A Primer in Entrepreneurship

A primary determinant of a new venture’s feasibility is the attractiveness of the industry it chooses.

Industries vary considerably in terms of their growth rate.

In addition to evaluating an industry’s growth potential, a new venture will want to know more about the industry it plans to enter.

• being large and growing

• being important to the customer

• being fairly young rather than older and more mature

• having high rather than low operating margins

• not being crowded (überfüllt/gesättigt)

Getting to know more about the industry can be accomplished through both

• primary and
• secondary

research.

Role of primary and secondary research is investigating (untersuchen/nachforschen) industry attractiveness.

Primary Research is the original research that is collected by the entrepreneur and involves an entrepreneur talking to potential customers and key industry participants.

Secondary Research is the Research that probes data that are already collected and have its source in industry-related publications, government statistics, competitor’s web sites, and industry reports from research like Forrester Research

A second consideration is the timeliness (Rechtzeitigkeit) of the introduction of a particular product or service.

• products/ services being an improvement of those already available in the marketplace
  • Window of opportunity: Open? Closed?

  • Good time for entering the market:
    Are customers buying?
    Are industry incumbents making money?

• breakthrough product/ service establishing a new market segment

  • Should we try to capture a first-mover advantage?

A niche market is a place within a larger market segment that represents a narrower group of customers with similar interests.

Selling to a niche market makes sense, because ...

• ...it allows a firm to establish itself within an industry without competing against major competitors head on.

• ...it allows a firm to focus on serving a specialized market very well instead of trying to be everything to everybody in a broad market which is nearly impossible for new entrant.

Another useful way of thinking about this topic is to distinguish between vertical and horizontal markets.

• Vertical Market
  • is analogous to a niche market and focuses on similar businesses that have specific needs. Start-ups typically start by selling into vertical markets.

• Horizontal Market

  • meets the specific needs of a wide variety of industries, rather than a specific one.

The aim is to determine whether the business itself has sufficient expertise, competence and resources to successfully launch its business.

• 1. Management Prowess (Bravery)

• 2. Resource Sufficiency (Enough)

A firm should candidly (fairly/objectively) evaluate the prowess (ability) of its management team.

Management should have:

• the requisite (necessary/needed/required) passion.

  • The passion that the solo entrepreneur or the founding team has for the business idea.

• the expertise to launch the venture.

  • The extent (degree/grade/level) to which the solo entrepreneur or the founding team understands the markets in which the firm will participate.

Solo entrepreneurs or founding teams with established social and professional networks also have an advantage.

The assessment of whether an entrepreneur has sufficient resources to launch the proposed venture focuses on nonfinancial resources.

• A firm should list the 6 to 12 critical nonfinancial resources that will be needed to move forward to successfully develop the business idea.

(If critical resources are not available in certain areas, it may be impractical to proceed with the business idea)

• Nonfinancial resources that may be critical to the successful launch of a new business may be :
  • availability of affordable office or lab space,

  • likelihood of local and state government support of the business,

  • quality of the labor pool available,

  • proximity (nearness) to key suppliers and customers,

  • willingness of high quality employees to join the firm,

  • likelihood of establishing favorable (advantageous) strategic partnerships,

  • proximity to similar forms for the purpose of sharing knowledge,

  • possibility of obtaining intellectual property protection in key areas.

As the final stage of a comprehensive feasibility analysis a quick financial assessment is usually sufficient.

• 1. total start-up cash needed
• 2. financial performance of similar businesses
• 3. overall attractiveness of the proposed venture

An actual budget should be prepared that lists all the anticipated capital purchases and operating expenses needed to generate the first CHF 1 in revenues.

It is a rare start-up that does not have some setbacks in getting up and running.

When projecting start-up expences, it is better to overestimate rather than underestimate the costs involved.

“ Whatever can go wrong, will go wrong. “

The proposed start-up’s financial performance is estimated by comparing it to similar, already established businesses.

There are several methods to do this, all of which involve a little ethical detective work:

• 1. Available reports, of which some are for free and some require a fee: They offer detailed industry trend analysis and reports on thousands of individual firms.

• 2. Simple observation research: For example, the owners of New Ventures Fitness Drinks could estimate their sales by tracking the number of people who patronize similar restaurants and estimating the average amount each customer spends.

