industry and whether it can carve out an attractive position in that industry:

• 1. Industry Attractiveness
• 2. Potential Success

• Type: Emerging Industries
  • characteristics: standard operating procedures have yet to be developed
    • opportunity: first-mover advantage
• Type: Fragmented Industries
  • characteristics: large number of firms of approximately equal size
    • opportunity: consolidation
• Type: Mature Industries 
  • characteristics: slow or no increase in demand
    • opportunity: process innovation and after- sale service innovation
• Type: Declining Industries
  • characteristics: reduction in demand
    • opportunity: leadership, establishing a niche market, and pursuing a cost reduction strategy
• Type: Global Industries
  • characteristics: significant international sales
    • opportunity: multi-domestic and global strategies

After a firm has gained an understanding of the industry and markets in which it plans to compete, the next step is to complete a competitor analysis.

• Competitive Analysis
  • is a detailed analysis a firm’s competition. It helps a firm understand the positions of its major competitors and the opportunities that are available to obtain a competitive advantage in one or more areas.

• Competitive Analysis Grid (Netz/Raster)

  • is a tool for organizing the information a firm collects about its primary competitors. A competitive analysis grid can help a firm see how it stacks up against its competitors, provide ideas for markets to pursue, and identify its primary sources of competitive advantage.

There exist three different types of competitors a business will face.

• 1. Direct Competitors
  • businesses offering identical or similar products
• 2. Indirect Competitors
  • businesses offering close substitute products
• 3. Future Competitors
  • businesses that are not yet direct or indirect competitors but could be at any time

To complete a meaningful competitive analysis grid, a firm must first understand the strategies and behaviors of its competitors.

• Competitive Intelligence
  • is the information that is gathered by a firm to learn about its competitors.

The following are examples of ways a firm can ethically obtain information about its competitors:

• attend conferences and trade shows

• read/ study industry related books, magazines, and websites

• talk to customers about why they bought your product rather than your competitors’

• study competitors’ websites

• purchase competitors’ products to study their features, benefits and shortcomings

• study websites that provide information about companies

A business plan is a written narrative (25-35 pages) that describes what a new business plans to accomplish and how it plans to accomplish it.

The Business Plan is a dual-purpose document.
It is important, since it is both an internal document and a selling document.

• Inside the firm

  • The plan helps the company to develop a “road map” to follow in executing its strategies and plans.

• Outside the firm

  • The plan introduces potential investors and other stakeholders to the business opportunity the firm is pursuing and how it plans to pursue it.

There are two primary audiences for a firm’s business plan: a firm’s employees, and investors as well as other external stakeholders.

A firm must validate the feasibility of its business idea, develop an effective business model, and have a good understanding of its competitive environment prior to presenting its business plan to its audiences.

A clearly written business plan is important for both the management team and the rank-and-file (рядовой) employees of a new venture.

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

External stakeholders, such as investors, potential business partners, potential customers, and key employees who are being recruited to join a firm, are the second audience for a business plan.

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

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

• structure
• content
• style / format

To make the best impression, a business plan should follow a conventional structure.

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

  • Departing from the basic structure of the conventional business plan format in order to demonstrate creativity is usually a mistake

• Software Packages
  • Software packages employ an interactive, menu-driven approach to assist in the writing of a business plan.

  • However, entrepreneurs should avoid creating a boilerplate plan (шаблонный план) that looks as though it came from a “canned” source ("консервированного" источника).

• Sence of Excitement (Чувство волнения)

  • 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.

The Business Plan should give clear and concise (краткую) information on all the important aspects of the proposed venture.

• long enough
  • to provide sufficient information,

YET

• short enough
  • to maintain reader interest.

SIEHE DAS BILD (Sehr Wichtig!)

The appearance of the Business Plan must be carefully thought of.

• It should look sharp

BUT

• not give the impression that a lot of money was spent to produce it.

Most business plans do not include all the elements introduced: Each entrepreneur must decide which elements to include in his or her plan.

• a)  Cover Page and Table of Contents

• b)  Executive Summary

• c)  The Business

• d)  Management Team

• e)  Company Structure, Ownership, and IP

• f)  Industry Analysis

• g)  Marketing Plan

• h)  Operations Plan

• i)  Financial Plan

• j)  Critical Risk Factors

• k)  Appendix

• l)  Putting It All Together

Cover Page should include the name of the company, its address, its phone number, the date, and contact information for the lead entrepreneur.

Executive Summary

• is a short overview of the entire business plan and should be created after the plan is finished; it provides busy readers 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.

One of the most important things investors want to see when reviewing the viability of a new venture is the strength of its management team. If it does not “pass muster”, most investors will not read further.

• “Skin In The Game”

  • is often called the amount of money the management team has invested. Investors wary if there is no “skin”.

• Relevant Information

  • relevant employment

  • professional experience

  • significant accomplishments (значительные достижения)

  • educational background

Company Structure , Ownership, and Intellectual Property

This section should describe and discuss ...

• 1. The structure of the new venture, including the reporting relationships among the top management team members
• 2. How the firm is legally structured
• 3. The intellectual property owned by the firm, including patents, trademarks, and copyrights

This section should discuss ...

• 1. 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
• 2. How the firm will diminish or sidestep (уменьшит или обойдет) the forces that suppress its industry’s profitability
• 3. The firm’s target market, along with an analysis of how it will compete in that market

An investor should have a good grasp (должен хорошо понимать) on the future prospects of the relevant industry, along with an understanding of the target market the firm will pursue and how it will defend its position.

The Marketing Plan immediately follows the industry analysis and provides details about the new firm’s products and services.

This section is very important to investors, since it is supposed to assure them that a new venture has a product that people will buy and has a realistic plan for getting that product to market.

This section should contain ....

• Fuller description of the product that the firm will sell than has been provided in previous sections.

• Results of the feasibility analysis, including the results of the concept and usability tests.

After reading this section, an investor should be confident that the firm’s

• overall approach to its target market and

• product strategy,

• pricing strategy,

• channels of distribution, and

• promotional strategy

are in sync with one another and make sense.

This section deals with the day-to-day operations of the company and should describe and disclose (раскрывать) ...

• An overview of the manufacturing plan (or service delivery plan),

• 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 risk or regulations pertaining (связанные) to the operations of the firm, such as non-routine regulations regarding waste disposal (удаления отходов) and worker safety.

An increasingly common feature of many business plans for start-ups is a reliance on outsourcing certain function to third parties as a way of allowing the start-up to focus on its distinctive competencies.