The extent to which a business opportunity is positive relative to each financial factor, which is associated with promising start- ups, is based on an estimate rather than actual performance.

• steady and rapid growth in sales during the first 5 to7 years in a clearly defined market niche

• high percentage of recurring revenue

• ability to forecast income and expenses with a reasonable degree of certainty

• internally generated funds to finance and sustain growth

• availability of an exit opportunity for investors to convert equity into cash

Industry is a group of firms producing a similar product or service, such as music, fitness drinks, or electronic games.

Industry Analysis is a business research that focuses on the potential of an industry.

Once it is determined that a new venture is feasible in regard to the industry and market in which it will compete, a more in-depth analysis is needed.

The Industry Analysis is needed ...

• ... to earn the ins-and-outs of the industry the firm plans to enter.

• ... to determine if the niche markets having been identified during feasibility analysis are accessible and which ones represent the best point of entry for a new firm.

• 1. Is the industry accessible – in other words, is it realistic place for a new venture to enter ?
• 2. Does the industry contain markets that are ripe (mature, DE: reif)  for innovation or are underserved ?
• 3. Are there positions in the industry that will avoid some of the negative attributes of the industry as a whole ?

It is useful for new venture to think about its position at both the company level and the product or service level.

At the company level, a firm’s position determines how the entire company is situated relative to its competitors.

As research has shown both firm specific and industry specific factors contribute to a firm’s profitability.

• Firm-Level Factors
  • firm assets, products, culture, teamwork among its employees, reputation and other resources.

• Industry- Specific Factors

  • threat of new entrants, rivalry among existing firms, bargaining power of suppliers, etc.

According to various studies, 8 to 30 % of the variation in firm profitability is directly attributable to the industry in which a firm competes.

The Five Competitive forces model is a framework for understanding the structure of an industry.

The framework was developed by Michael Porter and is comprised of the forces that determine industry profitability.

5 Forces are...

• 1. threat of substitutes
• 2. entry of new competitors 
• 3. rivalry among existing firms
• 4. bargaining (negotiating) power of suppliers
• 5. bargaining power of buyers

Each of Porter’s Five Forces has an impact on the average rate of return for the firms in an industry.

Each of Porter’s Five Forces applies pressure on industry profitability.

Well-managed companies try to position their firms in a way that avoids or diminishes these forces in an attempt to beat the average rate of return for the industry.

Porter’s Five Forces determine industry profitability.

The extent (level) to which substitutes suppress (push) the profitability of an industry depends on the propensity (предрасположенность) for buyers to substitute between alternatives.

That is why firms in an industry often offer their customers amenities to reduce the likelihood that they will switch to a substitute product, even in light of a price increase.

• switching costs

• buying inclination (склонность) to substitute

• price performance trade-off (Preis-Leistungs-Verhältnis) of substitutes

The price that consumers are willing to pay for a product depends, in part, on the availability of substitute products.

• availability of substitutes
  • (1.) none, or just a few
  • (2.) close substitutes

⇒⇒⇒⇒⇒⇒⇒

• industry profitability

  • (1.) high profitability

  • (2.) suppressed profitability; consumers will opt (предпочитать) not to buy when the price is too high

• absolute cost advantages

• proprietary (geschützt) learning curve

• access to inputs

• government policy

• economies of scale

• capital requirements

• brand identity

• switching costs

• access to distribution

• expected retaliation (erwartete Gegenmaßnahmen)

• proprietary products (firmeneigene Produkte)

A barrier to entry is a condition that creates a disincentive for a new firm to enter an industry.

Firms in an industry try to keep the number of new entrants low by erecting barriers to entry.

If there are some highly profitable firms in the industry, than industry becomes a magnet to new entrants, then competition in the industry will increase; the average industry profitability will decline!

Industries that are characterized by large economies of scale are difficult for new firms to enter, unless they are willing to accept a cost advantage.

Industries such as the soft drink industry that are characterized by firms with strong brands are difficult to break into without spending heavily on advertising.

I.e. (das heisst)  it now takes about 2 years and $4 million to develop an electronic game. Many new firms do not have the capital to gain entranced to the industry and to compete at this level.

Entrenched competitors may have cost advantages not related to size. I.e. the existing competitors in an industry may have purchased property when it was much less expensive than a new entrant would have to pay.